Kraft Heinz Company (KHC) — Q2 2019 Earnings Call Transcript

Hello, everyone, and thanks for joining our business update. With me today are Miguel Patricio, our new Chief Executive Officer; and David Knopf, our Chief Financial Officer. We'll begin today's call with opening comments from both Miguel and David, and then we'll open up the lines for 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 materially 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. And you can find the GAAP to non-GAAP reconciliations within our earnings release. Now it's my pleasure to introduce our Chief Executive Officer, Miguel Patricio.

Thank you, Chris, and hello everyone. First of all, I'm honored to be with you today as the new CEO of Kraft Heinz. As someone who has worked on some of the biggest brands in the world, I intimately know their power in the marketplace and with consumers. Kraft Heinz has some of the globe’s best roughly 200 brands in nearly 200 countries, with nearly 20 of them maintaining their relevance for 100 years or more. We are in 97% of American households today, holding the number one or two spots in 50 categories. And I’m humbled to follow the great CEOs who have successfully adapted our brands and businesses through tremendous change over more than 100 years. These are great assets for any business. But at Kraft Heinz, we have far bigger aspirations. That’s why I want to be candid with you from the start of my tenure here. The valuation of our stock is now among the slowest in the industry, and you deserve straight talk from me about how this business is run. I plan to do that today and for as long as I’m here. The entire Board has mandated a new approach to Kraft Heinz. As such, it’s my job to tell you what we got wrong and why we got it wrong. Over the coming months, I will share more with you about how we’ll fix it, but it starts right now with me and our entire senior management team. Our brands are icons; it’s our job to ensure they are leading icons. To do that, we must understand the future so we can lead, not follow. We must understand the consumer better than any other company. We have a good start on being data and process-driven, but we must put more attention on the consumer experience. For instance, we have sophisticated tools to tell quality impressions versus those that don’t reach the consumer. But we are also the company that had the first plant-based burger, the Boca burger, yet find ourselves far behind in the plant-based market today. Many of you believe our story is one of cost control and zero-based budgeting. This has been a strength of our company because it has enhanced our margins since the time of our merger. Without this discipline, we would be in a worse place today. But we have to do more than that. We need to change so we can apply strong, consistent investments in our brands. There is no doubt our industry is in a moment of significant transformation, in retail, non-traditional channels, private label, premiumization, consumer values, health, and wellbeing. Big transformation represents big opportunity, and we as an organization need to be at the forefront of this change. My first 40 days at Kraft Heinz have been rich in learning through honest and candid conversations with our global leaders, employees, as well as our customers. I have held numerous town halls, conducted one-on-one meetings with more than 300 employees, and visited all of our major offices around the world. Those conversations have left me with enormous appreciation for the team we have here at Kraft Heinz. Our team is hardworking and motivated to drive the next chapter of the business, and the consistent message I hear from them is that while they've been through a lot, they still have a strong desire to win. Their commitment to the company is why I am privileged to be their leader. But before we get into my first impressions and thoughts on our path forward, I'm going to ask David to review our first half results.

Thank you, Miguel, and good morning, everyone. First off, with the filing of Forms 10-Q for both the first and second quarters, we expect to regain our current filer status with the SEC. The accounting review and audit process for our 10-K was a thorough and time-intensive effort, and we restated past periods for misstatements that occurred over the past four fiscal years. Overall, the magnitude of adjustments to our historical numbers was a cumulative impact from 2015 to 2018 of less than 1% of net income. We are now taking extensive actions to improve internal policies and procedures and to strengthen internal controls, including over financial reporting. To date, we have implemented a comprehensive disciplinary plan for all employees found to have engaged in misconduct; enhanced our organization, augmenting our procurement finance teams with additional experienced professionals in the area of supplier contracts and related arrangements, as well as realigned reporting lines, so procurement finance now reports directly to the finance organization. Additionally, we have enhanced the level of precision at which our internal controls for financial reporting for goodwill and indefinite-lived intangible asset impairment tests are performed. We're also in the process of reassessing employees’ KPIs and will implement checkpoints to evaluate impacts from significant changes in the environment, as well as evaluating potential solutions to upgrade our procurement management software, and deploying a comprehensive global procurement training program. Taking these steps to improve internal controls is of utmost importance for our Board, Miguel, and myself. It will continue to be a high priority for the organization going forward. And I would like to thank all parties for their support and dedication, especially our finance and legal teams, our Board of Directors, and our financial partners, among others. Regarding our first half performance, overall, while our consumption and share trends continued to improve, our first half results were held back by actions at several of our retail partners in both the U.S. and Canada to reduce the amount of inventory they carry. We continued to suffer from higher supply chain costs. And frankly, the absolute level of year-on-year declines in EBITDA and EPS are simply unacceptable. If you recall, in February, we set our priorities around improving our growth and returns by driving consumption and market share, and leveraging in-store sales and e-commerce investments to build our brands and grow our categories. So far this year, our retail takeaway in both the United States and Canada has continued to grow and improve since the second half of 2018 into the first half of 2019. In the United States, first half consumption in measured channels was up 1.1% versus the prior year, with market share gains in more than half of our business. In Canada, retail sales consumption grew nearly 4% in the first half, although this was aided by a return to a more normal promotional calendar versus the prior year. And we’ve continued our strong push on condiments and sauces around the world with significant advertising and merchandising activity behind the Heinz 150-year anniversary. On the whole, we are dissatisfied with our financial performance year-to-date, as well as the fact that retailer inventory reductions dampened our potential for the first half and the full year. In terms of sales for the first half, we outlined in February the sources of our organic net sales decline. These included unfavorable promotional timing in both the United States and Canada as well as difficult comparisons versus an exceptionally strong prior year in UK soups. In addition to that, we also saw a negative impact from lower inventory levels at retail in North America that we did not anticipate, as well as lost sales due to trade negotiations in parts of Continental Europe as we implemented good, better, best pricing in ketchup between our Heinz and newly repatriated Kraft brands. From a total company perspective, organic net sales were down 1.5% in the first half, including an adverse impact of approximately 1.2 percentage points from retail inventory reductions primarily in the U.S. and Canada. Volume mix was relatively flat in the first half as the reduction in retail inventory levels more than offset consumption growth in the United States, Canada, and Latin America. Pricing was negative, down 1.3 percentage points, driven by three factors. The first factor driving lower pricing was unfavorable timing of promotional expense, representing roughly an 80 basis point decrease in price on a global basis, including approximately 90 basis points in the U.S. In the U.S., while we expected promotional timing to be a source of the year-over-year decline in the first half, it should turn favorable in the second half, thus remaining relatively neutral for the full year. By contrast, the step-up in Canada reflects greater activity versus last year, including the natural cheese business that we just sold, and it’s not likely to reverse in the second half. The second factor was key commodity-driven pricing in North America, representing roughly a 30 basis point drag on global pricing in the first half. The third factor primarily reflects continued promotional support behind specific U.S. categories, mainly in our Lunchables and frozen categories. With respect to profitability, we spoke about our first quarter and indeed our first half being up against our toughest EBITDA comparisons for the year. This reflected our expected net inflation curve, stepped-up fixed cost investments, retail channel growth, marketing, and our personnel, as well as pricing not beginning to take effect until the second quarter. In the end, the cost inflation picture, while improving, remained unfavorable versus the prior year across packaging, manufacturing, and logistics in the United States. This together with stepped-up fixed cost investments drove roughly half of the constant currency production in first half EBITDA we saw versus the prior year. Regarding adjusted EPS, the decline we saw in the first half reflected lower adjusted EBITDA, as well as higher depreciation and amortization expenses compared to the prior year period. Other income and our effective tax rate versus the first half of 2018 were more favorable than we expected, meaning that in total below the line items were a $0.02 benefit to adjusted EPS compared to the first six months of 2018. From a forward-looking perspective, we have now completed the two divestitures we previously announced: India nutritional beverages and Canada's natural cheese. These divestitures resulted in a combined after-tax proceeds of more than $1.5 billion, and we remain committed to using those proceeds to further deleverage and strengthen our balance sheet. However, I will highlight that regarding our effective tax rate, we continue to expect roughly 21% for the full year. The first half was only 18.4% due to the timing of discrete items, but this benefit is not expected to repeat, resulting in a higher rate in the second half, especially in Q3. For the second half of 2019, we continue to expect to see an improvement in year-over-year top and bottom-line growth rates versus what we saw in the first half. This should be driven by continued momentum in consumer offtake, more innovation coming to market, improved pricing trends, particularly as our price increases in the U.S. take hold, and lapping some of the stepped-up fixed costs and cost inflation that we saw in the back half of last year. Although I would note that we are seeing risks from further reductions in retailer inventory levels, as well as accelerating key commodity costs in the U.S. that we had not anticipated at the start of the year. Now I'll turn it back to Miguel.

Thank you, David. I'll start by saying that the level of decline versus the previous year is nothing we are proud of, and nothing that any of us should find acceptable moving forward. While I have officially been the CEO for roughly 40 days at this point, I think it's important to make a candid assessment of where I think we are today. At the outset, I shared many of the concerns that a good number of you have expressed regarding issues like brand support, supply chain execution, the sustainability of our profits, and just how long it would take to be in the position to start growing both the top-line and bottom-lines. Our Board of Directors made it clear that they wanted to bring change in light of the company's recent missteps and have given me their full support to contemplate any tasks that will create long-term sustainable value for our shareholders. So far, I have found, as you might expect, things are rarely as bad or as good as what you read from the outside. What is clear is that we win when we strongly and consistently invest in our brands. For instance, thanks to innovations and investments to extend a 150-year-old brand into new segments, Heinz achieved an all-time high market share in U.S. ketchup, reaching 70% in the second quarter. Philadelphia has consistently grown share and the category year-over-year since 2014, holding 68% share year-to-date by setting the standard for superior quality and taste. We have also built a world-class quality organization that has had the fewest recalls in the food industry over the past four years. Since 2015, we have invested more than $1 billion of CapEx in North America alone, including significant investments at the end of the line for detection, risk avoidance, and consumer complaint mitigation. These are just some examples of great things I have seen at the company in my early days. But it’s also important to face the cold, hard facts and assess where we have had shortfalls. First and foremost, the company had a significant decline in adjusted EBITDA margins from a peak of 29.4% in fiscal 2017 to roughly 24.5% for the trailing 12 months through the end of June this year. This was driven by a combination of inflation in our supply chain, including packaging, freight, overtime, and maintenance costs, as well as a significant step-up in fixed costs to support sales growth, with price increases lagging behind higher costs. Regarding our supply chain problems in 2018, it’s clear we lost forecast accuracy and our ability to execute productivity initiatives to offset market inflation. I believe we persisted with integration-minded cost-cutting and did not pivot to a continuous improvement and productivity-driven mindset soon enough. Before I arrived, the company started to take actions to ensure this doesn’t happen again. But I see an opportunity to go further by bringing in more technical expertise in critical areas, improving collaboration and processes between our category and supply chain teams, and doing a better job of understanding the root causes of supply chain losses. This needs to be supported by our finance team leading cross-functional efforts to improve visibility. So one of my main priorities now and going forward is to ensure we have much better visibility in our supply chain as well as more robust ongoing productivity initiatives. I believe this critical part of the company should and can generate significant productivity. If we have the proper visibility, we can build a solid pipeline of efficiency-oriented initiatives across our value chain. Moving to our fixed costs or SG&A, we have taken out significant costs from the business since 2015. We also reinvested roughly $300 million last year in areas like people, go-to-market capabilities, marketing, and innovation. To be honest, it's too early for me to tell which investments will generate the returns we expect. But my experience tells me that whenever there are a lot of big investments in such a short period of time, it’s difficult to see all of them working at once. It’s therefore critical that we prioritize the ones that are working and that fit the strategic agenda we are currently developing. For those investments that are not working, we need to move those dollars to areas that may need more investment. For example, I believe our investments in media remain low despite fixed costs and overall marketing spending increasing over the past two years. On the brand and innovation side, we need to become more consumer-obsessed so we can better predict their behavior even before they know it. There are practices that need to change in the product development process so we can be faster and more consumer-centric with our new products. We also need to better balance spending and marketing, innovations, and core brand support. Regarding retail channel development, Kraft Heinz has grown rapidly and has had strong share performance in e-commerce, but we really need to take a step back and develop a longer-term outlook on channel growth and assess how Kraft Heinz can win and understand the incrementality of each customer. It’s not just about cutting costs; it’s about becoming more efficient and making dollars already in our budget work harder elsewhere. Let me turn now to my priorities and the opportunities I see ahead of us. When I became CEO last month, I established three immediate goals with the Board. The first, which should be obvious, is to get to know our business, our consumers, our customers, and my colleagues. The second is to execute our existing 2019 business plan. The third and most important is to lead a comprehensive review to develop a new strategic agenda for the next three to five years. It is critical that we get the organization to concentrate on setting our strategic direction and laying the foundation for our future now. We need to ask ourselves the hard questions about our business, not just about the short-term or next quarter. We must take the time to seek out external and internal inspiration and build on best practices, both within Kraft Heinz and from other world-class brands. From a financial perspective, we do expect many of the top and bottom-line factors that held back the first half to improve in the second half. But I’ve asked David not to provide or update specific point estimate financial guidance. Setting short-term targets publicly won't be productive as we work to deliver against our strategic directions and priorities. Additionally, as I'm learning the business and developing our strategic agenda, I want us to spend more time evaluating the questions of the investors. We absolutely remain committed to our investment-grade credit rating. But our more urgent priority is to get the organization focused on our consumers and customers. In this process, we need to ensure we don't rush to give away potential value to others. We have already started work and taken some early actions to put in place the right team and structure to help achieve my three immediate priorities. As you may have seen, my first act as CEO was to make some changes in our structure to help accelerate our progress. First, I have taken on the U.S. President role on an interim basis. The U.S. represents 70% of our company and this will help me understand our business, consumers, and the customers faster. For me, this deep dive is an essential step to developing the right plan that drives sustainable growth and shareholder value for Kraft Heinz. I also established a new role of International Zone President for Kraft Heinz, combining our EMEA, Asia Pacific, and Latin American zones, representing 20% of our global business. We did this to create a streamlined, more robust international structure, find commonalities, refine our strategy, and drive the business with greater speed. We will continue to share more of our approach to the strategic agenda over the coming quarters. We expect to complete our work by the end of the year and anticipate sharing our conclusions with you early next year. As we build this plan, my experience has shown that to truly change the momentum of a business, we must understand the future—identifying where the consumer and marketplace are headed—and then invest quickly and consistently to ensure our core brands serve those needs better than the competition. Further, I believe we can and must find internal efficiencies, whether in our supply chain or fixed cost base. These have both increased substantially in our last two years and can help fund this strategy. Intense discipline is a virtue, but it’s not an end in itself. I believe great companies are the ones that keep expenses under control so they can use the capital for new investments that grow both the top-line and the bottom-line. It’s not one or the other. As I look ahead, I’m very excited about the opportunities at Kraft Heinz. Similar to my attention to consumers, customers, and colleagues, I also look forward to engaging with the investment community over the coming months and quarters. Now, we would be happy to take your questions.

So first from me, a little more broadly. As you mentioned, there's been so much written and said about Kraft Heinz really just into even 4Q results in February, which immediately feels like a lifetime Miguel. It’s a little hard to know from the outside, I guess, what range is true or not. So first off, perhaps if you could just go through a little bit of specifics on what you see as some of maybe the biggest misperceptions among investors at this stage, both positive and negative? And then I just got a follow-up.

Sorry, I’m not going to comment on rumors or on speculation about what people think about Kraft Heinz. But I’m glad to tell you why I’m optimistic and why I’m here at Kraft Heinz. I really believe in the power of the brand we have. I think that we have an amazing portfolio of brands; some are shiny, some are not, but the heritage we have in the brands and the household proliferation and awareness makes me feel positive about the possibility of turning around some of the trends that we have in the brands that are not doing as well. I also think that we have a great scale, and that is a very competitive advantage in America. I am also very, very excited about the possibility of turning the business around. I have done it before in my life, and I think that it is possible. Now to turn a business around, I think it’s critical that we define a comprehensive strategy. This strategy has to be based on understanding the future and the consumer. I believe that if we have the industry in huge transformation today, transformation is also a moment of opportunity, and those who take this opportunity are the ones that will understand the future better than the others. So they will lead. Those who do not understand will follow. And the followers will not win. So we need to again set a comprehensive, simple strategy for the future and be very disciplined in making and executing them. So I'm very excited; I am much more excited today after 40 days than I was on day one about our future.

Thanks for that. And I know you're not ready to address, obviously, what you see as sort of a more sustainable margin structure for the business yet going forward. But as you mentioned, EBITDA margins have sort of come in some 500 basis points or so in the past three years. Some of that's been reinvestment, whether in marketing or capabilities, and some has been related to other items. But margins are still well above the Group average. So I guess my question is, do you think Kraft Heinz, with its sort of geographic portfolio and relative market share makeup, should be able to sustain a margin structure still well above the Group or not? Because in your prepared remarks, I think you talked about using the spending more efficiently that's already in the base. Thanks so much.

Yes. Thank you, Andrew. Let me start by saying again that I truly believe we need to invest much more, especially in our people and our brands. I think that, as I said before, our media investments are below where they should be. But before going after new investments, I would really look at the possibility of inefficiencies in the system so I can reorganize and redeploy these investments. I recognize that it’s early to talk about it, but I'm seeing a lot of inefficiencies, and this could bring us significant opportunities. I'll give you just two examples so I'm not being too theoretical. In marketing, we increased investment in the last two years, but in media, we've seen a decline. We grew investments or allocated money behind many other things, like agency fees, production, research, product development. But the thing that the consumer really sees, we've declined to pay for that expense. This was an inefficiency that we can definitely address. Another example, because of all the complexity that we introduced in the system, our supply chain losses have been increasing, actually in double digits over the last years; that’s not acceptable. We need to understand very well the root causes of supply chain losses and address them. We have losses that can be converted into investments. So just two examples of inefficiencies that I have seen very early here in my job. This has to be my focus before talking about new investments and reducing the margin. My approach will be to target inefficiencies that can be addressed to fuel growth.

I just want to ask a question. You spoke about — and I had the benefit of listening to your comments there about needing visibility, improving processes, and bringing new technical expertise. From a high level, that sounds like that’s a lot more blocking and tackling, basic improvements that need to be made at Kraft Heinz in order to get the business to where you would like it. I’m just trying to get a sense of the timing or expense or something to understand. Those factors, those items that have kind of been missing at Kraft Heinz today — how long you're talking, how much do you think it will cost to get the company to the point where you think you have the visibility you need and the processes in place to better grow the business?

So Chris, let me go back a little bit in time regarding Kraft Heinz. I think when you put two companies together, the first phase or cycle has to be about bringing in new culture and extracting inefficiencies. I think the company did a good job with that. We extracted a lot of efficiencies and cut many costs. But after two years, it's hard to continue to cut costs. You need to change the strategy or the path. In the first year, you have two CEOs, and you cut one CEO; so that’s cost cutting. But then, there isn't another CEO to remove costs in the following year. Cost cutting is a one-time activity and it is necessary when opportunities arise, but you must shift and think about how to reduce costs in a different way. That way focuses on efficiencies; it’s about making every day better. You need to change the mindset. If you reduce costs prematurely, you may run into trouble. I think this second phase starts now with me. Yes, it could have started before, and I believe the company would have benefited from that, but it didn’t. So it starts now with me, and I’m emphasizing that—not on cost-cutting but on extracting efficiencies from the system, making things better every day, enhancing our factory efficiency, and improving our sales execution as well.

Yes, that makes good sense. And thank you for that color there. I had a quick question for David. Just do you expect — you're not giving guidance for the year, but if you could provide us some context around FX, variable compensation, and non-key commodity? Are those figures you can update today, David, or would you wait to get more information on those?

Yes, Chris, thanks for the question. So, like Miguel said, we're not providing guidance at this point. But I can give some additional color on some of the items below the line. So we continue to expect up to $0.25 of unfavorability below adjusted EBITDA for the full year relative to 2018, and this negative impact will be greater in the second half relative to what we saw in the first half for a couple of different reasons. First off, the largest driver is tax. We have some discrete benefits in the first half, whereas we expect some discrete costs in the second half of the year. Second, we did see some FX favorability in the first half in other income that may flip in the second half. Third, related to incentive-based compensation, we will have a significant expense in the second half of the year, and this is due to the timing of the delayed filings of our 10-K and our 10-Qs, which we typically expect in the first half.

Maybe let me add on this point, Chris, because I believe this was a big disappointment for you that we're not giving you guidance. Let me go further and tell you why? First, because I believe that for Kraft Heinz, what we don't need is to focus on short-term profit targets. We have a substantial agenda to build. We have a second half to deliver. Focusing on short-term targets will not help. But since I've been here just for 40 days, I wouldn't feel comfortable giving guidance that I still do not have the necessary confidence in these numbers. I'm not sure if I'm going to overachieve in the second half, if I'm going to underachieve, or if I will achieve at all. In this situation, when managers look at leaders with empty pockets, they perceive uncertainty. What I know is that in the second half, some of the pressures we faced in the first half will persist, like supply costs or even commercial costs, and that is positive. However, there are also risks, such as further retailer inventory reductions and commodity inflation in categories where private labels have succeeded, like natural cheese, meat, and coffee.

So first question from me, I guess, we’ve gotten this a few times this morning on just how we should be thinking about confidence in the dividend going forward, particularly in the context of at least I guess not having the EBITDA guidance we had before. So if you could just talk about how you are thinking about the dividend and what factors may or may not affect it?

Sure, Bryan, this is David. Thanks for the question. As we said before, we are committed to our investment-grade rating, and we firmly believe that our business today generates sufficient free cash flow to support both deleveraging organically over time, as we’ve committed, as well as to support the current dividend payout that we have. On top of that, we have taken actions, as you know, earlier this year to accelerate the delevering, producing our dividend and successfully divesting the India beverages and Canada cheese businesses at a couple of digits multiple. So again, we feel that the business currently generates sufficient cash flow to cover the dividend and also to deleverage organically.

And then Miguel, just as you’re going through the process of reviewing the business, there has been some commentary in the past about potentially just evaluating the portfolio and implied additional asset sale. So could you just provide your perspective—not so much on what you might be thinking about doing, but just probably more from a higher level about how you think about asset sales in terms of how they create value and how they don't create value? What parameters you're considering in terms of what would lead you to do something along those lines?

Bryan, nice talking to you. I don’t want to be evasive on your question. But actually I don’t want to talk about divestitures or non-divestitures until we make our strategic decisions. I think that has to follow what portfolio you’re going to carry for the future, and only after refining and having these approved with our Board and discussed, I think we should be talking about divestitures. For that reason, at this moment, that question is not on the table.

Just a clarification, and not to beat a dead horse, but you do already have guidance for the year, right? You’ve talked about positive organic sales growth and adjusted EBITDA of $6.3 billion to $6.5 billion. I just want to make sure I understand – are you officially pulling this guidance, or are you just opting not to address it today?

Hi, Ken, this is David. That's right; we're not providing guidance for the full year, so we're pulling guidance. But I can provide a little bit of color on our expectations for the full year without giving an updated point estimate for sales or EBITDA. As I said before, we expect to see better year-over-year performance in the top and bottom lines in the second half compared to the first half, and some of the drivers are consistent with what we stated in February. However, there are some new potential risks to that as well. What hasn’t changed versus our expectations in February are continued retail takeaways we’ve seen in the market with U.S. consumption up 1% and Canadian consumption up 4%. We expect both to be supported by accelerated innovation in the back half.

Okay, thank you for that. I appreciate it. And then my follow-up. Miguel, I know you're not ready to really talk about this in detail, and I understand it. But there's been a lot of talk today about the supply chain, shifting the mindset from that of a merger savings model to ongoing productivity. But is there anything you can give us specifically in terms of what's really going wrong on the top-line? I know you mentioned media spending has gone down and so forth. But just your initial take, because to me that's the most important thing that Kraft can do to turn the story around is to reverse the top-line trend. So if there's any specifics you can share with us right now, that'd be great.

I think that we need to have a strong focus on both bottom-line and top-line. Perhaps in the past, we were too focused on the bottom-line. We need a strategy for growth, which is critical. We need to find opportunities, identify white spaces, determine which brands to invest in, and which channels that currently have lower share need more investment. We should also consider what countries where we should grow and bet on. Examples include China; we have a very good business in soy sauce. We are leaders in two provinces, Guangdong and Fujian, which are wealthy areas. But we are only in three provinces. The soy sauce industry is $12 billion and grows at 8% annually. We have great activity there, but we have only penetrated two provinces—a big opportunity for expansion. We must approach it with good policies and mindsets. Additionally, we need to work on efficiencies to fund these growth initiatives and be more efficient than every other player in the market. Upon arriving here, I was completely assured I would find opportunities for growth; however, I did not know if we had room for efficiencies. Today, I know we have numerous opportunities across the board.

Welcome Miguel. Supply chain savings, or like it rather, was cited as a big reason for the last 2018 shortfall. Where do you believe your supply chain costs and competencies are relative to where they should be? And I asked because I think there are many who wouldn’t be surprised to hear about the investments needed given the stories we heard out there—not just that the savings are not there as the company stated last year? And I had a quick follow-up.

The good news is that the service level we achieved in the first half was, I think, the best we've seen, maybe ever, or in the last year. This is a positive development, and I credit this to the changes that were made prior to my arrival under the leadership of the supply area. For the future, we are opening up channels for internal and external expertise to help us define what is an effective path for future efficiencies. We’ve opened eight fronts, addressing supply chain losses, service levels, staffing, and productivity on the line. These aren't one-off projects; this will become a way of life. We've been overly focused on the present, essentially on fire fighting—extinguishing fires as they come up. We need to concentrate on our future competencies with a mindset of continuous improvement every day. This shift in mentality is something I’ve experienced before in my career, and it is essential.

And just a quick follow-up; there was some reinvestment that was made last year, I think it was $300 million in some levels of brand support. You said that there are some inefficiencies there. But as far as the return on that investment and any marketing investments you're making in your brands in the categories you're in, do you feel like there are enough success stories that you can build upon here? And what would those be? Because I think there are a lot of questions about the return on any marketing investment in some of the categories that you're in.

Let me start with progress. Consumption is that we haven't seen consumption up for a long time, share is flat. I would cite that I've received reports from Nielsen covering 21 categories, with 13 of them having positive shares in the first half of the year. So I could argue with you that many investments are indeed working. For instance, Heinz Ketchup, with the innovation we had and the communication around it, is a very good example. The innovation to premiumize the brand, along with launching organic versions with no added sugar, allows us to command a higher price point with improved margins. That contributes to our brand perception. This is a prime example of what we should be doing—investing more in brands to achieve robust share growth, i.e., moving from 60% to 70% share. But on the other hand, as I mentioned, we can do a much better job in concentrating investments on core brands, not diluting that focus among numerous smaller brands. We should prioritize accretive innovation on major brands instead of spreading ourselves too thin with too many new ones.

Hey, good morning, folks. And welcome Miguel. Two questions from me as well. And you probably just kind of touched on it by referencing consumption and market share trends, but appreciate the commentary on the reinvestment into people, media, and perhaps in some white space opportunities. A lot of investors we speak with have also questioned whether investment may be necessary in price—whether it be to narrow price gaps with private labels or to change the economics of retailers to incentivize focus more on your brands. I would love it if you could just maybe comment on that—where you see these price gaps and the retailer economics today and whether you think you're properly aligned?

Look, I think that pricing is an area of opportunity. I would even say that revenue management overall is another area where we could improve. However, specifically concerning pricing, I believe that in the categories we lead, we must remain competitive, and in the past, it took us too long to pass inflation along, leading to struggles. While we have brands like Heinz Ketchup or Philadelphia, where we've been able to manage pricing effectively and continue to grow, we feel more pressure in categories facing intense competition from private labels or those driven by commodities like cheese. As David mentioned earlier, one risk we face in the second half is due to rapidly increasing cheese commodity prices, where we are tracking our pricing, and we expect private labels to respond accordingly. However, the outcome remains uncertain. Additionally, I believe better revenue management opportunities exist—we can optimize our discount allocations across our portfolio more effectively throughout the year, understanding better what works and when. Overall, I believe there are significant areas to explore in these arenas going forward.

Thank you, that's helpful. And my last question—I appreciate that you guys don't want to box yourself in with specific guidance for this year, but you did have another impairment charge, a fairly sizable one related to a new five-year operating forecast or revised expectations and priorities. I was hoping you could put a little more context around what is changing as you look out over the next five years versus maybe where your expectations were at the end of last year?

Jason, this is David. Thanks for the question. On the impairment side, first off, our impairment testing, as you know, occurs in the second quarter every year. So we performed our testing procedure this year after we filed the 10-K, concurrent with preparing our Q1 and Q2 financial statements. To reiterate, these are preliminary numbers that we disclosed in 8-K. The preliminary impairment charge in the first half was driven by two main factors. First, as you said, we did have revised expectations in response to current market factors in some of our international businesses, which were evaluated during the first quarter of 2019 as we developed these five-year plans. As a reminder, these are EMEA East reporting unit, LTA Exports reporting unit, and Brazil, where we had an impairment. Secondly, we also applied a higher discount rate to reflect the sustained decline in our stock price since the start of the year. Also, keep in mind that we started the year with nearly $60 billion of goodwill and indefinite-lived intangibles, with less than 20% attrition relative to carrying value. So there is a risk of future impairments; any change in forecasts or modeling assumptions can particularly trigger that. Regarding our operating forecasts, we did have lower revenue and margin expectations for the three reporting units mentioned earlier.

Hi. Good morning and welcome, Miguel. A very short opening question then a little bit more of a strategic one. So the short question would be, as you think about the strategic review, when should the investment community as a whole kind of expect to receive the output of the notification? And then from a strategic standpoint, wanted to understand, given your experience at ABI, a different industry, what are some of the similarities and dissimilarities relative to Kraft’s portfolio that you observed and how that ultimately impacts the earnings power of the company? I recognize your private label is low in that industry, but how does that shape your view with the current portfolio they're working with? Thank you.

Okay, Steve. We'll update you through the rest of the year on how strategic work is going. Our intention is to share our findings with our Board at the end of the year and then share with you at the beginning of next year. Now, regarding my experience with food—well, with beer and how this can be adapted to food, there are similarities but also many differences. This fresh perspective has been beneficial; I’ve been asking questions that were obvious yet not previously considered. This is a positive shift. My prior experience, both in leading global brands at ABI and employing premiumization as a growth model, has been quite interesting. When I was Head of Marketing, ABI grew substantially due to mix, especially premium brands. I see this as an opportunity for our industry; premiumization is still being driven largely by smaller companies rather than the larger ones. Additionally, one significant insight comes from my experience leading our business in Asia; China has been a source of organic growth for ABI because we accurately forecasted that economic growth would lead to premiumization and rapid channel growth. Making parallels with Kraft Heinz, we must navigate current challenges while building a strategy focused on the future. It is essential to identify where growth will occur in the food industry and stay ahead of the competition. Our success in China came from understanding the market better than local players. We must maintain a forward-looking approach in order to thrive. In summary, I am excited about the opportunity to propel Kraft Heinz to the next level. Like you, I am disappointed with the results from the first half. I am determined to restore our business momentum with the support of our Board, which not only encourages me but also expects a new direction moving forward. There are no sacred cows and no preconceived ideas—just fresh eyes and a focus on what's best for our company. Despite the obstacles, I see encouraging signs in solid consumption trends, but we must diligently work on our portfolio, strategy, and approach to establish ourselves for growth in both revenue and profit. We need to improve our speed, become absolutely obsessed with consumer understanding, and anticipate market trends better than others. We must transition away from a cost-cutting mentality towards a culture of continuous improvement and efficiency, which is also a priority in strengthening our balance sheet.

Thanks, everyone for joining. For analysts who have follow-up questions, Andy Larkin and I will be available, and for those in the media, Michael Mullen will be available for you as well. Thank you very much and have a great day.