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 First Quarter 2020 Earnings Conference Call. I will now turn the call over to Chris Jakubik, Head of Global Investor Relations. Mr. Jakubik, you may begin..

Hello, everyone, and thank you for joining our business update. We will begin today's call with an overview of our first quarter 2020 results, as well as an update on our path forward from Miguel Patricio, our CEO; Paulo Basilio, our CFO; and Carlos Abrams-Rivera, the Head of our U.S. business, and then we'll open the lines for your questions.

Please note that during our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our press release and our filings with the SEC. We will also discuss some non-GAAP financial measures during the call today.

These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release. Now let's turn to Slide 3, and I'll hand it over to Miguel..

to keep feeding the world. At the start of the year, if you recall, our main objective for 2020 was to lay the foundation for the future growth, the first step in a 3-stage turnaround. I can tell you today, it's turning out to be just that and so much more. In February, I said the essential ingredients for our turnaround were in place.

People with deep experience in key roles to drive functional excellence, perspective on where consumers are going and how we can win, productivity initiatives with detailed jobs to be done and the financial profile with strong free cash flow going forward.

I think we are seeing each one of this on every front in what we cover today from our COVID-19 response, where our people are rising to the challenge, to Q1 results that show the underlying business in line with initial expectations and how we have met an unexpected spike in demand and increased consumption of our brands; our turnaround progress for 2020, which is on track, even as we adapt to this unprecedented call to action, making us cautiously optimistic for the rest of the year; and the fact that we are turning our strategic plans into action despite on strains of working virtually.

As many of you have wrote, the next several months will be critical in understanding the path forward and potential for our industry. The same goes for Kraft Heinz at the pace of our turnaround in the near-term. We are in a highly dynamic, unprecedented environment, and what we think today may be significantly different from tomorrow.

For now, let's focus on what this new world has meant for our business so far. In a nutshell, our response to this pandemic so far and how our people are rising to the challenge is showing ourselves and the rest of the world just how strong our company really are.

In procurement, the team has worked over time to make sure we had adequate supplies to meet demand. They were building scenarios very early when things first started happening in China, increasing inventories of critical materials and finding new success.

There's no question that we are meeting peak demand today because we did a great job anticipating the future. As I'm sure you can imagine, the situation continues to evolve rapidly, but I feel certain that I have the right team in place to prepare our business for what's ahead.

In late February, we established our global Kraft Heinz coronavirus task force to actively monitor the COVID-19 outbreak worldwide and in U.S. This has allowed us to take proactive steps to keep our employee and supply chain safe during this time.

And we are learning through the journey, leveraging our global presence and sharing best practices across the organization at an unbelievable speed. But our people on the front lines in manufacturing, distribution and in-store sales are the real heroes in all this. And they are taking our business to the next level.

Morale in our plants has never been so high, and I cannot say enough about our people's commitment. Our teams are producing with pride and purpose, working smart by eliminating those products with significant changeover times in order to boost production.

In sales, not only has the team deployed itself more broadly to assist distribution and stock in retail shelves, but they have done an excellent job optimizing channel and SKU mix to make sure we get the right products where they are needed the most.

And this has gone a long way in improving our collaboration and continuity with our retail partners, something we can build further upon once we have past this crisis. Our IT shared service, human resources, communication and legal teams have been anticipating our needs, enabling us to work closer even though we are physically further apart.

They have been coordinating with our external partners, including government and community leaders so we can continue to be effective under various shelter-in-place rules state by state and country by country.

And our finance team has been working tirelessly to improve both our liquidity and our forecast accuracy to enable industry-leading execution under multiple scenarios. Overall, our business is strong. We are operating to peak capacity, performing at world-class levels and leveraging our industry-leading safety, quality and hygiene practices.

Our entire organization is displaying agility as demand forecasts and news flow can change scenarios multiple times per day. Going forward, as we will talk about later, this crisis is causing us to accelerate our supply chain, the complexity efforts, reprioritizing our merchandising calendars and rebalance our marketing efforts.

I think this is an important moment where our culture of accountability, the speed and agility our lean structure can bring and our scale to be everywhere for consumers in times of uncertainty can be a real differentiator for Kraft Heinz.

A big part of our strategy development was to get our marketers thinking about the future, building the future, to ask themselves what will happen next, what behaviors will change.

Now we have to think about future consumption if 40% of adults live alone and will eat more meals at home, if kids eat more breakfast and lunches at home versus school or on the run, if new consumers that have come online stay online to their shopping; if consumers will continue consuming big trusted brands, brands that bring them comfort and familiarity in moments of uncertainty; and if drive-through and delivery becomes the norm, how we can be more creative with our foodservice customers and make our products more relevant.

Turning to financial impacts. We've done our best to quantify the impact from the recent spike in demand, although we acknowledge, this does not come with our typical level of precision.

On a net basis, we estimate that the additional demand that we have experienced as a result of COVID-19 resulted in about 6 to 7 points of incremental organic growth in the first quarter and with the contribution of 9 to 10 points of additional EBITDA growth.

Looking forward, while Kraft Heinz, our customers and our peers will continue to operate in an environment of significant uncertainty, there are 4 expectations we have a high degree of confidence in sharing. First and foremost, we think it will be critical for our brands to reassert their advantages in taste, performance, value and reliability.

So we will continue to step up investments behind our brands, and the work that's been done behind our new strategic plan has given us a head start on this front.

Second, we expect our foodservice sales to decline between 30% and 70% in each of our geographic zones depending on channel mix as well as the creativity and agility both we and our customers display during this period. And keep in mind that foodservice represents roughly 15% of our net sales in each of our business segments.

Third, and perhaps the most important, the scenario planning we do regarding both at-home consumption trends and the likelihood for global recession will be key to our near-term growth and profitability, as well as building more strategic, collaborative and long-term relationships with our customers.

And finally, I will tell you that we do not believe Q2 consumption patterns will be a reliable first indicator of what the new normal. Variables like at home versus away from home and recession versus growth will likely become clearer as the second half of the year unfolds.

And obviously, all of this will play out differently by country in each one of the segments. So at this point, I will hand it off so Carlos and Paulo can discuss our business and financial results and outlook. And then I will return with few words on our Investor Day before we go to Q&A.

With that, I'm delighted to introduce you to Carlos Abrams-Rivera, the new leader of our United States business. Well, to say that Carlos has hit the ground running would definitely be an understatement.

Carlos?.

We Got You, America. We were also inspired that we amplify their voices by bringing the spirit to live on film for all America to see on our hashtag We Got You, America as campaign. Now in terms of our Q1 results for the U.S.

segment, we initially expect the Q1 sales to be pressured from a combination of pricing to offset dairy and meat inflation with related share loss and volume declines as we led on pricing; some carryover distribution losses, particularly in our frozen business; with a partial offset from strong foodservice growth as we lapped the prior year comparison due to winter storms last year.

In January and February, the overall business performed slightly better than anticipated. However, our market share trends remain weak with natural cheese, cold cuts and frozen meals, in particular, is down roughly 2 points. In March, however, this trend reversed.

Consumptions in cheese, meat, and most every category for them had accelerated, while foodservice sales fell more than 20% versus last year. As a result, Q1 organic growth was 6.4%. And in terms of profitability, we initially expected a mid-single-digit decline in adjusted EBITDA for Q1. Instead, we grew roughly 6%.

Looking forward right now, we think organic top line growth in Q2 will be in the mid-single-digit range. And this is based on our expectations for strong retail takeaway to continue, boosted by retail customers rebuilding inventory and with the foodservice sales declined by roughly 2/3.

I would, however, caution you in expecting a similar top line growth in the second half of the year. This is because at some point soon, it is reasonable to expect initial pantry loading to run-off as consumers adjust to a new normal. Foodservice weakness is likely to continue beyond this initial crisis period.

And keep in mind, we will exit the McCafé business in the U.S. beginning in Q3, and we'll now lap some distribution losses until late in the year. Now I will turn things over to Paul to talk through the results for the rest of the business and where we expect to go from here on the financial front..

we establish a strong base of sales and earnings, to rebuild underlying business momentum and continue to reduce debt while maintaining our current dividend. All these priorities are on-track even as we adapt to the new challenges.

In addition, the negative year-over-year impact from the divestitures, business exits and the normalization of certain costs and business trends that we outlined in February held back our first quarter results, largely as expected. And we continue to think these same factors will continue to hold back our results for the remaining of the year.

We do expect the Q1 impact from greater COVID-19 related demand, both sales and EBITDA that Miguel outlined earlier, will be additive to the full year 2020 financial expectations we laid out in February.

And below EBITDA for the full year, we continue to expect a roughly $0.38 headwind, but reflecting an effective tax rate above our original 20% to 22% range due to a current U.K. tax view under consideration, a slightly higher interest expense due to our revolver drawdown, to be offset by more favorable other income versus our prior expectation.

I will also note that if the change in U.K. tax law does occur in Q2, we are likely to see an effective tax rate of about 30% in the quarter due to a one-off non-cash adjustment to deferred tax liabilities, which brings me to our Q2 outlook.

For Q2, all things considered, including recent data, we currently see low to mid-single-digit organic net sales growth and mid-single-digit constant currency adjusted EBITDA growth as reasonable expectations. And while a stronger Q2 should mean greater upside for the full year, at this point, it remains a highly unpredictable environment.

And it's, therefore, difficult to become significantly more optimistic about the second half. On one hand, there will be no pause in our initiatives to focus our investment in strengthened brand support behind our flagship brands and capital efficiencies. And we will continue to refine our merchandising calendars against available capacity to execute.

On the other hand, we see 3 discrete factors that will hold back second half EBITDA. First is the McCafé exit that is already underway in Canada, but begins in the United States in July. Second is the incentive compensation also mentioned on our prior call. And third is currency translation, particularly given recent dollar strength.

Together, these factors currently represent an approximately 700 basis point headwind to our second half results versus the prior year.

In addition to that, we see a number of risks that are currently difficult to quantify, including foodservice sales and their certain pace of recovery, the potential for consumer pantry deloading and supply disruptions, as well as the possibility that the recent key commodity deflation we are seeing in the market could turn into greater commodity volatility and therefore, not benefit profitability as the year progresses.

As a result, while we are comfortable calling for the Q1 upside and a good portion of potential Q2 outperformance to stick for the remaining of the year, we feel that there are too many unknowns at this time to confidently expect significant upside beyond that.

At the same time, none of these uncertainties are expected to get in the way of our continued work and continued expectation to strengthen our balance sheet and adhere to the capital allocation priorities we laid out earlier this year.

This includes maintaining our typical conservative posture as it relates to liquidity, which we believe is even more important as we focus on making sure all our products remain available to public during these challenging times.

It also reflects our expectation that free cash generation as a percentage of net income is still expected to go up versus last year. And even though we are holding to our CapEx of $750 million for the year, we now expect to generate more cash than originally expected in excess of our normal dividend payout in 2020.

So we are in a strong position to continue reducing our debt and look for opportunities to further improve our liquidity while we maintain our current dividend. With that, I will turn it back to Miguel for a preview of our Investor Day..

Thank you, Paulo. As you know, we have been developing our new strategy, transforming our capabilities and making needed investments in the business for months. And no one was more anxious to share our work than we were.

But uncertainties that have entered with COVID-19 have given rise to a heightened attention on the next five months versus the next five years. And frankly, it has made it more than appropriate for us and the broader industry to revisit assumptions, some strategic priorities and for us to revise the pacing of our savings and investment expectations.

So we decided to move this event to September to do things once and do them in a holistic way.

In September, we want our new leadership team to share our perspective on the unique assets and advantages we are building from, key findings and the paradigm shift we are employing and the new operating model we are putting into place and of course, give you a chance to ask questions to our broader team.

We will walk through the extensive review we've done by category, by country and in market to build consumer understanding that has led to the new insights, how we think our portfolio fits today's consumer and how we can adapt and drive future consumer trends.

We'll also provide our assessment of the unique building blocks we think we have at Kraft Heinz, assets such as scale, global footprint, deep household penetration, an unparalleled portfolio of business and brands, capabilities in the form of an advantaged cost structure and a culture of agility and accountability and how this can allow us to anticipate and deliver against consumer needs with agility at scale.

We will also discuss how we no longer think about our portfolio as 55 product categories and individual businesses by geography.

We are reorienting to how consumers think, a few specific platforms that are globally relevant, platforms that will leverage our strengths to drive property consumer insights and allow us to better prioritize our emerging market growth initiatives, for instance. It's an approach that we are very excited about, but more of this to come in September.

And finally, we will provide with our blueprint for our future. We'll describe a new Kraft Heinz operating model that will include and address that many questions you have around; our new strategic priorities, marketing and sales initiatives and saving opportunities in sourcing and supply chain.

We have a more clear view of the things that will make a difference for us, the things that will bring both more operating efficiency and better consumer relevance for our brands. We'll have a lot to discuss in September. For now, I will leave you with this.

Standing here today with a comprehensive strategic plan, I'm even more confident that we can return Kraft Heinz to consistent, predictable top tier growth on both top line and bottom line. Now we would be happy to take your questions..

[Operator Instructions] Our first question comes from Andrew Lazar with Barclays. Your line is now open..

Great. Thanks. Good morning, everybody..

Good morning Andrew..

It's interesting. A number of food companies that have reported thus far have pulled full year guidance, certainly given all of the uncertainties, but have also been less comfortable providing any real outlook for – even for calendar 2Q. So it's interesting.

What are you seeing, I guess, that's enabled Kraft Heinz to provide, as you call it, a reasonable expectation for 2Q perhaps when others have been less comfortable doing so?.

Andrew, this is Paulo. We've been improving our way of communicating with the market and trying to share with investors and now how we're seeing the business. And again, we decided to give a better view, giving out the volatility that we're seeing in the market.

We decided to share what we are seeing, although highlighting the risks, how we're seeing the Q2. And given the demand that we see in terms of our retail business, also the headwinds that we are facing our foodservices business.

So it's the decision that we took to share with the market, how we're seeing this next – the Q2 and the next 2 months that we're at the end of April. And we are very cautious in relation of the second half. But it's because we believe that we have a good visibility and just an ability to share more our views for the quarter with the market..

Great. And I think you expect the profit flow-through from some of the incremental COVID-related demand in 2Q to be even stronger than the profit flow-through from that, that we saw in 1Q. So I'm just curious maybe what are some of the -- either some headwinds that potentially dissipate between 1Q and 2Q that will allow for this? Thanks so much..

Yes. No, I think very much the 3 drivers that are improving our profitability of sales fall-through to EBITDA are first, we are seeing a much better mix -- product mix versus what we have in Q1, including the retail versus foodservice.

I think the second component is, where our supply chain performance, as we discussed before, we were seeing some supply chain headwinds come in Q1, and now they are behind us. And the third is a better balance between price and commodity costs.

As we also highlighted in the prior call, we were lapping a very low price for one of the commodities in the Q1 that now we believe is going to be more balanced. This balance between price and commodities will be better. So those will be pretty much the three drivers that are driving the flow-through improvement from Q1 to Q2..

Thanks so much..

You are welcome..

Thank you. Our next question comes from Ken Goldman with JPMorgan. Your line is now open..

Hi. Thank you. Good morning, everybody..

Good morning..

Good morning. I wanted to ask about the input cost outlook. You did talk about how one of the risks is that current commodity deflation could become, I think, the word you used was a little more volatile.

I was wondering if there's any potential for you to minimize some of that volatility, whether it's using futures contracts or hedges, just to take advantage a little bit of maybe some of the cheaper costs for some of the key items that you're buying today?.

So, Ken, let me start here, and then maybe Carlos or Miguel can also comment, specifically Carlos. But we are seeing – there is no doubt that we are seeing a much more favorable environment in commodities than the start of the year. And also, we should – you should see sequential improvement from what we saw in Q1 versus Q2.

For now, what I can tell you that is the favorability that we see in Q2, it's already considered in the outlook that we've just provided. But for the second half, for us now, it's too early to give any type of level of precisions given that level of volatility that we're still see in the market.

And also, if you remember, there are also the component of uncertainty around the retail prices that will come..

Probably, the only thing I would add is that, as you said, the meat and dairy projections are within the outlook we've given for Q2..

Well, that makes sense. I'm just wondering if you're physically able to buy ahead a little further out. I know some of those futures contracts for months that are further out are not as liquid. But I'm just trying to figure out if there's a way for you to physically lock in some of the advantages that you might have.

I'm not asking for guidance for the back half as much as I am for – just curious if there's any steps you can actually take right now to help yourself..

Listen, we have, in some cases, it varies. We have some opportunities to doing some type of markets depending of the commodity to do some hedges, and we are evaluating this. The future also as the spot price, they have differences. And there are some opportunities in terms of the inventory that we're exploring, but they are limited..

Okay. And very quickly as a follow-up. You are maintaining your CapEx guidance. Most food companies have lowered their CapEx guidance.

Can you just talk about whether you consider at all deferring some capital projects into 2021? And whether that was a strong consideration, or what made you decide to keep the CapEx as it is?.

Listen, we are – as Miguel and Carlos mentioned, we are – we have our clear strategic view. We have some relevant projects that we have. Our – as we are discussing our cash flow position, and our visibility of the business is strong in terms of cash.

We are – of course, we are reevaluating and replanning the type of CapEx and the type of equipment that we will do and the timing that we're going to get them through the year. But we want to keep the investment and want to keep the execution that we plan for the year..

Thank you. Our next question comes from Robert Moskow of Credit Suisse. Your line is now open..

Hi, thanks. I think I'm going to pivot to private label. In the past, Kraft has had trouble maintaining market share versus private label during times of commodity volatility. And your shares are up right now.

What do you think retailers are going to do about their private label merchandising in the back half of the year, especially given the likelihood of a recession? Do you have any concerns that categories like cheese or meats might see more pressure than you're seeing right now from private label?.

Look, Robert, I think in terms of uncertainty, consumers turn to brands that they trust. They want to experiment less. They want to experiment less with new brands. And that's what we're seeing right now. Our brands represent comfort for people. And I think that the consumers are coming back to big brands.

As a result, our leading iconic brands are growing household penetration in almost every market, especially the developed markets like U.S., like Canada, like U.K. So I think it's critical that we continue investing behind our brands to reassert the advantage that we have in taste, in performance and in value.

And I think also that for our customers, reliability and availability are extremely important in this environment. And this is where agility can, with scale, can really set you apart. I think that we are working with our customers in a very, very, very agile and close way. And I don't – and this is what's happening right now. Yes..

Yes. I totally agree.

But are you monitoring your price gaps? Maybe the price gaps don't matter that much today, but have they expanded since you initiated price increases in the start of the year, or is it just too volatile to know?.

Listen, I think if you think about the fact that when we went through this process of the crisis, we actually were able to think about working with our customers what is the best way for us to actually reduce some of the promotional events that was happening right now in the marketplace.

So both because of the fact that our inventories were a challenge and then we work with our customer to make sure we actually got to the right events that we wanted to have in the marketplace in places that we, in fact, had better inventory.

As we're going back and going forward, we'll see that potentially our -- we'll be able to actually go back and start thinking about what are the promotional events that we can then pull back in the market to work in the right pricing, but that's only once we have the inventories back in place that we wanted in the year to go..

Congrats on a great execution. Thank you..

Thank you. Our next question comes from Bryan Spillane with Bank of America. Your line is now open..

Excuse me, hi good morning everyone. I guess, maybe to follow-up a little bit on Rob's question. You went into this year with plans to increase marketing, also some product renovation and product innovation.

So maybe could you talk about just how this situation has altered your plans? Are you still expecting to bring some innovation to market this year? And maybe also just how retailers are thinking about new products and product pipeline?.

Sure. Bryan, Miguel. We disclosed in previous calls that it was in our plan, in our budget, to increase media around 30% this year, although this increase would be from – paid from within. So marketing shouldn't have a substantial growth, but media would grow 30%. It's our intention to keep the investments on our brands.

And even evaluating right now, if we shouldn't even put more to create the momentum, and especially to keep the penetration that we are seeing, the increase in penetration of our brands with our consumers. Regarding innovation, we postponed a lot of innovation.

Talking with our customers, we thought – actually, that was the best thing to do because at this moment, what we are doing is actually reducing the number of SKUs that we are producing, so we can have better productivity in our lines. And we both thought it was not the best moment of introducing innovation, so they were postponed..

Let me just add a couple of things, Miguel. One in terms of the marketing and what we're seeing is, listen, I think that Miguel said, we're committed to, in fact, spend more or less.

Now what you're going to be seeing is that we will actually rebalance our lower marketing spend so that it can better reflect the healthful gains we're making and the new consumers that now have coming to our franchise.

So as we speak, we're actually looking at what is the right media, the right channels for us to reach those new consumers that now have come into our franchises. Already some of that work is underway. And I think let me just give you a couple of examples how that translated into the marketplace.

We're actually making some adjustment on sync like the Oscar Mayer, Front Yard Cookout, a way for us to stimulate during the grilling season that kind of behavior with our brands. You're also seeing things like our Heinz Designer Support, a way actually for us to give back to our diners in a moment in which they really need us.

And then just switching, just one additional comment on the innovation part of the question. What I'll tell you is that completely aligned with Miguel in terms of us, adjusting some of the innovation. And in general terms, I think that we will continue to evaluate innovation as we think through the lens of capacity.

The one challenging all this on innovation, you have to do with our food service. We are seeing already some restaurants that actually are shifting from things like tabletop to more portion control. We're working to adapt. I think we have a very agile organization that allows us to make this shift.

And we're working with our customers to make sure that we supply them in the way they need now going forward..

All right. That's very helpful. And just as a clarification, in terms of marketing and advertising levels, the plan – planned increases that you had for your budget this year are still embedded in the expectations. So it's not like the marketing budget or advertising is going to be lower this year and has to go up again next year.

At least as you know now, you're planning to spend what you're originally expected to spend..

That is correct..

Thank you..

Thank you. Our next question comes from Steve Strycula with UBS. Your line is now open..

Hi, good morning. Quick clarification to Bryan's question.

For the innovation slate that was pushed out, Miguel, can you clarify whether that was to the back half or the back-to-school season of this year, or is that maybe even a little bit further into 2021?.

No. We are talking about what we had in the pipeline for this year. Yes, for the midyear for back-to-school and towards the end of the year. So we're talking about the remaining of the year, not 2021..

Okay. Great. And then a more fundamental question, I would say is, as we think about going into Investor Day, one thing that you emphasized was the importance of scale in global platforms.

When you look across the portfolio, which platforms do you define as being the most scalable and relevant to food is a little bit of a local business? And then in the past, when Kraft and – was first put together with Heinz, the company was emphasizing the degree of number one brands that were in the portfolio.

So my question is, how is scale may be underutilized in the past? And how can a new strategy may be better execute and leverage that scale relative to how it was the last few years? Thank you. .

Look, I think that scale is a critical work for us and what makes us different. We – especially in North America, we have scale. How – scale has to come with agility because if you have scale and you were not agile, that goes against you. But if you have agility of scale, it can be a killing combination. And I think that for us is very important.

I think that the business in the past was managed almost by category. And then when you do that, it's like slicing the company in pieces. I think what we have to do is exactly take advantage of the commonalities, the scale that we have. And when you find these commonalities, then a lot of things come with it, insights, synergies.

And so yes, I think that for us, we are absolutely intrigued with the benefits of agility at scale at this moment. Talking specifically about what can be global. What is global, what can be global and will be global is our ability to win in products that adds taste and flavor to foods.

And instead of talking about ketchup and mustard and mayonnaise you know if you think about what are the products that actually enhance taste to food and what are the insights and the synergies that are behind is pretty exciting for us. So that's the way we are looking at.

So when we think about platforms, we are starting with consumers, understanding what are the consumer needs, what are the main reasons, what their consumer is looking for and putting these categories, these products, these brands together, looking at commonalities of consumer needs, occasions, which is pretty exciting.

And this is -- in China, maybe the enhancer's tastes are different, but the need is the same than here in United States. And we can leverage a lot to our global scale by understanding these needs in depth. Talking about brands global, because you asked about that.

I think I think that we have Heinz as definitely a big global brand that we see every day more potential. And then we have the local jewels, right? We have Masters in China. We have CAD in Brazil. We have ABC in Indonesia that are brands that are local and are designed to enhance taste of local food.

Not going through a lot of details because we don't have time for that, Steve. That would be what I would tell you..

Very helpful. Thank you and congrats on the quarter..

Thank you..

Thank you. Our next question comes from Alexia Howard with Bernstein. Your line is now open..

Good morning, everyone..

Good morning..

Thank you. Can I ask about your ability to sustain higher levels of production on the grocery side of the business, while restaurant traffic is down? I know you closed two – I believe you closed two foodservice plants in the U.S. and one in the U.K., so presumably, that's not easy to flex into grocery.

Have you grocery have respond-- produced the same double-digit volume growth while the restaurant traffic is weak.

And then as a quick follow-up, how secure is your supply of meat, given what we're hearing from the meat processing plants at the moment with some of your competitors back [inaudible] is that potentially a risk for you if you can secure supply? Thank you..

PPES, like using masks, gloves, face guards, temperature checks, health certification. In all our factories, we are communicating regularly, very regularly daily with our teams. We have a task force daily routine with operations to monitor and to respond everything very quickly.

In procurement, the team has made sure that we have had adequate supplies of meat despite spike in demand. We were building scenarios very, very early. When things started happening in China, we start increasing inventories of critical materials and finding access to materials that we thought we could have problems.

So far, we haven't had any problem with procurement. In manufacturing and distribution, our frontline people are really the heroes. We are working three shifts in many of our factories. We are keeping our plants running 24/7. And we are showing a lot of agility with a huge sense of duty and responsibility.

We are taking actions to accelerate the decomplexity and improve the throughput. We are benefiting from process improvements and sharing and adapting best practices around the world.

Maybe, Carlos, you want to give a perspective on U.S., specifically on the question?.

Yes. Well, I think, Miguel, I think you covered the overall supply chain and how we're feeling about it. Just to go deeper then in terms of what's happening here in the U.S., I think in the news, you have all heard, there's been a certain amount of constraint happening right now within the meat processing.

Well, as Miguel said, I'm pretty proud of the fact that as an organization, we took actions early, the point that Miguel made around safety being the number one priority, the elements that we put in our factories to protect our overall lead supply chain, social distancing, PPE, temperature checks, twice-a-day operation calls to make sure that we are sharing best practices and adapted quickly to a situation.

Today, we're basically pulling all levers to make sure that we make meat available to our consumers as fast as we can. We believe that right now, the way we are seeing the outlook for Q2 is actually manageable with the information that we share with you. Thanks for the question..

Thank you. And our final question comes from David Palmer with Evercore ISI..

It's actually Kevin Lehmann on for David. Good morning. It looks like the U.S. segment saw reduced promo spend in Q1, but then higher promo spend in Canada. Certainly, the company is experiencing more supply chain inflation lately to keep up, of course, with at-home demand. And then you just mentioned meat and dairy volatility.

Can you help us organize perhaps the biggest buckets of higher and lower costs in 2020 that we should expect to continue that are directly related to COVID? Thanks..

Let me just tell you, first, in terms of our overall promotion strategy in the U.S. and then I'll have Paulo ask some additional information.

When we look at the world as I mentioned earlier, we saw that initially, the – because of the tightness of the inventories at the moment of the search that occur, we actually were able to work with our customers to reduce our promotional spending.

We were very specific about where the places that we were actually going to reduce their promotional spend and then work with our customers to then say, as inventories improve and we go forward, we'll be able to then judiciously bring those promotions back into the pipeline in the year to go events that we were looking at.

So that it continues to be a valuation.

I think where we are in constant communication with our customer, which actually has only improved the way we are managing through this together to make sure we have the right availability of product at the right promotional events only as the customers that needed to be the particular situation that they're facing.

Paulo, if you want to add something?.

Yes. Sorry, I don't know if I understood correctly the first part of the question. I don't know if your question was about Canada.

Do you want to -- can you clarify a little bit the second part of the question, please?.

Yes, just helping us organize the elevated costs or the lower costs that we should expect in 2020 that are specifically related to the COVID crisis, whether it's – I mean, you touched on the promo changes, but also commodity volatility, supply chain that are specifically related to pantry loading and COVID-related items..

Okay. So I think trying to organize, we have like clearly, the – as a consequence, some benefit in commodities that I've already discussed. And again, the numbers are already discussed in our Q2 outlook.

I think there is another component that is the component of the additional cost that we are having in the business to keep the business running as we go through this situation in terms of additional cost for ramp up, the capacity, the incentives that we need to give for our front-line workers, additional equipment that we need to have.

I think overall, all of those costs, they are happening with us. They are growing, but I would say that they are manageable, okay? And we are managing them. And they are also included in this outlook of Q2 that we have. So I think the high level that I would – it's split would be like we have this commodity, a situation that we're seeing today.

We have this additional cost. And on the other side, we have a better productivity from our lines, from our plants being brought by the higher volume that we have..

Very helpful. Thank you..

You are welcome..

Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the call back over to Chris Jakubik for any closing remarks..

Thanks very much, and thanks, everybody, for joining us this morning. For the analysts that have follow-up questions, myself and Andy Larkin will be available for you. And for anyone in the media, Michael Mullen will be available to take your calls. Thanks very much, and have a great day..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..