The Kraft Heinz (NASDAQ:KHC) Q3 2020 Earnings Call

0:00 Good day. My name is Kevin, and I'll be your operator today. At this time, I'd like to welcome everyone to the Kraft Heinz Company 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.

0:14 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, 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 Sabrums 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.

1:07 With that, I'll hand it to Miguel.

1:10 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. say frequently that we were cautiously optimistic about the path forward. But our momentum has been building, causing us to turn more to a confidently optimistic. This is based on three facts. First, in the previous two quarters, our results benefited from the scale that Kraft Heinz could bring in the immediate response to the pandemic.

1:56 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 increase demand for our brands. And third, our strategic work is moving from planning and organizing into action. Based on these three 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.

2:43 To better make these points, let me share a few relevant charts. Slide six presents an updated view of our at home or retail versus away from home. or Food Service, 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.

3:36 And despite both volatile demands 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.

4:21 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.

5:17 Our underlying growth is tracking with our strategies. 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 food service, 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 off-ense.

6:12 This visibility is critical as consumers' 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 Thank you very much. Thank you very much. Up and down the price-value ladder.

7:19 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 increasingly choosing brands that can better align with their values. These consumer trends are tailwind. 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.

8:12 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.

8:57 We have talked at length about the many things and the way to transform our company from adapting our innovation pipeline to eliminating waste and driving productivity as well as better planning with our partners and ramping up investments in our brand and our capacity and our rich e-commerce and emerging markets. The point is that we now have the framework and visibility to distort resources, reverse 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.

9:47 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.

10:29 Thank you, Miguel. And good morning, everyone. I think the analogy I will 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 space. 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 we finish out the quarter. As you can see on slide 12, we maintain a strong momentum in both the top and bottom line. Organic net sales growth reflected higher household penetration and repeat rates and a revenue management discipline.

11:18 An outstanding execution and efficiency in operations and procurement resulted in strong adjusted EBITDA gains, 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, three things give us further confidence. First, as Miguel mentioned, we are encouraged by the continuing trend towards greater home consumption. Second, is that we're seeing more consumers coming back to our brand. 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 nine months.

12:14 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 operational 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 new foundational processes with a growth mindset.

13:07 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 six platforms is underway in the US 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 energized platforms.

13:57 In our op centers, collaboration 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 costs, 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.

14:51 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 plans 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 food service partners.

15:41 From piloting new innovations like zero-touch dispensers to helping create unique menu items that drive traffic and sales 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 grow in share has gone from only 20% in the first half to 41% in Q3 and up to 58% in September.

16:36 And we are fixing our biggest categories. As the 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 So 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.

17:30 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 is one of the inherent strengths 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 and Cheese, Philadelphia, and Planters. But what is most encouraging is that the rate of new buyers repurchasing our products two 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.

18:29 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.

18:58 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 one-point drag from the McAfee exit, which began July 1st. Volume mix growth across retail, e-commerce, and club channels was strong and more than offset lower food service 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.

20:00 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 efficiencies more than offset those impacts. In our international segment, Q3 top-line performance checked three of the boxes of the strategy we outlined for the zone at investor day.

20:45 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 a 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.

21:35 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. Lower coffee and food service shipments more than offset pricing gains and strong platform growth. In fact, Q3 retail consumption for easy meals made better and taste elevation, our two priority consumer platforms in Canada, grew at a double-digit rate, and we increased share in 70% of our categories.

22:27 Constant currency adjusted EBITDA improved sequentially. as we fully lapped the divestiture of the Canadian franchise business in Q3. That said, we still saw a decline versus prior year due to the Maccafe exit. Excluding the Maccafe 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 compensations. For Q4, we expect a combination of software food services sales this year and seasonally strong Maccafe sales in the prior year to weigh on organic sales.

23:15 These impacts 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 two 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 38 cents below the line headwinds due to a combination of higher tax, Lower Other Income, and Higher Equity Compensation.

24:05 Those three factors played out mostly as expected in Q3, with a $0.12 negative impact to adjust the DPS. 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 non-cash in nature. In terms of free cash flow, year-to-date 2020 free cash flow has more than doubled compared with the first nine months of 2019. Much of the increase has been driven by year-to-date sales and adjusted EBITDA growth.

24:50 However, some of it is also due to favorable accrual timing and lower CapEx expense. 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.

25:39 We now expect organic net sales to grow mid-single-digit 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 four times by the end of the year. Looking into 2021, we now have things in place to accelerate our investment with a strong visibility on returns and build on the momentum we established this year.

26:30 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 do 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.

27:15 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.

27:27 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. Ladies and gentlemen, if you have a question or comment at this time, please press the star then the one key on your touch-tone telephone.

28:12 If your question has been answered or you wish to move yourself to the queue, please press the town key. One moment for our first question. First question comes from Ken Golden with JP Morgan.

28:29 Hey, good morning. 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 complement.

29:10 We still haven't really felt the effect of the crisis that we have. So the reduction of GDP. We continue to see a pretty big acceleration in consumption. And of course, 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.

29:55 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. We are selling more economy packs, bigger packs, than we were before. So mix in packages. Carlos, do you want to compliment specifically to you?

30:27 Yeah, Miguel. So I guess let me just go back to something that I said during investor day, which is, you know, it's not so much about fighting with private label as it is coexisting with private label. 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 continue in the next quarter as well. Thank you.

31:22 Thanks. Can I ask a quick follow-up to Paolo? 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 2021 than it is

31:38 at the end of 2020? Yeah, I meant that list. And we are generating cash. You know, as we said, we had a very strong cash generation this year. You have 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 the mention was pretty much to say that 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. Great. Thank you.

32:26 Our next question comes from Andrew LaSalle with Barclays.

32:31 Morning, everybody. 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, you know, 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, you know, especially with key retail partners, which I know has certainly been, you know, an area of focus for the company.

33:10 Well, first, thank you, Andrew, and I do appreciate you recognizing the changes we're making. And let me, I guess, start with giving you a little bit of a context about How do we re-organize our structure, upgrading our processes, and really installing great disciplines on how we spend? So, I mean, I think you speak about the re-organization we have made. We have brought Newtown in which, and I think what I'm most proud of is the huge amount of experience and diversity of thinking that are also bringing to Crab Mines. 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've also centralized our customer development and revenue management teams to make sure we really leverage our scale in a different way. So as you said, Some of the key times we have, not only a 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.

34:32 So we are pulling forward a planning cycle to make sure we better match their timelines,

34:37 which is Thank you very much. Thank you. 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.

35:22 Thanks for that. 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 Thanks so much. No, thank you. And thanks for the question.

36:03 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 strides on improving our capacity in those lines that we have constrained. I think you have talked about the fact that in those constraints line, we've actually driving 20% more out of those lines that we have ever done. So, you know, it's also both making sure that we address that, but also is that we are also 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, you know, that also translates on how we are actually working with our partners differently. Because we know that, you know, for example, let me just take one, which is, you know, mac and cheese.

36:53 Well, mac and cheese, really the only constraint we have is in mac and cheese cups. So what we have done is we're collaborative with our retail partners so that we can actually flex our marketing and promotion so that we can emphasize our box mac and cheese and that kind of segmentation and focusing with our partners into the places that 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 translating to improve share performance. Thank you. Thank you. Our next question comes from Robert Mascow with Threadsleaf.

37:33 Hi, thanks. I have 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 so that 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 pre-infection rates are rising higher. Do you actually have to expand capacity well beyond your normal situation in order to satisfy what retailers want?

38:32 Thanks.

38:38 I can take that one, at least for the U.S., and then we'll, if there's anything else, Miguel, you wanted to comment, you know, from performance on share. You know, what I would say is that, you know, if you look at are, you know, the way we're now thinking about our business. We're also looking at how we go from 55 categories to the six platforms that we identified during Investor Day. And I think the thing that is very encouraging for us is that we are seeing strong performance across all six, you know, growth platforms. In particular, the two areas we designated as growth platform around taste elevation and easy meals made better, both are adding really strong penetration rates. So Thank you very much.

39:51 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're seeing consumers actually doing more of as we go into this in most recent quarters. And then if you look at things like Easy Meals Made Better, we have areas like Mac and 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 and 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?

41:00 Yes. You know, just complementing what you said, in the international zone, we are seeing stable for share growth. The most remarkable growth is coming from Brazil, from Russia, and from the Middle East. In Canada, we are actually gaining share in 70% of the categories that we have to reoperate. We have problems in coffee, especially because of Macafe, that is not in the And that was very representative for Canada.

41:47 It was about 5% of the net sales for our business in Canada. But, you know, January, this will no longer be in the base. So, you know, that complements the great momentum we have in the U.S. You know, just to say that we're seeing some records in some of our products. Ketchup and Lunchables and Cream Cheese and Mayo. Very, very good momentum.

42:21 And then, thank you, Miguel. And then, Rob, I think your question, the other part of your question was around the inventory levels. You know, I think that what we, let me just, I guess, put it within the context first of what we saw in Q3, which is, you know, we did see some rebuilding of retail inventories when you look at year over year. But that was really as a result of, you know, the drawdown that we saw in Q1. So, you know, it does vary by customer, but overall I think we are seeing that progression of most of that recovery, you know, happen from what we saw in Q1. Now, the reality is that, you know, 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, you know, still to be known. What I can tell you we're doing is we're actually working very collaborative with our customers to make sure that, you know, we are there as they are preparing for a holiday season that I think in many ways would be unprecedented. And then secondly is in places where we know that, you know, our consumers are looking to expand maybe into non-traditional categories.

43:29 So we are seeing things like, you know, in our meat business that actually recover in Q3 and we saw the improvement in share, you know, with some of the meat Great, thank you. Our next question comes from Brian Swain with Bank of America.

44:12 Hey, good morning, everybody. Thanks for taking the question. 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. You know, my impression from the investor day was that the baseline expectation that you all were setting going forward was, Thank you for joining us. Maybe tied to that, just how you plan, like what do you do to maintain that stickiness? Is it increased advertising?

45:09 Is it, you know, new products? Just what can you do to make sure that that demand sticks? Thank you.

45:20 Let me, I guess, let me take a, you know, we know we talked about it. Let me try to give you maybe a little more color in terms of how we think about our demand and making sure that it does stick. You know, 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, you know, when you look at the results, we are really encouraged about the rate of new buyers repurchasing a product that it's two or more times. So it's not only 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 of Philadelphia. The repeat is up 23% as its users really are looking for more user location to do with whether that is not just baking but actually breakfast as well.

46:14 And we're seeing places like Oscar Mayer where people are preparing more at home lunches and they're using our products in new locations now that they are spending more time at home. So if you take it all together, then you say, okay, first, our big brands are really resonating with our 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 come bring it all together, it just shows that, you know, to me, the best way to exemplify this is that You've seen the sequential improvement that we're seeing in our shared 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 hit us in a significant way as we go forward.

47:16 And I'm very pleased with the agility the organization is doing in order to make sure that we work collaboratively with our customers to ensure that we are flexed 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 Alexi Howard with Bird Speed.

47:45 Good morning, everyone. Can you hear me okay?

47:50 Yes. Yes.

47:51 Great. 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 fade going forward as promotional activities start to ramp up again? I'm just curious about the conversations you're having with retailers about that. Are they starting to ask for more promotional activity in a capacity-constrained environment? How are those conversations going? And then I have a follow-up.

48:36 Sorry, I can't take this one, Alexis. I think I'm going to start here talking about the comment about the pricing, and then maybe ask Carlos to talk to get the USPs. I think it's a good way to approach that. You know, one piece that we see is that, now as we comment, the first thing 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 are 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 promotion, but then I'm going to ask Carlos to build on that.

49:25 Yeah, thank you, Paulo. So 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, in fact, 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 seeing 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.

50:31 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.

50:51 Great. And as a follow-up on the emerging market, 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?

51:08 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 are having record sales, like in Russia, like Middle East, like in Brazil. And the momentum is strong. We both.

51:41 Great. Thank you very much. I'll pass it on. Thank you. Our next question comes from Jonathan Feeney with Consumer Edge. Good morning.

51:52 Thanks very much. Just one question. I guess... Thank you for joining us. 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? Thanks very much.

52:29 I can answer that, and Carlos, if you want to complement that specifically about U.S., 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, you know, because they... 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.

53:19 But of course, it will not go to the level that was before. And that is good. It's good for us. Reduces the complexity in our factories and improves, you know, make us really do a very good analysis on profitability, and Velocity and streamlined and necessary SKUs. Carlos, if you want to add anything, please.

53:51 Just to build more than branding, adding, I would say, building on your answer, Miguel, what I would say is that, you know, 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 collaboratively with our customers, shows that we're able to then Thank you for joining us today.

55:02 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 third that we're reducing. At the same time, that innovation is actually going to have a bigger impact in terms of overall drive and sales since we go into 2021. So I'm much more focused on fewer, bigger, better innovation We also focus on the right SKU so that we can better service our customers.

55:36 Thanks for the question.

55:37 That's great. Thank you. Ladies and gentlemen, let's conclude the Q&A portion of today's talk. I'd like to share in the context of what we've got for closing comments.

55:49 Okay. Well, thank you very much for your presence with 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 the way 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.

56:43 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 these better positions are trying to sustain gains. 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 is expected during our strategic planning.

57:31 So with that, thank you very much. Have a great day and thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.