Christopher M. Jakubik - Kraft Foods Group, Inc. Bernardo Vieira Hees - The Kraft Heinz Co. George Zoghbi - The Kraft Heinz Co. Paulo Luiz Araújo Basílio - The Kraft Heinz Co..

Kenneth B. Goldman - JPMorgan Securities LLC Christopher Growe - Stifel, Nicolaus & Co., Inc. Kenneth Bryan Zaslow - BMO Capital Markets (United States) Matthew C. Grainger - Morgan Stanley & Co. LLC David Palmer - RBC Capital Markets LLC David Cristopher Driscoll - Citigroup Global Markets, Inc. (Broker) Jason English - Goldman Sachs & Co.

John Joseph Baumgartner - Wells Fargo Securities LLC Alexia Jane Howard - Sanford C. Bernstein & Co. LLC.

Good day. My name is Latif, and I will be your operator today. At this time, I would like to welcome everyone to The Kraft Heinz Company's Third Quarter 2016 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 thanks for joining our business update for the third quarter of 2016. With me today are Bernardo Hees, our CEO; Paulo Basílio, 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 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 could find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation available on our website. Now, let's turn to slide 2, and I'll hand it over to Bernardo..

one, our solid EBITDA growth; two, the benefits from refinancing the preferred stock; and three, lower taxes driven by some discrete items coming into play in the current period. Now, I will hand this over to George and Paulo to talk more about how we did in each reported segment and what are expecting going forward.

George?.

Thank you, Bernardo, and good afternoon, everyone. Let's turn to slide 4 and our performance in the United States. Consistent with our goal for the year, in Q3 we again delivered stable, if not improving, top line performance during significant transformation of our business.

First and foremost, our new product initiatives are working well and having a measurable impact. Our Mac & Cheese renovation is bringing people back into the category, boosting consumption and household penetration. Cracker Barrel Mac & Cheese and Devour frozen meal are addressing previously un-served segments of the market.

Capri Sun Organic continues to build distribution and is doing well. Our Heinz Sauces business had a very successful summer season, led by our new Heinz Barbecue Sauces and the second year of Heinz mustard. And in cheese, Philadelphia Cream Cheese continues to grow strongly and we're seeing good improvement in the nacho cheese segment.

We also expect the impact of our new product activities to build into Q4 with advertising about to go live behind the launch of VELVEETA Mini Block and our all natural Jell-O Simply Good dry package dessert. The second factor I would highlight is Q3 shipment versus consumption bridge where we continued to see improvement.

As you can see in the chart, our categories were essentially flat and our main challenge continued to be net market share losses. Behind the numbers, I can tell you that more than 80% of our impact from share losses are due to cold cuts, roast and ground coffee and snack nuts, a significantly shorter list than we've seen in the past.

And in each of these areas, we either have initiatives already in the marketplace or soon to be launched to reverse those trends. So overall, we are feeling good about our momentum in measured channel. With regards to non-measured channel and changes in the retail inventory, there are three things at work.

First, we continued to see strong growth in non-measured retail channels like club and value stores. Second, we continue to add new food service customers as we go after whitespace opportunities.

However, Global Food Service in Q3 was down slightly due to the traffic decline that you've heard about from the restaurant companies, as well as some proactive trimming of less profitable contracts in our ingredients business.

And third, we had new product pipeline shipments of the VELVEETA and Jell-O innovations that I mentioned, as well as a few others that benefited Q3 shipment. The final piece of my update is our integration program, where we are well underway and, more importantly, on plan.

During Q3, we maintained 98% case fill rate, despite some service issues that continued to negatively impact cold cuts and Lunchables and held back our sales in those two parts of the business. That being said, we are improving those service issues in Q4.

More importantly, the overall integration project will make us more competitive in 2017 and beyond from simplifying our network and co-locating similar types of production line to modernizing our production processes and improving product quality. In summary, we have a full plate of opportunities to drive profitable growth in our U.S.

business, and I look forward to updating you in coming quarters. With that, I'll turn it over to Paulo to wrap up our comments..

Thank you, George, and good afternoon, everyone. I will start on slide 5 and add some more detail on Q3 U.S. financials. In the third quarter, U.S. organic sales were down 1.2%. We think that pricing was down 0.7 percentage points due to roughly 1.5 point of key commodity deflation, mainly in meats and coffee.

Volume mix was down 0.5 percentage point, an improvement from the 1.5% decline we saw in the first half of the year. We delivered strong gains from innovation led by Lunchables in our Mac & Cheese renovation, as well as improved volume and mix benefits in our coffee business. But these were offset by lower shipments in cold cuts, foodservice and nuts.

In terms of adjusted EBITDA and margins, while margins were down sequentially due to normal seasonality of the U.S. business, significant year-over-year growth in margin expansion was similar to what we saw in the first half of the year.

This was driven by integration program savings and, to a much lesser extent, favorable pricing relative to lower key commodity costs. While we've seen the benefit of pricing relative to key commodity costs for the first nine months of the year, we expect commodities favorability to fade even more in the fourth quarter.

Let's turn to slide 6, and the significant gains we saw in Canada's Q3 numbers. Currency turned neutral on the top line, and was a small benefit to EBITDA in the quarter, much better than the significant drag it was in the first half of the year.

Organically, volume mix swung to 3.4 percentage points of growth, up from negative 2 percentage points in the first half, and driving Q3 organic net sales growth of 2%. By contrast, pricing was down 1.4 percentage points, having been up 3.4 percentage points in the first half of the year, due to commodity-driven pricing actions in coffee.

Now, before we get to EBITDA, I have to note that the Q3 volume mix gains were driven by a combination of early event-related shipment versus the prior year and foodservice gains. And while the gains in foodservice have a good chance of repeating, we are likely to give back a good portion of the positive Q3 volume mix in Q4.

At the profit line, adjusted EBITDA was up 32.7% versus the year ago period in constant currency terms. This was driven by a combination of gains from cost savings initiatives, and this favorable volume mix I just described.

I would also note that consistent with what we said on our last call, there was no material impact at EBITDA from key commodities in Q3. And I will add that, we may see it turn into an unfavorable impact in Q4. That brings us to Europe on slide 7. Overall, it's fair to say that we've been up and down in Europe over the past few quarters.

Results this quarter were sequentially worse than Q2, after Q2 was sequentially better than Q1. However, we do not believe that the underlying trends are as bad as the Q3 numbers suggest. Let me deconstruct the results to give a clear picture of underlying trend.

Pricing was down 2.9 percentage points, primarily due to the timing of promotional expenses versus the prior year. Volume mix decreased 4.9 percentage points, reflecting a combination of shipment timing versus the prior year and on-going consumption weakness in several categories, primarily in UK and Netherlands.

So from both a pricing and volume mix perspective, roughly half of the decline in each was due to timing that we would not expect to repeat going forward. As a result of the factors I just described, we saw constant currency EBITDA and margins down slightly, both on a sequential basis and versus the prior year.

This reflected the combination of unfavorable volume mix and pricing I just described and increased market investments that offset ongoing manufacturing savings. And, again, roughly half of the constant currency decline was due to timing that we do not expect to repeat.

So, overall, we think that the health of our European business is better than our Q3 numbers indicated, and with some changes in the works, we expect the business to be a meaningful contributor in 2017. Finally, we will look at the rest of the world on slide 8. Here, for the first quarter in many, foreign currency was not a significant headwind.

In fact, it was slightly positive as we lapped recognition off Venezuelan bolivar devaluation. In terms of organic growth, we saw some deceleration versus the second quarter. Much of it came from pricing, which increased 1.9 percentage points.

While this was driven by pricing to offset higher input cost in local currency, particularly in Latin America, it also included higher promotional expanding to support new product initiatives like launching Planters in China and re-launching our soy sauces line in Indonesia.

On a sequential basis, we experienced less local input cost inflation to offset with pricing as well as a step up in support behind new product activity and we would expect each of these factors to come into play in the near term. Volume/mix was up 1.7 percentage points versus last year.

Again, a deceleration from the first half primarily reflecting three factors; one, continued strong growth in condiments and sauces in all regions; two, a decline in our ABC Soy Sauce business in Indonesia. And three, a temporary disruption in distribution within our Middle East and Africa business due to retailer consolidation in the region.

Overall, while we did see some deceleration in sales this quarter, going forward, we expect the distribution issues to be resolved and have investments in place to accelerate growth. So we don't see any reason to change our expectations for a strong growth in our rest of the world business, either in the near term or longer term.

Adjusted EBITDA, it was down 3.9% in constant currency terms as organic sales growth was not enough to offset higher input costs from local currency and our investments in new product initiatives. In a sense, we invested in Q3 ahead of growth.

Going forward, while we face a strong comparison in Q4, we do expect better performance at the EBITDA line in our rest of the world business in 2017. Now, before we go to Q&A, on slide 9, I want to cover a few more factors that may impact our financial performance over the near to medium term.

We start and more as a reminder than a comment on our operating performance. From a comparison's perspective, I think it's important to note one of the six factors that will affect our Q4 results. That is we will experience comparisons to a Q4 2015 that included a 53rd week of shipment.

Recall that when we reported Q4 2015 results, we mentioned that the 53rd week benefited net sales by 4.7% and adjusted EBITDA by 4.5 percentage points. The second factor I want to highlight is our expectations around our integration program. Right now, we are keeping all of our targets the same, savings and cost to achieve.

We are still targeting integration program savings of $1.5 billion, net of inflation by 2017. As we've said before, savings have come in faster than we expected. And we do expect that input cost inflation outside of key commodity costs in North America is likely to be a partial offset to savings moving forward, especially as 2017 progress.

That said, as Bernardo mentioned, we are currently firming up our 2017 plans both cost and savings expectations, so we will be in a better position to provide a more robust update in the coming months.

Along those lines, we are also finalizing our plans and investments behind our 2017 pipeline of Big Bets and whitespace initiatives to drive profitable growth.

Based on what we've already seen in the marketplace, we remain confident in our ability to drive improvements in our top-line trends in existing markets and invest behind whitespace expansion opportunities for Kraft and Heinz brands in both foodservice and international channels.

And we look forward to talking about these initiatives in the months ahead. The last item I want to highlight is our progress and our expectations with regard to debt leverage. To the end of Q3, we have reduced our leverage to the 3.7 to 3.8 range. And this is down from roughly 4.5 only a year ago.

So, we are making great progress on our goal to achieve below 3 times ratio over the medium term. And we expect this to continue at a strong pace as we move forward. This includes fulfilling our commitment to pay off $2 billion of debt when it matures next year. That completes our update to the third of 2016.

There were certainly a number of puts and takes in our Q3 results. But overall, the progress we've continued to make, improving our operations and performance in the marketplace, gives us confidence that the profitable growth we've delivered to-date, is sustainable and that we can build on this going forward.

Our focus from here is to finalize a strong agenda for 2017 and finish 2016 in a way that gives us good momentum heading into the next year. Thank you. And now, we'd be happy to take your questions..

Our first question comes from the line of Ken Goldman of JPMorgan. Your question, please..

Hi. Good afternoon, everyone. You said you were sticking with $1.5 billion in synergy guidance.

I think the words were quote right now, is it safe to say, given that you're already at $1.3 billion and you're five quarters ahead of your target date that it's really no longer a question of whether the $1.5 billion number will be raised, but I guess rather by how much and when you might raise it?.

Hi, Ken. This is Paulo. Again, I think what I can say for you now that we're still targeting the $1.5 billion net of inflation for next year.

I can share with you that, yes, we have a good visibility on strong stream of future savings, but we are still finalizing our expectations around things like cost inflation, product and brand investment and I think that we'll be in a better position to provide a more complete update in the coming months for you..

Okay. And one more from me. You mentioned I think two or three quarters ago, that maybe you had – and correct me if this is wrong, kind of bit much out of some spending in the UK, I think if memory serves, it was related to some soup promotions and maybe you thought it was prudent to add some of those promos back.

As the year has progressed, is there anyone else – or anywhere else rather you really cut into the bone and you had to add back, whether it's in terms of number of people, capabilities, promotions? I'm just trying to get a sense because you've been very aggressive and it seems all to have been so successful, are there any areas where maybe you had to tweak your initial expectations or practices perhaps?.

Hi, Ken. It's Bernardo. Thanks for the question. Let me start by the end. I really don't think the UK performance, and I'm going to comment about that in a minute, has anything to do with the level of spend or we cut too much on the model that – I can guarantee you, we really don't see that way.

What I think is important when it's to Europe, and especially the UK that you mentioned, is to separate, because we continue to have a solid performance in Continental Europe, okay? With the exception of the Netherlands, I would say all other countries are having a positive year and with a good buildup of plans for 2017.

But our performance in UK has been poor, right? The environment has been difficult, but that has been the case for a couple of years, and we really don't see that changing in the next coming months, quarters, or even years. I really believe we have been slow to react and get the right price mix and offering in the marketplace.

If you see our market share, especially on key categories like beans, sauces, and others, and also to some small degree soups, it hasn't changed that much, has been quite solid share performance. But we haven't suffered from a category decline in a channel mix change in the country.

There is a lot happening now, especially with the new soup season that starts right now as the winter approaches the country. So we're really changing a lot our balanced price, promotion, distribution in this very shaky retail environment in the UK. We had a change in leadership in the country as well.

We moved our most – one of the most talented commercial people we had from Australia, New Zealand that are even more difficult when you concentrate with the environment to the UK and Europe to lead our business there. So I'm really confident that we can have a better performance looking at 2017 and beyond.

We're seeing all the seeds of the performance and that's already happening as we speak. That being said, the mistakes we did on price mix and distribution, now a good learning for us to have a much more solid plan coming 2017..

Thanks very much..

Thank you. Our next question comes from Chris Growe of Stifel. Your line is open..

Thank you. Good afternoon. My first question for you just in relation to the net cost savings that you reported of $330 million in the quarter.

I just want to get a sense, does that incorporate any measurable benefit from lower input cost or lower cost in general? And then would you accept that the turn sort of be more of a drag on that figure in the fourth quarter with more in 2017 when you expect that to occur?.

Yeah. Hi, Chris. It's Paulo again. It incorporates all the savings and all the cost base we have. It does not incorporate any type of the big four commodities that we have. But all the other costs are inside these numbers..

Okay. Thank you. And then, I just want to make sure I follow a bit on Ken's question in relation to Europe. I think you mentioned around half of the decline in organic sales was due to some unique factors. It still suggests sales was down 4%.

I think you have some easier comps coming up, but you also mentioned having some more plans in place to accelerate that growth in Europe. Is that a near-term opportunity or 2017? And I think you just mentioned how the UK remains quite weak.

Are these UK-related plans or more around the Continental Europe?.

Hi Chris, it's Bernardo. Like following up the question before, like I said, if we see our Continental performance, again, with the exception of the Netherlands, it's actually quite solid in all countries including Italy, where we have been experienced more difficulty in past years and we have been improving.

So that being said, that we're not changing our plans for Continental Europe in no means. The performance in UK that for us has been disappointed. Like I mentioned before, it's true that overall 50% has been one-offs, like Paolo said, and a fact, but we are working on the categories we have a strong presence like soups and so on.

We'd come here completely different product offering in volume/mix, promotions and so on. And also remember that you're coming with other Big Bets looking 2017 and beyond that I think really can move the needle in the country.

I think a good example of that would be Heinz Serious Good Mayo that we just had the start in the last really seven months, eight months and it's doing quite well from a market share standpoint. And we see more of that coming 2017 and beyond. Is that going to be enough to the turnaround of margin to the country? It's for us to prove.

But they're the seeds of the things we are doing there, are definitely showing much better results and give us optimism about what's happening for the coming quarters and years in the country..

Okay. Thank you..

Thank you. Our next question comes from Ken Zaslow of Bank of Montreal. Your line is open..

Hey, good afternoon, everyone..

Hi, Ken..

You discussed that there had been some mistakes in terms of the pricing and promotional spending.

Can you talk about where you are on your analytics of this process because when I think about you guys, I think that you guys are probably the most furthest along on the analytics of understanding where your promotional spending will get the greatest lift and it sounds like throughout the world, there were some issues – spotty issues.

I was just kind of curious to see what analytics you're working on, where you're going with it and how far along you think you are?.

Thank you, Ken. This is George, and I will speak in general because one feature of our business model is that they are very similar processes we use in the United States and around the world and one of them, utilization of analytics to really manage revenue, manage cost and so forth.

Where we are now, we're very happy that we have the capability built already to look at more granular understanding of category drivers and performance. We've done that for about 30, 34 categories. So far, it has had some positive effect, but limited to few categories, one or two in each business unit. And we like the results we are seeing.

It will take time though to execute all the opportunities we identified by category or by geography. And for us, this is an area where we would like to get it done right rather than move fast because it's a very delicate area and it requires a number of things to come together within the organization and us working with external parties..

Great. And my second question is, you talked about commodity inflation. Which commodities are you seeing inflationary, or are you talking about labor costs and healthcare costs, because it seems like there is – at least the meat cost seems very deflationary.

Can you talk about that?.

Thank you. Look. I'll talk about the commodity, and I will pass to Paulo to talk a little bit about other costs and give you color about that. So, the big four commodities that have impact on our business are mainly in dairy, in meat, in coffee and in nuts. And we have seen a different direction depending on the category.

So as of late, we have seen coffee has edged up a little bit, so has dairy, where meat went into the other direction. For us, it's very hard to try to call where it's going to be in the future.

We are better off at managing the actual outcome of it than actually trying to forecast it, especially the movement, whether up or down, that we are seeing has no fundamental. But we feel very good about our ability to manage it regardless which direction it went to. As for the rest of the cost, I'll pass it on to Paulo to give you some color..

Oh, yes, George. Now, if you think about it, now there's some inflation outlook here, we are expecting some input cost inflation outside our big four commodities in 2017. I think we're going to have a better color of that in the few months ahead.

But just remember that when we track and do – when we track our savings, all of these costs beside the big four are included in the number that we provide to the market..

Great. Thank you very much..

You're welcome..

Thank you. Our next question comes from Matthew Grainger of Morgan Stanley. Your question, please..

Hi. Thanks, everyone. I wanted to ask two category specific questions to George. First is on the meats business.

I was hoping you could elaborate a bit on the drivers of the weakness, and to what extent, if any, has that been driven by competitive dynamics in the category as opposed to service issues? And while you're taking these steps to fix the business, have there been any – have these fulfillment issues resulted in any sort of distribution losses that we should expect to take longer to correct?.

Thank you very much, Matt, and let me answer your question. Within the meat business, we have a number of categories, so let me break it down and give you commentary around each one of them. The service issues that we have are restricted to two categories, happen to be large categories for us.

One is what we call the cold cuts, which is the sliced meat, and the other one is Lunchables. Lunchables is driven by a very, very strong demand. We saw mid-year some double-digit growth in that business.

And, while it's been growing, our ability to supply has been somehow constrained, and we are working now and getting out of it, but the business is still growing. In cold cuts, in the sliced meat, we have had capacity issues, and this is the area where we are investing the most, and our footprint changes.

We're essentially building brand-new factories, two brand-new factories, one in Davenport, one in Kirksville as an addition to the factories we have there. And we started working on getting out of the service levels, but that was severely affected with service levels.

And we had some distribution losses in some of the customers and that was jointly managed and agreed between us and our trade partners and within time as our ability to supply increases, you will see us moving forward in that. As for the hotdog category, that is a category issue.

So our market share is in line with where the category and our growth rate or decline is in line with the categories, and we feel very good about our bacon business where we are doing well..

Okay. Thank you, George.

And just one other question, could you talk a bit more about the approach to nutritional meals and the Smart Ones brand in particular? Just curious if you're proactively walking away from SKUs or product lines there, and whether there's any plans in place to reposition or upgrade that business?.

Thank you. And let me – what we did over the past few months, we reframed the frozen meat categories to broaden the customer base that we are serving.

Historically, we only serviced a very small segment within the broader frozen meal, and that is what we called nutritional, but really it was the diet segment, the people who are on a diet and we used the Smart Ones brand to service that consumer segment.

We had a look at the category about seven months, eight months ago and we felt we would – we are in a strong position to broaden the segment we are serving. And essentially, we are servicing now three consumer segments. One is the Smart Ones segments and the diet segment for people who are managing weight losses. The second one is the Smart Made.

It's a slight difference to that one by utilizing more products that are natural or venturing into the Real Food category while maintaining good calorie content. And the third one, it's purely on taste, and that is Devour.

And we launched in the marketplace only a few months ago and where it has distribution, we've seen our market share at mid to high single digit, and it's doing very well and it's servicing a segment that is – that's where weight management and calories is less relevant and taste is the key criteria. So, and we're very happy where we are so far.

That segment, for us, the frozen meal, was in a severe decline and every time we venture in serving new customers, we cut that decline significantly and we feel very good about its prospect moving forward..

Okay, thanks very much, George..

You're welcome..

Thank you. Our next question comes from David Palmer of RBC. Your line is open..

Great. Thanks. Good evening. You've spoken in the past and a little bit on this call about you approaching a period of shifting dollars to more effective promotion programs, and you mentioned that you did analytics. I think, you said earlier on across 34 categories.

Are you still in the sell-in period to retailers for improved promotion constructs, and in other words, do you believe that promotion effect in this is going to show up more in your net revenue in 2017 and beyond than perhaps what we're seeing in the second half of this year?.

Thank you, David. For your question. I will add some commentary to that. Revenue management – or if you want trade, promotion and some promotion, it is part of a broader revenue management program. What we're focused on since we came together as one company is truly building the capabilities.

We found the focus on building the capabilities has far long-term impact on what we do than having a project to get a quick wins out of it. And the second, once we build that capabilities, we started testing in a number of business units and we tested one or two categories in each business units. We like what we saw.

And it is not just a promotional activity, it is a number of levels that we looked at. And in some cases, we saw ourselves investing more rather than investing less. In some places, we took prices up; in others we refused and took prices down. But we're very happy with the capabilities we're building.

The reason I say this is a long term and we want to do it right rather than doing it fast, because it has wider impact on your product mix that has impact on your supply chain. This has an impact on the competitive set. And it has an impact on the discussion with the retailers.

So far, our discussions with our trade partners have been very good because it has been mutually beneficial for them and us..

And just a quick follow-up on the innovation front, you've had some successes. You can see in the data, Cracker Barrel Mac & Cheese and the Kraft barbecue sauce, but obviously, I'm sure you'd like to have more of those Big Bet successes.

Do you feel like your pipeline into 2017 versus 2016 at this time last year is more robust, more Big Bets next year than this year?.

Yes, I do. Simply I do feel that 2018 is much stronger than 2016 in terms of innovation – and sorry, 2017 is much stronger than 2016, and 2018 is much stronger than 2017.

This is an area that despite all the transformation and integration work that we did, we never lopsided that, this is the area that is going to sustain our performance into the future. As with every new product, you never have 100% success rate.

So the way we look at it, to get an x number of dollars out of the innovation, we plan launches much higher than that allowing to success rate. And when we look at the probabilities of success for 2017 compared to 2016, we're starting with much larger pipeline. So if we apply the same probabilities of success, we would be in a stronger position..

Thank you..

Thank you, David..

Thank you. Our next question comes from David Driscoll of Citi. Your line is open..

Great. Thank you, and good evening..

Good evening..

Could you....

Hey, David..

Thank you.

Could you guys quantify the year-to-date benefits from PNOC? And then could you just comment upon the repeatability or sustainability of those benefits?.

Hi, David. This is Paulo. You clearly see that in our press calls that we have a big benefit from PNOC in the first half of the year. When you think about Q3 specifically, the benefit we have from PNOC is smaller. As we were communicating before, it is around $11 million we have in the North America business benefit from PNOC.

So this benefit would still be as expected. I'm going to ask George to comment on that..

Yeah. Thanks, Paulo. Let me talk a little bit about the repeatability. This is something that it is part of how we manage revenue and at some stage, the line is going to blur between what is PNOC, what is trade efficiencies, what is revenue management, it is going to be part of all that.

But so far, we have managed very well in both on the ups and downs of commodity. Our expectation is to continue doing so..

Okay. And then just one other question. The integration is expected to be completed by the end of the year I think. I think it's a stated comment but I do believe that you've got some manufacturing plants that are slated to be closed but will occur in 2017. So I'm a little bit confused on exactly when all the "integration efforts" are done.

The purpose of the question is just to ask when do you have capacity such that you could start to contemplate another deal, and that you would have the capacity to actually begin an integration? Does that make sense?.

Hi, David. It's Bernardo. You're right on the footprint question. We'll continue to have a couple of manufacturing changes and so on already announced and planned. So it's actually going quite well.

George mentioned here the two facilities that we're building on the meat side, but we have others on the warehousing and other categories that we're expanding. And so all this work, it goes up to 2017 as planned. So that's not changing.

They are important milestones and integration that's already behind us, like the systems, and already operating, all the planning on the commercial side and analytics in the same environment. So it's really Kraft Heinz, I would say, already operate as one, and most part of the issues we have behind us.

On your question about whether there's an M&A, we never like to comment on hypothetical, and we really believe we have a solid organic path here to create value, and we are working really hard on that. That being said, we also believe our model is highly scalable, and I think the integration results of Kraft Heinz are proving it.

So a lot for us to do on the day-to-day, and we want to be focused on that for now..

Thank you so much..

Thank you. Our next question comes from Jason English of Goldman Sachs. Your line is open..

Hey. Good afternoon, guys. Thank you for the question. I wanted to come back to Bernardo, your last comment on sort of the organic growth of the asset you've assembled from a bottom line perspective and some of the other questions that have anchored around the UK.

I think some of the skeptics of your model are probably going to look at the results and look at year-to-date EBITDA and the rest of the world down 8%, Europe down 13.5%, and I know UK has got some unique situations, but still you combined those two businesses, which are probably our best approximation of legacy Heinz and EBITDA is down 11%.

And I think some will look at that and say, gosh, is the risk that two years from now North America looks similar.

So, I was hoping maybe you could comment on some of those, what I think will be questions from some investors, and also maybe add on top of that, some of what you've learned from those markets that you're applying in North America to ensure that the North America growth is more sustainable..

Thanks, Jason, for the question. I think I understand the way you're grouping different things and so on, but I think it's important here to separate. First, on the rest of the world part, we continue to see really very solid near and long-term growth perspective to the business.

As Paulo said, there were temporary issues behind this core area like distributors disruption in Middle East and Africa. We invested much more behind the growth you're already seeing for 2017. For example, the launch of Planters in China is a good example and others, so we were seeing these in a very, I would say, a solid way.

On respect of the model and again, I totally understand your comments. I think there are learnings from the UK situation that are really specific to the country.

Especially, remember what happened to UK in the last two years, is that the leader of the retail environment really faced a lot of problems and disconnect to the market for quite some time for different issues.

And now it's coming back in a very strong way and this retail shaking that happened in the country, I truly believe you have not been fast enough on the offerings that were coming.

I cannot see any correlation to your question to the model given that everything we did, we didn't – if you see all our lines connected to the market, like marketing, selling and modern investments, they all grew up in the country in the last four years..

Got it..

So from a model standpoint, there is absolutely no correlation. That is a vital essence for us that your last question, can you learn from the UK and to be applied in other places like the U.S., and others. There I could not agree more. I think they are important lessons for us, for me, for George, for Paulo and for the entire team here.

That you're going to need to prepare, especially when you have a situation like happened in the retail in UK. It's not that often that that happens for us to be ahead of the game and not reactive, given the market share and the positions we have in the country. So I think the situation anyway, your bundle are very different.

In rest of the world, I'm investing for more growth. So I'm coming for China with a different plan. I'm coming for Indonesia. I'm coming – even for markets with like space, like Australia and New Zealand. In the UK, it's a different story.

My volume mix and everything I'm working behind my promo activity is to get right what is the offer in my distribution, so I can come back to profitable growth strategy. From a model standpoint in the question that – you cut too much or cut too little.

I can't have any correlation given what is that, because in that sense, my marketing is going up and my selling is going up within the country..

Okay..

The right criticism to say to us, is to say, hey, if I have money invested, as I did this year in UK, I probably would be better off (57:25)..

No, I....

But my offering didn't come true as it should. And I don't think it's the right thing to do as well, because we're looking for UK for the next 10 years, 15 years, 20 years.

So the brands we have in the country are so strong and our equity is so solid that we will never going to sacrifice the middle and long term for any short-term gains, we don't do that.

So in a sense, I don't think it's a model issue, I think it is, for sure, a question of the balance of product mix and offering and so, and those learnings we should take, and apply in other markets..

I think that's fair, the question obviously needs to be asked. So thank you for the explanation, I really appreciate it. I'll pass it on..

Thank you..

Thank you. Our next question comes from John Baumgartner of Wells Fargo. Your question, please..

Good afternoon. Thanks for the question. George, I wanted to come back to the cold cuts business in that the last time Kraft made capacity improvement to the U.S. network, it was done in cheese. And that drove some pretty material efficiencies and flexibility to invest back in the network for some nice competitive separation.

So as these meat plants are commissioned, how should we think about any sort of step change that'll create in terms of capabilities or cost to serve, innovation or otherwise?.

Thank you, John. And answering this question for me is easy because I did that change in the cheese capabilities, if you remember. I ran that business six years ago. And this is when we made the step change in cheese and since then, we never looked back and you've been seeing the results of that.

We're actually repeating very similar model in the meats business. What we're trying to do, we're trying to get two things at once. One, modernize the manufacturing capability and the technology to be able to make the products of the future rather than the products of the past.

And two, try to get a cost advantage compared to anyone in the marketplace and we believe we are in a strong position to do so.

It's just going to take a little bit of time for us to complete that project, and once we're out of it, no different to the model we did in cheese when we modernized and reduced our costs and we became world-class, cost effective in it. The meat business would be in a similar situation..

Once you get past the meat investments, are there other categories you can call out that may have been starved for investment over the years, similar to meat and cheese?.

It's a very good question. Yes, there are. Actually, meat, while meat has taken the lion's share of our footprint investment, there are a number of other manufacturing sites where we are making investments. As a matter of fact, about 15% of our active lines are affected between transfers, decommissioning old lines and installing new ones.

What we're also doing, we are outsourcing a number of non-core low volume SKUs across the board, and we are in-sourcing some higher volume SKUs, again across the board, not exclusive to meat. And we're also reducing the number of warehouses and distribution centers. So all together, it's a very large investment across the entire network.

The meat happened to have the larger portion of it, but we're doing it across the board..

Great. Thank you, George..

Thank you very much..

Latif, if we can take one more question that will be great..

Yes, sir, and that question will be from Alexia Howard of Bernstein Research. Your line is open..

Good afternoon, everyone. Can I just ask about the promotional activity again? It looks as though your proportion of sales on promotions in the U.S. are down several hundred basis points this year, and you've gone through how you've been optimizing that.

So with Walmart and other retailers asking for reinvestment back in pricing in 2017, do you anticipate that the promotional activity will really start around perhaps next year? And if so, what does that do to your margins? Thank you, and I'll pass it on there..

Thank you, Alexia. I will take that. Our promotional activities and the intensity of our promotional activities keep changing depending on a number of factors. One is the competitive environment. Two is the strategic position of that category.

So when we look at our categories, we classify them as an invest category, protect category, or bet on or manageable margin. And so we do not just have one view of promotional activities and we go and implement it. So if you look deeper into our sales, if you go one layer down or two or three, you would find a very different direction.

And that's why we try not to take as an overall view whether it's going up or down. And as for the investments moving forward, we would continue exactly utilizing those same strategies.

What we're finding though, it's not just the promotional activities or the sales generated from promotional activities, rather than the return that we get from promotional activity. We have become, through data analytics, lot more competent in the ability to select which promotion and which category with which account.

And we're finding very, very different returns. And that, by itself, is allowing us to actually do more with that. So, we're not going to somebody and just saying, we're cutting across the board promotional activities. We're just doing more with that..

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

Thank you, Alexia..

Thank you. At this time, I'd like to turn the call back over to Mr. Jakubik for any closing remarks.

Sir?.

Thanks, Latif, and thanks, everyone, for joining us this afternoon. For any of the analysts that have additional questions, I'll be around, as well as Andy Larkin. And for anybody in media who has additional questions, Michael Mullen will be available to take your call. So have a good afternoon and thanks again for joining us..

Thank you very much. Appreciate it..

Thank you..

Ladies and gentlemen, that does conclude your Kraft Heinz company call. You may disconnect your lines at this time. Have a wonderful day..