卡夫亨氏 (KHC) 2017 Q2 法說會逐字稿

Good day.

My name is Chelsea, and I will be your operator today.

At this time, I would like to welcome everyone to The Kraft Heinz Company's Second Quarter 2017 Earnings Conference Call.

I will now turn the call over to Chris Jakubik, Head of Global Investor Relations.

Mr. Jakubik, you may begin.

Hello, everyone, and thanks for joining our business update for the second quarter of 2017.

With me today are Bernardo Hees, our CEO; Paulo Basílio, our CFO; and George Zoghbi, the Chief Operating Officer of our U.S. Commercial business.

During our remarks, we'll 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'll 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 and at the end of the slide presentation available on our website.

Now let's turn to Slide 2, and I'll hand it over to Bernardo.

Thank you, Chris, and hello, everyone.

To begin our review today, it's important to recognize that clearly not everything went our way in the first half.

Canada, India and commodity costs in the United States are just a few examples.

But given all that's going on in our industry at the moment, it's good to report that we remain on track with all our overall plans.

I'm confident that we will gain additional business momentum in the second half of the year.

This is because we continue to make progress against our agenda for 2017 and 3 objectives of our long-term strategy.

On the top line.

Why we are not satisfied with our first half numbers?

We are not discouraged with our ability to drive sequential improvement in organic sales and deliver our 2017 plan for profitable growth.

So far in the year, our Big Bet and whitespace initiatives from last year have been the main driver, and that's very encouraging from the perspective of sustainable growth.

George will speak to that for the United States.

Outside the U.S., we're seeing this play out through positive investment-driven consumption trends, driven by our condiment and sauces portfolio in Canada, Europe, Latin America, Asia and Middle East.

At the same time, we have been laying the groundwork to capture additional whitespace opportunity.

That includes the significant commercial investment to drive top line growth in our EMEA region that we have spoken about before.

It also includes our Latin American investment in people to increase distribution across traditional trade, modern trade and Foodservice in Mexico, as well as expand our distribution footprint in South America.

So overall, we believe we have a strong pipeline to drive profitable sales growth going forward.

In terms of our goal to establish industry-leading margins, we remain on track with our cost-savings initiatives.

Our total savings so far in 2017 have been stronger than expected.

Cumulative savings from our integration program were approximately $1.45 billion at the end of the second quarter, and all 3 areas of our program are contributing: Organization structure, ZBB in procurement and manufacturing footprint.

It's true that you have had known key commodity costs as a headwind so far in 2017.

More important, however, we are improving execution in all areas of the business.

In operations, we have either capped or enhance it, our (inaudible) through rate, safety and product quality metrics.

In marketing, we're supporting our brands with a greater number of quality advertising impressions.

At the same time, we have invested to build new in-house go-to-market capabilities such as revenue management and assortment management with the objective of driving these capabilities globally.

Finally, on the capital structure front.

In the second quarter, we took additional actions to deliver superior return of capital and continue to strengthen our balance sheet.

As we previously said and consistent with our commitment to an investment-grade credit rating, we paid down $2 billion of debt within 2 years of closing the merger of Kraft and Heinz.

And as you saw today, our Board of Directors set a 4.2% increase in our quarterly dividend to $0.625 per share or $2.50 on an annual basis.

That's a broad overview of where we stand after the second quarter of 2017.

And consistent with our brand, we remain in a good position for profitable top line growth and EBITDA gains to drive solid EPS growth for the full year.

Let's turn now to Slide 3 to review the details of our Q2 financial results.

As it relates to today's company sales, there are 2 things to highlight: First, sequentially better organic net sales performance driven by volume/mix improvements in the United States, Canada and Europe; and our volume/mix did improve despite some significant headwinds in our Rest of the World markets that Paulo will discuss later.

Second, pricing was sequentially lower due to promotional timing in the United States and Canada.

At EBITDA, quite simple.

Our second quarter results reflected strong incremental cost-saving initiatives, primarily from the $180 million of incremental savings delivered by our North America integration program.

And the savings more than offset several headwinds, including higher key commodity costs in North America, lower net sales as well as investments in the Rest of the World markets behind growth initiatives.

Adjusted EPS, we still see strong growth, mainly driven by the refinancing of the preferred stock as well as some tax probability.

More important, as I mentioned, we expect to continue our business improvement in the second half of 2017 with a combination of profitable top line growth and EBITDA to be the main drivers of EPS growth for the full year.

Now I will hand it over to George and Paulo to highlight our performance in each reporting segment and what we expect in each area going forward.

George?

Thank you.

Thank you, Bernardo, and hello, everyone.

Let's turn to Slide 4 and our performance in the United States.

To start, you will note that we did not survive the consumption bridge for the U.S. that we have in the past.

This is due to a growing divergence between our sales performance and measured channel data and our desire to provide you with a clear concise picture of how we are doing.

While it's true that we're operating in a challenging and rapidly changing environment, we do not believe that our challenges are to the degree that measure channel data currently suggest.

What is clear is that we had a sequential improvement in net sales from Q1 to Q2.

So as Bernardo said, while we are not satisfied with our numbers, we are not discouraged with our ability to drive sequential improvement either.

In the second quarter, we started to see better leverage of Kraft Heinz's scale at retail in the form of increased in-store activity with several scale events, including Easter, Memorial Day and our Feed Your Family, Feed the World cause-related events.

We're also seeing solid consumption gains in a number of our largest categories, including strong growth in our frozen business after years of decline behind the introductions of Devour and SMARTMADE brands as well as solid performance in frozen snacks; ongoing growth in our Kraft American slices, Philadelphia Cream Cheese and Oscar Mayer bacon portfolios from recent renovation and innovation; as well as innovation-led growth in the on-the-go arena from Lunchables and P3.

And we are encouraged that our share performance was stable overall, considering a back half-weighted set of initiatives.

That's not to say that some consumption challenges remain.

But they are concentrated in few categories.

Natural Cheese, mainly due to aggressive competitive pricing in the category; cold cuts as we rebuild our end market distribution and resumed merchandising after the self-imposed restrictions due to capacity constraints during 2016; and finally, ongoing weakness in salad dressings.

Another factor that gives us confidence in strengthening our performance at retail going forward is the fact that we are enhancing our capabilities in a number of disciplines, including: revenue management as a platform for more informed, data-driven decision-making to support our efforts to drive category growth; assortment management to ensure our -- we're getting right product range at the right account in the right geography; as well as ramping up our e-commerce efforts, where we saw more than 60% growth in Q2, albeit from a base of roughly 1% of our U.S. retail sales.

In addition, roughly 70% of our footprint-related production line start-ups were completed by the end of the second quarter, and more is happening as we speak.

So moving forward, we continue to believe we can drive sequential improvement and profitable organic growth from Q2 to the second half of the year.

At retail, we expect to further leverage our scale for a better in-store activity going forward and more of it in Q3.

We also have a strong pipeline of innovation, renovation and communication to drive improved back half consumption trends in key categories and some of our more challenged categories.

In Q3 alone, you will see robust support of Capri Sun Sport and Capri Sun Organic, more activity in our meals business, including Cracker Barrel Oven Baked Mac & Cheese as well as the second half of grilling season with our renovated line of Oscar Mayer hotdogs.

With that, I'll turn it over to Paulo.

Thank you, George, and good afternoon, everyone.

I will start on Slide 5 with our U.S. financials.

As expected, we delivered a sequential improvement in organic net sales performance, a 1.2% decline from a 3.5% decline in Q1.

This was driven by sequentially better volume/mix performance that reflected the Easter shift, which added roughly 40 basis points of growth versus the prior year, as well as solid gains in our frozen, Mac & Cheese and condiments.

We also continued to see volume/mix headwinds from distribution losses of certain products in measured channels, primarily club, that affected our consumption numbers in cheese and meats, as well as lower shipments in Foodservice.

But we expect these 2 areas to improve as the year progresses.

On the pricing front, lower pricing in Q2 reflected a combination of higher price in cheese, mainly to address a rise in dairy curve, that was more than offset by a negative impact from the timing of trade promotion recognition in the prior year.

Moving to EBITDA.

Our second quarter EBITDA was up 3.2%, and EBITDA margin rose 140 basis points.

As Bernardo mentioned, this was driven by incremental integration savings that amounted to roughly $180 million between the U.S. and Canada.

And this more than offset unfavorable key commodity costs, particularly cheese and coffee, in both retail and Foodservice channels that continued to hold back gains in Q2.

I will note here that roughly $40 million of the cost savings we realized in Q2 were due to the timing of overhead and other costs versus the prior year.

And looking forward, this will likely mean that we see a lower level of incremental savings in Q3 relative to Q2.

Let's turn to Slide 6 and Canada, where, in the second quarter, we saw foreign exchange headwinds returned, but business momentum began to resume.

Volume/mix gains reflected normal resumption of normal retail activity during Q2, as well as strong consumption growth in condiments and sauces.

These gains were somewhat offset by the discontinuation of select cheese products at retail, a volume/mix headwind that we expect to be a factor again in Q3.

In terms of pricing, lower pricing in the second quarter largely reflected an increase in promotional activity versus the prior year.

At EBITDA, we had both growth and margin expansion resume in Q2.

Constant currency EBITDA was up 2.3%, and EBITDA margin was up roughly 150 basis points versus Q2 last year.

This was driven by incremental cost savings that were partially offset by the impact from an increasing promotional activity.

Importantly, our second quarter performance in Canada shows that the go-to-market agreements achieved with our key retailers are, in fact, a win-win proposition and can drive profitable growth going forward.

As a result, we remain confident that we will continue to see improving trends in the growth and profitability of our Canadian business during the second half of the year.

That brings us to Europe on Slide 7, where we also saw sequential improvement in volume/mix growth.

Similar to Q1, strong currency headwinds continued to be a factor in the results, and pricing declined due to the timing of promotional activity in the U.K., as well as trade investments to address competitive activity in our Italian infant nutritional business.

Volume/mix improved, driven by strong consumption gains in condiments and sauces as well as gains in Foodservice.

And this came despite the headwind from shipment phasing last year that we mentioned on our last call.

Importantly, the ongoing stable consumption growth in the U.K. gives us the confidence that the business is on the right path.

EBITDA, we continue to benefit from volume/mix gains and strong efforts to control costs, especially within manufacturing.

However, this was more than offset by unfavorable input costs in local currency, driven by transactional currency headwinds as well as the impact from lower pricing.

Going forward in Europe, we expect to see profitable, investment-driven net sales growth as the key driver to EBITDA growth.

And this should come from both existing markets and categories as well as whitespace initiatives.

Finally, let's look at our Rest of the World segment on Slide 8. In Q2, organic net sales growth decelerated to 3% from 8.1% growth in Q1 and a lower rate of growth than we would expect on an ongoing basis.

What I would highlight here, however, is that more than 100% of the quarter-to-quarter deceleration was due to 2 factors that we do not expect to repeat going forward: one was a negative impact from the general sales tax regime in India that you have heard a number of our global peers talk about recently; two was a holiday-related shipment timing in Indonesia related to the shift in the Ramadan holiday versus last year.

And unfortunately, this more than offset strong double-digit gains in China, Brazil and the Middle East, as well as growth in condiments and sauces across most of our other markets.

Going forward, we expect organic sales to reaccelerate as comparisons in Indonesia will ease and India should return to more normal shipment patterns with distributors.

However, it's important to note that we are unlikely to regain the Q2 volume loss in India during the third quarter, mainly due to the seasonal nature of a part of our business.

At EBITDA, recall that our plan for 2017 is to invest aggressively in marketing, go-to-market capabilities and product development upfront, and that this would hold back margin expansion versus the prior year.

We saw these in Q1.

In Q2, results continue to reflect significant commercial investments to drive growth in our EMEA region and to a lesser extent, Latin America.

However, the distinction I would make is that the decline in adjusted EBITDA this quarter primarily reflected a very strong margin comparison to the prior year.

In fact, this quarter's EBITDA margin was at 21.2%, bringing us to 19.4% for the first half of the year and just roughly 1 point below what we saw for the full year in 2016.

Looking forward, we expect second half organic sales growth to accelerate from the first half levels and better leverage the investment we've been making.

Which brings us to our outlook.

I will echo what Bernardo and George said earlier.

Despite a number of headwinds we faced in the first half and considering that we are operating in an increasingly challenging environment, we remain confident that we can improve our performance going forward.

As we've said before, we expect sequentially better organic growth in the second half of 2017 versus the second quarter just reported.

We have a strong pipeline of marketing, go-to-market and product initiatives to drive profitable organic growth, including further whitespace gain.

We expect the sequential improvement in Canada to continue, driven by sustained recovery in our activity at retail as well as innovation-driven gains in our grocery portfolio.

In our Rest of the World segment, we expect innovation and whitespace gains to drive accelerated growth in both EMEA and Latin America.

On cost savings, we are still targeting $1.7 billion of cumulative integration program savings by the end of 2017 or $500 million of net incremental savings in 2017 versus 2016.

As far as the timing of savings is concerned, we've achieved a roughly $280 million of net incremental savings in the first half of the year and expect the remainder in the second half.

As I mentioned earlier, so far this year, savings have come in stronger than anticipated.

But at this point, we are not ready to call upside to the $500 million of net incremental savings for the year.

Along these lines, I would also note that a combination of cost saving and the ramping up of footprint-related savings is likely to mean that we see less than half of the remaining 2017 incremental savings in Q3.

Turning to EBITDA and EPS.

The obvious question is, "How are we going to drive strong EBITDA growth in the second half with less than half of our remaining 2017 incremental cost savings?" The answer is a combination of underlying business momentum and comparisons versus the prior year.

In the first half just completed, our strong base of cost savings resulted in a slight decline in constant currency adjusted EBITDA.

This was due to its lower business momentum in the form of: rising key commodity costs; organic sales headwinds in Canada, Europe and India; and upfront investments ahead of further innovation and whitespace expansion in our Rest of the World markets.

It also reflected comparisons against our first half 2016 that benefited from strong favorable pricing net of key commodity costs in North America.

By contrast, the second half of 2017 should in many ways be a mirror image of the first half.

We continue to expect a strong stream of cost savings, but our business momentum should pick up significantly as we see sequentially better organic net sales growth leveraging the investments we've been making, as I've just described.

And comparison versus the prior year should ease, reflecting a more favorable balance between pricing and input costs.

Finally, there is one housekeeping item I should mention related to tax.

Given the favorability from these split items we've seen through Q2, we now expect our full year 2017 effective tax rate to fall between 29% and 30% versus the 30% we think is representative to our run rate on an annual basis.

That said, our effective tax rate in Q3 will likely be higher than our full year run rate as we currently expect net discrete items turn unfavorable.

All things considered, we remain confident that strong earnings growth should continue in the second half of the year, driven by a combination of profitable organic sales growth and margin expansion.

Thank you, and now we'd be happy to take your questions.

(Operator Instructions) And our first question comes from the line of Rob Dickerson with Deutsche Bank.

So I'd say, good job in Q2.

I think the sequential improvement we saw from Q1 is obviously a positive.

Just in terms of your expectation into further sequential improvement that's expected in the back half of the year, I guess, one is, you've spoken to Q2 being better than Q1 and the back half being better than Q2.

But is -- like I said, one, should Q3 be better than Q2 and Q4 better than Q3?

And then secondly, as you speak about you're leveraging the scale at retail and the investments that you're making, just wondering if you could give us 1 or 2 explicit examples of what investments you are making and how so the innovation has already been playing out well?

Rob, this is Paulo.

So in terms of the outlook, yes, as I said it, we're expecting sequentially better organic sales growth, and our view is that -- and the call that we are having today is that we're seeing our second half -- improvement in the second half, that's our Q2 results.

We are not breaking out this number for Q3 and Q4, but do expect today's improvement in the second half versus Q2 in terms of organic growth.

I'll ask George to talk about the second question.

Yes, Rob, this is George Zoghbi.

As far as the second half, we believe the performance will improve compared to Q1 and Q2.

We'll continue to see sequential improvement, driven mainly by 3 things: one is the innovation that we have launched early in the year.

It's building up to a higher ACV, and then we turn on the advertising behind it.

Number two is the in-store execution.

We expanded the business development team for in-store execution.

And number three, we already announced a number of price increases to cover for the commodity that constituted headwinds for us in Q2.

So this is -- these 3 actions here will help us for further sequential improvement in the second half of the year.

I think the same is applicable for the Canadian business and the Rest of the World, and Europe and Latin America already doing better second quarter to continue their journey.

And our next question comes from the line of Andrew Lazar with Barclays.

So on the cost saves side, it looks like you delivered pretty strong cost saves in the quarter.

And I guess, my question is -- I guess, why didn't more of that translate, I guess, dollar to dollar into EBITDA?

And perhaps, as part of that, can you give us an idea of the shape of the year in that context?

Andrew, this is Paulo.

So just to -- let me break down the EBITDA in North America for you, so try to give more color on that.

So our North America -- we had $180 million of integration savings in the quarter in North America.

Our EBITDA in North America grew approximately $62 million, okay?

So the offsets that we had pretty much the first and the big one was the commodity unfavorability, $80 million roughly.

Again, against the significant favorability we had in the prior year on that line.

And approximately $40 million in sales performance, that being the majority of this coming from the timing of trading accruals, as I said, that we expect to have the benefit in the second half.

When you think about the savings, so just to give about why -- that the reasons why we had a lot of offsets on the savings to the EBITDA.

When you go to the second question about the savings, I can tell you that now even discounting the $40 million related to the timing of overhead expenses, it's correct.

Our savings are coming further expected.

But also -- and we are seeing more gross savings coming in that inflation than we originally expected, but now our view here is that there's still a lot to happen in the second half.

So for now, we're still targeting the $1.7 billion savings for this year.

As soon as we change our point of view on that, we'll let you know.

Okay.

And then it sounded like in a bunch of the segments, pricing was lower in the quarter year-over-year because of some of the timing around promotional environment and things you talked about, trade spend timing.

Should I read that, that we'll start to see a return, I should say, to positive year-over-year pricing as we move through the third quarter?

Andrew, this is George.

Yes, you are right about that.

So the Q2 pricing was down from a combination of things.

One is higher promotional activities versus the prior year, particularly in April, where we are heavy on Easter promotions.

And number two is the timing of the trade cost accrual last year, as Paulo mentioned.

So we expect this to improve in the second half from a better balance between pricing and input costs.

Also, please note that we have announced already price increases in a number of large categories already.

So that's being done and being implemented in the marketplace.

And our next question comes from the line of David Driscoll with Citi.

I had 2 questions on the U.S. They're related.

It's -- you called out 3 different areas as problem areas.

But when I look at the Nielsen data, we see volumes in snack nuts down 17%, shelf-stable juices down 9%, coffee down 9%, powdered beverages down 15%.

But you also made this interesting comment about the Nielsen data just not being accurate.

So 2 questions here.

The first one is that, are these areas seeing significant weakness and maybe could you talk about them?

And then secondly, just bigger picture on the Nielsen data, kind of what's wrong with this data?

Is it something that you would dissuade people from relying on too much?

Thank you.

I mean, this is -- let me cut the question into 2 parts.

It's a little bit complicated.

First, we still have to rely on AC Nielsen.

However, the coverage of AC Nielsen has shrunk to where we are selling our product.

So with the changing retail landscape, measuring consumption is not as simple as it used to be.

AC Nielsen cover mainly scan or -- and non-census data within traditional and some mass and clubs.

However, there's significant growth going on in hard discounters and some big major club players that are not covered by Nielsen and almost the entire e-commerce channel.

It's not covered by AC Nielsen.

So just to give you an idea, as I mentioned in my remarks, based on a small base of 1%, our e-commerce channel is growing at 60%.

It happened to be the 2 largest segments we have in e-commerce happen to be the snack nuts and coffee segment.

So they lent themselves more towards that channels.

The other thing is, we are comfortable about where we are at with juices as our plans were delayed somewhat to take full advantage from the new products, advertising and promotion as a combined bundle at the same time.

So to summarize, yes, we still rely an AC Nielsen, but we try to focus the AC Nielsen measurement in the channel where we can get scan data, we add to it our own data to fill the gap to get the picture.

And that's why we had the divergence between what is net sales revenue and what is consumption from AC Nielsen.

So today's data wouldn't suggest an inventory build at retail.

You're just saying that the Nielsen data is just understating the reality of it because it is unmeasured.

Is that fair?

It is fair for us.

I can't speak for other companies.

In our case, inventory build or decline was not a major factor in our Q2 results.

And our next question comes from the line of Steven Strycula with UBS.

So a 2-part question.

The first would be for your global route-to-market capability.

You're a little past the 2-year mark in terms of formal deal legally closing.

So can you spend a moment talking about some of the global supply chain investments and CapEx and route-to-market spend?

What evidence are you seeing of this yielding revenue synergies for some of your global brand platforms?

And then secondarily, how do we think about adding new brands on top of your platform?

What's particularly unique about what you build here to drive incremental scale?

Steven, it's Bernardo.

You're right.

We're just, actually, celebrating 2 years of the merger of Kraft and Heinz this July.

It has been quite a journey and much more ahead of us.

And to your question about investment in Rest of the World, in our 5-year strategic plan and the way we're positioned, remember, we talked about having -- trying to have 3 global brands with 5 platforms, and there would be significantly push towards these brands and platforms.

And I'm pleased with the progress.

There's a lot of investment being made, especially in the Rest of the World business on the supply chain side, not only on the manufacturing, but the capabilities, the approving process of the products, having them ready with local legislation packaging and go-to-market routes, marketing.

And you're seeing the results from that, right?

With the Mac & Cheese launch in Europe and Latin America, with the Planters being now -- being rolled out from U.K. to Continental Europe, to seeing Planters China, what has been a 100% e-commerce-driven as a launch.

A lot of the now -- we're preparing ourselves to declare Kraft repatriation for 2018 that's going to affect our business in Continental Europe and Australia for next year.

So I would say, it's too early to say, but we are pleased with the foundation of the things to accelerate.

Part of the Rest of the World results we're having is related to that.

Our top line, on the second quarter Rest of the World take advantage of the question, has been softer than anticipated for really 2 reasons that has nothing to do with your question on the global brands and the merger.

But really, the timing of Ramadan in Indonesia that had shifted part of our sales to the first quarter.

And really, the change in taxes system in India that have made our distributors destocking our products for some time.

That also is a timing-related.

Taking out those 2 issues, we are very pleased with the progress on the Rest of the World, and we should see that in the second half not only on the top line, but also in the better bottom line.

And our next question comes from the line of Bryan Spillane with Bank of America.

I have a question for you, George, related to the Foodservice business in the U.S. Given where the consumer is sort of shifting more and more out of traditional food retail, Foodservice is an important -- should be an important component of your business to capture those sales.

So I guess, it's been an ongoing source of weakness here this year.

So could you talk a little bit about -- maybe a little more color in terms of what's happening there and maybe some actions that you're taking to correct that?

Yes.

So you're right about Foodservice.

We continue to think we have more whitespace to capture in this area, and we are working hard at it, not just in the U.S., but everywhere around the world.

That being said, we did need to course-correct.

In Foodservice, we had a large number of initiatives that did not yield what we wanted to get out of it, so we found that we were chasing too many small things.

We needed to reorganize so that we were facing the customers, the large customers with large, big ideas.

And we made that correction about 2, 3 months ago.

And we already started seeing some good results that we are pleased with last month or the first months where we started getting net -- when we look at the net gain, net loss from customers, we got into the net gain positive territory.

So overall, we expect Foodservice business to continue improvement in the rest of the year, and it continues to be a strategic whitespace for us.

Have you actually added salespeople?

Like is there -- do you just have more sales coverage than you had before?

We refocused the sales team on where we believe the largest opportunities are.

You see in the Foodservice, it's a very large universe.

You can get lost where you're chasing ideas.

And we went through a program and a project to identify where best to focus our resources and our investment, and we made that change a few months ago, and we're very happy with what it is yielding.

And going forward, we expect more positive results.

And our next question comes from the line of Michael Lavery with Piper Jaffray.

Just wanted to get some better understanding on Europe margins.

A couple of years or so ago, that looked like sort of benchmark, standard of where everything could go.

And since then, those margins have come back in.

Do you think they've peaked there?

Is there a path to how you see visibility on better upside?

And what's the right way to think about some of the levers and opportunities you have there?

Michael, it's Paulo.

So yes, you're right.

We -- our European business, yes, used to have a much higher business, if you think, like 1, 2 years ago.

Pretty much 3 things I would mention here that impacted this.

The first one was, for sure, the depreciation of the pound that had a big impact in not only the transact -- because part of that -- what we sell in U.K. comes from Continental Europe.

So that was an impact that we have, a transaction effect.

The second piece also is that we are growing more in the Continental Europe, so there is a geographic mix that changed.

And the third also, need to adjust slightly below -- lower margin because of -- we had Russia on the Europe.

So I think those 3 would be the main impacts in that order I told you, in terms of that impact to the European margin.

I think going forward -- sorry.

So I think going forward, I think, we should see, as we always mentioned, our focus is in dollar margin to dollar growth.

But as the business recover, I think we should see and should count with some margin accretion for the future.

That's very helpful.

You also called out the higher promotional levels in the U.K. and Italy.

Is there a light at the end of the tunnel?

How much is there ability to get some better pricing?

And do you see sort of timing on how that may -- when and how might that happen?

Yes.

Michael, I think there are 2 different stories here.

We have -- on the Italy case, we're still going to go through a more extended promotion trends given what's happening in the baby food environment.

Remember, our sauces business is expanding fast and slow in the country, but baby foods continues to be predominantly the anchor of the business in the country.

And that has been a more challenged category with different competitors coming from different places outside Italy.

We're actually the Italian brand and the Italian producer in the country.

The U.K. is going to depend a lot on where we're going over now to end the sauce season in the summer.

Now it's going to come soup and back-to-school with beans that we're going to have some promotional activity, but we don't see that changing that much from the level we are right now.

We are performing well in the country.

We're back to growth.

And seeing volume/mix and activity in the country, I would say should be very stable even with the changing in seasonality between sauces and soup and beans.

And our next question comes from the line of John Baumgartner with Wells Fargo.

George, I'd like to ask about the mix opportunity in the U.S. I mean, looking at some of your recent news, the organic Mac & Cheese is a premium product.

The Simply Heinz Ketchup is at a premium price per ounce.

And there's a few other examples I can think of.

But when you look at your consumer base, whatever you've seen and how do you think about the opportunity to keep, I guess, just walking people up that pricing ladder through mix?

Do you exhaust that at some point?

Is it contingent -- just continuing attractive new products?

How do you think about that?

Yes.

It's a very good question about -- particularly, we always talk about the changing landscape in retail that is always that changing landscape in consumers.

And what we're finding, there is very large number of consumers in this market.

They're happy to move up the value chain, and premiumization was one of our strategy to create growth.

It's worked for us in beverages for Capri Sun Organic.

It's worked for us in ketchup with the Simply and Organic.

It's worked for us in Mac & Cheese by having price at a 300% premium in Cracker Barrel versus the blue box Mac & Cheese.

And you're going to continue to see some of that in the marketplace.

So that's one way to create premium in a market where the population is stagnant, inflation is under wrap and so forth.

The other area is to create a new segment to deal with consumer needs.

And we've got some exciting news that we'll be talking about in the next few weeks, where we will create new segments in the market that serves a new consumer need.

The combination of these 2 supported with advertising and higher-quality product, fresher, less processed, makes a good proposition for growth.

And I guess, just broad generalization, but are you finding that over the mix-accretive products, those also tend to be margin-accretive more often than not?

It depends.

So we find, when we move to a more premium product, it can be margin accretive.

In some area, we added cost in to protect the brands, and we could not price up in that category, so we have to do it in another category until consumers see value of it.

So it depends on the category.

It depends on the project.

Either way, we are always driven by the consumer insight because that's what matters first, to keep the brands relevant and keep the categories alive.

And our next question comes from the line of Chris Growe with Stifel.

Just a question for you.

I think, really, for George, in relation to the U.S. I think you mentioned in the quarter a flattish market share performance overall, so, I guess, I would confirm that.

I was just curious if you see a stronger category performance picking up in the second half of the year?

Or is it more about your market share performance with all the activity you've coming up in the second half?

It's a good question.

So we have a large number of categories where we grew market share, including American Singles, including bacon, including ketchup, frozen meals, frozen snacks.

And we have a number of categories where we lost market share, like natural cheese, cold cuts and so forth.

And that's why, when you look at the balance, market share was not a major driver for the decline of the 1.2%.

It was more the categories we operate in.

Moving forward, we see different comps in the second half to what we had last year.

That's number one.

Number two, we implemented a number of price increases, which will lift the dollar value per pound in the category.

And number three, we have a number of innovation either ramping up or about to announce to the market.

That's why we are confident that the sequential improvement will continue in the second half from Q1 and Q2.

And can I just ask in relation to that?

There's been a number of companies -- a number of categories we've seen private label mix and inroads.

Are you seeing that in any notable way in any of your categories in the U.S.?

Yes, we are.

There has been, as I said, a more pronounced focus in leading national retailers on increased private label total distribution point, merchandising, as a way to compete against discounters or separate themselves.

For us, the results of the focus on private label was mixed.

We benefited a lot when retailers did that through an assortment work where they reduced the number of brands on offer, and it led to better category performance.

A great example of that, Kraft Singles and American Slices.

By contrast, where retailers resorted to pricing private labels so low to compete, it simply resulted in a reduction of the category size and profitability for everyone.

Example of that is natural cheese.

So lucky for us, one offset the other.

But to just to give you an example how one was beneficial, the other one was not.

So at the end of the day, what will win for us is growing our brands and categories by differentiating through innovation, through our innovation and strong communication campaign.

And our next question comes on the line of Jason English with Goldman Sachs.

George, I think I'll keep you talking for a bit longer and build off of, I think, your response to last question, in terms of private label, market dynamics, et cetera.

We're hearing from a lot of your competitors about a lot more friction in terms of implementation of price increases than they've seen.

Many have described it as sort of unprecedented.

But you're on the call saying you're implementing, you're getting them through.

It sounds like it's not -- the degree of friction isn't really what you're seeing.

So can you expound on that a little bit more?

It -- from your vantage point, with your categories, does the pricing environment really seem that different than it has in years past?

Well, implementing pricing anytime in any year is never a straightforward process.

So for us, we usually take the approach, whether there's an input cost, cost in our product or something like that.

And we always do it when it's justified.

We just don't take price increases if not justified.

So that is, for us, utilizing our revenue management programs, combine that with our assortment management to create category value.

That is usually what our selling story is based on.

And in most cases, you see when we implemented the -- using assortment management, revenue management, build innovation around it, we created value for the entire category and not just for our brand.

And in these instances, we have been successful doing it.

But again, it's never an easy task at any time in any year.

Okay.

It was a nice segue into a related question.

You mentioned revenue management.

Some of us, myself included, have a lot of optimism of what it could do for your top line.

Clearly, categories are slower than they were when the optimism was percolating.

But still, even it accounting for the category slowdown.

There isn't really a lot of tangible evidence success on that front, especially given that this is kind of the year that it would start to, it was supposed to start to hit its stride.

So can you bring us up to speed on where you stand on those initiatives?

Why maybe we aren't seeing tangible evidence of what we can expect on the forward?

Yes.

So for us, we feel good about the implementation of our program, that in particularly in relation of where the promotional effectiveness and lift -- and the lift from promotional activity is heading.

We feel very comfortable about the investments that we are making.

Revenue management is not about just taking a price increase or reducing trade.

For us, sometimes, we do exactly the opposite.

We find it beneficial to do the opposite.

So we're very comfortable where we are.

We believe the effectiveness of our program is very good, and we will continue with managing our categories through the tools we created in revenue management, through the tools we created in assortment management, and we will continue to innovate to grow the categories.

And our next question comes from the line of Jonathan Feeney with Consumer Edge.

So 2 questions, if you don't mind.

One is quick.

Is it fair to say that we've seen in the U.S. that net revenue -- that revenue management is pretty much working outside of that like 20% of your business that's natural cheese and lunch meats, where it seems like you've implemented some price increases and that resulted in some volume share loss?

Would you agree -- would you -- is it fair to say that it's somewhat of a tale of 2 cities there and it's working outside of there?

And secondly, did -- a broader question.

Does anything -- is there something perhaps fundamentally different about those particular categories as far as your level of value add?

And does that shape the way you think about how you want to grow this portfolio going forward either internally or externally?

Okay.

So let me break down the question.

One on -- the first one on revenue management, particularly in the natural cheese and cold cuts, and the second one was about the different things about shaping the business.

Did I understand it correctly?

Yes, category attributes.

It just seems like there's a big difference between category attributes.

I got it.

Okay.

So the natural cheese and the cold cuts have different sets of issues.

On the natural cheese, as I mentioned, there were really aggressive pricing that we did not take a major part in the marketplace and that resulted in some share losses.

And you can see the months when it's happened, and that persisted with us over the last 2, 3 months.

So it was purely based on the elasticity through pricing.

And we always keep assessing moving forward when we participate and when we do not participate.

On the cold cuts, it's a completely different issue.

The cold cuts, as we went through our footprint program, last year, we had a major constraint, and we deleted a number of SKUs.

So if you look at the total distribution points, or what we refer to as TDPs, is down year-on-year because of that.

And our merchandising is down year-on-year before that.

Once we get over August, you will find that this will change.

We overlap that period of time, and we feel good about rebuilding that business.

As a matter of fact, the programs we put in accounts where we accelerated the program, we started seeing a good trend bend.

Now, is there anything good about these categories as opposed to other categories?

The -- what we see that we have higher chances of success where the brand equity is stronger and the relative market share is higher.

So these 2 attributes allow us a little bit of flexibility in terms of both revenue management and assortment management.

So building the brand equity is important to us.

That's why we always focus on innovation and communication and building our relative market shares because we believe these 2 attributes in any category are strong assets for the organization and the brand.

And this concludes today's question-and-answer session.

I would now like to turn the call back to Chris Jakubik for any closing remarks.

Great.

Thanks very much, and thanks, everyone, for joining us.

For any analysts who have follow-up questions, I as well as Andy Larkin will be available to take your questions.

And for anybody in the media, Michael Mullen will be available as well.

Thank you.

Good evening.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program, and you may all disconnect.

Everyone, have a great day.