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..

Andrew Lazar - Barclays Capital, Inc. Steven Strycula - UBS Securities LLC Bryan D. Spillane - Bank of America Merrill Lynch Rob Dickerson - Deutsche Bank Robert Moskow - Credit Suisse Securities (USA) LLC Michael Lavery - CLSA Americas LLC Kenneth B. Goldman - JPMorgan Securities LLC Jason English - Goldman Sachs & Co. Alexia Jane Howard - Sanford C.

Bernstein & Co. LLC Christopher Growe - Stifel, Nicolaus & Co., Inc..

Good day. My name is Karen and I'll be your operator today. At this time, I would like to welcome everyone to The Kraft Heinz Company's Fourth 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 full year and fourth 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 can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation available on our website.

Before I hand it over to Bernardo, please note some changes to our financial reporting that were outlined in our earnings release. In the fourth quarter of 2016, we reorganized our operating segments to better align with our global growth strategy, and therefore have reflected these changes in our business segment reporting for all periods presented.

As a result, our Russian business is now part of our Europe segment instead of rest of world, and cost associated with our Global Procurement Office have been reclassified from our Europe segment to general corporate expenses. Now, let's turn to slide 2, and I'll hand it over to Bernardo..

Thank you, Chris, and Happy New Year to everyone. As I hope you saw in our press release, we had solid Q4 results overall with solid sales and business investments to further improve the health of our brand. But I'll start by focusing more on what we have been able to accomplish in the first full year of The Kraft Heinz Company.

It formed the base and in many ways that's our agenda for the year ahead. So, let's start with our progress against the three objectives of our strategy that we laid out at the beginning of our merger.

In our first objective, to deliver profitable sales growth, on the top line, we built positive momentum through the year, despite the commodity headwinds that persisted during the year, resulting in profitable sales and flat to positive organic sales growth in all regions except Europe.

We generated significant gains from our Big Bet innovation strategy in our efforts to capture whitespace opportunities. This was led by condiments worldwide, especially ketchup and barbecue sauce, pasta sauce in North America and Latin America; soy sauce in China, and hot sauces and mayo in Europe.

Our investments also led to better market share trends over the course of the year in core categories such as sauces worldwide including pasta sauce in Canada and Latin America; green cheese and mac & cheese in the United States, UK beans; baby food in Italy; and in Australia, beverage. That said we still have significant areas to improve in 2017.

They include Indonesia soy sauces, U.S. cold cuts, baby food in Canada, and our non-measured channel shares in the UK to just name a few. We also pushed into places, whitespace, where Kraft Heinz did not previously compete, products such as Devour frozen meal, Cracker Barrel mac & cheese and Heinz Barbecue Sauces in the United States.

There was Planters which now is available in both China and the UK. We also brought Heinz Mayonnaise to Europe, Brazil and Australia. And we made significant progress toward extending our foodservice presence, not just in the west but through strong performance in Canada, Brazil and Russia as well.

Nevertheless, there is much, much more to go after in 2017 and beyond. It's also clear that our go-to-market investments are paying off and delivering profitable growth through distribution gains and better performance at retail. We supported go-to-market activations with better management of our field teams in Canada, U.S., Brazil, Russia and China.

These efforts resulted in phased execution improvement in a challenging retail environment all around the world, including Australia, Japan, China, Russia, Egypt, Brazil and Germany. And then our second objective, we made meaningful progress toward achieving best-in-class margins.

Through our ritual and routines, including zero-base budgeting and managed by objectives, we drove sustainable improvements throughout the year.

ZBB savings were a key driver of value creation across the company delivering faster than expected savings at the outset of the year and contributing to the company achieving $1.2 billion in cumulative savings since the inception of our Integration Program.

As of today, we have cascaded personal MBOs directly from company leadership to more than 6,000 employees worldwide. This is a critical step in aligning everyone behind common goals and improving our day-to-day execution. To put that number in context, this represents more than 50% of our white collar population around the world.

And in supply chain, we invested more than $1 billon into manufacturing upgrades in our footprint program to modernize our facilities and enhance our capacity for innovation and quality.

We went live with our Global Business Services in Europe, which together with our shared service integration in North America, helped drive processes standardization and improved service levels. Importantly, as all of these was happening, we achieved a global case fill rate of 98%. We also invested heavily in our people, in our capability.

For example, we promoted more than 1,700 team members worldwide last year. We expanded our talent acquisition programs worldwide, growing the volume of applicants by 40%. And in our ongoing effort to grow a better world into a partnership with Rise Against Hunger, we package and distribute more than 65 million meals to people in need.

Finally, on the capital structure front, our leverage ratio was reduced to approximately 3.6 times EBITDA and we kept up our strong dividend payout. Paulo will build more on our capital structures improvement in a moment.

Overall, we made solid progress in our first full year as a merger company and it set a strong base for us to build upon in the next phase of our development. So let's turn to slide three to review our Q4 and full year financial results and how the numbers bear out our progress.

As it relates to the company sales, there're really two things to highlight. First, for the reasons I mentioned earlier, we drove sequentially better organic sales growth driven by volume/mix improvement in all segments.

The primary contribution to this growth were condiments and sauce globally and costs in refrigerated meal combinations in the United States. Second, we had solid price realization in most segments during the year despite a deflation in key commodities like dairy, coffee and meat in the U.S.

as well as the trade investments we made in our UK and Netherlands business. Net EBITDA full year growth at constant currency was driven by strong cost savings from integration and restructuring activities, favorable net price and growth in our Rest of the World market. I should note however that our rate of growth in Q4 was held back by two factors.

First, we began to lap integration savings that began last year in Q4. And, second, we accelerate our investment behind growth initiatives late in the year, as well as trade investment we made in our UK and Benelux business.

Dropping down to our adjusted EPS, both Q4 and full year were up more than 50% excluding the extra week last year, primarily driven by EBITDA gains and the refinancing of the preferred stock in June. Now, I will hand over to George and Paulo to highlight our performance in each reporting segment and what we expect going forward.

George?.

Thank you, Bernardo, and good afternoon, everyone. Let's turn to slide four and our performance in the United States. The first point I would make is that we had a strong finish to 2016, in many ways giving us good momentum from a consumer takeaway perspective as we head into 2017.

If you look at the charts on the right, there are few things I would note. First, in measured channel, the negative impact from commodity deflation on category growth persisted during 2016 and longer than we originally thought, although, we currently expect that this is likely to turn to inflation as 2017 progresses.

Second and more importantly, you can see that we had improved measured channel share performance in Q4 versus our 52-week numbers below, driven by our Big Bets and better retail execution.

Specifically, we drove strong consumption improvement from the launch of Devour and SMARTMADE in frozen meal, mainstream, and ground coffee and pods as well as nice turnaround in sandwich cheese, both Kraft Singles and Natural.

This was supported by improved execution at retail with an increase in total distribution points, TDPs, versus the prior year in Q4 and better feature and display conversion. In fact, we exited the year with a shorter list of share challenges than we started the year with.

We also saw a longer list of categories moving into share gains and ended the year with roughly 70% of our categories holding or gaining shares in Q4. The third factor I would highlight is that sales in Q4 were good. However, they included some one-off benefit that will not repeat.

Foodservice was not a contributor to non-measured channel growth in Q4 as whitespace gains gave way to weakening trend in base consumption and store traffic.

And although, we had further whitespace gains in non-measured retail channel, much of the green bar in the top right of the graph was due to the benefit of trade inventory shifts versus the prior year.

Specifically, we had a relatively weak Q4 2015 comparison that reflected retail inventory de-loading as well as strong shipments in Q4 2016 to support a very robust level of in-store activity during the holidays. In the end, we exited the year with some of our Q4 shipments needing to be worked off in January.

And we expect Q1 2017 shipments will see roughly a half-a-point headwind versus consumption, because of this. And that's before the impact of the Easter shift that Paulo will talk about later.

So overall, we closed 2016 with significant progress in the marketplace and improved execution, during the year of significant transformation, just as we planned. Looking forward, our agenda for 2017 is focused on three simple goals. One, on the top-line, drive profitable growth and further improve challenged categories.

Two, better leverage our scale, at retail, with increased in-store activity, including more scale events and improve our day to day sales execution. And three, utilize our supply chain modernization or footprint initiative, as a way to increase investments in innovation and renovation, particularly, at the back half of the year.

With that, I'll turn it over to Paulo..

Thank you, George and good afternoon everyone. I will start on slide 5, to highlight the two more things on U.S. financials. First, price was higher for the year and in Q4, despite persistent headwinds from deflation in key commodities.

Although, it appears, we've now reached the bottom on commodities and are likely to have to contend with commodity inflation beginning in Q1 of this year. Second, we were encouraged by the improvement, in our vol/mix performance over the course of the year. We had better results in meats, ready-to-drink beverage late in the year.

And this combined with the strong growth in coffee, Lunchables and mac & cheese that we saw all year and drove positive growth. Moving to EBITDA, the U.S. delivered strong double-digit growth all year driven by cost saving initiatives and favorable net pricing.

In Q4, although the pace of cost savings was in line with our expectations, EBITDA growth was held back by timing of overhead expenses versus the prior year. Let's turn to slide 6 and Canada where our results played out fairly consistent with what we had talked about on our Q3 call.

Pricing trailed input cost fluctuations in local currency throughout the year. By that I mean that, from a P&L perspective, pricing was lower to follow deflation in key commodities in the first part of the year and late in following higher input costs in local currency, particularly in the fourth quarter.

By contract, volume/mix performance showed more of a steady improvement, first half to second half. This primarily reflected solid gains in condiments, sauces and foodservice, which were partially offset by the volume impact of lower cheese shipments versus the prior year.

At EBITDA, I think it's important to highlight that despite the ups and downs during the year, Canada's full-year adjusted EBITDA and margin are fairly representative of the current health and profitability of the business. That brings us to Europe on slide 7.

We said on our last call that the health of our European business was better than our Q3 numbers indicated, and with or without Russia in these numbers that bore out in Q4.

As a general rule of thumb, from a 2016 versus 2015 perspective, the addition of Russia to our Europe segment has the effect of adding roughly 1.5 points of organic net sales growth and roughly 75 basis points to constant currency adjusted EBITDA growth, but reduces segment EBITDA margin by approximately 130 basis points.

That being said, our performance this year in Europe is not what we planned, and not what we would expect in any year. It's true that we had strong unfavorable currency translation all year, and that's likely to continue into the beginning of 2017.

But from an operating perspective, we made significant trade investments during the year, primarily to jumpstart our UK business in a changing and difficult retail environment. And so far, we are encouraged by the results.

The improvement in our volume/mix trends reflect a combination of gains from Big Bets in condiments and sauces even with the results of Russia, as well as improving consumption in shared trends across most countries, including positive overall consumption in the UK.

Net EBITDA, the decline we saw in Q4 and throughout the year was from a combination of pricing and increased marketing to drive our Big Bets and whitespace initiatives and in Q4, higher overhead cost due to timing, which we don't expect to repeat. These factors more than offset manufacturing savings realized during the year.

Finally, our Rest of the World segment on slide 8. Here, the underlying drivers of organic growth were fairly consistent throughout the year. Higher pricing was primarily driven by price increases to offset higher input cost in local currency, mainly in Latin America.

And vol/mix growth was driven by strong years in China and Latin America, and solid performance in Australia and in Japan with the strong overall growth in condiments and sauces across all regions. Some challenges still remain, including Indonesia soy sauce and some difficult economic conditions to overcome in India and the Middle East.

But overall, as we said in our last call, after seeing a slight deceleration in Q3, we continue to expect strong growth in our rest of the world business, both in the near-term and long-term. Net EBITDA, as we also mentioned on our last call, in Q4, we faced a strong comparison to the prior year.

And we are investing heavily behind whitespace initiatives. This led to the decline in adjusted EBITDA we saw in Q4 in the second half of the year. For the full year, EBITDA growth was primarily driven by organic sales growth that was partially offset by increased marketing investments to support new products.

Now, before we go to our agenda for 2017, I think it's also important to highlight the significant progress we made in 2016 to improve our capital structure and credit metrics. The first point I will make on slide 9 is that our focus on cash is paying off.

We generated approximately $1 billion of cash from working capital improvements, mainly driven by an increase in payables and tight management of inventories. In fact, we were able to achieve negative working capital by the end of the year, equal to negative 1.6% of sales, down from 4.5% of sales at the end of last year.

And we did this while increasing safety stock in an effort to de-risk our footprint activity. We also redeemed our preferred debt resulting roughly $550 million of annual after-tax cash savings for the company. In terms of leverage, we've also made similar significant progress in short period of time improving our credit metrics.

Through a combination of EBITDA growth and refinancing, we've reduced our leverage from approximately 4.5 times EBITDA at the time of the merger to 3.6 times at the end of 2016. We remain confident in our ability to fully deleverage in 2017 to bring us closer to our ultimate goal of below three times leverage.

And we remain committed to paying down $2 billion of debt when it comes due in July and holding off on any share repurchase plans until that pay down is complete. Beyond our deleveraging goals, our priorities of ongoing financial policy and use of free cash flow are straightforward. First, maintain an investment grade credit rating.

Second, fund a highly competitive dividend. And third, deploy excess cash against opportunity on a risk-adjusted return basis, which bring us to our agenda for 2017. And I'll hand back to Bernardo to start it off..

Heinz, Kraft and Planters, and in five categories with global potential; condiments and sauces, cheese, meals, nuts and baby food.

The emphasis within these opportunities will be to increase investment levels and improve execution, which includes applying best practice for wining in each channel, from traditional retail and discounters to foodservice, and over time e-commerce.

All this will be fueled by significant incremental investment in marketing, both for market capabilities and product development, covering North America, Europe and rest of the world. Our agenda also includes achieving best-in-class operating efficiency with top quality.

We plan to reduce complexity through active assortment management in United States, an achieve best in class operations efficiency and quality within our manufacturing facility. Also great execution begins with great training and we are actively building a new methodology and training platform to support our performance-driven organization.

But let met turn it back to Paulo to wrap-up by explaining how our agenda will translate into 2017 financial performance..

Thanks, Bernardo. In terms of cost savings, we are now targeting net integration program savings of $1.7 billion by the end of 2017, up from $1.5 billion previously. Keep in mind that we achieved cumulative savings of approximately $1.2 billion through the end of 2016.

And note that our new target is net of an approximately $300 million negative impact in 2017 from a combination of business reinvestments and additional non-key commodity inflation that were not contemplated at the time of the merger. To achieve these new targets, we expect cost to achieve of $2 billion, up from $1.9 billion previously.

This includes $1.2 billion in pre-tax cash P&L costs, as well as CapEx of $1.3 billion. Finally, we expect to deliver a strong EPS growth, driven by EBITDA gains and further accretion from the preferred refinancing.

EBITDA growth is likely to be driven, primarily by incremental integration savings in North America, as well as strong organic top-line growth in our Rest of World markets. In addition, our earnings expectations currently reflect an effective tax rate of approximately 30% and assume no change in existing tax regimes and regulations.

As far as seasonality throughout the year, our 2017 plan reflects aggressive upfront investment in growth followed by significant second half savings from footprint initiatives. In addition, please note that several factors will hold back first quarter organic net sales and EBITDA.

They include a shift in higher margin Easter shipments to Q2 2017 versus Q1 2016, upfront investments in innovation and whitespace in a number of geographies, as well as our expectation that additional integration related savings will be second half oriented.

That being said, we do expect 2017 will be another year of strong sustainable profit growth for The Kraft Heinz Company and another significant step forward in realizing our potential. Thank you. And now we'd be happy to take your questions..

Thank you. Our first question comes from the line of Andrew Lazar from Barclays..

Good evening..

Hi, Andrew..

I just have two things, if I could. One is you talk about profitable organic sales growth going forward, a sharpening of focus on that.

I guess how should we externally measure the company against that goal of profitable sales growth? Is there a minimum amount of growth and sort of EBITDA margin that – or a combination of those two that we can use as, let's say, measuring sticks to assess the execution on this goal?.

Hi, Andrew. This is Paulo. So we aren't going to provide like a target on this. But the way that we see this profitable organic growth is that through our innovation process and through our all the initiatives that we're handling here in the company we expect to have sales that really move down to EBITDA over time..

Okay. And then if we think about – I guess if we think about the North American business investments that you talk about, that I think you mentioned were not contemplated at the time of the merger.

Trying to get a sense of sort of exactly what you mean by netted out of the synergy? And should we take from that that the cost of growth essentially is more significant than you might have thought at the time of the merger or how should we put that business investment step up in context?.

Hi, Andrew. It's Paulo again. So what we're talking about here is that in the first half the business investment is pretty much investment that we're doing in quality improvements for the products, renovation, marketing pullout, new products, and more Big Bets.

We're investing behind both markets to improve the retail execution that we have and also now expanded distribution in our foodservice segment. And, again, all of these investments, we were not contemplating to do that. We saw the opportunity to do this now and we're executing this.

And just to be clear that we always decided to provide a savings target that was net of everything, so we're keeping doing this. We're just highlighting that we found more opportunities in the business and we're executing this. But, again, our target of $1.7 billion is still net of all of these investments..

Thank you..

Thank you. And our next question comes from the line of Steven Strycula from UBS..

Hello, everyone. Good revenue quarter. So, quick question, kind of like following up with Andrew. The timing of the factory closures, it seems like some of that is getting – taking a little bit longer than maybe expected or maybe we mismanaged how it would flow into the year.

So, does that mean there is some kind of tail effect of cost savings dipping into early 2018? That'd be my first question..

Thank you, Steve. This is George. I will take this question. Our manufacturing modernization program is on track to deliver updated technology and low cost production. We are now in the peak activity and won't be past that peak until late 2017, as I shared on the last call.

We remain in line with expectation and on budget to deliver what we shared with you on prior call..

Okay. Great. And then, my other question would be related to pricing. We definitely saw very strong volume. So, George, if you could help us understand, would the U.S.

business organically still have been positive ex, call it, the trade shift? And should we think about – with price/mix being just below flat this quarter should we start to see that improve as you think through revenue management initiatives for the Kraft portfolio this year? And also you're saying that commodity prices might be bottoming, if you could help us think through that, that would be great?.

Yeah. Pricing for Q4 was in line with our strategy all along and in line with our expectation. And you'd probably saw both sides of revenue management at work, the side where we went dark in some categories, and the side where we went heavy in other categories and we're very happy with the results that we got.

The reason we do that, Steve, is that lift on promotion, that traditional lift where you put a promotion and you measure the growth that it's no longer what it used to be. So we have to resort to a number of levers to be able to maintain volume. We tried a number of things in Q4. We are very happy with the results.

And that would be reflected moving forward. So that's what you want to expect from us. Some category we're going to move harder. Others we would move softer. All in all, we will manage our revenues always to be ahead to improve our margins..

Great. Thank you..

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

Hey. Good afternoon, everyone..

Hi, Bryan..

Just two questions from me. One is your thinking about – as we're looking at 2017 and at some point later this year, you'll start to begin the process I guess of repatriating some of the Kraft brands licenses from Mondelēz.

Is there anything that you're doing in 2017 and maybe spending ahead of that or anything in there that affects that we should be thinking about in terms of 2017 growth or performance?.

Hi, Bryan. Good afternoon, this is Bernardo. Look, about the repatriation, you're right, there would be the brands coming back to us in January 2018, and there is some work to be done in preparation. But from a cost standpoint or from a revenue standpoint, there is really no benefit or impact in the year, right.

There is preparation from marketing, from distribution, from our manufacturing capabilities to hit the ground and be running, but I don't think there will be an impact to – on the cost or the revenue for the repatriation efforts..

Okay, thank you.

And then just a couple of housekeeping items, can you give us now a sense of what we should look for D&A for this year, depreciation and amortization, interest expense? And maybe just how we should think about transactional foreign exchange?.

Hi, Bryan. This is Paulo. So, starting from the D&A, we are in Q4 – we're today in a related Q4, $135 million, that's where we are today, so this would take us in $440 million next year. And on top of that, we believe that we're going to have additional $50 million because of the footprint investment that we are doing during 2016.

And it looks the interest rates is pretty much our – we have an average cost of debt of 2.9% per year, roughly $32 billion in gross debt, so this would be around $1.3 billion in interest rate. And again, we expect this to come down a little bit once we pay the $2 billion debt that we're going to have in the mid of the year..

Okay..

So this is pretty much D&A interest expense. Regarding the transaction FX, now we are expecting to see some headwinds in Europe.

But again I think our team – our local team is taking the right measures there to have a balanced approach in terms of setting these with price, and also – but also getting the best distribution and sales position to offset that. It's important to – again to remember that Europe for us is 4% of the business and UK is around 0.5% of that..

Okay. Thank you..

Thank you. And our next question comes from the line of Rob Dickerson from Deutsche Bank..

Good evening, everyone. I just have one simple question just on your pointing to the three core brands, and kind of the five core categories globally. So is the expectation, I guess mainly in 2017 as you plan to invest more in certain areas of opportunity in North America. Considering it is still about 75%, three-quarters of your EBITDA.

Is the expectation that that investment will be in North America in those brands, and then later you would invest more so in those three core brands on a global basis, so you start in the U.S., but then you expect to continue investing in those brands globally to gain scope, then hopefully improve returns, or we just stick with the investment in North America for now because that's really where the majority of the cash flow is coming?.

Hi, Rob. This is Bernardo. I think, it was important to highlight that, just to give a sense of the direction of the focusing looking at three global brands and five top categories that really, when you mix all them represent 70% of the business, and you're going to move forward.

That is United States and North America like I mentioned, but also worldwide. And so I don't think there is a distinction really in the amount of investment between U.S. and international. They will be – they'll be moving together.

They'll pursue different states and different – what the business is by country and by region, but as a focus looking mid-term, those are the ones. I think, it's important in your question also to highlight that our business is a balance between global brands and local brands.

Global brands having the strength and the scale to grow multi-categories and multi-regions; and the local jewelry (39:49) like we like to call customizing to consumer needs on local markets and regions. So we are really happy with our portfolio and the balance we have today between the global brands and local brands, and the specific categories.

But those three global, we're calling global brands, in those five categories is really what's going to push us to the next level that we're calling this balance towards profitable growth. I don't think there is a distinction between investment in North America or internationally.

It would be case-by-case depending on the state of the business at the regional level..

Okay. Great. Thank you..

Thank you. And our next question comes from the line of Robert Moskow from Credit Suisse..

Hi, thank you. I just wanted to make sure I understood how the savings will flow through as you build up to $1.7 billion. If I assume that things kind of stay the way they are in the first half of 2017, you would still have quite a bit of benefit versus first quarter a year ago and second quarter a year ago.

In fact, I could argue that that gives you the best tailwind in first quarter, but you are guiding to a weaker first quarter. So can I understand like do you expect first quarter to be like your weakest EBITDA growth quarter because of these other Easter factors and such? Or is that offset just by the easy comparison on the saves? Thanks..

one, that we're having the investments that are inside the savings number, as I mentioned before, in the first half of the year; and two, there is addition of saves that we found also is going to start more in the second half of the year as we expected today. So that's one thing.

In terms of seasonality, in terms of Q1 versus the full year next year, I think the three things that we are mentioning here I think is, first of all, the Easter shift Q1 versus Q2; and this break down of this savings flow that we expect the first half of the year where we're going to have more investments and in the back half of the year we're going to have more net savings, as I've just explained to you.

So I think those are the two points that I would like to make..

Okay. But just to clarify, the investments are included in that net savings number. So does that mean – fourth quarter you had about $345 million of net savings.

Could it possibly go down in first quarter because of the investments sequentially?.

I don't want to give the guidance break down by quarter. But again, we always believe that we are adding initiatives in savings and we're adding also investments. So we believe that our savings are going to ramp up throughout the year..

Okay. Just want to make sure we're aligned, but thank you..

Thank you..

Thank you. And our next question comes from the line of Michael Lavery from CLSA..

Good afternoon and thank you. Can you just confirm – I think I caught this, but one of the five categories you said you would focused on, I think it was baby food and you clearly have a smaller footprint there now. I think it's mostly Italy and a little bit in China.

When you talk about that as a white space opportunity, is that just organically or would you consider M&A to be a part of that as well?.

Hi, Michael. Look, we always look with this, the way that we think the categories and the brand, we always look and think about profitable and organic growth. So the way you're directing here is all organic. And the reason for that is actually you're right to say it's true.

A small part in the total portfolio, but very relevant in many countries important for us, including Canada, including Australia, including the UK, for sure Italy like you mentioned, for sure China, Mexico, you're getting to Brazil, Russia that's the biggest category we have there.

So when you see all this, even the small presence, where we have a presence it's significant through the Heinz brand most part of the time, sometimes local brands like Plasmon in Italy and so on. And we believe there is a lot of opportunities, like you said, in whitespace geography, again, country-by-country, region-by-region.

There is a role that can be played and we want to look at that with the right expectation..

Okay. Thank you. That's very helpful. And then just one other clarification on 1Q. You talked about the Easter shift and the higher investments and the savings pacing being more back-half loaded. Is the Easter shift – that seems more like it affects a shift into 2Q? You also talked about the trade loading in helping 4Q.

Is that also potentially one of the headwinds in 1Q or do you think that was that more a pipeline fill for new products or something that might not have as much of a drag on 1Q?.

Michael, George here. So as I said in my earlier remark, we have two things that will affect the first Q. One is the Easter shift. And, normally, we put that at just over 1%, 1% to 1.5%, something like that. And the second one that is unique to this year.

Because of the strong promotional activities that we've had in the month of December, we put a lot of inventory to support that. That inventory is working its way off in January. And as I said in my remarks, that would be about a 0.5 point. So that will be, to give you an idea, what are the headwinds we will be facing in Q1.

One of them is the shift between Q1 and Q2 and the other one is a one-off due to the inventory work-off..

Okay, perfect. Thank you very much..

You're welcome..

Thank you. And our next question comes from the line of Ken Goldman from JPMorgan..

Hi. Thank you. Two for me. First, there's obviously a lot of uncertainty in general right now regarding U.S. tax law, currency exchange rates, et cetera.

So I'm curious if that uncertainty – to what degree does it affect your desire, your ability to pull a trigger on a next deal whatever that might be because obviously it's more challenging than usual for any company, not just you, to forecast cash flow for any potential target in this kind of environment? I'm just curious is the macro uncertainty high on your list? It's not really high on your list of concerns.

How do you think about that when you think about potential M&A going forward?.

Hi, Ken. This is Paulo. So, again, I think, first of all, we don't need another acquisition to drive value. And, again, as Bernardo mentioned, we have brands that can sell well. We have a lot of whitespace in front of us. And, again, we are going to evaluate any opportunity that makes sense for the company, that creates value for the company.

But again, as a matter of practice we don't comment on possible opportunities..

But you can't comment even on the general way of thinking about it?.

I prefer not to comment on how so and hypotheticals..

Okay. And then, Paulo, you've talked to us in the past, maybe the answer is no comment here as well, but I'll try anyway. You've talked to us in the past about how important it is for this vehicle, The Kraft Heinz, to have, I think in your worlds, iconic brands. And I'm just trying to get a sense, not in an M&A sense, but given what you have already.

Why is this quality so critical? Why do you value it so heavily? Really what does it mean to Kraft? I'm just trying to get a sense for maybe why certain assets with I guess call it good brands that maybe don't qualify in your mind as iconic wouldn't be a great fit for what you're trying to do?.

Ken, what we've always said is that we believe that we like a lot the industry and we believe that the most valuable asset and the most valuable asset that we have, the asset that gives us the most competitive advantage are the brands. So we value a lot the brands that we own, so that was pretty much the mention I made at that time..

Okay. Thank you..

We think it's very important, very strong brand in the portfolio..

Thank you very much..

Thank you..

Thank you. And our next question comes from the line of Jason English from Goldman Sachs..

Hey, guys. Thanks for carving out some time for me. Appreciate it. Congratulations on a strong year in totality. A couple questions for me. First, the pricing of the commodities benefit for the year.

Where did we stack and rack as the year finished out?.

Hi, Jason, this is Paulo. So when we said in terms of the commodity, we said that in 2016 we had a deflationary year. We mentioned at the beginning – not the beginning, in the mid of the year that we would expect this benefit to stay but it didn't.

And in 2017, when we take a look at the spot and forward rates, we're likely to see year-over-year inflation. And we're already seeing that in cheese, coffee, bacon, as George mentioned. So that's what we are today..

Okay.

Any specificity in terms of the benefit though, that PNOC benefit for the year?.

Yeah. So, if you think about what we saw in Q4, we had – definitely we had benefit in price in our results in Q4. But as we're implementing revenue management, key commodity costs are just one of the inputs of our category strategy. And separating the impact of price or PNOC from the variances of the commodity is not as informative as it used to be.

So I can say that we had a price benefit in our results in Q4, but I think separate the price initiatives that we had from PNOC is not as informative as it used to be..

I think that's a great point, because some of the skeptics out there are going to take the EBITDA growth, they're going to take the synergy number, they're going to back it out, they're going to take the PNOC benefit to at least the first three quarters, back it out, give you credit for currency, and point to an underlying EBITDA decline, net of those benefits, all-in.

And say, maybe that's sort of the underlying rate. This is excluding the savings and sort of net savings of $500 million next year. The underlying business is flat to down. And when those savings run out, the business will fall off.

And certainly, if you look at consensus, consensus right now is modeling more than $500 million of EBITDA growth next year. So they're going to view that with some degree of skepticism, given you only have $500 million of savings in the underlying soft.

What's wrong with that line of thinking or is there some validity in that line of thinking? And how should we be thinking about the underlying business, even absent sort of the cost saves on the forward?.

Now, when you think about our model – our overall model, we always – always as I said, we expect growth coming from Rest of the World. We have the savings flowing through, and you have our other initiatives, revenue management, we have investment in new products that we're doing to boost our sales and our results.

So it's a bunch of initiatives that we have that will compound our results for next year and the following years..

Okay. Thank you very much..

Thank you..

Thank you. And our next question comes from the line of Alexia Howard from Bernstein Research..

Good evening, everyone..

Good evening..

Hey, good evening..

So for investors last quarter, there was a concern about the trends in Europe, and I think things have changed over there, but that's still an element of concern. Basically, that's the legacy Heinz business that you've now owned for a little over three years.

This time around the EBITDA still shrinking, I guess attributed to some step-ups and timing of overhead spending.

How you – how can you address the concern that that European business and maybe particularly the UK seems to be slipping? How much were those overhead timing effect this time around, and when do you expect that business to gain some traction again? Thank you..

Hi, Alexia, it's Bernardo. Like we mentioned in the last call and continue to be, the point, our goal in Europe is to return to profitable growth.

We really think that our performance – that was a weak performance in 2016 and Europe has absolutely no correlation with the cost side and like you mentioned the overhead, I think, there was a lot of correlation on the stakes, on the go-to-market and things on the promo side, volume mix that didn't work out as we showed, and what we are actually encouraged about is when you see the Q4, the performance by all the business, especially the Benelux and the UK had improved significant looking at sell out consumption, looking at share on the main category, soup, beans, sauces, and you already have 70% of renovation for the year ready in the market.

So the results from the Q4 plus what you're seeing now in January moving into February, I really encouraged by a much better performance 2017 in Europe than you had 2016. Still going to be challenged, the retail environment is challenged like the density (54:59) between FX rate and everything that's happening in the continent.

But that being said, I think the performance Q4 is really encouraging about we can have a better performance looking at 2017, than our weak performance in 2016..

Will you be able to get some EBITDA growth at some point in Europe? I guess the question is, yes, the top-line is improving. But at what cost, that's the question I am getting..

Look again, when we talk about profitable growth and like Paulo mentioned in the beginning, our idea of sales mix, really sales flowing to the bottom line. We have no intention of gaining sales without profitability. Component that come attached to that.

There are investments that needs to be done in the marketing side and in go-to-market side that I think we have been doing and we'll continue to do it. But that being said, if we're able to create profitable growth sales in Europe that should come also with a better performance in the bottom line..

Thank you. I'll pass it on..

Shall we take maybe one more question?.

Certainly. Our final question for today comes from the line of Chris Growe from Stifel..

Hi, good evening. I just had two quick ones for you. I wanted to ask if I could first, with reference to the revenue management program, is that contingent on capital investments and footprint rationalization such that we wouldn't see much of that benefit until the second half of the year or does that program sort of kick in early in the year..

Chris, thank you. This is George. We've been working on establishing the revenue management program infrastructure, processes, and the benefit of it for quite some times now. And as we said in a number of key items we saw that what we used to call our pricing strategy or pricing commodity or trade spend.

All of it now is part of our revenue management program. So we're not separating where the efficiency is coming from.

So the best, it works best for us just in the investment in the footprint, but more in investment in brands and particularly in building the brand equity as we invest in marketing activity, as we invest in new products, as we invest in renovations like taking out official stuff out like what we did with Mac & Cheese, what we did with frozen meals.

You see categories that were declining at double-digit. Now they're all of a sudden increasing at high single-digits. So that's giving us the power to one, price and two, the ability to increase household penetration, so renovation of product and innovation of product. So that's for us is the better working model..

Okay. That's helpful. Thank you. And then just one quick one, I think for Paulo. You talked about in the quarter some incremental investments. I believe marketing was up in the quarter as well as some of the overhead timing.

Could you quantify those in anyway percentages or give us any idea of how much that could have burdened the fourth quarter?.

Yeah. So when you think about the Q4, North America, EBITDA increase that we have, the majority of the EBITDA came from savings. We also had, as I said, some benefit coming from price in our EBITDA and this timing of overhead that each of them offset each other then they're both in the range of $50 million. That's what we saw..

Okay. Thank you for your time..

Thank you..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Chris Jakubik for any closing comments..

Well, thank you, everybody for joining us this afternoon. For any of the analysts who have follow-up questions, myself and Andy Larkin will be available to take your calls. And for anybody in the media with follow-up questions, Michael Mullen will be here for you as well. So, thank you very much and have a great evening..

Thank you..

Thank you..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day..