Kraft Heinz Company (KHC) — Q1 2020 Earnings Call Transcript

Hello, everyone, and thank you for joining our business update. We will begin today's call with an overview of our first quarter 2020 results, as well as an update on our path forward from Miguel Patricio, our CEO; Paulo Basilio, our CFO; and Carlos Abrams-Rivera, the Head of our U.S. business, and then we'll open 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 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 let's turn to Slide 3, and I'll hand it over to Miguel.

Thank you, Chris, and good morning, everyone. I want to begin my comments today with a few thoughts about purpose. To be leading one of the largest food companies in the world at the moment of an unprecedented crisis is at the same time a privilege and a great responsibility, not only to our consumers and customers, but also to our employees, our employees on the front lines, producing, distributing and shelving our products. Our teams understand exactly and have embraced our sense of duty. They are proud to be feeding the world, and suddenly, our purpose has become much more obvious: to keep feeding the world. At the start of the year, if you recall, our main objective for 2020 was to lay the foundation for future growth, the first step in a 3-stage turnaround. I can tell you today, it's turning out to be just that and so much more. In February, I said the essential ingredients for our turnaround were in place: people with deep experience in key roles to drive functional excellence, perspective on where consumers are going and how we can win, productivity initiatives with detailed jobs to be done, and the financial profile with strong free cash flow going forward. I think we are seeing each one of these on every front in what we cover today from our COVID-19 response, where our people are rising to the challenge, to Q1 results that show the underlying business in line with initial expectations and how we have met an unexpected spike in demand and increased consumption of our brands; our turnaround progress for 2020, which is on track, even as we adapt to this unprecedented call to action, making us cautiously optimistic for the rest of the year; and the fact that we are turning our strategic plans into action despite the strains of working virtually. As many of you have noted, the next several months will be critical in understanding the path forward and the potential for our industry. The same goes for Kraft Heinz at the pace of our turnaround in the near term. We are in a highly dynamic, unprecedented environment, and what we think today may be significantly different from tomorrow. For now, let's focus on what this new world has meant for our business so far. In a nutshell, our response to this pandemic so far and how our people are rising to the challenge is showing ourselves and the rest of the world just how strong our company really is. In procurement, the team has worked overtime to make sure we had adequate supplies to meet demand. They were building scenarios very early when things first started happening in China, increasing inventories of critical materials and finding new success. There's no question that we are meeting peak demand today because we did a great job anticipating the future. As I'm sure you can imagine, the situation continues to evolve rapidly, but I feel certain that I have the right team in place to prepare our business for what's ahead. In late February, we established our global Kraft Heinz coronavirus task force to actively monitor the COVID-19 outbreak worldwide and in the U.S. This has allowed us to take proactive steps to keep our employees and supply chain safe during this time. And we are learning through the journey, leveraging our global presence and sharing best practices across the organization at an unbelievable speed. But our people on the front lines in manufacturing, distribution, and in-store sales are the real heroes in all this, and they are taking our business to the next level. Morale in our plants has never been so high, and I cannot say enough about our people's commitment. Our teams are producing with pride and purpose, working smart by eliminating those products with significant changeover times in order to boost production. In sales, not only has the team deployed itself more broadly to assist distribution and stock in retail shelves, but they have done an excellent job optimizing channel and SKU mix to make sure we get the right products where they are needed the most. And this has gone a long way in improving our collaboration and continuity with our retail partners, something we can build upon further once we have passed this crisis. Our IT shared service, human resources, communication, and legal teams have been anticipating our needs, enabling us to work closer even though we are physically further apart. They have been coordinating with our external partners, including government and community leaders so we can continue to be effective under various shelter-in-place rules state by state and country by country. And our finance team has been working tirelessly to improve both our liquidity and our forecast accuracy to enable industry-leading execution under multiple scenarios. Overall, our business is strong. We are operating at peak capacity, performing at world-class levels and leveraging our industry-leading safety, quality, and hygiene practices. Our entire organization is displaying agility as demand forecasts and news flow can change scenarios multiple times per day. Going forward, as we will talk about later, this crisis is causing us to accelerate our supply chain, the complexity efforts, reprioritizing our merchandising calendars, and rebalancing our marketing efforts. I think this is an important moment where our culture of accountability, the speed and agility our lean structure can bring, and our scale to be everywhere for consumers in times of uncertainty can be a real differentiator for Kraft Heinz. A big part of our strategy development was to get our marketers thinking about the future, building the future, to ask themselves what will happen next, what behaviors will change. Now we have to think about future consumption if 40% of adults live alone and will eat more meals at home, if kids eat more breakfasts and lunches at home versus school or on the run, if new consumers that have come online stay online for their shopping; if consumers will continue consuming big trusted brands, brands that bring them comfort and familiarity in moments of uncertainty; and if drive-through and delivery becomes the norm, how we can be more creative with our foodservice customers and make our products more relevant. Turning to financial impacts. We've done our best to quantify the impact from the recent spike in demand, although we acknowledge this does not come with our typical level of precision. On a net basis, we estimate that the additional demand we have experienced as a result of COVID-19 resulted in about 6 to 7 points of incremental organic growth in the first quarter and with the contribution of 9 to 10 points of additional EBITDA growth. Looking forward, while Kraft Heinz, our customers, and our peers will continue to operate in an environment of significant uncertainty, there are four expectations we have a high degree of confidence in sharing. First and foremost, we think it will be critical for our brands to reassert their advantages in taste, performance, value, and reliability. So we will continue to step up investments behind our brands, and the work that has been done behind our new strategic plan has given us a head start on this front. Second, we expect our foodservice sales to decline between 30% and 70% in each of our geographic zones depending on channel mix as well as the creativity and agility both we and our customers display during this period. And keep in mind that foodservice represents roughly 15% of our net sales in each of our business segments. Third, and perhaps the most important, the scenario planning we do regarding both at-home consumption trends and the likelihood for a global recession will be key to our near-term growth and profitability, as well as building more strategic, collaborative, and long-term relationships with our customers. And finally, I will tell you that we do not believe Q2 consumption patterns will be a reliable first indicator of what the new normal will look like. Variables like at home versus away from home and recession versus growth will likely become clearer as the second half of the year unfolds. And obviously, all of this will play out differently by country in each one of the segments. So at this point, I will hand it off to Carlos and Paulo to discuss our business and financial results and outlook, and then I will return with a few words on our Investor Day before we go to Q&A. With that, I'm delighted to introduce you to Carlos Abrams-Rivera, the new leader of our United States business. Well, to say that Carlos has hit the ground running would definitely be an understatement. Carlos?

Thanks for the kind words, Miguel. The last 90 days have been challenging and even more rewarding than anticipated. I was familiar with most of the business and understood the opportunity for change. Our response to this crisis has only strengthened my belief that Kraft Heinz is in a unique position to serve families with trusted brands, has a strong sense of ownership and clarity of purpose to feed the world and is demonstrating agility to rise to the challenge of the moment. As you would expect, I spent my first month getting to know the team, assessing our capabilities, doing some deep dives on underperforming business, and shaping a new consumer-centric direction for our U.S. zone. And with the turnaround work already underway, I have worked quickly to add my own perspective into our efforts to simplify processes, distill marketing resources to higher ROI and gross margin parts of the business, drive the complexity, and establish clear priorities to deliver our commitment. All these efforts have only intensified as a result of the crisis in which we are living. So I was expecting my first interaction with you would be to talk about the new integrated business plans we're installing to improve our forecasting, reduce waste and sharpen our strategic direction as well as the beginning of our sales transformation and the steps we are taking to accelerate marketing excellence. For these last two months, we've had an extra layer of crisis management that, in many ways, is accelerating our turnaround. We are cautious to move faster to simplify manufacturing to maximize throughput, reevaluate our merchandising strategies, shift our marketing spending, adjust our messaging and strengthen our collaboration with our suppliers and customers. I will finish my initial observations by saying what a privilege it is to work with the thousands of colleagues who, day and night, are doing what's needed to make our trusted brands available all across our country. I have been amazed by the work of our teams, and nothing captured this better than the message that was born from our factories: We Got You, America. We were also inspired to amplify their voices by bringing this spirit to life on film for all America to see with our hashtag We Got You, America campaign. Now in terms of our Q1 results for the U.S. segment, we initially expected Q1 sales to be pressured from a combination of pricing to offset dairy and meat inflation with related share loss and volume declines as we led on pricing; some carryover distribution losses, particularly in our frozen business; with a partial offset from strong foodservice growth as we lapped the prior year comparison due to winter storms last year. In January and February, the overall business performed slightly better than anticipated. However, our market share trends remain weak with natural cheese, cold cuts, and frozen meals, in particular, down roughly 2 points. In March, however, this trend reversed. Consumption in cheese, meat, and most every category for them had accelerated, while foodservice sales fell more than 20% versus last year. As a result, Q1 organic growth was 6.4%. And in terms of profitability, we initially expected a mid-single-digit decline in adjusted EBITDA for Q1. Instead, we grew roughly 6%. Looking forward right now, we think organic top line growth in Q2 will be in the mid-single-digit range. This is based on our expectations for strong retail takeaway to continue, boosted by retail customers rebuilding inventory, and with foodservice sales declining by roughly two-thirds. I would, however, caution you against expecting similar top line growth in the second half of the year. This is because, at some point soon, it is reasonable to expect initial pantry loading to run off as consumers adjust to a new normal. Foodservice weakness is likely to continue beyond this initial crisis period. And keep in mind, we will exit the McCafé business in the U.S. beginning in Q3, and we'll now lap some distribution losses until late in the year. Now I will turn things over to Paulo to talk through the results for the rest of the business and where we expect to go from here on the financial front.

Thank you, Carlos, and good morning, everyone. I will start with our new international segment. We came into the year expecting Q1 organic sales to reflect growth in Asia and Latin America, offset by product discontinuation in Australia and New Zealand. In net EBITDA, we expected a decline after the prior year, driven by carryover supply chain inflation, mainly in Australia and New Zealand. Instead, Q1 organic net sales grew nearly 7%, and constant currency adjusted EBITDA grew 7.3%. This was driven by COVID-19 related sales, primarily in developed countries where disposable incomes allowed for greater stock-up, specifically Western Europe, Australia, and New Zealand, although foodservice sales during the quarter were down more than 6%, with declines in both developed and emerging markets. Looking forward, we are cautiously optimistic that our international business can see Q2 organic top-line growth in the mid to high single-digit range, similar to that of Q1. Thus far, during this crisis period, we have seen our brands gain market share in most categories in most countries, and we expect solid retail sales momentum to continue. However, foodservice sales are at risk in the near term, and we expect Q2 foodservice sales could decline 30% to 50% versus the prior year. Turning to Canada. We initially expected Q1 organic sales to be down significantly from a combination of lower pricing due to both a higher level of trade activity as well as the timing of trade expenses versus the first quarter last year and lower volume, driven by lower coffee shipments, including our exit from McCafé at the start of the year. We expected constant currency adjusted EBITDA to decline significantly versus the prior year, including the impact of the divestiture. Excluding the divestiture, adjusted EBITDA was also expected to decline from a combination of the lower organic sales and supply chain inflation. In the end, top-line growth came in better due to COVID-19-related consumption in March, and market share improved in the vast majority of our categories. However, declining profitability was disappointing, due to a combination of additional supply chain costs and the timing of trade expenses. As I said in February, more work needs to be done to turn underlying terms in Canada around, and we expect this to happen as the year progresses. For Q2, while we expect further benefit from greater at-home consumption, organic net sales are still likely to decline low single-digits as foodservice is expected to decline significantly versus the prior year, and we have the ongoing impact of the McCafé exit. At the same time, while adjusted EBITDA should decline due to the divestiture impact and McCafé exit, EBITDA margin should begin to return to prior year levels in Q2 as both pricing and supply chain performance improve sequentially. Turning to total company performance. I do not want to repeat what we've discussed already, only to highlight three key points. First, while Q1 organic net sales growth was consistent with the approximately 6% growth we forecasted at the beginning of the month, adjusted EBITDA came in somewhat better than expected at roughly flat on a constant currency basis, although it's still not reflecting the full benefit of the incremental sales in the quarter. The second thing to highlight relates to adjusted EPS, where the items below EBITDA, although unfavorable year-on-year, were largely consistent with our full-year expectations. Finally, I would like to mention the improvement in our cash flow and cash generation. As many of you know, our first fiscal quarter is typically our lowest in terms of cash generation. That said, free cash flow in Q1 was nearly 1.5 times the prior year’s. And it's worth noting that at the end of Q1, we had a significant increase in quarter-end receivables due to the spike in demand. That was only partly offset by lower inventory levels. So we should see the free cash flow benefit from higher sales show up later this year, which brings me to our financial outlook. Like most companies today, it seems we have more scenarios than certainties as we look at the remainder of the year. At the same time, there are a number of things we can forecast and therefore, set a base that we can update as the year progresses. For instance, we still believe 2020 will be an important year of progress in the multi-year turnaround we envision. Recall that we set three priorities for 2020: we establish a strong base of sales and earnings, to rebuild underlying business momentum, and to continue to reduce debt while maintaining our current dividend. All these priorities are on track even as we adapt to the new challenges. In addition, the negative year-over-year impact from the divestitures, business exits and the normalization of certain costs and business trends that we outlined in February held back our first-quarter results, largely as expected. And we continue to think these same factors will continue to hold back our results for the remainder of the year. We do expect the Q1 impact from greater COVID-19 related demand, both sales and EBITDA that Miguel outlined earlier, will be additive to the full-year 2020 financial expectations we laid out in February. Below EBITDA for the full year, we continue to expect a roughly $0.38 headwind, reflecting an effective tax rate above our original 20% to 22% range due to a current U.K. tax view under consideration, a slightly higher interest expense due to our revolver drawdown, to be offset by more favorable other income versus our prior expectation. I will also note that if the change in U.K. tax law does occur in Q2, we are likely to see an effective tax rate of about 30% in the quarter due to a one-off non-cash adjustment to deferred tax liabilities, which brings me to our Q2 outlook. For Q2, all things considered, including recent data, we currently see low to mid-single-digit organic net sales growth and mid-single-digit constant currency adjusted EBITDA growth as reasonable expectations. While a stronger Q2 should mean greater upside for the full year, at this point, it remains a highly unpredictable environment. Therefore, it's difficult to become significantly more optimistic about the second half. On one hand, there will be no pause in our initiatives to focus our investment in strengthened brand support behind our flagship brands and capital efficiencies. And we will continue to refine our merchandising calendars against available capacity to execute. On the other hand, we see three discrete factors that will hold back second half EBITDA. First is the McCafé exit that is already underway in Canada but begins in the United States in July. Second is the incentive compensation also mentioned on our prior call. And third is currency translation, particularly given recent dollar strength. Together, these factors currently represent an approximately 700 basis point headwind to our second half results versus the prior year. In addition to that, we see a number of risks that are currently difficult to quantify, including foodservice sales and their certain pace of recovery, the potential for consumer pantry deloading and supply disruptions, as well as the possibility that the recent key commodity deflation we are seeing in the market could turn into greater commodity volatility and therefore, not benefit profitability as the year progresses. As a result, while we are comfortable calling for the Q1 upside and a good portion of potential Q2 outperformance to stick for the remaining of the year, we feel that there are too many unknowns at this time to confidently expect significant upside beyond that. At the same time, none of these uncertainties are expected to get in the way of our continued work and continued expectation to strengthen our balance sheet and adhere to the capital allocation priorities we laid out earlier this year. This includes maintaining our typical conservative posture as it relates to liquidity, which we believe is even more important as we focus on making sure all our products remain available to the public during these challenging times. It also reflects our expectation that free cash generation as a percentage of net income is still expected to go up versus last year. Even though we are holding to our CapEx of $750 million for the year, we now expect to generate more cash than originally expected in excess of our normal dividend payout in 2020. So we are in a strong position to continue reducing our debt and look for opportunities to further improve our liquidity while we maintain our current dividend. With that, I will turn it back to Miguel for a preview of our Investor Day.

Thank you, Paulo. As you know, we have been developing our new strategy, transforming our capabilities, and making needed investments in the business for months. And no one was more anxious to share our work than we were. But uncertainties that have arisen due to COVID-19 have given rise to a heightened attention on the next five months versus the next five years. And frankly, it has made it more than appropriate for us and the broader industry to revisit assumptions, some strategic priorities, and for us to revise the pacing of our savings and investment expectations. So we decided to move this event to September to do things once and do them in a holistic way. In September, we want our new leadership team to share our perspective on the unique assets and advantages we are building from, key findings, and the paradigm shift we are employing and the new operating model we are putting in place, and of course, give you a chance to ask questions to our broader team. We will walk through the extensive review we've done by category, by country, and in market to build consumer understanding that has led to the new insights, how we think our portfolio fits today's consumer, and how we can adapt and drive future consumer trends. We'll also provide our assessment of the unique building blocks we think we have at Kraft Heinz, assets such as scale, global footprint, deep household penetration, an unparalleled portfolio of businesses and brands, capabilities in the form of an advantaged cost structure, and a culture of agility and accountability, and how this can allow us to anticipate and deliver against consumer needs with agility at scale. We will also discuss how we no longer think about our portfolio as 55 product categories and individual businesses by geography. We are reorienting to how consumers think, a few specific platforms that are globally relevant, platforms that will leverage our strengths to drive proper consumer insights and allow us to better prioritize our emerging market growth initiatives, for instance. It's an approach that we are very excited about, but more of this to come in September. And finally, we will provide you with our blueprint for our future. We'll describe a new Kraft Heinz operating model that will include and address many questions you have around; our new strategic priorities, marketing and sales initiatives, and saving opportunities in sourcing and supply chain. We have a more clear view of the things that will make a difference for us, the things that will bring both more operating efficiency and better consumer relevance for our brands. We'll have a lot to discuss in September. For now, I will leave you with this. Standing here today with a comprehensive strategic plan, I'm even more confident that we can return Kraft Heinz to consistent, predictable top-tier growth on both top line and bottom line. Now we'd be happy to take your questions.

Great. Thanks. Good morning, everybody.

Good morning, Andrew.

It's interesting. A number of food companies that have reported thus far have pulled full-year guidance, certainly given all of the uncertainties, but have also been less comfortable providing any real outlook for – even for calendar 2Q. So it's interesting. What are you seeing, I guess, that’s enabled Kraft Heinz to provide, as you call it, a reasonable expectation for 2Q perhaps when others have been less comfortable doing so?

Andrew, this is Paulo. We've been improving our way of communicating with the market and trying to share with investors how we're seeing the business. And again, we decided to give a better view, given the volatility that we're seeing in the market. We decided to share what we are seeing, although highlighting the risks, how we're seeing Q2. And given the demand that we see in terms of our retail business, also the headwinds that we are facing in our foodservice business. So it’s the decision that we took to share with the market how we're seeing this next – the Q2 and the next 2 months that we're at the end of April. And we are very cautious about the second half. But it's because we believe that we have good visibility and the ability to share more of our views for the quarter with the market.

Great. I think you expect the profit flow-through from some of the additional COVID-related demand in the second quarter to be even stronger than what we experienced in the first quarter. I'm curious about any potential headwinds that may ease between the first and second quarters that could contribute to this. Thank you.

Yes. No, I think very much the three drivers that are improving our profitability of sales flow-through to EBITDA are first, we are seeing a much better product mix versus what we have in Q1, including the retail versus foodservice. I think the second component is where our supply chain performance, as we discussed before, we were seeing some supply chain headwinds come in Q1, and now they are behind us. And the third is a better balance between price and commodity costs. As we also highlighted in the prior call, we were lapping a very low price for one of the commodities in Q1 that now we believe is going to be more balanced. This balance between price and commodities will be better. So those will be pretty much the three drivers that are driving the flow-through improvement from Q1 to Q2.

Thanks so much.

You are welcome.

Hi. Thank you. Good morning, everybody.

Good morning.

I wanted to ask about the input cost outlook. You did talk about how one of the risks is that current commodity deflation could become, I think, the word you used was a little more volatile. I was wondering if there's any potential for you to minimize some of that volatility, whether it's using futures contracts or hedges, just to take advantage a little bit of maybe some of the cheaper costs for some of the key items that you're buying today?

So, Ken, let me start here, and then maybe Carlos or Miguel can also comment, specifically Carlos. But we are seeing – there is no doubt that we are seeing a much more favorable environment in commodities than at the start of the year. And also, you should see sequential improvement from what we saw in Q1 versus Q2. For now, what I can tell you is that the favorability that we see in Q2 is already considered in the outlook that we've just provided. But for the second half, for us now, it’s too early to give any type of level of precision given that level of volatility that we're still seeing in the market. And also, if you remember, there is also the component of uncertainty around the retail prices that will come.

Probably the only thing I would add is that, as you said, the meat and dairy projections are within the outlook we've given for Q2.

Well, that makes sense. I'm just wondering if you're physically able to buy ahead a little further out. I know some of those futures contracts for months that are further out are not as liquid. But I'm just trying to figure out if there's a way for you to physically lock in some of the advantages that you might have. I'm not asking for guidance for the back half as much as I am for – just curious if there's any steps you can actually take right now to help yourself.

Listen, we have, in some cases, it varies. We have some opportunities to do some types of markets depending on the commodity to do some hedges, and we are evaluating this. The future also as the spot price; they have differences. And there are some opportunities in terms of the inventory that we're exploring, but they are limited.

Okay. And very quickly as a follow-up. You are maintaining your CapEx guidance. Most food companies have lowered their CapEx guidance. Can you just talk about whether you consider at all deferring some capital projects into 2021? And whether that was a strong consideration or what made you decide to keep the CapEx as it is?

Listen, we have – as Miguel and Carlos mentioned, we have our clear strategic view. We have some relevant projects that we have. Our – as we are discussing our cash flow position and our visibility of the business is strong in terms of cash. We are – of course, we are reevaluating and replanning the type of CapEx and the type of equipment that we will do and the timing that we're going to get them through the year. But we want to keep the investment and want to keep the execution that we plan for the year.

Hi, thanks. I think I'm going to pivot to private label. In the past, Kraft has had trouble maintaining market share versus private label during times of commodity volatility. And your shares are up right now. What do you think retailers are going to do about their private label merchandising in the back half of the year, especially given the likelihood of a recession? Do you have any concerns that categories like cheese or meats might see more pressure than you're seeing right now from private label?

Look, Robert, I think in terms of uncertainty, consumers turn to brands that they trust. They want to experiment less with new brands. And that's what we're seeing right now. Our brands represent comfort for people, and I think that the consumers are coming back to big brands. As a result, our leading iconic brands are growing household penetration in almost every market, especially the developed markets like U.S., like Canada, like U.K. So I think it's critical that we continue investing behind our brands to reassert the advantages that we have in taste, in performance, and in value. I think also that for our customers, reliability and availability are extremely important in this environment. This is where agility can, with scale, really set you apart. I think that we are working with our customers in a very agile and close way. And I don't – and this is what's happening right now. Yes.

Yes. I totally agree. But are you monitoring your price gaps? Maybe the price gaps don't matter that much today, but have they expanded since you initiated price increases at the start of the year, or is it just too volatile to know?

I believe that during the crisis, we managed to collaborate with our customers to find the best ways to reduce promotional events that were currently occurring in the market. Our inventory challenges necessitated this collaboration to ensure we focused on the right events in areas where we had better stock. As we move forward, we anticipate being able to reintroduce promotional events in the market once our inventory is restored to the desired level for the year.

Congrats on a great execution. Thank you.

Excuse me, hi good morning everyone. I guess, maybe to follow up a little bit on Rob's question. You went into this year with plans to increase marketing, also some product renovation and product innovation. So maybe could you talk about just how this situation has altered your plans? Are you still expecting to bring some innovation to market this year? And maybe also just how retailers are thinking about new products and the product pipeline?

Sure. Bryan, Miguel. We disclosed in previous calls that it was in our plan, in our budget, to increase media around 30% this year, although this increase would be coming from within. So marketing shouldn't have substantial growth, but media would grow 30%. It's our intention to keep the investments on our brands, and even evaluating right now if we shouldn't even put more to create the momentum, and especially to keep the penetration that we are seeing, the increase in penetration of our brands with our consumers. Regarding innovation, we postponed a lot of innovations. Talking with our customers, we thought – actually, that was the best thing to do because at this moment, what we are doing is actually reducing the number of SKUs that we are producing so we can have better productivity in our lines. And we both thought it was not the best moment to introduce innovations, so they were postponed.

Let me just add a couple of things, Miguel. One in terms of the marketing and what we're seeing is, listen, I think that Miguel said, we're committed to, in fact, spend more or less. Now what you're going to be seeing is that we will actually rebalance our lower marketing spend so that it can better reflect the healthful gains we're making and the new consumers that now are coming to our franchise. So as we speak, we're actually looking at what is the right media, the right channels for us to reach those new consumers that now have come into our franchises. Already some of that work is underway. And I think let me just give you a couple of examples of how that translated into the marketplace. We're actually making some adjustments on sync like the Oscar Mayer, Front Yard Cookout, a way for us to stimulate during the grilling season that kind of behavior with our brands. You're also seeing things like our Heinz Designer Support, a way to actually give back to our diners in a moment in which they really need us. And then just switching, just one additional comment on the innovation part of the question. What I'll tell you is that we are completely aligned with Miguel in terms of us adjusting some of the innovation. And in general terms, I think that we will continue to evaluate innovation as we think through the lens of capacity. The one challenging all this on innovation, you have to do with our food service. We are seeing already some restaurants that actually are shifting from things like tabletop to more portion control. We're working to adapt. I think we have a very agile organization that allows us to make this shift. And we're working with our customers to make sure that we supply them in the way they need now going forward.

All right. That's very helpful. And just as a clarification, in terms of marketing and advertising levels, the planned increases that you had for your budget this year are still embedded in the expectations. So it's not like the marketing budget or advertising is going to be lower this year and has to go up again next year. At least as you know now, you're planning to spend what you're originally expected to spend.

That is correct.

Thank you.

Hi, good morning. Quick clarification to Bryan's question. For the innovation slate that was pushed out, Miguel, can you clarify whether that was to the back half or the back-to-school season of this year, or is that maybe even a little bit further into 2021?

No. We are talking about what we had in the pipeline for this year. Yes, for the midyear for back-to-school and towards the end of the year. So we're talking about the remaining of the year, not 2021.

Okay. Great. And then a more fundamental question, I would say, is as we think about going into Investor Day, one thing that you emphasized was the importance of scale in global platforms. When you look across the portfolio, which platforms do you define as being the most scalable and relevant to food is a little bit of a local business? And then in the past, when Kraft and – was first put together with Heinz, the company was emphasizing the degree of number one brands that were in the portfolio. So my question is, how is scale maybe underutilized in the past? And how can a new strategy better execute and leverage that scale relative to how it was the last few years? Thank you.

Look, I think that scale is a critical word for us and what makes us different. We – especially in North America, we have scale. How – scale has to come with agility because if you have scale and you are not agile, that goes against you. But if you have agility of scale, it can be a winning combination. And I think that for us, it is very important. I think that the business in the past was managed almost by category. And then when you do that, it's like slicing the company in pieces. I think what we have to do is exactly take advantage of the commonalities, the scale that we have. And when you find these commonalities, then a lot of things come with it, insights, synergies. And so yes, I think that for us, we are absolutely intrigued with the benefits of agility at scale at this moment. Talking specifically about what can be global. What is global, what can be global and will be global is our ability to win in products that add taste and flavor to foods. Instead of talking about ketchup and mustard and mayonnaise, if you think about what are the products that actually enhance taste to food and what are the insights and the synergies that are behind is pretty exciting for us. So that's the way we are looking at. So when we think about platforms, we are starting with consumers, understanding what are the consumer needs, what are the main reasons, what the consumer is looking for, and putting these categories, these products, these brands together, looking at commonalities of consumer needs, occasions, which is pretty exciting. And this is – in China, maybe the enhancers' tastes are different, but the need is the same as here in the United States. And we can leverage a lot to our global scale by understanding these needs in depth. Talking about brands globally, because you asked about that. I think we have Heinz as definitely a big global brand that we see more potential every day. And then we have the local jewels, right? We have Masters in China. We have CAD in Brazil. We have ABC in Indonesia that are brands that are local and are designed to enhance the taste of local food. Not going through a lot of details because we don't have time for that, Steve. That would be what I would tell you.

Very helpful. Thank you and congrats on the quarter.

Thank you.

Good morning, everyone.

Good morning.

Thank you. Can you discuss your capability to maintain higher production levels in the grocery segment despite a decline in restaurant traffic? I understand you've closed two foodservice plants in the U.S. and one in the U.K., which might complicate adjustments for grocery. Has your grocery division still achieved the same double-digit volume growth despite weak restaurant traffic? Additionally, how stable is your meat supply, considering the current situation with meat processing plants and some competitors facing challenges? Thank you.

Okay. Let me give you a color of – more a global color on supply, and then I will ask Carlos to comment on things specifically to the U.S. We have at the moment all our factories open. It's true that some of our foodservice factories are with very low production because of the reduction of demand. But we have 80 factories in the world, and they are all working. To date, our supply chain has been stable, and the team is showing how strong we are. There's a huge sense of pride right now in our factories. Morale is very high. Safety is our number one priority. And of course, there are risks in the supply chain, but I think we've done a very good job keeping our people safe. We have been very fast to adapt within our factories and distribution. Example, social distancing in the factories, we were very, very early to adopt it: PPE, like using masks, gloves, face guards, temperature checks, health certification. In all our factories, we are communicating regularly, very regularly daily with our teams. We have a task force daily routine with operations to monitor and to respond to everything very quickly. In procurement, the team has made sure that we have had adequate supplies of meat despite spikes in demand. We were building scenarios very, very early. When things started happening in China, we started increasing inventories of critical materials and finding access to materials that we thought we could have problems with. So far, we haven't had any problem with procurement. In manufacturing and distribution, our frontline people are really the heroes. We are working three shifts in many of our factories. We are keeping our plants running 24/7. And we are showing a lot of agility with a huge sense of duty and responsibility. We are taking actions to accelerate the decomplexity and improve the throughput. We are benefiting from process improvements and sharing and adapting best practices around the world. Maybe, Carlos, you want to give a perspective on U.S., specifically on the question?

Yes. Well, I think, Miguel, you covered the overall supply chain and how we're feeling about it. Just to go deeper then in terms of what's happening here in the U.S., I think in the news, you have all heard, there's been a certain amount of constraint happening right now within the meat processing. Well, as Miguel said, I'm proud of the fact that we took actions early, the point that Miguel made around safety being the number one priority, the elements that we put in our factories to protect our overall supply chain, social distancing, PPE, temperature checks, twice-a-day operation calls to make sure that we are sharing best practices and adapting quickly to a situation. Today, we're basically pulling all levers to make sure that we make meat available to our consumers as fast as we can. We believe that right now, the way we are seeing the outlook for Q2 is manageable with the information that we shared with you. Thanks for the question.

It's actually Kevin Lehmann on for David. Good morning. It looks like the U.S. segment saw reduced promo spend in Q1, but then higher promo spend in Canada. Certainly, the company is experiencing more supply chain inflation lately to keep up, of course, with at-home demand. And then you just mentioned meat and dairy volatility. Can you help us organize perhaps the biggest buckets of higher and lower costs in 2020 that we should expect to continue that are directly related to COVID? Thanks.

Let me just tell you, first, in terms of our overall promotion strategy in the U.S. and then I'll have Paulo ask for some additional information. When we look at the world as I mentioned earlier, we saw that initially, because of the tightness of the inventories at the moment of the surge that occurred, we actually were able to work with our customers to reduce our promotional spending. We were very specific about where the places that we were actually going to reduce their promotional spend and then worked with our customers to then say, as inventories improve and we go forward, we'll be able to then judiciously bring those promotions back into the pipeline in the year to go events that we were looking at. So that continues to be an evaluation. I think where we are in constant communication with our customer, which actually has only improved the way we are managing through this together to make sure we have the right availability of product at the right promotional events only as the customers that needed to be the particular situation that they're facing. Paulo, if you want to add something?

Yes. Sorry, I don't know if I understood correctly the first part of the question. I don’t know if your question was about Canada. Do you want to clarify a little bit the second part of the question, please?

Yes, just helping us organize the elevated costs or the lower costs that we should expect in 2020 that are specifically related to the COVID crisis, whether it's – I mean, you touched on the promo changes, but also commodity volatility, supply chain that are specifically related to pantry loading and COVID-related items.

Okay. So I think trying to organize, we have like clearly, as a consequence, some benefit in commodities that I've already discussed. And again, the numbers are already discussed in our Q2 outlook. I think there is another component that is the component of the additional cost that we are having in the business to keep the business running as we go through this situation in terms of additional costs for ramp up, the capacity, the incentives that we need to give for our front-line workers, additional equipment that we need to have. I think overall, all of those costs, they are happening with us. They are growing, but I would say that they are manageable, okay? And we are managing them. And they are also included in this outlook of Q2 that we have. So I think at a high level that I would – it's split would be like we have this commodity, a situation that we're seeing today. We have this additional cost. And on the other side, we have a better productivity from our lines, from our plants being brought by the higher volume that we have.

Very helpful. Thank you.

You are welcome.

Thanks very much, and thanks, everybody, for joining us this morning. For the analysts that have follow-up questions, myself and Andy Larkin will be available for you. And for anyone in the media, Michael Mullen will be available to take your calls. Thanks very much, and have a great day.