Christopher M. Jakubik - Vice President-Investor Relations, Kraft Foods Group, Inc. Bernardo Vieira Hees - Chief Executive Officer Georges El-Zoghbi - Chief Operating Officer Paulo Luiz Araújo Basílio - Chief Financial Officer & Executive Vice President.

Christopher Growe - Stifel, Nicolaus & Co., Inc. Kenneth B. Goldman - JPMorgan Securities LLC Bryan D. Spillane - Bank of America Merrill Lynch Andrew Lazar - Barclays Capital, Inc. Pablo Zuanic - Susquehanna Financial Group LLLP Vivek Srivastava - Goldman Sachs (India) Securities Pvt Ltd. Matthew C. Grainger - Morgan Stanley & Co.

LLC Michael Lavery - CLSA Americas LLC David Palmer - RBC Capital Markets LLC Priya Ohri-Gupta - Barclays Capital, Inc..

Good day, my name is Sabrina and I will be your operator today. At this time, I would like to welcome everyone to The Kraft Heinz Company's First Quarter 2016 Earnings Conference Call. I will now turn the call over to Chris Jakubik, Head of Investor Relations. Mr. Jakubik, you may begin..

Good afternoon and thanks for joining our business update for the first quarter of 2016. With me today are Bernardo Hees, our CEO; Paulo Basilio, our CFO; and George Zoghbi, the Chief Operating Officer of our U.S. commercial business. During our remarks, we'll 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'll discuss some non-GAAP financial measures during the call today, and you can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation available on our website.

And with that let's turn to slide 2, and I'll hand it over to Bernardo..

Thank you Chris, and good afternoon everyone. Here we're again. It seems like only a few weeks ago we were reviewing Q4 results. Last call, we gave our agenda for 2016, so how we're doing so far? We're off to a good start, good not great. As expected, some headwinds hung around, including consumption trends in some key categories that held us back.

On our last call, we spoke about plans to address categories such as U.K. soups, U.S. mac & cheese, ready-to-drink beverage, and frozen nutritional meals. And while we're making progress against those opportunities and expect better performance as the year unfolds, they held back our results in Q1.

At the same time, our emphasis on profitable sales growth is paying off. Our market share trends are improving behind innovation and marketing investments. For instance, investments we've made in our global ketchup franchise are leading category growth in the U.S., Canada, and Europe and driving strong growth for us in developing markets.

In Europe, outside of U.K. soup, the rest of the portfolio is improving share performance in a challenging consumer and retail environment. And we're seeing good gains from investments in the rest of the world, pasta sauce in Latin America, soy sauce in China, and soups and mayo in Australia.

We were also able to improve our sales and go-to-market execution in what remains a challenging retail environment. For instance, our Case Fill Rate in the United States was 98%; Europe was above target at more than 99%. And Canada achieved for the first time, 97%.

Why is this so important? As we implement our manufacturing footprint initiatives, we're trying to keep our focus in two areas, customer service, where we had a good performance with our customers, which is shown by increased service levels in the quarter. In fact, we are already becoming the benchmark for customer service in some key categories.

And second, product quality where I'm pleased to report progress in the quarter, but with a lot of work still to be done. Regarding the integration program, I'm also happy to report that our savings are coming faster than we were expecting, roughly $225 million in Q1. Paulo will speak more about where we stand with the overall program later.

But faster progress towards our goal to achieve best-in-class margins allowed us to invest with greater confidence as we lay the groundwork for future growth. Our Big Bet launches are starting to gain traction in the marketplace, and we have more to come. George will talk about our strong pipeline for U.S. Big Bets.

In Europe, we continue to go after the opportunity to grow condiments and sauces with the March launch of Heinz Seriously Good Mayonnaise in the U.K., Spain, Italy, and Germany. In Italy, we launched a Plasmon Nutrimune, which contains a proprietary functional ingredient that significantly improves babies' immune systems.

And in both Europe and North America, we're beginning to go after whitespace opportunities in foodservice. Finally, we took further steps to bring our performance-driven culture to life. As part of our MBO process, management by objectives process, first quarter performance appraisals are going well.

We now have 6,000 employees worldwide, who have MBOs, up from 3,000 at this point last year. So overall, good operating progress that we expect will lead to better execution and profitable growth going forward. But let's turn to slide three to see what this meant for our Q1 financial results.

On the top line, while we saw less foreign exchange drag than Q3 and Q4 that year, it was still a 4.5% headwind on Q1 results. That being said, we had a solid organic net sales performance, up 1.1%, driven by a good balance of volume/mix and pricing.

Pricing was up 0.3%, reflecting gains in most segments, despite deflation in key commodities in the United States and Canada. Volume/mix was up 0.8%, reflecting growth in, first, condiments and sauces globally with particular strength in developing markets; second, Lunchables and P3 in the U.S. And finally, foodservice expansion in the United States.

At EBITDA, we drove strong dollar growth and margin performance, both year-over-year and sequentially from Q4, despite the Venezuela devaluation impact that began in Q3, 2015. This was driven by a combination of our strong cost-savings performance, favorable pricing relative to key commodity costs over the prior year, and profitable top-line growth.

At the EPS line, adjusted EPS was up 37.7% versus the year ago period to $0.73, primarily reflecting the growth in adjusted EBITDA. Now, I'll hand over to George and Paulo to talk more about how we did in each reporting segment and what we expect going forward.

George?.

Thank you, Bernardo, and good afternoon, everyone. Turning to slide four, overall, we are encouraged by our U.S. results so far this year, as it reflects steady commercial execution in a year of transformation. In the first quarter, we had a mix of positives and negatives we have seen before.

We have continued our momentum from investments in Heinz ketchup and mustard, Philadelphia cream cheese, Lunchables and P3, and ready-to-eat refrigerated desserts. At the same time, consumption and share challenges in ready-to-drink beverages, mac and cheese, frozen nutritional meals, and salad dressings remained.

And, I will mention what we are doing about it in a moment. We did deliver sequentially stronger organic growth in Q1, although you will note that our growth was above consumption which you would have seen in our first quarter scanner data. This was due to three factors.

First, we saw solid growth in our foodservice business and non-traditional retail channels like club and dollar stores. This is consistent with the business development or whitespace opportunities I mentioned on our last call.

Much of it has been enabled by the combination of the Kraft and Heinz foodservice teams, and we should continue growing in coming quarters. The other two factors were new product pipeline fill from our solid innovation agenda and shipment timing between quarters, which we do not expect to repeat in the second quarter.

We also saw our cost savings initiative pick up pace sequentially from Q4. This is from ZBB and procurement savings, adding momentum to the organizational structure savings we saw in the fourth quarter of last year.

It positions us well as we ramp up modernization and capability-building within our manufacturing footprint, and continue to invest behind our brands and Big Bets over the rest of the year.

I hope you have seen some of our advertising already, but our Big Bets activities are beginning to gain some traction in the marketplace, with more activities to come. For example, the launch of our Kraft Mac & Cheese renovation has been well received by consumers.

And we supplemented that with the launch of new premium Mac & Cheese under the Cracker Barrel brand in the same category. We launched Capri Sun Organic and renovated our Kool-Aid Jammers product with fewer calories and no preservatives.

We added a new line of premium pasta sauces under the Classico Riserva brand, made with no artificial ingredients or added sugar. We strengthened our barbecue sauces business by adding new lines under the Heinz brand, betting on consumer regional preferences in this category.

And we added new lines to our salad dressing business including new packaging formats. It's very early days. And we are not claiming victory in any category; but to the extent we can prove the trend-bending ability of our Big Bets, it's not only good for Kraft Heinz, it's good for the center of the store in general.

With that I'll turn it over to Paulo to wrap up our prepared comments..

our capital structure and our expectations for the balance of 2016. I will start with capital structure on slide nine. I think it's important to recognize the significant steps we've taken and plan to take to strengthen our capital structure.

As you may have seen in our 10-K, we've taken steps to reduce and de-risk our pension and postretirement liabilities. We froze or ended executive retirement benefits plan where possible.

And during both last year and the first quarter, we've taken actions to improve our funded status by approximately $1.7 billion and further de-risked our plans by an additional $1.7 billion through terminations, buyouts, and lump sum offerings.

We've also been able to match our debt with our underlying business structure, and believe we've made our balance sheet and P&L well-protected against currency volatility.

Going forward, we remain confident in reducing leverage from roughly 4 times net debt to rolling 12-months adjusted EBITDA at the end of Q1 to less than 3 times over the medium term. In addition to grow EBITDA, three factors will also help us to get there. One important step will be refinancing our preferred stock when it becomes redeemable in June.

At current interest rates, we expect this will be a highly accretive action from both an earnings and cash flow perspective. Second, we continue to expect to pay down $2 billion of debt by July 2017. And third, we aren't planning to commence any common stock repurchases until at least July 2017.

Overall, we are making good progress in balancing a conservative financial policy, while remaining committed to a strong dividend payout. That brings us to slide 10 and our outlook. First, we remain on track or ahead in each of the three areas of our integration program; organizational structure, ZBB, and manufacturing footprint.

All our targets remain the same, savings and cost to achieve. We continue to target cost savings of $1.5 billion, net of inflation, fully realized in 2017. And we still anticipate $1.9 billion of pre-tax P&L costs, including $1.1 billion in cash.

Through Q1, we've taken roughly $1.1 billion or just over a half of the total P&L costs, including roughly $700 million or 65% of our likely cash expense. On the capital expenditures side, we continue to anticipate $1.1 billion of CapEx from the integration program.

To date, integration related CapEx has been just over $300 million or roughly 30% of the CapEx spend we're anticipating. But keep in mind that integration-related CapEx is in addition to the 2.5% to 3% of net sales we expect to spend on an ongoing basis.

As far as our 2016 outlook goes, based on our results through Q1, we remain confident that we'll make meaningful progress this year towards our goal of achieving best-in-class margin. That being said, as I mentioned earlier, pricing is likely to be more in line with key commodity costs going forward.

And faster ZBB savings will give way to organizational structure savings beginning to lap around September. By contrast, we expect to see stronger EPS in the second half of the year due to expected earnings accretion from refinancing of our Preferred Stock in June.

That's our current expectation from a financial perspective, but we have significant work ahead of us to realize our potential. We have additional Big Bets to launch as the year progresses and we continue to lay the groundwork for whitespace expansion of both Kraft and Heinz brands in both foodservice and international channels.

We are also ramping up our IT and supply chain footprint activities significantly. And we are highly aware that, in many ways, we've benefited so far by a lack of business disruption, and making sure that remains the case will be a key area of emphasis throughout the year.

Kraft Heinz is in a good position to unleash profitable growth, but as Bernardo said on our last call, it's also a time of significant challenges for The Kraft Heinz Company. Thank you, and now we'd be happy to take your questions..

Thank you. And our first question comes from the line of Chris Growe of Stifel. Your line is now open..

Hi, good afternoon..

Hi, Chris..

Hi, just had a question for you in relation to the synergies and the savings coming through, when you see the incremental savings, I think I heard you discuss, Paulo, some discussion about ZBB savings coming through this quarter.

I just was curious as well is that the main driver of the incremental savings sequentially or are there footprint savings coming through as well; I thought of those being more back half of the year?.

Hi, Chris this is Paulo. You're right and I'll – we're seeing these savings appearing in our results earlier and then the majority of this is coming from our ZBB program and in some part also from the footprint that we started but the majority of them are coming from the ZBB..

And should we think about the footprint savings then continuing through Q2 and those are just starting earlier? Or is it still more back half loaded in 2016?.

It is still more back half loaded in 2016..

Okay, just – okay, thank you. And just one quick follow-up. I think you mentioned in the U.S. there was a very little Easter effect, were there any – I heard a couple of unique factors that affected the quarter.

Was Easter a factor overall for the business perhaps in Europe as well?.

Hi, Chris. This is George. Thank you for that. Easter for us was effective mainly in shipment. As I said in my remarks, what we saw – the difference between shipment and consumption was due to three factors mainly.

One of them is the shipment timing, as we anticipated large uptake on promotions for Easter, and that was one-off and we would be giving back in the following quarter. The second one was filling the pipeline for the Big Bets NPD that we had and that was a one-off. And the third one, we have about 20% of our U.S.

business, comes from foodservice and non-measured channels. And that for us was growing healthy at mid-single-digit in Q1, and we will continue to have a positive outlook on that part of the business..

Okay. Thank you for your time..

Thanks..

Thank you. And our next question comes from the line of Ken Goldman of JPMorgan. Your line is now open..

Hi. Good afternoon, everybody. There's this thesis out there and I'm sure you've heard it ready espoused by some of your competitors, that you're ripping out promotions too aggressively, and these reductions you're making, they're helping now, but eventually, you'll tick off your customers, you'll lose some display space and you'll suffer.

So, I'm just curious, now that you're further into the development of this particular business, can you talk about why that's not a fair assessment? I mean, I know you talked about customer service being a key focus area going forward, but how is your relationship with your larger customers today? And do you see any meaningful risk of shelf space losses ahead as a result of maybe being very aggressive with pulling out some promotions?.

Hi, Ken. Here's Bernardo Hees. I'm going to try to address part of your question, then I'm going to let George jump in to talk about the relationship with the clients and so on.

The reason we're confident about the model moving forward, if you think about it, because you believe that efficiencies you're generating put us in a competitive advantage to really support and push an agenda of profitable growth, right, by investing the things we believe can really affect the marketplace, and like we say, really three pillars, is innovation through our Big Bets strategy, more marketing expenditures, and building the go-to-market capability.

And if you see what's happening in the company is actually the opposite; you see marketing expenditures going up, selling expenditures going up, and the Big Bets are coming at a faster pace.

So, there are a lot of challenge in our categories and like George was saying before, there is still a lot for us to do to overcome them not only here in the United States, but also in different areas of the world.

But we truly believe we are preserving and investing where our consumers can see in the marketplace and the efficiencies can help us to have a competitive advantage to push the agenda of profitable growth. With that, I'm going to let George to complement with the client relationship..

Thank you, Ken. I think for us, it's worth looking at different category performance. We have some performance in categories, we are really over-performing the category, like ketchup, mustard, pasta sauces, cheeses, Planters, single-serve coffee and we have categories where we are underperforming like frozen meal, bacon hot dogs, salad dressing.

I think where we are underperforming, it's largely sometimes we are missing the mark from a consumer trends point of view rather than having a different business model. Our business model applies to all categories similarly.

So from a relationship with retailers, we believe we have a very strong relationship, we have a positive relationship and we see a positive outlook there. The most important things between us and our retailers and in my discussion with many of them was whether we can maintain the service level up or not.

And we have demonstrated not only we can maintain the service level and the Case Fill Rate, but we actually increased it and we feel good about that..

Great. Thank you very much..

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

Hey, good afternoon, everyone. Just two questions around the EBITDA growth year-over-year. I guess if you look at it, there was about almost $120 million of EBITDA growth that was above and beyond your cost savings.

So one question related to that is how much of that is sort of tailwinds from legacy programs? How much of it is just the favorable spread on price versus commodities? And like, I'm just trying to get underneath how much of that we should keep in our base as we think about the full year? And then the second related to that is, with some profit upside, will you consider at all either accelerating your investment on revenue generating programs, whether it's Big Bets or filling white space or will you maybe spend more than you were originally thinking, because you've got some upside there?.

Hi, Bryan, this is Paulo. I'm going to answer the first part of your question and then ask Bernardo to get the second. If you think about the EBITDA, if you isolate the North America, that is U.S.

and Canada, the two countries that are really more exposed to the big four commodities in the savings initiatives that we are having this year; the EBITDA improved around $400 million.

Out of this, $225 million are coming from our savings program as we disclosed, a bit more than the half the rest is coming from a price net of commodity favorability versus prior year that we are not expecting to repeat going forward. The balance is coming from a combination of other impacts including marketing timing..

Okay..

On your – Bryan, on your question about accelerating the sales initiatives and so on, it's really not too related to the financial capability in that sense and how much you can invest and so there are other considerations like George was saying by – with the product pipeline having the right consumer insight, testing well, having the right communication about it.

So it takes some time and each category is a little different for us to – really what we call a big bet that we believe can generate the ROI in a significant step forward.

So, it's not really having more financial capability or less, but having the discipline in the process to have a product and a proposition that we consider, we consider a winning proposition..

Okay. Thank you..

Thank you. And our next question comes from the line of Andrew Lazar of Barclays. Your line is now open..

Good evening, everybody..

Hey, Andrew..

Of the three items that you talked about as causing some of the differential between shipments and consumption in the first quarter, the first two being Easter and filling of the pipeline behind some of the new items, are the ones that are or you talked about is really not recurring if you will? Is there a way to help quantify the impact that those two things had on overall organic sales in the first quarter to get a sense of what maybe a more sustainable rate of organic sales were in the first quarter?.

Yes. Thank you, Andrew. First let me clarify something that we're unlikely to have shipment exactly in line with measured channel consumption in any given quarter.

And this is – the fact is that the major big, the major and big holiday week were sales for us completely stock in consumption and many times they fall in different quarters to where the shipment goes.

So your question is very good about, okay, how we can quantify that? The best way to look at it is, about 20% of our business doesn't come from measured channel, so the rest you can see this kind of data the way we see it.

That business for us in Q1 grew at around low single digits to-mid single digits, and we expect to continue seeing positive outlook on that business. The other two, one of them was completely one-off.

We launched four Big Bets in Q1, so we had one-off pipeline that would have a neutral effect moving forward, and one was timing of shipments between Q1 and Q2 that we'd see some of it reversing..

Okay. And then, I think on the last call, George, you talked about the goal really for organic sales this year as a whole was really to kind of show sales that were stable.

And I don't think by stable you necessarily meant flat year-over-year, but just not really subject to a lot of disruption, let's say, from the integration of Kraft and things like that, even accounting for some of these things like pipeline fill and whatnot in the first quarter.

It kind of seems like maybe organic sales were maybe more than stable, in other words, you didn't have any big disruptions, and perhaps organic sales were give or take still flattish or so.

So, I guess we're just trying to get a sense of whether you feel like you are even maybe ahead of plan with respect to just organic sales already in this year relative to what maybe your initial hope or expectation had been, and if so, would love to get a sense of the drivers there..

Thank you, Andrew. You're right, that we did not have any disruption. We have been working very hard to ensure that we didn't get any disruption and we will continue working very hard not to get any disruption moving forward.

However, there are a lot of headwind coming at us as you know that is putting downward pressure on sales, because historically in the U.S. market the growth did not come from volume. If you look back for the last number of years, it came from inflation and that inflation was based on commodities inflation.

Now, we are living in an environment where there is no inflation in commodities, so it is harder to be able to say, to have a bullish approach to grow. What we said, and we'll continue to maintain, that we would have stable top line.

And as you know, we have an exposure to a large number of commodities, so it's very hard to put exact number to it, but we feel that stability for us is a very good outcome..

Okay. Thank you..

Thank you. And our next question comes from the line of Pablo Zuanic of Susquehanna. Your line is now open..

Thank you. Just two questions.

So, to be clear, you mentioned that $220 million or the $225 million came from North America, I don't know if you've given the number for the total $1.5 billion before if you can comment on that? And the second question, I mean the EBITDA growth in this quarter was about half driven by those cost savings and then you qualified in one of my previous questions, the fact that some of the drivers of the other half of that EBITDA expansion would not be there in the second half, and that we should assume that the EBITDA growth in the second half is going to be mostly driven by the cost savings.

So if you can just expand on that please? Thank you..

Hi. So, hi, this is Paulo, Pablo. So let me maybe repeat what I said and explain the bridge. So what I said was that, we have two countries that are exposure today for the savings, for integration plans that we have that are U.S.

and Canada, okay? So when you get the EBITDA improvement from these two countries, for the region for North America, the EBITDA improved by $400 million, $225 million came from the sales initiatives that we had.

The balance, more than half, a little bit more than half of the balance is coming from price net of commodity that you're not expecting to repeat going forward. In the balance, it's a combination of other initiatives including marking time, not market timing, that was the view that we have.

Going forward, we expect our program savings, it's still ramping up to the year every quarter until we get to the $1.5 billion savings through savings that we expect to see in 2017..

Thank you. Just a quick follow-up.

So, when do you start on a different subject, when do you start looking at SKU cards or is that already happening and looking at divestitures? And related to that, back in the day, Burger King lost The Heinz – the ketchup business with McDonald's, is that a risk that you would lose the My Café brand in the coffee business at some point? Thanks..

Thank you, Pablo. This is George. Let me start answering this backward on the second half of the question. Excuse me for not commenting on commercial relationship between us and our customers. This is a practice that we adopt for all our customers, not just the quick service restaurant.

On the first one, from the SKU rationalization as part of the merger, there was no need for us to run a major SKU rationalization program, so it did not exist to bringing the two businesses together.

However, having said that, SKU rationalization or pruning what we call it is always looked at as part of our assortment efficiency, so we do that as part of the disciplined business practice. It does not have a significant impact that is worthy of reporting, and that's why we do not mention it in our numbers here..

Okay. Thank you..

You're welcome..

Thank you. And our next question comes from the line of Vivek Srivastava of Goldman Sachs. Your line is now open..

Hi, just a question on trade belt optimization in Europe. In 2015, you were able to have better pricing on back of promotional cuts in U.K. How does 2016 look in terms of promotions in U.K.

and are there any new geographies in Europe, where you are thinking of promotion cuts?.

Hi, Vivek. It's Bernardo. Thanks for the question. I think, this – your question allows me to comment a little bit about the outperformance in Europe. And I think here, it's important to really separate a Continental Europe from the U.K.

We had actually a very solid first quarter in Continental Europe from the Netherlands to Germany, France, Spain, even Italy, that has been more challenge for us. On the infant category, we had a better first quarter. On the other hand, the U.K.

that's a significant part of our business, in Europe had key categories that experienced challenges, especially the soup one, that's related to your question about promo activity.

And in the soup, Paulo mentioned that, during the remarks, we came, given the underperformance, we have on the four quarters during the soup season, we decided to protect market share and distribution infusing trade to the system.

When you do that, you're already seeing in March, better volumes and better results and moving forward in U.K., we believe with the summer season coming and so on, we should see and should experience a sequential better quarters moving forward in U.K. I think in Europe as a group, what happened in the soup U.K.

is a specific category and is a specific challenge situation from the retail environment and comparatives..

Thank you. And our next question comes from the line of Matthew Grainger of Morgan Stanley. Your line is now open..

Hi. Good evening, thanks. You call that a few of the factors impacting EBITDA in Europe during the quarter in promotion and marketing spend. As we think about the near-term impact on results of a whitespace launch into a new category like mayonnaise.

Are there meaningful upfront costs associated with that kind of expansion, how should we think about the impact of a launch like that during its first year in the market?.

Hi, Matthew. No, I don't think there's nothing that's not in our plan already. So in a sense it's not that we're going to have higher cost because of the whitespace.

You're right to say that given the investment and so on there is a migration of margins that's going to accelerate in the second year, third year and so as we ramp up the awareness, distribution, and so on. But I don't think that's that significant to change the way we think about the business in that sense.

I think it's fair to say that our underperformance in the soup season in U.K. forced us to take other measures to put back distribution and market share. That's correct..

Okay. All right, thank you. And then, could I just ask one more on the U.S. coffee category? You called out the category as an area, where you had strong PNOC and also some volume growth, based on scanner data, it seems to be a case where the volume is mostly coming from single-serve.

While in roast and ground, you're sacrificing some amount of volume, I guess on the roast and ground piece specifically, are you comfortable with the balance you have there between promotional spending and volumes?.

Yes, thank you, Matthew. This is George. I'll take that. In the coffee category, you are right to separate the roast and ground from the pods business or the single-serve. The decline in roast and ground is largely due to pricing.

As you know, we had a deflationary impact in the marketplace, and that put downward pressure on pricing, the volume is declining, but that's slightly. So, that's not the bigger issue for us. And we are seeing and it has been going on for some time now, consumer shift towards the more convenient pods or single-serve categories.

In this category, we are very pleased with our performance. As you know from the scanner data, we grew at over 13% year-to-date, compared to a category growth of 6.9%, so that is twice the category growth, and that's where we believe the future is going to be.

We are also comfortable with where we are at from profitability point of view, during the time of deflation..

Great. Thank you, George..

Thank you, Matthew..

Thank you. And our next question comes from the line of Michael Lavery of CLSA. Your line is now open..

Good evening.

Just as you look at your margin opportunity, say two years or three years out, how do you think about what the opportunity is over and above the savings? Do you do a bottoms-up for you? Do you do benchmarking, is it both of those? And where do you see where that can go? And then just a housekeeping question on volume and mix, can you give a sense of what the split is between those two?.

Yes, Michael, let me start with the second. We don't break down volume mix when you see the number of categories and brands that we have, we don't provide this breakdown.

In relation with the first question again, we have this program today that we are very focused to deliver, but again when you see, we're always going to be looking for in – we always benchmark ourselves, we benchmark the expense that we have, a lot of work in terms of what's the best way for us to provide in the cost to serve in the company, but yes, that's right, we're going keep the ZBB program, is a program that it refresh itself every year.

So again, all the tools that we have, I'm sure that it will allow us, to be every time reviewing this and pushing more to have a more efficient company..

And just in terms of where you might ever hit a wall or if there is limits to that? Do you have ways you can measure or try to quantify that?.

Hi, Michael, it's Bernardo. Look, the experience we have and the way we think about those tools forward was mentioned just a couple of minutes ago, it's much more as a system than really a one-off or it's not the way we do things here, that's why our thinking is very long-term in that sense.

So ZBB MBO revenue management, all the innovation pipeline, the way we follow through the process here, we're looking 2016, 2017, 2020, 2025 and is a system. So our experience tells us, that's not a question of having a wall or not a wall like you're saying. It's a question as a system to prepare and to accept value where there are.

And sometimes, you're going to be infusing quarter, taking cost that doesn't matter, but the system works in a way that you can identify the opportunity and invest behind, not only from a top line, but from bottom line.

So if the process is working properly, I don't believe the situation is a one-off that to cross the line, because we self correct ourselves in a very fast way..

Okay. That's helpful. Thank you very much..

Thank you. And our next question comes from the line of David Palmer of RBC Capital Markets. Your line is now open..

Thanks, good evening. Your gross margin gain of over 550 basis points in the quarter, that was even more than the fourth quarter which surprised us, particularly, because the promotion comparisons were not as easy as that quarter.

You mentioned that pricing net of commodities was favorable, how much of the gross margin gain would be what you would call commodity timing? And perhaps what are some of the other drivers that you would call out for gross margin specifically?.

Hi, David. Again, I think, as I was explaining, we had this benefit from the price net of commodity in the first quarter, that's prior year, that for sure was a benefit in terms of gross margin.

We also had a piece of our savings a little bit less than half of the savings that $225 million, that is going – is coming – is appearing in the COGS that both of these factors or those of the facts impact the gross margin and kind of explain the majority of the improvement we had in the gross margin ratio.

Again, that's not the clear way that we track the business, generally we separate more between contribution margin, variable cost and fixed cost. But those were the main facts that we had in the gross profit..

Is there any color that you could offer about what's driving that mid-single-digit growth that you see sustainable on the foodservice area?.

Thank you, David. Yes. The foodservice is not just a foodservice area, it's foodservice and other non-measured channels. So, it is anything that goes into club stores, commissaries, foodservice and Dollar General.

For one, these businesses tend to have a higher rate of growth than the measured channels, and two, as I mentioned on the last call, we initiated a major whitespace and business development program that started to payoff, and we continue to see a positive outflow for these businesses..

And then one last one on advertising spending, in the quarter, does that increase become behind some of those Big Bets, and what's your general plan for ad spending for the year? Thanks very much..

Yes, the advertising as we said on the last call that would be increased in the U.S. by about $50 million year-on-year, and the majority of this is being put behind the Big Bets.

You would've seen the advertising so far on the new items that we have launched this Q1 and Q2 where the most of these advertising actually being spent and we will continue into Q3 and Q4..

Thank you..

You're welcome..

Thank you. And our final question comes from the line of Priya Ohri-Gupta of Barclays. Your line is now open..

Thank you so much for taking the question. Two, if I may.

First, can you just talk about how you think about some of the secured debt in your structure, whether there is a focus on trying to clean that up and have only unsecured borrowings given that you are an investment grade issuer? And then just secondly, can you talk a little bit about the rationale behind the $4 billion commercial paper program you put in place recently and just in terms of the size of that versus your ongoing needs? Thank you..

Hi, Priya. Again as you know, we have intention to redeem the prefer as soon as it gets callable beginning of June. We've talked a lot how accretive this transaction would be in terms of cash flow and earnings and EPS for the company. We are considering how close we are to access the market.

I would prefer and I will disclose this information soon, as soon as we access the markets. But we are intended to access the market in the near-term..

Thank you. And I would now like to turn the conference back to Chris Jakubik for closing remarks..

Okay. Thanks, everyone, for joining us today. For any of the analysts who have follow-up questions, Rishi Natarajan (57:11) and myself will be around to take your calls and if anybody from media has any follow-up questions, Michael Mullen would be happy to take your calls. Thanks very much, and have a great night..

Thank you..

Thank you..

Thank you..

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