卡夫亨氏 (KHC) 2018 Q2 法說會逐字稿

Good day.

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

At this time, I would like to welcome everyone to The Kraft Heinz Company's Second Quarter 2018 Earnings Conference Call.

As a reminder, this conference call may be recorded.

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.

We'll start today's call with an overview of our second quarter and first half results as well as an update on our 2018 plan from Bernardo Hees, our CEO; and David Knopf, our Chief Financial Officer.

Then Paulo Basilio, President of our U.S. zone, will join the rest of us for the Q&A session.

Please note that during our remarks today, we will make some forward-looking statements that are based on how we see things today.

Actual results may differ materially due to risks and uncertainties.

And these are discussed in our press release and our filings with the SEC.

We'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 good morning, everyone.

Similar to our Q1 results, our second quarter results were better than we expected at the time of our last earnings call.

The transitory factors that led us to be cautious on the near-term sales played out much as expected, including the headwinds in United States from Planters and Ore-Ida and the impact from retail inventory change in Canada.

That said, we delivered slightly better net sales than expected.

This was driven by encouraging ongoing improvement in retail consumption trends in most countries and most categories as well as strong foodservice performance in a number of key countries.

At EBITDA, we spoke about near-term pressures in United States, Canada and Rest of the World from a combination of accelerated commercial investment, significant cost inflation, especially in freight as well as strong comparisons with the prior year in every region.

Still, we delivered stronger-than-expected EBITDA from solid productivity gains in EMEA as well as better growth in certain Rest of the World markets.

In addition, and perhaps even more important, we continue to make progress in building the capabilities and putting in place the go-to-market plans that we expect will generate top line growth going forward.

Many of you have asked why we're so confident in our ability to deliver the top line and what specifically will drive it.

So on Slide 3, we have laid out many of the key initiatives we expect will help us build momentum into the second half by region, by brand.

In the United States, we saw consumption trends improve as Q2 unfolded.

And as Planters [club] comparisons fade and as Ore-Ida and cold cuts activity and distribution improves, we're targeting top line growth in the third quarter.

Our focus is on incremental volumes and mix improvement coming from new products, like Lunchables Around the World flavorings, Oscar Mayer plates, Just Crack an Egg, Heinz Real Mayonnaise as well as Planters, where we brought back consumers' favorite, Cheez Balls and Cheez Curls, for a limited time.

In addition, we are planning stronger in-store activity as we move forward, including back-to-school, behind mainstays like Oscar Mayer, Kraft Cheese, Lunchables and Capri Sun as well as continue Philadelphia's growth with strong holiday program.

In Canada, while the impact of tariffs on sales is still largely unknown, we continue to feel good about getting Canada back to growth track by year-end.

This should come on building on the good performance we are seeing in coffee pot, frozen meals and natural cheese slice innovation as well as stronger merchandising behind Cracker Barrel Cheese.

In EMEA, we are looking to sustain the momentum we have seen from the positive consumption tailwinds that have been driving performance to date, including those coming from newly repatriated Kraft and BULL'S-EYE brands.

In the second half, we also see opportunities for improvement for both whitespace and innovation initiatives, including Heinz in Middle East, Africa and Eastern Europe; the recent launch of BULL'S-EYE barbecue in the U.K.; and Plasmon infant biscuit in Italy.

And in our Rest of the World market, as some of the short-term headwinds we recently experienced start to fade, we expect some drivers to show [to work] in a stronger way in the second half.

These include the strong growth and turnaround of Complan in India; the repatriation of Kraft brands and our Cerebos acquisition in Australia, New Zealand; high scone demands in Brazil and Mexico, Kraft Mayo in Brazil and [salters] whitespace expansion in Central America and the Southern Cone.

Outside of traditional retail, I'll also add that we have innovation, distribution and assortment initiatives underway in foodservice to drive substantial incremental gains in each region as well as in the e-commerce channel, where in the United States alone, we're up more than 75% in both Q2 and through the first half.

And our online portfolio is now over index market share versus traditional retail channels.

In total, this is, by far, the strongest innovation pipeline we have had in place in our short history as Kraft Heinz.

At the same time, and something we have been talking about, are the commercial investments and capabilities to play more [offense].

It gives us further confidence in our ability to change trajectory in both distribution and consumption, especially behind innovation.

On Slide 4, we show again the 6 goals from the framework we introduced early this year.

During the second quarter and into the second half of 2018, we continue to make strides in each area.

I just talked about our brand-building initiatives, pushing into new categories, new segments, new occasion and doing this with a focus on incrementality, not just gross sales from new items.

We will strongly supported, for instance, to data-driven marketing, where we're putting our in-house tools to work to drill deeper into quality impressions.

We're concentrating on building even more native impressions or impressions that are created by being part of the conversation of consumers' everyday lives.

[Environment] impressions, where you can create the news and share it through media coverage.

For those of you in the United States, you have seen this at work with our Heinz Mayochup and Country Time Lemonade campaigns, helping to drive improving consumption trends.

Year-to-date, we estimate that natives and earnings PR impressions we have generated in the United States alone is greater than all of 2017 and double what we generate in full year 2016.

And we have more coming to support our second half initiatives.

In both category management and go-to-market capabilities, we now have more capacity to drive category and brand growth as our product pipeline will be fully in place in Q3.

In category management, while we have significant potential still ahead, there are key areas of improvement we can leverage right now.

At retail in the United States, for instance, our efforts have been targeted at improving SKU adoption, distribution velocities through assortment management and planograms.

And in Canada, our in-house tools and disciplined return routines are in place to help set pricing guidelines and guardrails as well as conduct pre- and post-event analysis, always aimed to make more informed decisions and improved returns.

In go-to-market capabilities, the next wave of our in-house, in-store sales teams is now in place in the United States, on track to more than double by the end of the year.

With that, we believe that we now have critical mass to see a measurable impact on feature and display conversion, out-of-stock and planogram compliance just as we ramp up our second half sales plan.

When our capabilities and products [news] come together, we see measurable, incremental and sustainable gains.

We see Oscar Mayer hot dogs increase household penetration and velocity, grow dollar sales and gain share.

This is happening now behind our For the Love of Hot Dogs campaign and a step-up in store activity at Memorial Day and Fourth of July.

We see successful breakthrough innovation, like our Just Crack an Egg platform.

Just over 6 months in the market with launch velocity roughly 2x our estimate, top quartile trial and repeat and proving to be a successful bridge between convenience and freshness.

And internationally, when our marketing category management and go-to-market capabilities come together, we hit the ground running with newly repatriated and acquired brands, like BULL'S-EYE and Kraft in Europe and Cerebos in Australia and New Zealand.

Both are performing ahead of plan.

Finally, the backbone of everything we do, operations, people and corporate social responsibility, are fully aligned and even more capable to execute our plans.

In operations, we continue to deliver against aggressive industry-leading targets in quality, safety and customer service in nearly all geographies we operate.

Customer service in particularly has been an area of significant focus and investment.

And we have made significant improvements in the United States and Canada.

And in people, during Q2, we leveraged our marketing playbook and category [market] programs to close any gaps in best-in-class skills and capabilities and further deploy our new in-house tools.

And on the CSR front, earlier this week, we expanded our environmental commitment.

We aim to deliver 100% recyclable, reusable or compostable packaging by 2025.

And we are doing our part to accelerate the transition to a low-carbon economy by joining the Science Based Targets Initiative and working to set science-based carbon reduction goals.

So to summarize, our first half results came in better-than-expected.

Our second half commercial plans are the most robust since the 2015 merger.

And now it's up to us to execute with excellency.

I will now hand it over to David to provide more color on our Q2 results and how our plans for the second half are likely to play out in our financial results going forward.

Thank you, Bernardo, and hello, everyone.

Turning to our results on Slide 5. Total company organic net sales were down 40 basis points in Q2, sequentially better than Q1 and, as Bernardo said, somewhat better than what we expected at the time of our last call.

Pricing was positive for the fourth consecutive quarter, up 1.3 percentage points in Q2 and 1.1 percentage points in the first half.

In both periods, this was driven by a combination of pricing to offset local input costs in Rest of World markets and carryover pricing in both the U.S. and Canada that more than offset stepped-up in-store and new products activity in EMEA.

Volume/mix was 1.7 percentage points lower in Q2 and 2 points lower for the first half due to known headwinds in the United States and Canada that overshadowed strong growth in EMEA.

By segment, the U.S. was slightly better than our initial expectations.

As expected, Planters and Ore-Ida had a negative impact of approximately 1.5%.

And the combination of trade spend timing and Easter shift was roughly 1 point of headwind to Q2 net sales.

Excluding these factors, underlying U.S. consumption again exceeded reported results and showed a slight sequential improvement from Q1.

And I would add that consumption has continued to improve based on the data we've seen so far for July.

In Canada, results reflected the anticipated combination of comparisons with prior year promotional activity that was not repeated, primarily in condiments and sauces as well as trade inventory adjustments and select product discontinuations.

EMEA had another strong quarter, driven by strong condiments and sauces growth across the zone, including solid consumption gains for both the Kraft and BULL'S-EYE brands.

Strong gains in foodservice in every region are also contributing to EMEA growth.

And in Rest of World, while top line growth was supported by pricing, another quarter of strong vol/mix gains in condiments and sauces across the majority of regions and strong growth of Complan in India were again held back by one-off factors.

In Q2, this included lower sales of canned seafood in Indonesia and the truckers' strike in Brazil.

That said, we do expect sequential improvement in Rest of World moving forward.

At EBITDA, Q2 performance was slightly better than expected, although the drivers were consistent with our expectations.

Specifically, we had solid gains from productivity savings and net pricing, gains that were offset by inflationary pressures, primarily elevated freight and resin costs as well as costs associated with our aggressive commercial investment agenda.

And in adjusted EPS, we were up $0.02 versus Q2 last year, driven primarily by a roughly 720 basis point reduction in the tax rate on adjusted earnings.

Overall, our first half financial performance was consistent with the type of start to the year we expected, if not somewhat better than expected at the profit line and provides a solid base from which to build, which brings us to our outlook on Slide 6.

As Bernardo outlined, we believe things are in place for us to push a more aggressive growth agenda in the second half from a strong innovation pipeline, distribution gains across channels as well as expanding our brands into geographic whitespace.

Despite the slow start with several transitory headwinds and recent key commodity weakness in the U.S., we believe we're in a strong position to deliver organic growth for the full year.

And therefore, we continue to expect that 2018 will be a year where the first half, second half balance of net sales will be skewed to the second half.

Our organic net sales growth is expected to begin now in Q3 with the U.S. growing and EMEA and Rest of World sustaining momentum.

In Canada, with near-term risks at play, it may be Q4 until we see the turn.

To support this growth and given our confidence in the pipeline of activities that Bernardo described, we're planning our commercial investments to be at the high end of the $250 million to $300 million range we previously discussed, mainly in the form of more working media dollars.

At the same time, we think it's appropriate to be more conservative in the near term with expectations around adjusted EBITDA.

And instead of the second half skew that we previously talked about, we now expect more of a 50-50 split to the year.

This is driven by 3 factors: one is that we will be at the high end of our planned commercial investments that I just mentioned; two is our stronger-than-expected first half delivery; and three is cost inflation, where a number of areas have stayed higher for longer than we anticipated, mainly in freight and transportation, packaging, both resins and cardboard, as well as tariff risk currently impacting foil and aluminum costs in the U.S. and certain products we sell in Canada.

Net-net, our savings curve will take more time to overcome the incremental cost inflation we expect during the remainder of 2018.

So as we assess Q3 prospects, the combination of greater-than-expected inflation, a more aggressive investment posture and difficult comparisons on variable compensation versus last year will mean that Q3 adjusted EBITDA dollars are likely to be down a greater order of magnitude than what we saw in the first half of the year.

That said, we do expect our constant currency adjusted EBITDA trend to improve by year end and gain further momentum into 2019 with productivity net of cost inflation accelerating while the recovery in top line momentum continues.

Below the line, we are still targeting adjusted EPS growth and strong cash generation in 2018.

This should be aided by tax favorability, where we now expect an effective tax rate of approximately 21% for the full year in 2018.

I will also note that based on successful recent refinancing activity, we now expect incremental interest expense in 2018 of roughly $80 million versus the $100 million we previously outlined.

And in terms of cash generation, we continue to expect a significant step-up in 2018 despite a near-term headwind to working capital from recent termination of our accounts receivable securitization and factoring program in the U.S.

To close, I think it's worth repeating the thoughts that we've expressed all year: that we're developing capabilities to create brand and category advantage to achieve profitable growth; that we're investing aggressively now in order to see benefits sooner; and that these factors will shape our near-term results in 2018 and will drive sustainable, profitable growth into 2019 and beyond.

Now we'd be happy to take your questions.

(Operator Instructions) Our first question comes from Andrew Lazar with Barclays.

I guess, I'll kick it off.

With all of the investments in capabilities that you've been making recently and clearly some of the renewed confidence in the organic top line growth starting as of 3Q, I guess, do you feel as though this makes Kraft Heinz more willing to perhaps consider assets that may require a bit more heavy lifting rather than ones that already have better growth prospects but would certainly come at higher multiples?

Andrew, here's Bernardo.

Look, let me start with the investment part of your questions.

We're happy we accelerate the investments we announced at the beginning of the year, creating the capabilities that I really believe are going to stay here.

You're going to start seeing the second half of this year they are going to stay with us in 2019 and beyond, right, behind go-to-market sales teams, channels, activation, innovation, marketing dollars and so on.

We always said that what -- one-off investment, that we would see results in the year to come.

So we are happy with the program.

And as we always said as well, we wouldn't hesitate to sacrifice 1 point of margin to generate accelerated growth on the top line.

With that in mind, your question is given the capabilities we're building now, how this play on an M&A or nonorganic plans for the company, right?

What I can say about that is pretty much what we have been saying and have been consistent for quite some time.

Our framework has really not changed, right?

The fact that we like big brands, the fact that we like business that can travel in international, the fact that we do like to take synergies from existing business and to reinvest behind brands, behind products and behind people.

I don't think that this framework changed because of the capabilities we are developing.

What I can say is that with the experience we have today after being -- since Heinz 2013, 5 years into the industry, the knowledge on the categories, the knowledge of the things that do work and things that we have seen that do not work and so on allows us to be much more confident where to put the money or what assets can be turned around and things that can really being within this framework.

And also true to be said that our ability to integrate and to connect companies for a bigger scale and so on, given that we have been doing that for quite some time.

And every time, we have been doing better, got faster and we have a better understanding.

To your question about assets, slower growth or higher growth and so on, I don't think that changed with what we have in mind from a framework standpoint.

And our next question comes from Alexia Howard with Bernstein.

Can I ask about the pricing environment in North America?

It seems as though it's been pretty challenging the last 18 months or so.

You've obviously got some positive pricing that's running through now.

How do you expect that to play out in the second half?

And just how do you see the environment and the retailers' relationships playing out from here on out?

Alexia, this is Paulo.

So again, we believe that we have strong brands.

We have differentiated products.

We have a strong innovation pipeline.

And so far, we've been able to price our brands and products in line with what we perceive to be the value to the consumer.

But we always keep in mind, it's very important to us to strike the right balance between market share, distribution and profitable volume.

So this balance will [to] play differently in each category that we play.

So today, I can say that the relationship we have with customers are very -- are going very well and a very clear connection with all of them.

And so do you expect the pricing to strengthen as we head into the back half or the price/mix to improve?

Listen, as a matter of practice, we don't forecast pricing for the future.

What we can say that the growth that we expect to have in the second half is going to be more balanced through volume/mix.

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

Just two questions related to the investment and capabilities, the P&L investment this year.

I think if I remember it correctly, you're spending about $300 million, P&L dollars against it.

And I guess, two things: one, is this sort of an ongoing expense, meaning will it be an incremental headwind again as we kind of move into the future?

Or is it sort of a 1-year step-up?

And then second, if you could talk a little bit about how those investments specifically would help you?

Or do they at all improve your ability to integrate acquisitions?

So like the difference between integrating without these capabilities versus what it was before.

Thanks, Bryan.

It's Bernardo.

The investments we announced was really (inaudible) was a one-off, the $300 million [that you want a] to accelerate the capabilities we have in the company in go-to-market, channel activation, innovation, launch platforms and service levels with specific investments, directed to specific customers, especially in the United States.

So that, I would say, is coming really well, creating the capabilities the company have for the future.

Not only we expect to see that already as some results in the second half of the year but 2019 and beyond.

That is, like we said before, a step-up as a one-off, okay?

So related to the second part of your question, about the capabilities of integrating faster in an M&A environment, how this would happen, those capabilities will help us.

I think like I said at the first question, the learning and the experience we have today allows us to have a better knowledge on each one of the categories, right?

And those capabilities we are creating, when you think about revenue management, assortment management, planogram, go-to-market, breakthrough innovation, channel mix, activation in e-commerce, foodservice, clubs, drugstores, all of these kinds of capabilities, they are scalable in a more organic environment.

And if I could just follow up, David, is it still $300 million that you're spending back this year?

Bryan, this is David.

That's correct.

We talked about at the beginning of the year, commercial investments and investments in service between $250 million to $300 million.

So now we expect to be on the high end of that, at closer to $300 million.

All right.

So if we're thinking about the EBITDA guide for the year, even though you're having to face some inflation, you chose to actually spend at the high end of the investment either way because it's going to make sense longer term?

Yes, that's correct.

And our next question comes from Rob Dickerson with Deutsche Bank.

So two quick questions.

I guess, the first question, just in cadence for the rest of the year, Q3 versus Q4, is there -- in terms of the -- what you said about Q3, that Q3 EBITDA would be down slightly more than it was down in the first half of the year and then we should see a pick back up in Q4.

Just relative to internal forecasts originally from the beginning of the year, is there a change to the full year, just to be clear?

Or is it -- so some came in a little bit better in the first half and really in Q2, but then it will be a little bit worse in Q3?

Or how should we think about kind of where you are right now and how you view the full year versus where you viewed the full year at the end of '17?

That's it.

Sure.

Rob, this is David.

Thanks for the question.

So in terms of the second half cadence, so I'll start with Q3.

So our profitability in the quarter in Q3 versus last year is going to be driven by 3 factors.

So first, we expect that the swing from overhead favorability we mentioned last year to a more normal incentive compensation accrual this year to be roughly $75 million to $100 million in the quarter.

Second, as noted, we plan to be at the high end of our commercial investments for the year.

So again, the high end of the range of the $250 million to $300 million I mentioned.

And this is to support our second half growth initiatives more strongly.

And third is the fact that the additional inflation we noted is running ahead of our savings curve in the short term.

So those are really the 3 factors in Q3 that are going to drive that trend.

Going forward in Q4, we expect our comparisons to ease and our savings curve to accelerate, although we think it's best to maintain a conservative set of expectations with regard to cost inflation.

So that's why we think the year is going to look a little bit more balanced versus what we talked about earlier in the year.

Okay, great.

And then just quickly on tariffs, I think I heard you call out a few inflationary aspects of tariff effects on specific commodities.

Is there some potential risk though in terms of volumes, do you foresee?

And just a very general question.

Yes.

So in terms of tariffs, I think the point that I want to get across is, given what we're seeing, we want to be conservative.

And that drives our kind of outlook for the year.

But these types of things, we're not exactly sure what will stick and for how long.

So we're not going to take a stance yet on potential actions that we can take to offset those things.

So I'm not going to talk about that now.

But I think given those factors and some of the cost inflation we're seeing in the market, again we're going to have this kind of more conservative stance on the year.

And our next question comes from Chris Growe with Stifel.

I just had two quick questions for you.

I wanted to ask, first of all, if you look at this quarter, if you think of like the [old key commodities] pricing [coming out of] commodity inflation, is that positive or negative in the quarter here such that are you getting pricing through, given this accelerated rate of non-commodity inflation.

That's my first question.

Sure.

Chris, this is David.

So I won't talk specifically on the quarter.

But I'd say overall for the year, we continue to expect pricing relative to our key commodities to be stable.

We have recently seen some key commodities come down more recently and expect that for the year.

But as a matter of practice, we're not going to discuss potential future pricing actions relative to that.

But as Paulo said earlier, we're confident in the strength of our brands and we'll continue to strike a balance between market share distribution and profitable volume as it relates to commodities.

And so just to be clear, does non-key commodity inflation come into your thinking as you're approaching pricing?

Not that you're going to tell me what you're going to do, but is that a factor you consider in terms of your pricing?

Or is it something you have to over -- to offset with cost savings?

Yes.

So certainly part of the equation there, we're not going to provide color on pricing going forward.

But between commodities, non-key commodity inflation, we think in terms of pricing and potential productivity initiatives to offset that.

Okay.

I had just one question as well.

And you've had some weight on your sales from Planters and Oscar Mayer and Ore-Ida.

I think you approach much easier comparisons on that front in the second half of the year.

Is that right?

Those kind of -- you get past a lot of those issues in the second half?

And do those shift to growth in the second half of the year as a result of that?

Chris, this is Paulo.

Yes, I think that is one of the components as we see it.

We are confident that we're expecting our sales to grow in U.S. in the second half.

I think one component that we're seeing is that you can see that our categories are improving.

Our categories now are growing.

And on top of that, the big headwinds in share that we were seeing, these negative headwinds, we expect them to fade.

I can give examples of cold cuts, Ore-Ida, lost distributions that we have, the capacity restrictions we had.

Now we have the capacity in place, so we expect to recover the distribution.

I can also say that on top of that, we are going to see our -- we have a strong innovation pipeline coming to the market that's already distributed and also a much better and stronger program driving improvement in consumption.

So pretty much this is the main pillars to support our expectations for growth of the business in the second half.

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

Two quick ones.

You mentioned foodservice a couple of times.

And I was wondering if you could just elaborate a little bit on some of your initiatives there, what the opportunities are and how much is it whitespace-driven that you're filling in gaps.

And then just second, following up on Andrew's question a little bit, how do you handicap the ability of a brand to travel?

And how do you think about that when you are evaluating inorganic growth?

Michael, it's Bernardo.

In respect to foodservice, it has been actually a whitespace opportunity worldwide, not only here in the United States that we have been growing now for the second year in a row, but worldwide has been double-digit growth in Europe.

We have seen many countries in Asia that have been experience growth in foodservice.

Remember, we're building a factory in countryside at Brazil in the state of Goias that there is a significant volume related to foodservice, so has been a strategic decision from the company to create capabilities in different zones in countries to push this.

We do believe our products resonate in a big way.

There are some [applications].

And I think we are getting better as a company to create the right packaging and the right product assortment to understand the dynamics of this channel that are different than the normal retail channel.

So that has been something that has been improving in the company.

We do expect that to continue in the years to come.

And do expect us to get better and to be stronger in the foodservice channel than we've ever been, again not only in United States that has been more a reality for some time but other parts of the world.

The second part of your question about the capabilities and how to evaluate from an M&A standpoint, remember, we were seeing that and we are doing that, taking brands from existing countries and making them on a global or a zone stage now for some time, right?

We had the repatriation of Kraft this year in Europe, in Australia.

I think a good example that is unfolding as we speak is the launch of BULL'S-EYE barbecue and premium sauces in U.K. and Continental Europe.

And we're seeing Kraft being deployed now in Latin America, it will be launched in Brazil.

It's being launched in many countries in Asia.

We're seeing Planters being deployed in U.K., Continental Europe, China and other countries.

So we have been doing that.

I don't think, understanding the category and having a stronger brand that resonate sometimes in a country like America.

In the case of BULL'S-EYE, it was very strong in Germany.

And now we're making in different countries in Europe.

But understanding the strength of the brand, what is the category drivers and what consumers want.

I think the connection is quite there.

As we evaluate new brands on organic, for sure, always there are risks.

But I would say our experience today allows us to be more assertive about it.

And our next question comes from Jason English with Goldman Sachs.

A quick question for clarification.

Did I hear you right that you're now expecting EBITDA to be about a 50-50 split, front half, back half?

Jason, this is David.

That's right.

We expect it to be a little bit more balanced, 50-50, for the year.

That implies that EBITDA, if we just kind of track with the first half, would be down year-on-year by a bit over $200 million?

Last quarter, you guys guided for organic EBITDA growth.

And you mentioned that first half is exceeding expectations.

I'm kind of interpreting this to mean that you're lowering your full year EBITDA guidance by about $300 million.

Is that wrong?

And given that you've overdelivered, it's really all coming in the back half.

I know you've got some cost creep with some [liners] . But you also mentioned some of your key commodities trending down.

What am I missing to bridge that all the way to that $300-ish sort of million difference?

Sure, Jason, this is David.

So let me walk you through kind of the cadence of what we're seeing for the rest of the year.

So we continue to have good visibility on significant productivity and cost savings initiatives for the remainder of the year and going into 2019 as well.

That said, as I talked about, we're seeing additional cost inflation that in the immediate term is outpacing the savings curve.

And it's just kind of 2 factors.

So first, we have some costs that are staying higher for longer.

And in some cases, like freight, they're continuing to climb this year.

And then second, as I talked about, we had some headwinds from tariffs as well, of which we're not exactly sure what will stick or for how long.

But for those reasons, we think it's better to take a more conservative stance.

At the same time, we have an opportunity to drive sustainable consumption gains from investments that Bernardo mentioned in our commercial pipeline.

So again, we think it's best to kind of head into the second half with a more conservative set of expectations around near-term EBITDA dollars, especially for Q3, as I mentioned, and continue to focus on sustainable top and bottom line growth going forward.

Our next question comes from Scott Mushkin with Wolfe Research.

So I wanted to go back to the M&A, a question I get a lot is why hasn't something happened?

Obviously, we know that you guys have been out there trying to -- looking at different assets.

I guess, I wanted to take a step back and understand your take on the landscape [of both] M&A clearly does matter a lot, especially with Walmart in the North American market, Walmart taking as much volume share as they are.

It would be nice to have the CPT companies consolidate a little bit more aggressively, especially you guys.

And I'm wondering if you think there's some structural impediments to that.

Here's Bernardo.

If I understood correct your question about if there is something structural that would be in the middle of more consolidation and M&A in the industry, right?

And then you related the Walmart example.

And so we really don't see that way.

I think the food industry is an industry that has not consolidated with the same speed as other industries.

There are some reasons for that, given local tastes and regulations and other things, but not to the extent we have seen it.

So we do believe looking at mid- or long-term that there will be more consolidation in the industry.

And we have not [shying] to say that we want to be a force behind it when the process happens, right?

To your point about structural obstacles and so on, we don't see really any in that sense.

I think again, it's important in our case to be very disciplined on our approach, that our framework, right, that has not changed.

We are disciplined on price.

To the value creation equation, I think we have proved that over time.

And that's something we believe is important for the long-term value creation equation, okay?

And I think also important to say we don't do something to be happy for the quarter and then be regretting for the long term, to be apologizing for the next couple of years.

When we move, we definitely move with a much longer-term view, believing that something is going to make the company stronger for the years to come.

Okay, so then -- appreciate the answer.

My follow-up question is it just seems that -- and what the answers have been around pricing in kind of the back half of the year, I mean, my interpretation is it's just hard to get price through.

I mean, you talk about cost inflation and not being able to be offset by the underlying savings.

But that's my interpretation of what you guys have been saying.

Is that interpretation incorrect?

And I'll yield.

This is Paulo.

No, I think that is a balance.

It's always a balance as we've been discussing.

Again, we've been able to price our brands so far.

But the way that we approach this is not to price to offset a specific cost.

It's really to find and to strike the right balance between profitable volume, distribution and share.

So that's our approach.

At the end of the day, profitability is one of the components, it's not the only one.

We see the business more as what's -- is the position that we're going to take that it's going to be healthier for the business looking to these 3 components that we share?

But so far, as we said, we've been able to price our own portfolio in line with the value that we have -- that our products have to the consumer, so.

And our next question comes from David Palmer with RBC.

You've listed a lot of reasons why sales were constrained in the first half in emerging markets, U.S., Canada.

And separately, you highlighted the analytics and sales investments.

And to those 2 buckets, I would add that in some key commodity categories, like cheese, you've had some big volume declines.

So I guess, what I'm wondering is going into the second half of the year, could you give some color about the reasons and timing for the sales recovery?

Where will you see the sales improve earlier and where later?

This is Paulo.

I'm going to speak for the U.S. here.

Pretty much the components are the ones we were sharing.

So first of all, we are seeing our categories improving.

So our categories are running positive today.

Many negative shares that we saw in the first half of the year are fading.

And we have the innovation pipeline coming.

Then again, when you see what is giving us confidence on that in the U.S. is that when you see the consumption figures that we have for July, these already happened.

We are already trading positive consumption in the month of July.

So it's pretty much the combination of improvement in the categories, the negative headwinds that we have fading, investments in innovation and better programming, that is giving us this confidence for the second half.

And David, from a worldwide standpoint, we have Europe, Middle East and Africa continue to grow with the same momentum they have in the first half of the year.

We do see acceleration in Latin America, especially after the strike event in Brazil in May, in June, July and moving forward.

We do see acceleration in some countries in Asia, where we have the one-offs with the problems with fish supply in Indonesia and some inventory timing in China behind us.

And we do see a better sequentially performance in Canada, right, given the level of activation and innovation coming from market in the second half of the year in the country.

With this picture, together with Paulo just mentioned in the United States, we feel confident about the acceleration and the connection between investment we announced in the beginning of the year and the results you're going to see in the top line in the second half of the year, Q3, Q4, going into first half 2019.

And our final question comes from Jonathan Feeney with Consumer Edge.

I guess, a little bit of a follow-up, Bernardo.

You talked about -- to Jason English's question, when you think about -- you talked about capabilities investments.

And for a company that's been very, very return-focused and very successful doing so, I'm just wondering how much of these capabilities investments have a return that we can measure in 2019, 2020.

And if you could -- I know you don't guide for 2019 or necessarily a long-term basis, but these investments you're talking about, are these really just increases in the cost of competition versus what you might have thought on January 1?

Or would you really see that maybe versus where we were thinking January 1, it's just a question of maybe profits being pushed forward into 2019 and subsequent years from these investments relative to your expectations?

The way to see that, and if you think about what we did, was not really a change on the plans we had.

We knew the capabilities were there and we knew what to do.

We took advantage of a better scenario we had in the United States from a free cash flow standpoint.

And we did accelerate the plans we had from a commercial standpoint to drive those capabilities, right?

So it's not something that was new to us.

But the acceleration, given the numbers we have been seeing in the pilots we run in 2016, '17 allowed us to be confident about where we're deploying the capital, right?

And the reason you're going to see that because a lot of the innovation that's coming to market, Just Crack an Egg, we started in 2016, right, Planters Crunchers, Heinz Real Mayo, Capri Sun natural, Capri Sun zero sugar, pasta sauce, Heinz in Continental Europe, BULL'S-EYE in Continental Europe, Heinz and Kraft Mayo in Southern Cone and Brazil and Latin America, right, the expansion to biscuit category and nuts category in China, right?

All of those things, we had in time and have been developed.

But with the acceleration of those capabilities, understanding the categories, connecting to our field teams in some countries that we wanted to expand, getting our channels right and so on would allow us to be in a position, not only the second half but looking at 2019 and '20 in a better way.

That's why I'm saying that a one-off could enhance our capabilities and then we come back to a normal plan.

So looking to 2019 and '20, you're probably going to go back to measure our returns in a normal year plan.

What's the return, and given my results on that sales, my results and profitability and so on?

We continue to be very focused in value creation, right?

That's us.

We're a performance-driven company.

And we are very pleased with the culture, with the way it is progressing, the morale, the way we're seeing the second half of the year, the way our employees, that's really the competitive advantage of the company, is really engaging with the plans we have so far for the short term in second half 2018 but looking into 2019 and beyond.

So we do believe there is a return for that.

And that's why we're confident in the investment we are making.

Ladies and gentlemen, that concludes our question-and-answer session for today's call.

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

Thanks for joining us, everybody, this morning.

For those analysts who have follow-up questions, Andy Larkin and I will be available for your follow-ups.

And for those in the media that have questions, Michael Mullen will be available for you as well.

So thanks again for joining us, and have a great day.

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

This does conclude today's program, and you may all disconnect.

Everyone, have a wonderful day.