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The Kraft Heinz Company (NASDAQ:KHC)
Q2 2018 Earnings Conference Call
August 3, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, please standby. Your Kraft Heinz Company second quarter 2018 earnings conference call will begin momentarily. Once again, thank you for your patience and please standby.

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 second quarter 2018 earnings conference call. As a reminder, this conference call may be recorded. I will now turn the call over to Chris Jakubik, Head of Global Investor Relations. Mr. Jakubik, you may begin.

Christopher Jakubik -- Vice President, Investor Relations

Hello, everyone. And thanks for joining our business update. We'll start today's call with an overview of our second quarter and first half results as well as an update on our 2018 plan from Bernardo Hees, our CEO and David Knopf, our Chief Financial Officer. Then, Paulo Basilio, President of our US Zone will join the rest of us for the Q&A session. Please note that during our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ materially due to risks and uncertainties. And these are discussed in our press release and our filings with the SEC. We'll also discuss some non-GAAP financial measures during the call today.

These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the end of the slide presentation available on our website. Now let's turn to slide two, and I'll hand it over to Bernardo.

Bernardo Hees -- Chief Executive Officer

Thank you, Chris. And good morning, everyone. Similar to our Q1 results, our second quarter results were better than we expected at the time of our last earnings call. The transitory factors that lead us to be cautious on the near-term sales play out much as expected, including the headwinds in the United States from Planters and Ore-Ida and the intakes from retail inventory change in Canada. That said, we delivered slightly better net sales than expected. This was driven by encouraging, ongoing improvement in retail consumption trends in most countries in most categories as well as strong foodservice performance in a number of key countries. At EBITDA, we spoke about near-term practice in United States, Canada, and Rest of the World from a combination of accelerate commercial investment, significant cost inflation, especially freight, as well as strong comparisons with the prior year in every region.

Still, we delivered stronger than expected EBITDA from assorted productivity gains in EMEA as well as better growth in certain Rest of the World markets. In addition, and perhaps even more important, we continue to make progress in building the capabilities and putting in place the go-to-market plans that we expect will generate top-line growth going forward. Many of you have asked why we are so confident in our ability to deliver the top-line and what specifically will drive it. So, on slide three, we have laid out many of the key initiatives we expect will help us build momentum into the second half by region, by brand. In the United States, we saw consumption trends improve as Q2 unfolded and as Planters club comparisons fade, and as Ore-Ida and cold cuts activity and distribution improves. We're targeting top-line growth in the third quarter.

Our focus is on incremental volumes and mix improvement coming from new products like Lunchables Around the World flavorings, Oscar Mayer plates, Just Crack an Egg, Heinz Real Mayonnaise, as well as Planters, where we brought back consumers' favorite, Cheez Balls and Cheez Curls for a limited time. In addition, we are planning stronger in-store activity as we move forward, including back to school behind mainstays like Oscar Mayer, Kraft Cheese, Lunchables, and Capri Sun as well as continued Philadelphia's growth with strong holiday program. In Canada, while the impact of tariffs on sales is still largely unknown, we continue to feel good about getting Canada back to growth track by year-end. This should come on building on the good performance we're seeing in coffee pots, frozen meals, and natural cheese slice innovation, as well as stronger merchandising behind Cracker Barrel cheese.

In EMEA, we are looking to sustain the momentum we have seen from the positive consumption headwinds that have been driving performance to date, including those coming from newly repatriated Kraft and Bull's-Eye brands. In the second half, we also see opportunities for improvement for both whitespace and innovation initiatives, including Heinz in Middle East, Africa, and Eastern Europe, the recent launch of Bull's-Eye Barbeque in the UK in part will Plasmon Infant Biscuit in Italy. And in our Rest of the World market, as some of the short-term headwinds were recently experienced start to fade, we expect some drivers to show toward a stronger way in the second half.

These include the strong growth and turnaround of co plant in England, the repatriation of Kraft brands and our Cerebos acquisition in Australia, New Zealand, Heinz condiments in Brazil and Mexico, Kraft Mayo in Brazil, and sauce's whitespace expansion in Central America and the Southern Cove Outside of traditional retail, I also would add that we have innovation, distribution, and assortment initiatives under way in food service to drive substantial incremental gains in each region as well as in the e-commerce channel, where in the United States alone, we're up more than 75% in both Q2 and through the first half. And our online portfolio is now over index market share that's a traditional retail channel. In total, this is by far the strongest innovation pipeline we have had in place in our short history as Kraft Heinz. At the same time, and something we have been talking about are the commercial investments in capabilities to play more offense.

It gives us further confidence in our ability to change trajectory in both distribution and consumption, especially behind innovation. On slide four, we show again the six goals from the framework we introduced earlier this year. During the second quarter and into the second half of 2018, we continued to make strides in each area. I just talked about our brand-building initiatives, pushing into new categories, new segments, now occasions, and doing this with a focus on incrementality, not just graph sales from new items. We will strongly support this, for instance, to data-driven marketing where we're putting our in-house tools to work to drill deeper into quality impression. We're concentrating on building even more native impressions, or impressions that are created by being part of the conservations of consumers' everyday life. And earnest impressions, where your can create the meals and share it to media coverage.

For those of you in the United States, you have seen this at work with our Heinz Mayochup, encountered by legal aid campaigns, helping to drive improving consumption trends. Here today, we estimate the native and earnest PR impressions we have generated in the United States alone is greater than all of 2017 and double what were generating full-year 2016. And we have more coming to support our second half initiative. In both category management and go-to-market capabilities, we now have more capacity to drive category and brand growth. And our product pipeline will be fully in place by Q3. In category management, while we have significant potential and still have, there are key areas of improvement we can leverage right now. At three, figure in the United States, for instance, our efforts have been targeted at the improving SKU adoption, distribution, and philosophies through assortment management and planograms.

And in Canada, our in-house tools in discipline, rigor, and routines are in place to help set pricing guidelines and guardrails as well as conduct free impulse event analysis, all with aim to make more informed decisions and improve returns. In go-to-market capabilities, the next wave of our in-house, in-store sales teams is now in place in United States, on track to more than double by the end of the year. With that, we believe that we now have critical mass to see a measurable impact on future industry conversion out of stock and planogram compliance, just as we ramp up our second half sales plan. When our capabilities and products meals come together, we see measurable, incremental, and sustainable gain. We see Oscar Mayer hot dogs increase households penetration and velocity, grow dollar sales and gain share. This is happening now behind our For the Love of Hot Dogs campaign. And we step-up in-store activity at Memorial Day and Fourth of July.

We see successful, greater innovation, like our Just Crack an Egg platform. Just over six months in the market with allowance velocity roughly two times our estimate, [inaudible] trial and repeat, and proving to be a successful bridge between convenience and freshness. And internationally, when our markets and category management and go-to-market capabilities come together, we hit the ground running. We newly repatriate and acquire brands like Bull's-Eye and Kraft in Europe and Cerebos in Australia and New Zealand. Both are performing ahead of plan. Finally, the backbone of everything we do, operations, people, and corporate social responsibility are fully aligned and even more capable to execute our plans. In operations, we continue to deliver against aggressive, industry-leading targets in quality, safety, and customer service in nearly all geographies we operate. Customer service, in particular, has been an area of significant focus and investment.

And we have made significant improvements in United States and Canada. And people during Q2 who average our marketing playbook and category mastered programs to close any gaps in best-in-class skills and capabilities, and further, to ply our new in-house tools. And on the CSR front, early this week, we expanded our environmental commitment. We aim to deliver 100% recyclable, reusable, or compostable packaging by 2025. And we are doing our part to accelerate the transition to a low-carbon economy by joining a science-based targeted initiative and working to set science-based carbon reduction goals. So, to summarize, our first half results came in better than expected. Our second half commercial plans are the most robust since the 2015 merger. And now, it's up to us to execute with excellency. I will now hand it over to David to provide more color on our Q2 results and how our plans for the second half are likely to play out in our financial results going forward.

David Knopf -- Chief Financial Officer

Thank you, Bernardo. And hello, everyone. Turning to our results on slide five, total company organic net sales were down 40 basis points in Q2, sequentially better than Q1, and as Bernardo said, somewhat better than what we expected at the time of our last call. Pricing was positive for the fourth consecutive quarter, up 1.3 percentage points in Q2 and 1.1 percentage points in the first half. In both periods, this was driven by a combination of pricing to offset local input costs in Rest of World markets and carry over pricing in both the US and Canada. That more than offsets stepped-up, in-store, and new product activity in EMEA. Volume mix was 1.7 percentage points lower in Q2 and two points lower for the first half due to known headwinds in the United States and Canada that overshadowed strong growth in EMEA. By segment, the US was slightly better than our initial expectations.

As expected, Planters and Ore-Ida had a negative impact of approximately 1.5%, and the combination of trade spend timing and Easter shift was roughly one point of headwind to Q2 net sales. Excluding these factors, underlying US consumption again exceeded reported results and showed a slight sequential improvement from Q1. And I would add that consumption has continued to improve based on the data we've seen so far for July. In Canada, results reflected the anticipated combination of comparisons with prior year promotional activity that was not repeated, primarily in condiments and sauces as well as trade inventory adjustments and select product discontinuations. EMEA had another strong quarter, driven by strong condiments and sauces growth across the zone, including solid consumption gains for both the Kraft and Bull's-Eye brands. Strong gains in food service in every region are also contributing to EMEA growth.

And in Rest of World, while top-line growth was supported by pricing, another quarter of strong vol mix gains in condiments and sauces across the majority of reasons and strong growth of Complan in India were again held back by one-off factors. In Q2, this included lower sales of canned seafood in Indonesia and the truckers' strike in Brazil. That said, we do expect sequential improvement in rest of world, moving forward. At EBITDA, Q2 performance was slightly better than expected, although the drivers were consistent with our expectations. Specifically, we had solid gains from productivity savings and net pricing, gains that were offset by inflationary pressures, primarily elevated freight and resin costs as well as costs associated with our aggressive commercial investment agenda. And in adjusted EPS, we were up $0.02 versus Q2 last year, driven primarily by roughly a 720 basis point reduction in the tax rate on adjusted earnings.

Overall, our first half financial performance was consistent with the type of start to the year we expected, if not somewhat better than expected at the profit line and provides a solid base from which to build which brings us to our outlook on slide six. As Bernardo outlined, we believe things are in place for us to push a more aggressive growth agenda in the second half. From a strong innovation pipeline, distribution gains across channels, as well as expanding our brands into geographic whitespace. Despite this low start, with several transitory headwinds and recent key commodity weakness in the US, we believe we're in a strong position to deliver organic growth for the full year. And therefore, we continue to expect that 2018 will be a year where the first half/second half balance of net sales will be skewed to the second half. Our organic net sales growth is expected to begin now, in Q3, with the US growing and EMEA and Rest of World sustaining momentum.

In Canada, with near-term risks at play, it may be Q4 until we see the turn. To support this growth, and given our confidence in the pipeline of activities that Bernardo described, we're planning our commercial investments to be at the high end of the $250 to $300 million range we previously discussed, mainly in the form of more working media dollars. At the same time, we think it's appropriate to be more conservative in the near-term with expectations around adjusted EBITDA. And instead of the second half skew that we previously talked about, we now expect more of a 50/50 split to the year. This is driven by three factors. One is that we will be at the high end of our planned commercial investments that I just mentioned. Two is our stronger than expected first-half delivery.

And three is cost inflation, where a number of areas have stayed higher for longer than we anticipated, mainly in freight and transportation, packaging, both resins and cardboard, as well as tariff risk currently impacting foil and aluminum costs in the US and certain products we sell in Canada. Net-net, our savings curve will take more time to overcome the incremental cost inflation we expect during the remainder of 2018. So, as we assess Q3 prospects, the combination of greater than expected inflation, a more aggressive investment posture, and difficult comparisons on variable compensation versus last year will mean that Q3 adjusted EBITDA dollars are likely to be down a greater order of magnitude than what we saw in the first half of the year. That said, we do expect our constant currency adjusted EBITDA trend to improve by year-end and gain further momentum into 2019 with productivity net of const inflation accelerating while the recovery and top-line momentum continues.

Below the line, we are still targeting adjusted EPS growth and strong cash generation in 2018. This should be aided by tax favorability where we now expect an effective tax rate of approximately 21% for the full-year in 2018. I will also note that based on successful recent refinancing activity, we now expect incremental interest expense in 2018 of roughly $80 million, versus the $100 million we previously outlined.

And in terms of cash generation, we continue to expect a significant step up in 2018, despite a near-term headwind to working capital from recent termination of our accounts receivable securitization and factoring program in the US. To close, I think it's worth repeating the thoughts that we've expressed all year, that we're developing capabilities to create brand and category advantage to achieve profitable growth, that we're investing aggressively now in order to see benefits sooner, and that these factors will shape our near-term results in 2018 and will drive sustainable, profitable growth into 2019 and beyond. Now, we'd be happy to take your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * then the No. 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Again, that's * then 1 to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Andrew Lazar with Barclays. Your line is now open.

Andrew Lazar -- Barclays Capital -- Analyst

Good morning, everybody.

David Knopf -- Chief Financial Officer

Morning.

Bernardo Hees -- Chief Executive Officer

Good morning.

Andrew Lazar -- Barclays Capital -- Analyst

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

Bernardo Hees -- Chief Executive Officer

Hi, Andrew. It's Bernardo. Good morning. Well, let me start with the investment part of your questions. We're happy. And we accelerate the investments we announced at the beginning of the year, creating the capabilities that we really believe are gonna stay here, you're gonna start seeing the second half of this year, but gonna stay with us in 2019 and beyond, right behind go-to-market sales teams, channels, activations, innovation, marketing dollars, and so on. We always said that what a warm-up investment, that we'll see results in a year to come. So, we're happy with the program. And that's what we always said as well. We're more than educate to sacrifice a point of margin to generate, accelerate growth on the top-line. With that in mind, your question is given the capability we're building now, how this play on an M&A, all of our new, organic plans for the company.

What I can say about that is pretty much what we have been saying and have been consistent for quite some time. Our framework has really not changed. The fact that we like the grants, the fact that we like business that can travel and international, the fact that we do like to take synergies from existing business and to reinvest behind brands, behind products, and behind people. I don't think that this framework changed because of the capabilities we're developing. What I can say that the experience we have today, after being since Heinz 2013, five years into the industry, the knowledge of the categories, the knowledge of the things that do work and things that you have seen that do not work and so on allowed us to be much more confident where to put the money where what happens can be turned around and things that can really being within this framework.

And also true to the fact that our ability to integrate and to connect companies for a bigger scale and so on, given that you have been doing that for quite some time. And every time we have been doing better, got faster, and we have a better understanding. To your question about assets, lower growth or higher growth and so on, I don't think that changed with we have in mind from a framework standpoint.

Andrew Lazar -- Barclays Capital -- Analyst

Great. Thanks very much.

Operator

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

Alexia Howard -- Bernstein -- Analyst

Good morning everyone.

David Knopf -- Chief Financial Officer

Good morning.

Bernardo Hees -- Chief Executive Officer

Good morning.

Alexia Howard -- Bernstein -- Analyst

Can I ask about the pricing environments in North America? It seems as though it's been pretty challenging for the last 18 months or so. You've obviously got some positive pricing that's running through now. How do you expect that to play out in the second half? And just how do you see the environment and the retailer's relationship playing out from here on out?

Paulo Basílio -- US Zone President

Hi, Alexia. This is Paulo. So, again, we believe that we have strong brands, we have differentiated products, we have a strong innovation pipeline so far. We've been able to price our brands and products in line, while they perceive to be the advantage to the consumer. But we always keep in mind it's very important to us to strike the right balance between market share, distribution, and profitable volume. And this balance will play very differently in each category that we play. So, today, I can say that the relationship we have with customers are going very well, and a very clear connection with all of them.

Alexia Howard -- Bernstein -- Analyst

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

Paulo Basílio -- US Zone President

Listen, as a matter of practice, we don't forecast pricing for the future. What we can say that the growth that we expect to have in the second half is gonna be more balanced through volume mix.

Alexia Howard -- Bernstein -- Analyst

Thank you very much. I'll pass it on.

Operator

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

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning, everyone.

David Knopf -- Chief Financial Officer

Good morning.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Just two questions related to the investment and capabilities, the P&L investment this year. I think if I remember correctly, you're spending about $300 million, P&L dollars against it. And I guess two things. 1) Is this an ongoing expense, meaning will it be an incremental headwind again as we move into the future? Or is it a one-year step-up? And then second, if you could talk a little bit about how those investments specifically would help you or do they at all improve your ability to integrate acquisition. So, the difference between integrating without these capabilities versus what it was before.

Bernardo Hees -- Chief Executive Officer

Thanks, Bryan. It's Bernardo. The investments were announced what [inaudible] was a one-off. The $300 million that you wanna to accelerate the capabilities we have in the company in go-to-market, channel activation, innovation launch platforms, and at service levels with specific investments directly, specific to customers, especially in the United States. So, that, I would say, is coming really well, creating the capability the company has for the future. Not only we expect to see that already as some results in the second half of the year but 2019 and beyond. That is, like we said before, a step-up and a one-off. Related to the second part of your question about the capability of integrating faster and in an M&A environment how this would happen, those capabilities will help us. I think, like I said at the first question, the learning and the experience we have today, that allows us to have a varied knowledge in each one of the categories.

And those capabilities are created when you think about revenue management, assortment management, planogram, go-to-market, breakthrough innovation, channel mix, activation in e-commerce, food service, clubs, drug stores, all these kinds of capabilities. They are scalable in a more advantaged environment.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

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

David Knopf -- Chief Financial Officer

Hi, Bryan. This is David. That's correct. We talked about at the beginning of the year, commercial investments and investments in service between $250 to $300 million. So, now we expect to be on the high end of that at closer to $300.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

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

David Knopf -- Chief Financial Officer

Yes. That's correct.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

All right. Thank you.

Operator

Thank you. And our next question comes from Rob Dickerson with Deutsche Bank. Your line is now open.

Rob Dickerson -- Deutsche Bank -- Analyst

Thank you. Good morning. So, two quick questions. The first question just in cadence for the rest of the year, Q3 versus Q4. In terms of what you said about Q3, that Q3 EBITDA would be down slightly more than it was down in the first half of the year and then we should see a pick back up in Q4, just relative to internal forecast originally from the beginning of the year, is there a change to the full year, just to be clear? Or is it so some came in a little bit better in the first half and really in Q2, but then it would be a little bit worse in Q3? Or how should we think about where you are right now and how you've viewed the full year versus where you viewed the full year at the end of '17? That's it.

David Knopf -- Chief Financial Officer

Sure. Hi, Rob. This is David. Thanks for the question. So, in terms of the second half cadence -- so, I'll start with Q3. So, our profitability in the quarter in Q3 versus last year is gonna be driven by three factors. So, first, we expect that the swing from over at favorability we mentioned last year to a more normal incentive compensation accrual this year to be roughly $75 to $100 million in the quarter. Second, as noted, we planned to be at the high end of our commercial investments for the year.

So, again, the high end of the range of the $250 to $300 million. And this is to support our second half growth initiatives more strongly. And third, it's a fact that the additional inflation we noted is running ahead of our savings curve in the short-term. So, those are really the three factors in Q3 that are gonna drive that trend. Going forward in Q4, we expect our comparisons to ease and our savings curve to accelerate. Although, we think it's best to maintain a conservative set of expectations with regard to cost inflation. So, that's why we think the year is gonna look a little bit more balanced versus what we talked about earlier in the year.

Rob Dickerson -- Deutsche Bank -- Analyst

Okay. Great. And then just quickly on tariffs, I think I heard you call out a few inflationary aspects of tariff effects on specific commodities. Is there some potential risk though in terms of volumes do you foresee? And just a very general question.

David Knopf -- Chief Financial Officer

Yes. So, in terms of tariffs, I think the point that I want to get across is given what we're seeing, we wanna be conservative. And that's our outlook for the year. But these types of things, we're not exactly sure what will stick and for how long. So, we're not gonna take a stance yet on potential actions that we can take to offset those things. So, I'm not gonna talk about that now. But I think given those factors and some of the cost inflation we're seeing in the market, again, we're gonna have this more conservative stance on the year.

Rob Dickerson -- Deutsche Bank -- Analyst

Super. Thank you so much.

Operator

Thank you. And our next question comes from Chris Growe with Stifel. Your line is now open.

Chris Growe -- Stifel Nicolaus -- Analyst

Hi. Good morning.

Paulo Basílio -- US Zone President

Good morning.

Bernardo Hees -- Chief Executive Officer

Morning.

David Knopf -- Chief Financial Officer

Morning.

Chris Growe -- Stifel Nicolaus -- Analyst

Hi. I just had two quick questions for you. I wanted to ask first of all, if you look at this quarter, if you think of [inaudible] pricing that is commodity inflation, is that positive or negative in the quarter here, such that are you getting pricing through, given this accelerated rate of non-commodity inflation? That's my first question.

David Knopf -- Chief Financial Officer

Sure. Hi, Chris. This is David. So, I won't talk specifically on the quarter, but I'll say overall, for the year, we continue to expect pricing relative to our key commodities to be stable. We have recently seen some key commodities come down more recently and expect that for the year. But as a matter of practice, we're not gonna discuss future pricing actions relative to that. But as Paulo said earlier, we're confident in the strength of our brands, and we'll continue to strike a balance between market share distribution and profitable volume as it relates to commodities.

Chris Growe -- Stifel Nicolaus -- Analyst

And so, just to be clear, does non-key commodity inflation come into your thinking as you're approaching pricing? Not that you're gonna tell me what you're gonna do, but is that a factor you consider in terms of your pricing? Or is it something you have to offset with cost savings?

David Knopf -- Chief Financial Officer

Yeah. So, it's certainly part of the equation there. We're not gonna provide color on pricing going forward, but between commodities, non-key commodity inflation, we think in terms of pricing and potential productivity initiatives to offset that.

Chris Growe -- Stifel Nicolaus -- Analyst

Okay. I had just one question as well on -- you've had some weight on your sales from Planters and Oscar Mayer and Ore-Ida. I think you approached much easier comparisons on that front in the second half of the year. Is that right, those kind of -- you passed a lot of those issues in the second half? And do those shift to growth in the second half of the year as a result of that?

Paulo Basílio -- US Zone President

Hi, Chris. This is Paulo. Yeah. I think that is one of the components that, as we said, we are confident that we're expecting sales to grow in US in the second half. I think one component that you are seeing is that you can see that our categories are improving. Our categories now are growing. And on top of that, the big headwinds in share that you were seeing, these negative headwinds, we expect them to fade. I can give examples of cold cuts, Ore-Ida, lost distributions that we have, the capacity restrictions we have. Now we have the capacity in place. So, we expect to recover the distribution. I can also say that on top of that, we are gonna see our -- we have a strong innovation pipeline coming to the market that's already distributed and also a much better and stronger program in driving improvement in consumption. So, pretty much, these are the main appealers to support our expectations for growth to build in the second half.

Chris Growe -- Stifel Nicolaus -- Analyst

Okay. Thank you very much.

Paulo Basílio -- US Zone President

Welcome.

Operator

Thank you. And our next question comes from Michael Lavery with Piper Jaffray. Your line is now open.

Michael Lavery -- Piper Jaffray -- Analyst

Thank you. Good morning.

David Knopf -- Chief Financial Officer

Morning.

Paulo Basílio -- US Zone President

Good morning.

Bernardo Hees -- Chief Executive Officer

Good morning.

Michael Lavery -- Piper Jaffray -- Analyst

Two quick ones. You mentioned food service a couple of times. I was wondering if you could just elaborate a little bit on some of your initiatives there, what the opportunities are. And how much is it whitespace driven that you're filling in gaps? And then just second, following up on Andrew's question a little bit, how would you handicap the ability of a brand to travel? And how do you think about that when you are evaluating inorganic growth?

Bernardo Hees -- Chief Executive Officer

Hi, Mike. It's Bernardo. In respect to food service, it has been naturally a whitespace opportunity worldwide. Not only here in United States that you have been growing out for the second year in a row but worldwide. Has been double-digits growth in Europe. We have seen many countries in Asia that have been experience growth in food service. Remember, we're building a factor in countryside Brazil in the state of Goias, that there is a significant volume related to food service. So, has been a strategic decision from the company to create capability in different zones and countries to push this. We do believe our products resonate in a big way, that there are some applications -- and I think we're getting better as a company to create the right packaging and the right product assortment to understand the dynamics of this channel that are different than the normal retail channel. So, that has been something that has been improving the company. We do expect that to continue in the years to come.

And do expect us to get better and to be stronger in the food services channel than we ever been. Again, not only in United States that has been more of a reality for some time but other parts of the world. The second part of your question about the capabilities and how to evaluate from an M&A is important. Remember, we were seeing that and were doing that, taking brands from existing countries and making them on a global or a zone stage now for some time. We had the repatriation of Kraft this year in Europe and Australia. I think a good example that is unfolding as we speak is the launch of Bull's-Eye Barbecue and premium sauces in the UK and continental Europe. And we were seeing Kraft being deployed now in Latin America. It launched in Brazil. It's being launched in many countries in Asia. We're seeing Planters being deployed in UK, Continental Europe, China, and other countries.

So, we have been doing that. I don't think the understanding the category and having stronger brands that resonate sometimes in a country like America, in the case of Bull's-Eye was very strong in Germany. And now we're making in different countries in Europe but understanding the strength of the brand, what's the category drivers, and what consumers want. I think the connection is quite there as we evaluate new brands on organic. But for always, there are risks. But I would say our experience today allows us to be more assertive about it.

Michael Lavery -- Piper Jaffray -- Analyst

That's great. Thank you very much.

Operator

Thank you. And our next question comes from

Jason English -- Goldman Sachs -- Analyst

Hey. Good morning, fellas. Thank you for the question.

Bernardo Hees -- Chief Executive Officer

Morning.

David Knopf -- Chief Financial Officer

Morning.

Jason English -- Goldman Sachs -- Analyst

Quick question for clarification. Do I hear you right that you're now expecting EBITDA to be about a 50/50 split front half, back half?

David Knopf -- Chief Financial Officer

Hi, Jason. This is David. That's right. We expect it to be a little bit more balanced, 50/50 for the year.

Jason English -- Goldman Sachs -- Analyst

That implies that EBITDA if we just track what the first half would be down year-on-year by a bit over $200 million. Last quarter, you guys guided for organic EBITDA growth. And you'd mentioned that first half is exceeding expectations. I'm interpreting this to mean that you're lowering your full-year EBITDA guidance by about $300 million. Is that wrong? And given that you've over-delivered, it's really all coming in the back half. I know you've got some cost creep with some minus. But you also mentioned some of your key commodities trending down. What am I missing to bridge that all the way to that $300-ish million difference?

David Knopf -- Chief Financial Officer

Sure, Jason. This is David. So, let me walk you through the cadence of what we're seeing for the rest of the year. So, we continue to have good visibility on significant productivity and cost savings initiatives for the remainder of the year and going into 2019 as well. That said, as I talked about, we're seeing additional cost inflation that, in the immediate term, is outpacing the savings curve. And it's just two factors. So, first, we have some costs that are staying higher for longer and in some cases, like freight, are continuing to climb this year. And then second, as I talked about, we had some headwinds from tariffs as well, of which we're not exactly sure what will stick or for how long.

But for those reasons, we think it's better to take a more conservative stance. At the same time, we have an opportunity to drive sustainable consumption gains from investments that Bernardo mentioned in our commercial pipeline. So, again, we think it's best to head into the second half with a more conservative set of expectations around near-term EBITDA dollars, especially for Q3, as I mentioned and continue to focus on sustainable top- and bottom-line growth going forward.

Jason English -- Goldman Sachs -- Analyst

Okay. Thank you. I'll pass it on.

David Knopf -- Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from Scott Mushkin with Wolfe Research. Your line is now open.

Scott Mushkin -- Wolfe Research -- Analyst

Thanks, guys. I just have a few questions. So, I wanted to go back to the M&A. A question I get a lot is why hasn't something happened. Obviously, we know that you guys have been out there looking at different assets. And I guess I wanted to take a step back and understand. You're saying you're taking and landscaping both. But M&A clearly does matter a lot, especially with Walmart and the North American market. And Walmart taking as much volume share as they are, it'd be nice to have the CPG companies consolidate a little bit more aggressively, especially you guys. And I'm wondering if you think there's some structural impediments to that.

Bernardo Hees -- Chief Executive Officer

Hi. Here's Bernardo. If understood correct your question about if there is something structure that would be in the middle of market consolidation and M&A in the industry, right? And then you relate to Walmart example and so. We really don't see that way. I think the food industry is an industry that has not consolidated with the same speed as other industries. There are some reasons for that, given local pays and regulations and other things but not to the extent we have seen it. So, we do believe looking at middle-, long-term that there would be more consolidation in the industry. And we have not shied to say that we wanna be a force behind it when the process happens.

To your point about structural obstacles and so on, we don't see really any in that sense. I think, again, it's important in our case to be very disciplined on our approach and our framework that has not changed. We are disciplined on price to the value creation equation. I think we have proved that over time. And that's something we believe is important for the long-term value creation equation. And I think also important to say we don't do something to be happy for the quarter and then be regretting for the long-term, to be apologizing for the next couple of years. When we move, we definitely move with a much longer-term bill believing that something is gonna make the company stronger for the years to come.

Scott Mushkin -- Wolfe Research -- Analyst

Okay. I appreciate the answer. My follow-up question is it just seems -- and what the answers have been around pricing and the back half of the year, my interpretation is it's just hard to get price through. You talk about cost inflation and not being able to be offset by the underlying savings. But that's my interpretation of what you guys have been saying. Is that interpretation incorrect? And I'll yield. Thanks.

Paulo Basílio -- US Zone President

Hi. This is Paulo. No, I think that it's a balance. It's always a balance, as we've been discussing. Again, we've been able to price our brands so far. But the way that we approach this is not to price to offset the cost. It's really to find and to strike the right balance between profitable volume, distribution, and share. So, that's our approach. At the end of the day, profitability is one of the components. It's not the only one. We see the business more as what is the position that you're gonna take that's gonna be healthier for the business looking to this three components that we share. But so far, as we said, we've been able to price just fine in line with the either the bill that we have, that our products have for the consumers.

Scott Mushkin -- Wolfe Research -- Analyst

Thanks, guys.

Operator

Thank you. And our next question comes from David Palmer with RBC. Your line is now open.

David Palmer -- RBC Capital Markets -- Analyst

Good morning, everyone. We've got a list of a lot of reasons why sales were constrained in the first half in emerging markets to US, Canada. And separately, you highlighted the analytics and sales investments. And to those two buckets, I would add that in some key commodity, categories like cheese have had some big volume decline. So, I guess what I'm wondering is going into the second half of the year, could you give some color about the reasons and timing for the sales recovery? Where will you see the sales improve earlier? And where later? Thanks.

Paulo Basílio -- US Zone President

Hi. This is Paulo. I'm gonna speak for the last year. Pretty much, the components are the ones we were sharing. So, first of all, we are seeing our categories improving. So, our categories are running positive today. Many negatives of shares that we saw in the first half of the year are fading. We have an innovation pipeline coming. And again, when you see what is giving us confidence on that in US is that when you see the consumption of tiers that we have for July, these already happen. We are already seeing positive consumption in the month in July. So, it's pretty much just a combination of improvement in the categories, the negative headwinds that we have fading, investment in innovation, and better programming that is giving us this confidence for the second half. And David, from a worldwide standpoint, we have area of Middle East and Africa continue to grow with the same momentum they have in the first half of the year. We do see acceleration in Latin America, especially after the strike event in Brazil in May.

In June, July, and moving forward, we do see acceleration in some countries in Asia where you have the one-offs with the problem between fish supply in Indonesia and some inventory timing in China behind us. And we do see a barrier sequentially, performance in Canada, given the level of activation and innovation coming to market in the second half of the year in the country. With this picture, together with all I just mentioned in the United States, we feel confident about the acceleration and the connection between investment announced in the beginning of the year and the results you're gonna see in the top-line in the second half of the year, Q3, Q4, going to first half 2019.

David Palmer -- RBC Capital Markets -- Analyst

Thank you.

Christopher Jakubik -- Vice President, Investor Relations

Great. If we could take maybe one more question.

Operator

Thank you. And our final question comes from Jonathan Feeney with Consumer Edge. Your line is now open.

Jonathan Feeney -- Consumer Edge Research -- Analyst

Thank you very much for the question. I guess a little bit of a follow-up Bernardo, you talked about to Jason English's question -- when you think about -- you talked about capabilities investments. And for a company that's been very, very return-focused and very successful doing so, I'm just wondering how much of these capabilities investments have a return that we can measure in 2019, 2020. And if you could -- I know you don't guide for 2019 or necessarily a long-term basis, but these investments you're talking about, are these really just increases in the cost of competition versus what you might have thought on January 1st? Or would you really see that maybe versus where we were thinking January 1st as just a question of maybe profits being pushed forward into 2019 and subsequent years from these investments relative to your expectations? Thank you.

Bernardo Hees -- Chief Executive Officer

Hi, James. The way you see that, and if you think about what we did was not really a change on the plans we had. We knew the capabilities were there, and we knew what to do. We took advantage of a varied scenario we had in United States from a free cash flow standpoint. And we did accelerate the plans we had from a commercial standpoint to drive those capabilities. So, it's not something that was new to us. But the acceleration, given the numbers we have been seeing in the pilots we run in 2016, '17, allowed us to be confident about where we're deploying the capsule. And the reason you're gonna see that because a lot of innovation that's coming to market -- Just Crack an Egg, we started in 2016. Planters Crunchers, Heinz Real Mayo, Capri Sun Natural, Capri Sun Zero Sugar, pasta sauce, Heinz in Continental Europe, Bull's-Eye in Continental Europe, Heinz and Kraft mayo in Southern Cove and Brazil and Latin America, and expansion to biscuit category and nuts category in China.

All those things, we had in time and have been developed. But with the acceleration of those capabilities, understanding the category connected to our few teams in some countries that we wanted to expand, getting our channels right, and so on would allow us to be in the position not only the second half but looking at 2019 and '20 in a better way. That's what I'm saying, that a one-off could enhance our capabilities. And then we come back to a normal plan. So, looking 2019 and '20, you probably wanna go back to measure our returns in a normal year plan. What's a return given my results on net sales? My results and profitability and so on? We continue to be very focused in better creation. That's us. We're a performance-driven company.

And we are very pleased with the culture, with the way it's progressing, the morale, the way we're seeing the second half of the year, the way our employees -- that's really the competitive advantage of the company is really engaging with the plans we have for the short-term in the second half 2018 but looking 2019 and beyond. So, we do believe that we have a return for that. And that's why we're confident in the investment we're making.

Jonathan Feeney -- Consumer Edge Research -- Analyst

Understood. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that concludes our question and answer session for today's call. I would now like to turn the call back over to Chris Jakubik for any further remarks.

Christopher Jakubik -- Vice President, Investor Relations

Thanks for joining us, everybody, this morning. For those analysts who have follow-up questions, Andy Larkin and I will be available for your follow-ups. And for those in the media who that have questions, Michael Mullen will be available for you as well. So, thanks again for joining us. And have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a wonderful day.


Duration: 62 minutes

Call participants:

Christopher Jakubik -- Vice President, Investor Relations

Bernardo Hees -- Chief Executive Officer

David Knopf -- Chief Financial Officer

Paulo Basílio -- US Zone President

Andrew Lazar -- Barclays Capital -- Analyst

Alexia Howard -- Bernstein -- Analyst

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Rob Dickerson -- Deutsche Bank -- Analyst

Chris Growe -- Stifel Nicolaus -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Jason English -- Goldman Sachs -- Analyst

Scott Mushkin -- Wolfe Research -- Analyst

David Palmer -- RBC Capital Markets -- Analyst

Jonathan Feeney -- Consumer Edge Research -- Analyst

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