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

Hello, everyone, and thank you for joining our business update. We'll begin today's call with an overview of our second quarter 2020 results, as well as an update on our path forward from Miguel Patricio, our CEO; Paulo Basilio, our CFO; and Carlos Abrams-Rivera, the Head of our U.S. business. We will then open the lines to take your questions. Please note that during our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our press release and our filings with the SEC. We will also discuss some non-GAAP financial measures during the call today. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. You can find the GAAP to non-GAAP reconciliations within our earnings release. Now let's turn to slide three, and I'll hand it over to Miguel.

Well, thank you, Chris, and good morning, everyone. I think it's appropriate to start today by saying that more than anything else, the strength of our second quarter results reflects the hard work and dedication of our remarkable employees around the world. Without them, we would not have reported numbers anywhere near what you saw in our press release today. On our April call, I said that the coming months would be critical in understanding the path forward and potential for our industry for Kraft Heinz and the pace of our turnaround. Three months later, I can tell you that while the path of the economy and consumer behavior remains difficult for any of us to predict, our team has done excellent work, anticipating and responding with speed, agility, and creativity. And we can see this in the quality of our second quarter results. More importantly, we continue to make great progress on our turnaround. Our people are driving functional excellence throughout the organization. We are developing better perspectives on where consumers are going and how we can win. Our productivity initiatives are progressing and strong free cash flow is further improving our financial profile. All these things are coming through in what we will cover today in our business update, where we will talk about how we are adapting to consumer needs, to Q2 results that were much stronger-than-expected, due to continued momentum and strong consumer demand for our brands, as well as better-than-anticipated costs and supply chain performance and the fact that our solid execution is keeping us cautiously optimistic for the rest of the year. Carlos and I will begin today with how our business has responded so far and our current thoughts about the path forward, before Paolo discusses the financials, and then we'll take your questions. The first chart I wanted to share is our underlying year-on-year sales growth by geography, in both retail and foodservice channels. It shows the progression from Q1 to the April spike to the May-June settling out period. There are three important points to take away from this chart. First, it's the tremendous and abrupt shift in consumer behavior that we are witnessing. These are sales of food and beverage products, not microchips. So to describe the magnitude of this channel shift as unprecedented feels like an understatement. Second, the numbers in the chart are Kraft Heinz sales, not the broader market, not the broader categories where we play. And it's important to recognize that our supply chain capabilities are largely split between capacity to produce and service retail sales and producing and servicing food service sales. There is little overlap in terms of production lines and route to market. So what this chart reflects is that, during this period we have been able to successfully adapt to such an abrupt unprecedented change in consumer behavior. Keep every one of our plants around the world up and running, producing at industry-leading quality and safety levels, and therefore enable us to deliver more than 7% organic net sales growth in Q2. This is not to say that we captured 100% of the opportunity. As you know, there are some categories where we have lost share, and we are working hard to fix that. That said, I have seen the creativity and agility our teams around the world have demonstrated in meeting peak demand. Learning through the journey, as we like to call it, and ultimately, delivering roughly twice the organic growth we expected in April, which brings me to the third point; the source of Q2 upside, versus our previous expectations. The decline we saw in foodservice sales on a global basis was largely consistent with what we had forecasted, somewhat better in the U.S. and at a softer end of the range in our international business. At the same time, our retail performance was much better than anticipated. In the United States, which Carlos will speak to, in our international zone, we grew double digits in condiments and sauces, and in several markets, achieved record market share. And in Canada, we had double-digit growth and gained share in 80% of our retail categories as the team invested to strengthen brand relevancy in areas like peanut butter, pasta sauce, and Kraft dinners. In addition, what is not shown on this chart, but we will discuss later, is the extraordinary retail sales growth came with favorable category and product mix. Together, the combination of favorable channel, category, and product mix resulted in better-than-expected EBITDA margins versus what we originally expected, most notably in our United States business. At the same time, and in the second part of the business update, it's important to reiterate that we remain at the beginning stages of our turnaround and are still not where we want to be on several fronts, which we will talk about in great detail in September. We have done a lot to adapt to the pandemic, but we are also implementing a new operating model to improve our performance on a sustainable basis. We are making significant changes to how we work, how we are organizing our business, how we are developing our capabilities, and how we are reinvesting in the business. Our actions have been broad-based with the intent to create sustainable competitive advantage across our value chain. For instance, we have continued to work urgently and diligently to ensure the health and safety of our employees, taking on additional costs for personal protective equipment in our plants, as well as to accommodate working from home. At the same time, during the second quarter, we rolled out our new company purpose, vision, values, and leadership principles. We are redefining for our employees for the long-term our true north and how we are going to win by working as a team, inspiring excellence, and navigating our future. I want to specifically mention one of our company values. We demand diversity. We live in a world where systemic racism and inequality exists. And righting these wrongs requires an equally systemic response from everyone, including global corporations like ours. We have a responsibility to be part of the solution. Honest conversations with our African-American Business Resource Group led to a range of initiatives, including a $1 million commitment to food programs and social justice organizations serving Black communities, as well as our first Global Day of Service on June 10 last month. From internal mentoring and developing programs and expanded talent recruitment partnerships to supplier training programs for minority and women-owned businesses and the creation of a cross-functional inclusion council, we are proactive and hold ourselves and our company accountable for bringing about positive change. Changing times demand fresh, new approaches. For consumers, we are actively modeling multiple growth scenarios and defining new initiatives to adapt to each scenario. At the same time, we have reorganized our business units around new consumer-led platforms, so we can better address our consumers. With our customers and in marketing, we are improving communications today, but also how we deploy our resources to drive growth going forward. With customers specifically, collaboration has been key, as we are creatively addressing immediate customer needs on one hand while simultaneously trying to set plans for the coming year. In supply chain, the difference a year has made is simply incredible. We are finding efficiency to mitigate incremental COVID costs while taking actions to optimize and ensure production. At the same time, we continue to implement continuous improvement processes and programs for sustainable savings for the years to come. In many ways, we are leveraging our intentional strategic changes to better respond to an environment with significant uncertainty. As a result, I'm confident that we'll emerge a stronger Kraft Heinz. And the strategic direction we have set is the right one and one that we look forward to discussing in detail with you on September 15. I will close my opening comments here by summarizing a few points. We had stronger-than-expected Q2 results, reflecting continued momentum and strong consumer demand for our brands. We are implementing our new enterprise-wide strategy at the same time we are adapting to the pandemic. After a year as CEO, I can see our business transformation well underway, with strong employee morale, a well-defined strategy, and a team in place, working together with speed to bring agility with scale. And our work to date has only confirmed that we are on the right path. To bring this more to life, I'm going to ask Carlos to provide more color on how our U.S. business is performing in the marketplace and how he sees the path forward.

Thank you, Miguel, and good morning, everyone. My comments today are going to focus on what we have experienced so far, how we are preparing for the road ahead, and hopefully address a number of the questions many of you have raised about our recent performance. In terms of what we have experienced, to say it's been intense, dynamic, and rewarding would be an understatement. We have been working hard to optimize our manufacturing capacity to meet extraordinary demand, running some of our plants 24/7. This has caused us to cancel some programming and reallocate spending to the second half of the year. So, for instance, we had to pull back on our Memorial Day event for the first time ever. And not having that event removed the drive period in the quarter when we typically have very high market share. And average price gaps increased versus the prior year as a result. In areas like our Oscar Mayer meat and Kraft Singles businesses, our share has been negatively impacted by sustained elevated consumption versus supply chain constraints, while more vertically integrated players have been able to shift capacity from their foodservice businesses to retail. So while we're growing strongly in those businesses, we are seeing some share loss. Elsewhere in the portfolio, Heinz, Jell-O, Ore-Ida are gaining share, even with this accelerated consumption. In a nutshell, promotional activity and the pace of inventory recovery, both ours and our retail partners, have been dictated by the balance of supply and demand. What that means for us is growth has been good, but in certain categories, we know we can do better. If demand remains extraordinarily strong, growth should be fine, but share is likely to be challenging in certain categories. Which brings me to how we are preparing. From a consumption perspective, we are preparing for all the economic letters: the V, the U, the W, etc., but with an eye to the long term, investing to win on a sustainable basis. So to that end, we have now realigned our U.S. business unit structure, designed around the new platform-based strategy, which we will unveil in September. We are implementing a new operating model to ensure we operate with a growth mindset, a high level of accountability, and streamlined roles, responsibilities, and decision rights for each role. We are capturing savings from continuous improvements, leveraging the upside we have seen to date to invest even more than anticipated to renovate and differentiate our brands. And we are working hard to understand who is new to our brands and the best way to meaningfully connect with them. So regarding our path forward, while the depth and duration of this downturn will guide consumption in the near term, we are transforming our business for a better growth trajectory in the medium to long term. And consumer's embracement of our brands is providing us a significant opportunity right now. For instance, household penetration is one of the inherent strengths of our portfolio relative to the industry. You would think that there was not much more room to go, but our household penetration has strengthened further in the last 15 weeks. In fact, 75% of our brands are growing household penetration, and the majority of our brands growing household penetration are up double-digit percentage points versus the same period last year. Across our iconic brands, we are experiencing growing household penetration and increasing the rate of repeat among new buyers. This includes big brands that were already well-established and significant leaders in their categories, such as Heinz in ketchup, Kraft Mac & Cheese, Ore-Ida, Planters, Philadelphia, and Capri Sun. In terms of repeat rates, new buyers are repeating at higher rates than in the past and buying more frequently. In fact, 75% of new buyers since the pandemic started are still buying our products now. And finally, regarding new buyer demographics, smaller households, including those with no kids, are discovering our brands. Our new buyer households skew toward higher income, younger, and more diverse parts of the population, areas we have historically under-indexed. All this means we have a tremendous opportunity to build our base of loyal consumers, and we're going after this aggressively with a second-half plan that includes a 40% increase in working media dollars versus a year ago. To close, I just want to say how very proud I am of our colleagues for how they have responded to the challenges of the moment across our value chain and are showing tremendous agility in redeploying marketing investments to connect with the millions who are now making our brands part of their everyday lives. With that, I will turn it over to Paulo to talk through our financial results and outlook for the second half.

Thank you, Carlos, and good morning, everyone. Before I get into the details of our results, I think it's useful to outline some overall key drivers of the quarter that were consistent across our different segments. On our April call, I outlined four factors we expected to drive better profitability in Q2 versus Q1. One was improved product mix, mainly from categories within retail as well as a favorable shift between retail and foodservice. Two, higher volumes. Three, greater efficiency in operations as we adjusted to the higher volumes. And four, a better balance between price and commodity costs. In the end, all these factors came into play and were directionally consistent with our expectations. What pushed our growth and profitability higher than anticipated was a combination of stronger retail demand for longer than we anticipated, a better than projected relationship between price and commodity costs, and a more favorable category and product mix within our retail sales. These factors were most pronounced in our U.S. business. So that's where I will start. Organic net sales in the U.S. increased 8.5%. This was mainly driven by 6.2 percentage points of volume/mix growth, led by the strong retail performance Carlos described. Pricing was up, as it reflected lower promotional activity due to capacity constraints in certain categories. Taken together, volume leverage, favorable category product mix, as well as favorable pricing, adjusted EBITDA in the second quarter increased 17.6%. Specifically regarding mix, we saw favorable category mix in the form of relatively stronger demand and market share performance in areas like ketchup and condiments, mac and cheese, and frozen potatoes. We also saw favorable SKU mix within categories due to supply chain constraints, and therefore, greater sales of core items within our product lines. Looking forward, we are not anticipating retail demand to remain as strong as we saw in Q2 and likely to moderate further from recent levels with category mix normalizing and foodservice being a greater part of total sales. In addition, keep in mind that the McCafé exit is now underway and will, therefore, temper organic growth beginning in Q3. As a result, at this point, while Q3 profits should be higher than we anticipated three months ago, Q3 margins are likely to be closer to prior year levels as organic growth moderates, the favorable mix we saw in Q2 phases, and pressures from the recent spike in commodity inflation, specifically in cheese, come into play. While this would represent a significant change sequentially from Q2 to Q3, we believe it is the most realistic expectation based on the best estimates in consumption and cost trends today. Moving to our International segment. Results were largely consistent with our initial expectations, with organic net sales up 5.5% versus the prior year period and roughly equal contributions from volume/mix and pricing. Pricing accelerated to 2.6% from a combination of reduced promotional activity, carryover benefits from previous pricing actions, and inflation-related pricing in Brazil. Volume/mix increased 2.9% from strong growth in condiments and sauces, along with growth in mill-oriented categories, more than offsetting a decline in both foodservice and infant nutrition. Looking forward, we expect the deceleration we saw in growth during the second quarter to continue into Q3 as markets normalize, particularly in our biggest market in the U.K. And while the pace of normalization is unpredictable, we currently anticipate back half results, both organic sales growth and margins to soften compared to the first half. Finally, is Canada, where the Q2 turnaround we anticipated was even stronger than expected. In April, we said we thought that organic sales growth would improve sequentially but remain negative versus the prior year, given the McCafé exit, lower foodservice sales, and lower year-on-year pricing. In the end, our Canada team delivered 2% organic growth, with pricing turning positive for the first time in seven quarters and retail consumption growth in every category. The positive pricing reflected a combination of reduced promotional activity versus the prior year, as well as successful implementation of select but necessary list price increases. Also, volume/mix was positive, as stronger-than-expected retail takeaway more than offset lower foodservice sales and a negative 4.4 percentage point impact from McCafé exit. At EBITDA, we initially expected Q2 margins to begin returning to prior year levels. Actual results were slightly better, with an adjusted EBITDA margin up nearly 30 basis points versus the prior year, as improved supply chain performance added to gains from pricing and volume/mix. For the second half of the year, we would expect the improved performance in Canada to continue, with a sustained recovery in profitability, although with more normalized retail takeaway trends being offset by the ongoing headwinds from McCafé exit and lower foodservice sales. Turning now to total company results and our outlook for the year. There are just three additional notes I would make on our Q2 results. First, each business segment reported organic sales and EBITDA growth in Q2, and we hope this indicates more stable performance across our businesses going forward. Second, our taxes. On our last call, I flagged the possibility of a higher effective tax rate in Q2, due to the possible enactment of the U.K. tax legislation and a related non-cash adjustment to deferred tax liabilities. This was delayed, contributing to better-than-expected EPS and is now expected to happen in Q3. So we would now expect a tax rate on adjusted earnings in the high 20s for Q3, while our expectations for the full year remain in the 22% to 24% range. Third, free cash flow, which is up significantly versus the prior year on a year-to-date basis. This has been driven by a combination of EBITDA growth, lower working capital, somewhat lower capital expenditure, as well as significantly greater accrued liabilities due to the timing of cash outflows versus the prior year. Looking forward, we expect working capital to revert as we rebuild our inventories. And cash outlays related to accrued liabilities for taxes, trade spend, and marketing are second-half weighted this year. In addition, we continue to plan for CapEx in roughly $750 million this year, although we have had some delays so far this year and may not spend the full plan. Taking all of this into account, we do feel good about the quality of our free cash generation year-to-date and are confident that 2020 free cash flow will exceed that of 2019, which brings me to our financial outlook. I think it's helpful to come back to the fact that we are in the first year of our multi-year turnaround. The current environment has presented us with opportunities to be there for our consumers. To the extent we are successful now, it puts a wind at the back of our turnaround efforts, and we will be in a stronger position on a sustainable basis in the future. To that point, we do expect the upside in results we have posted during the first half of the year, both sales and EBITDA, to stick for the full year. While there is still significant work to do ahead of us, we believe that we are very well positioned with each of the three priorities we set for 2020: to establish a strong base of sales and earnings, to rebuild underlying business momentum, and to continue to reduce debt while maintaining our current dividend. That being said, I think it's important to highlight the key drivers that will work in the second half of the year as we establish that strong base of sales and earnings and work to rebuild our underlying business momentum. Specifically, we see four discrete factors, the same four we have talked about before, that will hold back second-half EBITDA versus the prior year. One is the McCafé exit that has been underway in Canada and began in the United States in July. Two is the high incentive compensation we mentioned on our prior call. Three is greater commodity volatility we had warned about in April, and we now expect will result in an unfavorable key commodity cost in Q3, specifically in our U.S. cheese business. And four is currency translation due to dollar strength relative to last year. Together, these factors currently represent an approximately 900 basis point headwind to second-half adjusted EBITDA growth versus the prior year. That's greater than the 700 basis point headwind we were expecting when we last spoke at the end of April. We expect slightly more of this pressure to fall in Q3 than Q4. During the first half of the year, incremental consumer demand more than offset these headwinds. From where we stand today, we are anticipating organic growth will moderate, and the favorable mix we saw in Q2 will fade. As a result, in terms of adjusted constant currency EBITDA, we currently expect organic gains in the 900 basis points of discrete headwinds I just outlined to essentially offset one another in the second half of the year. The other part of establishing our base comes from low EBITDA, where for the full year, we continue to expect a roughly $0.38 headwind from the combination of lower other income, a higher effective tax rate, and higher stock-based compensation versus the prior year. Year-to-date, we'll be seeing roughly $0.19 of the $0.38, so the second half should see another $0.19 of pressure versus the prior year. As for our third priority for 2020 to continue to reduce debt while maintaining our current dividend, we have made great progress and are well positioned going forward. Through July, we have now fully paid the $1 billion of our 2020 debt maturities with cash, reducing our gross debt outstanding. We fully repaid our precautionary revolver drawn down at the end of Q2, and $5 million remains available to us. We are in an extremely strong liquidity position with more than $2 billion of cash on hand, no meaningful refinancing needs for the next five years as a result of our leverage-neutral standard and refinancing transaction in May, and we simplified our capital structure, eliminating any remaining secured debt. So a very strong position to continue reducing our debt while maintaining our current dividend. Finally, I would also like to note that with the filing of this quarter's 10-Q, we expect to have remediated our previous material weakness identified in our 10-K we filed in June last year. In summary, we have had stronger-than-expected results through the first half of the year. Solid execution across the company keeps us cautiously optimistic for the balance of the year. As Miguel said, our business transformation is well underway, employee morale is strong, we have a well-defined strategy, and our team is in place, working together with speed to bring agility with scale. Now, we would be happy to take your questions.

Our first question comes from Chris Growe with Stifel. Chris, your line is open. If your line is muted, could you please unmute it? Should I move on to the next question?

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

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

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

We are currently adapting our content and delivery to better engage with the increased household penetration and new consumers rediscovering our brands. This is essential because we are learning about these new consumers, and we are focused on retaining them. They are already purchasing our products repeatedly, and we cannot afford to overlook this significant opportunity. It's almost like a sampling opportunity for us. We need to ensure these consumers stay with us. Additionally, we will be aligning our strategies to target specific globally relevant platforms, and in September, we will share more options that we believe can significantly accelerate our growth. Our portfolio will feature products that enhance profitability and contribute to sales growth, a clarity we've not had until now. As Carlos stated, we are increasing our media presence in the second half of the year to support brands that have experienced substantial household penetration growth. We are also undergoing a major transformation in our marketing approach. We have recently appointed three new Heads of Marketing for each geographic zone. We are evolving to be more consumer-oriented and improving our marketing effectiveness, consumer insights, innovation, and communication. This transformation is happening right now, which is very exciting for our entire commercial organization.

Okay. Super, thank you so much.

Next question comes from Chris Growe with Stifel.

Hi, good morning.

Good morning, Chris.

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

Hi Chris. To address your last point, as Carlos mentioned, we will increase our media spending compared to last year in the second half. Overall, our marketing spending will not significantly impact our performance in the second half of the year. The primary challenges affecting our EBITDA remain the same four issues we highlighted at the end of last year and the beginning of this year: incentive compensation, higher commodity costs mainly due to recent fluctuations in cheese prices, the exit of McCafé, and foreign exchange impacts. These four factors represent the key headwinds we anticipate for the second half. However, we still expect strong demand, improved operational mix, and enhanced supply chain efforts to help mitigate these challenges. Additionally, we anticipate offsets from various areas within the organization, such as reducing supply chain losses compared to the prior year. Overall, we believe that our sales mix, pricing strategy, and supply chain performance will counterbalance the aforementioned headwinds. Marketing should not pose a significant concern when considered alongside these other factors.

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

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

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

If I were to add to what Paulo mentioned, it would be about the pressure on natural cheese. This is mainly a short-term issue due to the government program. Looking into the second half of the year, there might be a small challenge with our commodity prices, but we believe it's manageable as we move forward.

Thank you.

Thank you.

Our next question comes from David Driscoll with DD Research.

Great. Thank you. Good morning.

Good morning.

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

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

Great. I would like to follow up on another point. It seems that in the long term, given the current demand from consumers and the reprioritization of your objectives, you may not need a significant earnings reset in 2021 and beyond. It appears that you can adjust your investments and get Kraft on a sustainable growth path. I'm trying to gauge your thoughts on this for September, but do you agree with my observation? Am I understanding you correctly?

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

Thank you very much.

Our next question comes from John Baumgartner with Wells Fargo.

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

John, thank you for your question. To begin with, let's set COVID aside for a moment and focus on the economic pressures we are currently facing. Ultimately, consumer purchasing behavior will depend on how the economy performs and the recovery timeline, both of which are difficult to predict at this stage. Reflecting on past recessions, such as those in the U.S. in 2001 and 2008-2009, our portfolio's organic growth remained relatively stable compared to pre-recession performance, with foodservice being the exception, as it experienced declines due to reduced foot traffic in restaurants. So, regarding your question about our current position, I believe we are well positioned. We have strong momentum in household penetration and are entering the second half of the year in a favorable spot with our promotional strategies, allowing us to reinvest in our brands. This investment includes not only promotional events but also media, with a projected 40% increase in the second half as we approach year-end. Based on our experiences and our current status, I feel confident about our positioning.

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

Sure. When we examine our portfolio, we see several areas where values have increased, despite some areas experiencing declines. It's crucial to note that we conduct an annual assessment every year in the second quarter. As mentioned, many segments of our portfolio are performing well and we have implemented improved strategies, particularly in our global condiment and sauce divisions, including in the US, as well as in various meal portfolios. We've observed positive trends in these reporting units, even in the more challenged parts of our business. However, the reporting units that experienced declines were primarily associated with Canada, foodservice and retail, and foodservice in the US. These reflect the fluctuations we noted during our impairment review.

Okay, thanks for your time.

Welcome.

Our next question comes from Michael Lavery with Piper Sandler.

Good morning. Thank you.

Good morning.

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

I can address that question. Looking at our promotional activities for the second half, I want to emphasize that our inventory and production levels are improving, which enables us to implement additional promotional activity in the third quarter. You'll notice this during our first dry period, which occurs around Labor Day. Thus far, we have been strategically reducing promotions, as reflected in the scanner data, but this has been targeted towards specific categories. Moving forward, our main focus remains on meeting consumer demand, as there is still a strong desire for our products. So, we will be increasing our promotions, but I believe we are doing this in a balanced manner to support those categories that currently have adequate inventory levels.

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

It's challenging to predict demand for 2021. We've been assessing various scenarios. Just like you, we don’t foresee a short-term solution for the coronavirus, so we must work with different scenarios. Our primary focus should be on retaining the new households we've attracted. It's crucial to maintain these new consumers who are trying our products, and it needs to be our priority to keep them engaged so we can make progress in 2021. If the pandemic persists into next year, it may work to our advantage. If it doesn't, we still have a larger base of consumers who have tried and continue to use our products, and we want to keep them. We remain committed to our strategy and ongoing improvement in all areas. A key factor for us is that we are beginning to collaborate with our customers on planning for next year, starting in the latter half of this year. This is very important for both us and our customers as we anticipate future planning cycles.

That's helpful color. Thank you very much.

Our next question comes from Scott Mushkin with R5 Capital.

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

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

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

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

Okay, guys. Thanks very much.

I think we can take one more question.

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

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

I'll take that. I think the question is probably more about the U.S. So let me start by reiterating our focus on increasing household penetration and retaining the new consumers who are coming to our brands. In terms of market share, I believe there have been three key moments since COVID began. Initially, we experienced a surge in demand alongside high inventory levels, which is typical for that time of year, and this helped us gain market share. However, as demand remained strong through May and June, we needed to manage our service levels more effectively, which resulted in some loss of share in certain categories. We also reduced our promotions during events like Memorial Day, something we had never done before, and streamlined our SKUs in our core businesses to enhance our throughput, which also affected our share. Additionally, we faced supply tightness across the value chain, particularly in meat, mainly pork and beef. Today, our retail demand remains robust as we concentrate on controllable areas. There are three key actions we're taking: First, we're increasing capacity to optimize our assets and expanding our number of co-packers, which appears to be effective. As a result, we're able to add more SKUs back onto the shelves where needed. Second, we are re-investing in promotional events and media for the second half of the year. These actions are leading to positive developments; our market share has shown improvement over the last two weeks, and we expect further progress moving forward. Overall, our goal for the team is to ensure we maintain positive momentum as we enter the second half and continue to connect with our new and valuable consumers.

Thank you.

Thank you.

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

Thank you for joining us on this call. As we conclude, I want to summarize our perspective on this quarter and our outlook moving forward. We experienced stronger than expected Q2 results, reflecting our continued momentum and robust consumer demand for our brands, which we find very encouraging. We saw notable growth in categories and brands driven by household penetration and repeat purchases. Additionally, we managed better-than-anticipated costs and supply chain challenges, despite significant inflation and rising costs due to COVID. Looking ahead to 2020, our priorities and actions remain on track, and we expect results to exceed expectations. We anticipate the positive momentum we experienced in the first half to continue. Solid execution gives us cautious optimism for the second half, though there remains uncertainty regarding scenarios like kids returning to school or offices reopening. However, if consumption remains strong, we could see further positive outcomes in the latter half of the year. Concurrently, we are adapting to unprecedented changes in consumption patterns and progressing with our transformation, which is still in its early stages and aims to enhance agility within our company. We have a lean structure and an ownership-based culture, both crucial for agility. While we need to make adjustments in some areas, we are enthusiastic about improving agility in a company of our scale. We believe this will benefit our shareholders, customers, and consumers. We look forward to sharing more details about our strategy, priorities, initiatives, and our new operating model at our virtual Investor Day on September 15. Thank you again, and I look forward to speaking with you soon.

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