卡夫亨氏 (KHC) 2020 Q3 法說會逐字稿

Good day. My name is Kevin, and I'll be your operator today. At this time, I would like to welcome everyone to The Kraft Heinz Company Third 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 earnings call.

As you know, during our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our press release and our filings with the SEC.

We will also discuss some non-GAAP financial measures during the call today. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release.

We will begin today's call with Miguel Patricio, our CEO, providing a brief business update. Carlos Abrams-Rivera will then review performance in our U.S. business. Paulo Basilio, our CFO, will discuss our financial performance and near-term outlook. Then we will all be available to take your questions.

With that, I'll hand it to Miguel.

Well, thank you, Chris, and good morning, everyone. I would like to start our business update by sharing the sentiment I provided earlier today in our earnings release. You have heard me say frequently that we were cautiously optimistic about the path forward, but our momentum has been building, causing us to turn more to confidently optimistic.

This is based on 3 facts. First, in the previous 2 quarters, our results benefited from the scale that Kraft Heinz could bring in the immediate response to the pandemic. Our exceptionally strong third quarter performance reflects the agility of our organization and our ability to sustain momentum. Second, the changes in consumer priorities continue to support greater at-home consumption and increased demand for our brands. And third, our strategic work is moving from planning and organizing into action.

Based on these 3 factors, we are raising our 2020 outlook and continue to expect 2021 results to be ahead of the strategic plan we finalized earlier this year.

To better make these points, let me share a few relevant charts. Slide 6 presents an updated view of our at-home or retail versus away-from-home or foodservice sales performance. The charts show Kraft Heinz' year-on-year sales growth by geography from Q1 through Q3. The abrupt, unprecedented shifting between at-home and away-from-home consumption that we saw in the first half of the year continued through the third quarter.

At our Investor Day, we spoke at length about the many things we have been doing to become more creative, more agile and more efficient. And despite both volatile demand and, in some areas, constrained capacity, our teams around the world are demonstrating their ability to adapt to demand through a mindset of growth.

Our agility led to a very strong second half of September, as retail demand accelerated yet again, and we responded effectively and efficiently. As a result, our Q3 top and bottom line performance was stronger than what we projected at our Investor Day on September 15.

We have talked about 2020 being the first year of a turnaround. We said it would be a year in which we laid the foundation for future growth, stabilized our underlying profitability and maintained our industry-leading margins, all while we rebuild our business momentum.

It is clear that this is happening, as you can see on Slide 7. From the first half through the third quarter, we have sustained underlying top and bottom line momentum. Even as we take on additional COVID-related costs and supply constraints, we have been keeping our cost of goods under control. Also as we outlined in February, we are resetting our base through divestiture, business exit and the normalization of incentive compensation.

Our underlying growth is tracking with our strategy. Platform growth is consistent with the portfolio roles we have defined, with growth platforms up 7% year-to-date and energized platforms up 8%. And what we find very encouraging is that, while Taste Elevation is growing middle single digits, excluding Foodservice, Taste Elevation is growing roughly 20%. Emerging market growth is accelerating, up 9% in Q3 versus 7% year-to-date.

The simplification that our platform approach and portfolio roles bring is a key enabler in guiding us and measuring our success as we move to offense. This visibility is critical as consumer preferences evolve, and we need to adapt to serve different needs, which brings me to another reason for our confidence in our path going forward.

We are seeing consumer preferences evolve in ways that indicate that elevated demand for both at-home consumption and big, trusted brands will remain strong going forward. We are seeing stickiness in at-home consumption as consumers discover or rediscover cooking at home and at-home meal experience.

We see them reassessing the shopping trip, with bigger baskets and greater bundling. Affordability is a rising concern, which should be a benefit to those companies that are fast to adapt and have a strong presence up and down the price value ladder.

Consumers are gravitating towards big brands, and our retail partners are reassessing assortment with availability and velocity, a key determinant for it. And consumers are increasing choosing brands that can better align with their values. These consumer trends are tailwinds, causing us to turn more confidently optimistic in the near term.

The actions we have already taken to put our operating model in motion and the things that we needed to fix the most heading to our turnaround are many of the same things needed to adapt to an unpredictable environment with faster, greater changes in the consumer development. For instance, since late last year, we focused on improving our people efforts by revamping and deploying new training and development programs.

In many ways, we were also ahead of the game in our efforts to reduce stress and burnout and boost morale. And just last week, Kraft Heinz was named to the top quartile of Forbes Magazine list of World's Best Employers, after not even making the list of 750 companies last year. This is very positive reinforcement for all our efforts.

We have talked at length about the many things underway to transform our company, from adapting our innovation pipeline to eliminating waste, to driving productivity as well as better planning with our partners and ramping up investments in our brands and our capacity and our reach, e-commerce and emerging markets.

The point is that we now have the framework and visibility to distort resources, reinvest savings where we have the most advantage and the greatest opportunities to grow. And most important, we are moving from planning and organizing to action.

I will close my opening comments by summarizing a few points. We had stronger-than-expected Q3 results due to the greater agility we are creating. The consumer trends we are seeing and the actions underway give us more confidence that our momentum will remain strong in the near term, and we expect to continue exceeding our original strategic plan into 2021.

I will pass it on to Carlos now to provide more color on how we are seeing this taking shape in our biggest business.

Thank you, Miguel, and good morning, everyone. I think the analogy I would use to describe this past quarter is that we successfully have been driving down the road at 90 miles per hour to keep up with all the demand, while we are changing the tires. Now that takes ownership and agility, and our teams are showing it in spades.

As Miguel mentioned, our third quarter results demonstrate how our new organization quickly adapts to opportunities, and it was evident across our U.S. business, as finished out the quarter. As you can see on Slide 12, we maintained a strong momentum in both the top and bottom line.

Organic net sales growth reflected higher household penetration and repeat rates and our revenue management discipline. And our outstanding execution and efficiency in operations and procurement resulted in strong adjusted EBITDA gain, even as a number of headwinds began to have a greater impact in Q3.

We did this while demand shifted between channels on a week-to-week basis, and the organization advanced the divestiture of our natural cheese business. While we can't predict the future, 3 things give us further confidence. First, as Miguel mentioned, we are encouraged by the continuing trend towards greater at-home consumption. Second is that we are seeing more consumers coming back to our brands. And third, we are now better positioned to retain and grow both new and loyal consumers, respond to rapidly changing demand and further capitalize on the gains we have made in the last 9 months.

Keeping with the driving analogy, operationally, we have turned a corner. I am pleased to share that we have rapidly moved from reorganizing to execution, and we are now in position to properly deploy resources and execute in a way that continues to build on the positive consumption trends we are experiencing.

To give you a better idea of what this means, in people, our new business unit structure is now fully operation and fully staffed. We have made recent external leadership additions in consumer insights and sales leads with major customers. These additions complement several internal placements in new or evolved critical roles, all helping to carry out a new foundational processes with a growth mindset.

The work we have done to put people first is paying off. We have seen higher engagement among our current employees, and we are continuing to attract top-tier talent into the organization more rapidly than ever before. And we're building and strengthening both organizational and individual capabilities. This includes leveraging digital as an enabler, which will allow us to accelerate our growth and raise the bar on what it means to be the best.

Turning to our platforms. Significant work on all 6 platforms is underway in the U.S. zone. And while results will be more evident in 2021, I'll show in a moment that we have already stored resources and investment to fuel our growth and energize platforms.

In our Ops Centers, collaborations across our entire supply chain contributed a significant amount to our success this quarter, including holding cost of goods under control, even with incremental COVID-driven cost, demand volatility and supply constraints.

In addition, our focus on operational excellence in manufacturing has enabled us to increase year-over-year production in the low single-digit range overall and by roughly 20% on lines where we have had constrained supply relative to strong demand.

In Q3, this included relieving constraints in high-demand categories, like cold cuts, cream cheese, mac and cheese and stuffing, helping us to sustain already strong household penetration and share trends, which I'll talk about shortly. And anticipating continued demand, we expect to go from double- to triple-digit investment dollars to improve capacity in 2021.

We've also made significant progress in our partner program, with customers citing much earlier and much deeper planning than in the past. To date, we have conducted more than 40 top-to-top meetings with key retailers, with another 40 planned in the coming weeks. In each meeting, we are sharing our transformational plans as well as joint business plan for the coming year. It's allowing us to be more strategic in category development and value creation.

And while we're doing a lot to maintain retail momentum, we're also finding opportunities to better support our foodservice partners from piloting new innovations like zero-touch dispensers to helping create unique menu items that drive traffic and sale for our partners. We have quickly pivoted to adapt to market needs. All of this is beginning to result in consumers voting more often for us.

As you can see on Slide 14, our retail market share has been continuously improving over the past year, running up to the end of September. This has been driven by an improvement in the overall health of the portfolio, as we have had increased capacity, invested in marketing, adapted our communication and built stronger collaborations with our customers.

The percent of our retail sales, where we're growing share, has grown from only 20% in the first half to 41% in Q3 and up to 58% in September. And we are fixing our biggest categories, as a percent of our categories where we are gaining share has gone from 36% to 49% over the same time period.

Some of this is due to resolving supply constraints in some key categories. For instance, Oscar Mayer cold cuts, part of our fast fresh meals platform and an area we are energizing, saw share growth this quarter for the first time in 18 months. This was the result of fast adapting our product mix to raw materials availability and capacity constraints as well as the agility to activate and execute differently with customers.

Some of this is due to greater focus and prioritization that our platform approach is bringing. For instance, in our Taste Elevation platform, we grew market share during Q3 in over 70% of the categories we compete. More importantly, we are well positioned and have the right plans in place to build on this.

I have shown previously that our household penetration was one of the inherent strength of our portfolio relative to the industry and how this has strengthened further since the onset of COVID-19. We continue to see increased household penetration and repeat rates across a sizable portion of the portfolio, including core brands like Kraft Mac & Cheese, Philadelphia and Planters. But what is most encouraging is that the rate of new buyer repurchasing our products 2 or more times is now double the rate versus what we're seeing last year.

To build our base of loyal consumers and keep this momentum going, we are stepping up our marketing investment by 40% in the second half of this year compared with the second half last year and 70% compared with the first half of this year, and we will have more working dollars as a percent of our spend as well.

To close here, our third quarter was very encouraging as we began to see ourselves bringing agility to our scale. And with our organization, prioritization and 2021 plans in place, we are well positioned to sustain the momentum we have benefited from so far in 2020.

With that, I will turn it over to Paulo to talk through our financial results and outlook.

Thank you, Carlos, and good morning, everyone. I will quickly walk through some key highlights of our results and then provide our expectations for the path forward. I will begin where Carlos left off with the U.S. business.

Organic net sales in the U.S. increased 7.4%, in spite of a roughly 1-point drag from the McCafé exit, which began July 1. Volume/mix growth across retail, e-commerce and club channels was strong and more than offset lower Foodservice sales.

Pricing was up 4% from a combination of lower promotional activity in certain categories to protect customer service, selective planned price actions and commodity-driven pricing, primarily in cheese. These effects are expected to fade in Q4, as we begin to lap prior year pricing actions, and we expect to return to more normal levels of promotional activity.

At adjusted EBITDA, even though we saw the key headwinds mentioned on our last earnings call, better retail performance, positive pricing, favorable mix and strong procurement and efficiencies more than offset those impacts.

In our international segment, Q3 top line performance checked 3 of the boxes of the strategy we outlined for the zone at Investor Day. First, we delivered mid-single-digit growth with a relatively balanced contribution from volume and price. Second, growth was led by emerging markets, with outside gains in priority markets, including Russia, Brazil and in Taste Elevation in China. And finally, we advanced our aspiration of global leadership in Taste Elevation with over 1 point of share growth in that platform.

Taken together, this top line growth fueled 6.8% constant currency adjusted EBITDA growth and more than offset higher supply chain costs, including incremental COVID-related expenses and normalized incentive compensation.

Looking forward, our outlook for the international segment is largely consistent with what we expressed in July. We anticipate results specifically on the top line to soften in the remainder of the year compared to the year-to-date trend.

Finally, in Canada, Q3 organic net sales growth decelerated relative to the first half. Here, lower coffee and foodservice shipments more than offset pricing gains and strong platform growth. In fact, Q3 retail consumption for Easy Meals Made Better and Taste Elevation, our 2 priority consumer platforms in Canada, grew at a double-digit rate, and we increased share in 70% of our categories.

Constant currency adjusted EBITDA improved sequentially, as we fully lapped the divestiture of the Canadian cheese business in Q3. That said, we still saw a decline versus prior year due to the McCafé exit. Excluding the McCafé impact, constant currency adjusted EBITDA would have been virtually flat with the prior year, as consumption growth offset supply chain cost inflation, mainly in logistics as well as higher incentive compensation.

For Q4, we expect a combination of softer foodservices sales this year and seasonally strong McCafé sales in the prior year to weigh on organic sales. These effects are likely to mask strong, although moderating, retail consumption growth and carry forward price initiatives. EBITDA is likely to be more resilient and remain near run rate margin levels, with positive pricing and favorable mix more or less offsetting higher operational costs.

Looking at the total company results. There are 2 things I'd like to highlight before going to our outlook. One is below EBITDA items, and the other is free cash flow. In July, we reiterated our prior forecast for $0.38 below-the-line headwinds due to a combination of higher tax, lower other income and higher equity compensation. Those 3 factors played out mostly as expected in Q3 with a $0.12 negative impact to adjusted EPS. That brought the year-to-date impact to $0.31 and remains in line with an approximate impact of $0.38 for the full year, a view I'm reiterating today. Also keep in mind that this impact is primarily noncash in nature.

In terms of free cash flow, year-to-date 2020 free cash flow has more than doubled compared with the first 9 months of 2019. Much of the increase has been driven by year-to-date sales and adjusted EBITDA growth. However, some of it is also due to favorable accrual timing and lower CapEx spend, which we expect to reverse in Q4. Furthermore, working capital as a source of cash should be comparatively less than it was in Q4 last year as we aim to rebuild inventory levels.

That said, we are confident that free cash flow will be significantly better than 2019 levels, and we would expect free cash flow conversion to be roughly in line with our long-term target of 100% for the full year in 2020.

Given where we are in the year and based on what we have been seeing to date, we are raising our outlook for Q4 and for the full year. We now expect organic net sales to grow mid-single digits in Q4, and that would result in mid-single-digit growth for the full year.

For adjusted EBITDA, we see high single-digit constant currency growth in the fourth quarter. And for the full year, we are now expecting high single-digit constant currency adjusted EBITDA growth.

In terms of cash flow and leverage, we expect a strong performance to date to result in 100% free cash flow conversion for the year and net leverage to be approximately 4x by the end of the year.

Looking into 2021, we now have things in place to accelerate our investment with strong visibility on returns and build on the momentum we established this year. It is difficult to predict consumer behavior and the balance between at-home versus away-from-home consumption going forward, so we will focus on what we could control and set our objectives appropriately.

From an organic sales perspective, our focus will be to retain developed market household gains we made in 2020 and improve our growth trajectory from agile portfolio management.

For EBITDA, we will accelerate growth investments, especially towards emerging markets, and deliver adjusted EBITDA above our strategic plan. We continue to be committed to a strong return of cash to shareholders, and we will continue to reduce gross debt outstanding, accelerated by the proceeds of the pending cheese transaction.

With that, let me turn it back to Miguel to close.

Thank you, Paulo. Well, to quickly summarize what we have seen and what we see going forward, our momentum remains strong as we rebuild our company through a mindset of growth. We are now moving to offense, able to reinvest savings and realize near-term upside in a purposeful, prioritized way. And we expect to continue performing ahead of our strategic plan.

Now we would be happy to take your questions.

(Operator Instructions) Our first question comes from Ken Goldman with JPMorgan.

You mentioned affordability as an increasing concern for consumers. But at the same time that, that's happening, we're seeing private label across almost all categories do quite poorly in terms of share. I'm just curious, you have some exposure to store brands in your categories. What is your research recently telling you about maybe why private label isn't doing a little bit better in this environment?

Well, let me start that, and then Carlos can comment. We still haven't really felt the effect of the crisis that we have, so the reduction on GDP. We continue to see a pretty big acceleration in consumption. And of course, that -- part of that is, number one, because of home consumption growing because of the pandemic. But number two, because of consumers going back to trusted brands. I think that, at this moment, there's a big need for brands that people trust.

That's a big change from the past, that there was a need of experimentation of brands and other things. What we see at this moment related to affordability is a change towards packs, so we are selling more economy packs this time than we were before. So mix impacted it.

Carlos, do you want to complement?

Yes, Miguel. So I guess, let me just go back to something that I said during Investor Day, which is it's not so much about fighting with private labels, as it is coexisting with private labels. I think, at this time, what consumers are looking from us is to make sure we continue to emphasize the value that we can bring, and we certainly do that with our brands.

If you think about other recessions, big brands tend to win as well as some of the private label. But then smaller brands actually do not perform as well, and I think that's playing out that way. So if you look at our Q3 results, our shares actually improved throughout the quarter. And as we go into Q4, we continue to invest behind our marketing. We'll see that continuing in the next quarter as well. Thank you.

Can I ask a quick follow-up to Paulo? Just a clarification. You said you expect to reduce gross debt next year. Is there anything we should read into that, that you said gross and not net debt? Do you also expect, I guess, to have your net debt lower at the end of '21 than it is at the end of 2020?

Yes. I meant that. Listen, we are generating cash. As we said, we had a very strong cash generation this year. Year-to-date, we've paid down pretty much more than $1 billion in debt already, and just to say that we intend to keep paying down debt next year with the strong cash flow that this company here generates.

But that's -- the mention was pretty much to say that we're going to use -- we're going to be paying down debt every year to focus on the gross debt reduction. And of course, as we generate cash, our net debt also will go down.

Our next question comes from Andrew Lazar with Barclays.

Carlos, we've noticed you've obviously brought on quite a bit of new talent at high levels in a number of areas, but perhaps most visibly in sales. Having recently hired, I think, a new head of U.S. sales, a new head of U.S. sales in national accounts, and I'm sure some others that I'm missing, maybe you can talk a little bit about in terms of sort of what skill sets you were looking for when you brought some of these folks on and some of the other efforts you've been making, specifically on the sales side. And maybe what you're seeing thus far as a result, especially with key retail partners, which I know has certainly been an area of focus for the company.

Well, first, thank you, Andrew, and I do appreciate you recognizing the changes we're making. But -- and let me, I guess, start with -- give you a little bit of a context about how we're rethinking our sales organization.

For us, it was around how do we actually build agility in the organization and in 3 different pieces: how do we reorganize our structure; upgrading our processes; and really instilling great discipline on how we spend. So I mean, I think you speak about the reorganization we have made. We have brought new talent in which -- and I think what I'm most proud of is that huge amount of experience and diversity of thinking they are also bringing to Kraft Heinz. And we're also making sure we are changing how our account structure, so that we can focus on those critical partners.

And then internally, we have also centralized our customer development and revenue management teams to make sure we releverage our scale in a different way. So as you said, some of the key talents we have, not only a head of -- new head of sales, but people under him actually account for over 50% of our overall sales in the U.S., so that is a significant new leadership that we have put into critical places.

And then as we work with our customers, I'll tell you that one of the things that they also seem to be noticing is that we have also upgraded our processes. So we are pulling forward planning cycle to make sure we better match their time lines, which is something that we haven't done in the past. And then making sure we have that greater discipline that I spoke about, which is make sure we have clear planning time lines that we commit and deliver, and we have the clarity to drive accountability and speed internally.

And if you take a step back, Andrew, I think what you see is that kind of improved execution, it's showing on both in terms of our growth as well as the sequential improvement we're seeing in market share. So I am very pleased with the talent that we're bringing to the organization, again, with the discipline, with the experience and the diversity of thinking that I think is going to continue to make us a stronger company as we go forward. Thank you.

Just a quick follow-up then would be you've talked a lot about bringing on additional capacity, particularly in some categories where you've been most constrained. Is there any way to dimensionalize maybe sort of what percentage of that capacity is sort of third-party manufacturers versus, let's say, putting more of your own capital in the ground?

And the reason I asked this is to trying to get a sense of that could be also a telltale on sort of your expectations around how much of this incremental demand could really be sticky by putting more of your own capital in versus, let's say, the flexibility of a copacker.

No, thank you, and thanks for the question. So I think the way I think about it in terms of capacity is there are some pockets of capacity constraints, but really nothing that should be holding us back in a significant way. We have been making significant stride on improving our capacity in those lines that we have constrained. I think you have heard us talk about the fact that in those constrained line, we're actually driving 20% more out of those lines than we have ever done.

So it's also both making sure that we address that, but also is that we have to be more agile to making sure we put the capacity that we have where we need it and working with our customers in a collaborative way.

And some of that agility that also -- it also translates on how we're actually working with our partners differently because we know that, for example, let me just take one, which is Mac & Cheese, well, Mac & Cheese, really, the only constraint we have is in Mac & Cheese cups. So what we have done is work collaborative with our retail partners so that we can actually flex our marketing and promotion, so that we can emphasize our boxed Mac & Cheese, and that kind of segmentation and focusing with our partners into the places where we do have a lot of capacity, that actually has worked well. And it also is part of the reason why you're seeing that translate into improved share performance.

Our next question comes from Robert Moskow with Credit Suisse.

I had a couple of questions, the first is on the market share improvements. It looks pretty impressive. Can you give a little more color on what categories are improving the most? And maybe explain what you did to -- so that you can -- we can feel comfortable that those shares are sticky. Was it product? Was it pricing? What's fixed?

And then secondly on inventory and supply chain, glad to see that you're accelerating everything. Are retailers asking for more inventory than normal, though? And when you say that the environment will go back to normal in fourth quarter, maybe a little more color on -- as infection rates are rising higher, do you actually have to expand capacity well beyond your normal situation in order to satisfy what retailers want?

I can take that one and -- at least for the U.S. and then we'll -- if there's anything else, Miguel, you want to comment from performance and on share.

What I would say is that if you look at our -- the way we're now thinking about our business, we also have -- we're looking at how we go from 55 categories to the 6 platforms that we identified during the Investor Day. And I think the thing that is very encouraging for us is that we are seeing strong performance across all 6 growth platforms. In particular, the 2 areas we designated as growth platform around Taste Elevation and Easy Meals Made Better, both are adding really strong penetration rates.

So it is not only the fact that we are driving improved share, but also is that we actually continue to drive the penetration in the places we really are going after, and that is done because of the work that we're doing.

So for example, there are things we're doing in Taste Elevation and let me tell you -- for example, the Heinz brand. We are benefiting as we are actually focused on those host foods that we identified during our Investor Day, whether that was burgers and fries and nuggets, and those occasions are actually driving even higher. So the places that we said that we're going to be focusing on are actually the behavior that we see in consumers actually doing more of as we go into this -- in most recent quarters.

And then if you are to look at things like Easy Meals Made Better, where we have various like Mac & Cheese, we're also seeing how they continue to come back as they are now understanding how good the product is, how they're doing more prepared meals at home, whether that is with Mac & Cheese or with our classical pasta sauce or either potatoes.

So it's a combination of us improving on the way we think about our consumers with a stronger focus on the consumer platform as well as continue to drive improved focus on our penetration of our brands and driving with better marketing.

Before I get to your questions about the overall inventory levels, I don't know, Miguel, anything else you want to comment in terms of share?

Yes. I -- just complementing what you said, in international -- in the international zone, we are seeing stable for share growth. The most remarkable growth in share is coming from Brazil, from Russia and from the Middle East.

In Canada, we are actually gaining share in 70% of the portfolio that we operate. The -- we have problems in coffee, especially because of McCafé that is not in the space, and that was very representative for Canada. It was about 5% of the net sales for our business in Canada. But January, this will no longer be in the base.

So that complements the great momentum we have in U.S. that Carlos just mentioned. Just to say that we're seeing some records in some of our products, ketchup and ranch dressing, cream cheese and mayo, very, very good momentum.

And then -- thank you, Miguel. And then, Rob, I think your question -- the other part of your question was around the inventory levels. I think that what we -- let me just, I guess, put it within the context first of what we saw in Q3, which is we did see some rebuild on the retail inventories when you look at year-over-year, but that was really as a result of the drawdown that we saw in Q1.

So it does vary by customer, but overall, I think we are seeing that progression of most of that recovery happen from what we saw in Q1. Now the reality is that we don't know what the precision is of where retailers are going to end up in terms of the number of days of inventory they're going to be carrying as we go forward, so that's still to be known.

What we -- what I can tell you we're doing is we're actually working very collaborative with our customers to make sure that we are there as they are preparing for a holiday season that I think, in many ways, could be unprecedented.

And then secondly is in places where we know that our consumers are looking to expand maybe into nontraditional categories, so we are seeing things like in our meat business that actually recover in Q3. And we saw the improvement in share with some of the meat business that normally wouldn't sell as much in Q4, we're seeing already the improved performance and consumption as we go into the holidays.

So net-net, I would tell you is that we are working collaborative. We are seeing some improvement in Q3 in terms of retail inventories. Where exactly it's going to land, not as clear yet, but we're going to be there with our customers to make sure we do the right thing.

Our next question comes from Bryan Spillane with Bank of America.

So I guess, I wanted to follow up a little bit on Andrew Lazar's question just with regards to the capacity additions and kind of the implications for, I guess, the stickiness of some of the elevated demand this year. My impression from the Investor Day was that the baseline expectation that you all were setting going forward was really that you weren't expecting a lot of this extra demand that we picked up in 2020 to stick. So I guess, my question is, it sounds like you're expecting more of it to stick. So maybe what's changed with regards to your thoughts around that, first?

And then second, just can you give us a sense of how you're monitoring that? Like just how do you identify that? And then maybe tied to that, just how you plan -- like what do you do to maintain that stickiness? Is it increased advertising? Is it new products? Just what can you do to make sure that, that demand sticks?

Let me -- I guess, let me take -- we know we talked about it. Let me try to give you maybe a little bit more color in terms of how we think about our demand and making sure that it does stick. We do see -- and we saw this in Q3 with consumers coming back to our brands in a much stronger way.

So the fact is that we -- when you look at the results, we are really encouraged about the rate of new buyer repurchasing a product that is 2 or more times. So it's not they're coming back, but they're actually coming at a higher rate than we have seen in the past. And we are also seeing that particularly in our big brands.

So let me give you an example, Philadelphia, the repeat is up 23% as those users really are looking for more user occasion of what to do with whether that is not just baking, but actually breakfast as well. And we're seeing places like Oscar Mayer where people are preparing more home lunches, and they're using our products in new occasions now that they are spending more time at home.

So if you take it all together, then you say, okay, first, our big brands have really resonated with new consumers. Those consumers are actually now that they are trying our brands are seeing the great taste, quality and value advantage that we bring, so they're actually coming back at a higher rate. And when you bring it all together, it just shows that, to me, the best way to exemplify this is that you've seen the sequential improvement that we're seeing in our share performance. So that gives us quite a bit of confidence.

I spoke earlier around the capacity. And I can say, again, we are seeing pockets, but at the same time, it's nothing that should be -- hit us in a significant way as we go forward. And I'm very pleased with the agility the organization that is doing in order to make sure that we work collaborative with our customers, to ensure that we have flex where we need it, but that actually has been something that we feel positive about as we go forward into Q4. Thanks for the question.

Our next question comes from Alexia Howard with Bernstein.

Can you hear me okay?

Yes.

Yes.

Yes.

Right. So can I ask about the pricing dynamics? You talked about, obviously, there was strength in pricing this quarter, particularly in the U.S. But do you expect that to save going forward as promotional activity starts to ramp up again?

I'm just curious about the conversations you're having with retailers about that. Are they asking for more promotional activity? And in a capacity-constrained environment, how are those conversations going? And then I have a follow-up.

So...

Sorry. I can take this one, Alexia. So I think I'm going to start here talking about like the comment about the pricing. So -- and then maybe ask Carlos to talk to get the U.S. piece. I think it's a good way to approach that.

We -- one piece that we see is that now, as we comment, the first I think in Q4, we are going to start lapping some price increases we had in Q4 last year. So that is one of the components that we mentioned. So in a relative basis, so we're going to start lapping this price. And again, given the constraints that we had, and I'm going to ask Carlos to complement there, we are also coming back to a better or a more normal level of promotions. But then I'm going to ask Carlos to build on that.

Yes. Thank you, Paulo. So like in the U.S., what I would say is that we're beginning to now return to more normal levels of promotion and activity. I think you saw the effects of some of that already in the Labor Day time period. And if you look at not only the actual Labor Day weekend, but also overall, you take a step back and look at back-to-school performance, that back-to-school was actually pretty in line to what we saw last year. So that shows, I think, that we are returning back, that our customers want to make sure that we have the right pricing as we go into the remaining of the year.

So it was both in terms of us saying that we are ready in terms of having the availability of capacity to make sure we have the right promotions back in place as well as working with our customers to make sure that we are there when we know consumers are going to be looking for our brands, regardless of the channel, whether that is in brick-and-mortar or e-commerce.

And again, I think that if you look at it again, you see, just to finish the thought there, is that -- and what you see is the market share performance, I think, will show that kind of returning to promotions at the right level that we're doing as we go back and have the availability and the right investment with our customers.

Great. And just a follow-up on the emerging markets. It's obviously strong right now, but should we be worried about macroeconomic slowdowns in those regions and that may be starting to slow down demand for branded products?

Well, we are not seeing that. We have great momentum in the emerging markets, and I don't see any reason to think that this will change in the short term, any signs of that. Actually, some countries we're having record sales like in Russia, like Middle East, like in Brazil. And the momentum is with us.

Our next question comes from Jonathan Feeney with Consumer Edge.

Just one question. I guess, a lot of the retailers have talked about SKU reductions and a more efficient supply chain. That was clearly a response to the supply chain constraints brought on by COVID. But I'm curious, how do you think this will play out over the next 12 months? Do you think more SKUs and items come back, and the old complexity we had comes back? Or do you think that we wind up with a more efficient business model? And to what impact on margins, if any, or your retailer relationships looked at holistically?

I can answer that, and Carlos, if you want to complement that specifically about where. I think it's actually both. I think that the first moment to maximize capacity, what we did, and the market did was to reduce dramatically the number of SKUs to maximize productivity in the short term. Some of these SKUs, however, were relaunched. And because they are important, they are incremental.

And so I think in a way, the market is adapting. It went to one extreme, and now it's coming back. But of course, it will not go to the level that it was before, and that is good. It's good for us because the complexity in our factories and improves -- make us really do a very good analysis on profitability and velocity and streamline the unnecessary SKUs.

Carlos, if you want to add anything, please.

Just to build more than adding, I would say, building on your answer, Miguel, what I would say is that while it's difficult to say how the customers are going to stay in terms of levels of inventory and SKU levels, there are things that we are doing internally to make sure that we have the most agile supply chain organization, and that includes us reducing the number of SKUs as we go into next year. So from what we had a year ago to what you'll see in 2021, it's about down 20% of number of SKUs.

That actually is something that, as we work collaborative with our customers, shows that we're able to then make sure that we respond with the type of service they need in the core SKUs that they're also looking for.

So now that doesn't take away from us being able to also stay focused on the kind of innovation that we want to bring. So we are doing both reducing our SKUs to make sure -- by 20% to make sure we have the agility in our supply chain. At the same time, we also are still focused on innovation as we go into 2021, in which we actually feel very prepared. And the reason for that is we have reduced innovation -- a number of innovations in '20 by half of what we had in 2019. And as we go into 2021, it's another 1/3 that we're reducing.

At the same time, that innovation is actually going to have a bigger impact in terms of overall drive in sales since we go into 2021. So a much more fewer -- a much more focus on fewer, bigger, better innovation, with also focus on the right SKUs, so that we can better service our customers. Thanks for the question.

Ladies and gentlemen, that does conclude the Q&A portion of today's call. I'd like to turn the call back over to Miguel Patricio for closing comments.

Okay. Well, thank you very much for your presence to be with us and to listen to us.

I just want to finalize and repeat some of the things we said during this call. We had stronger-than-expected Q3 results, and that is already reflecting the agility that we are creating in our organization. We have been able to manage this shift at-home versus away-from-home consumption in an impressive speed. We are holding on to new households and consumers in a greater rate than before, and the result of that is that our market share is showing pretty good signs of improvement.

Our strategy is really moving or already moved from organizing really to action. We are investing in the business. Investments are ramping up. We have, today, a much better team and talent in all levels. And this better positions us, as we are trying to sustain gains.

So we are, as I said before, confidently optimistic in the near-term performance, and that's why we raised our 2020 outlook. And in 2021, the financials are ahead of what we expected during our strategic plan.

So with that, thank you very much. Have a great day. Thank you.

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