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

Rob Dickerson - Deutsche Bank Securities, Inc. Andrew Lazar - Barclays Capital, Inc. David Cristopher Driscoll - Citigroup Global Markets, Inc. Steven Strycula - UBS Securities LLC Bryan D. Spillane - Bank of America Merrill Lynch Michael S. Lavery - Piper Jaffray & Co.

John Joseph Baumgartner - Wells Fargo Securities LLC Christopher Growe - Stifel, Nicolaus & Co., Inc. Jason English - Goldman Sachs & Co. Jonathan Feeney - Consumer Edge Research LLC.

Good day. My name is Chelsea and I will be your operator today. At this time, I would like to welcome everyone to the Kraft Heinz Company's second quarter 2017 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 second quarter of 2017. 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 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 end of the slide presentation available on our website. Now, let's turn to slide 2 and I'll hand it over to Bernardo..

renovation structure, ZBB and procurement, and manufacturing footprint. It's true that we have had known key commodity costs as a headwind so far in 2017. More important, however, we are improving execution in all areas of the business. In operations, we have either kept or enhanced our K-through rate, safety and product quality metrics.

In marketing, we are supporting our brands with a greater number of quality advertising impressions. At the same time, we have invested to build new in-house ultra market capabilities such as revenue management and assortment management with objectives of driving these capabilities globally.

Finally, on the capital structure front, in the second quarter, we took additional actions to deliver superior return of capital and continued to strengthen our balance sheet.

As we previously said and consistent with our commitment to an investment grade credit rating, we paid down $2 billion of debt within two years of closing the merger of Kraft and Heinz. And as you saw today, our board of directors set a 4.2% increase in our quarterly dividend to $0.625 per share or $2.50 on an annual basis.

That's a broad overview of where we stand after the second quarter of 2017. And consistent with our plan, we remain in a good position for profitable top line growth and EBITDA gains to drive solid EPS growth for the full year. Let's turn now to slide 3 to review the details of our Q2 financial results.

As it relates to today's company sales, there are two things to highlight. First, sequentially better organic net sales performance driven by volume/mix improvements in the United States, Canada and Europe. And our volume/mix did improve despite some significant headwinds in our Rest of the World markets that Paulo will discuss later.

Second, pricing was sequentially lower due to promotional timing in the United States and Canada. At EBITDA, quite simple, our second quarter results reflected the strong incremental cost saving initiatives, primarily from the $180 million of incremental savings delivered by our North America Integration Program.

And these savings more than offset several headwinds including higher key commodity costs in North America, lower net sales as well as investments in the Rest of the World markets behind growth initiatives. At adjusted EPS, we still see strong growth mainly driven by the refinancing of the preferred stock as well as some tax favorability.

Going forward, as I mentioned, we expect to continue our business improvement in the second half of 2017 with the combination of profitable top line growth and EBITDA to be the main drivers of EPS growth for the full year.

Now I will hand it over to George and Paulo to highlight our performance in each reporting segment and what to expect in each area going forward.

George?.

natural cheese, mainly due to aggressive competitive pricing in the category; cold cuts as we rebuild our end market distributions and resume merchandising after the self-imposed restriction due to capacity constraints during 2016; and finally ongoing weakness in salad dressings.

Another factor that gives us confidence in strengthening our performance at retail going forward is the fact that we are enhancing our capabilities in a number of disciplines, including revenue management as a platform for more informed, data-driven decision making to support our efforts to drive category growth, assortment management to ensure we're getting right product range at the right account in the right geography, as well as ramping up our e-commerce efforts, where we saw more than 60% growth in Q2, albeit from a base of roughly 1% of our U.S.

retail sales. In addition, roughly 70% of our footprint-related production line startups were completed by the end of the second quarter, and more is happening as we speak. So, moving forward, we continue to believe we can drive sequential improvement and profitable organic growth from Q2 to the second half of the year.

At retail, we expect to further leverage our scale for better in-store activity going forward and more of it in Q3. We also have a strong pipeline of innovation, renovation and communication to drive improved back-half consumption trends in key categories and some of our more challenged categories.

In Q3 alone, you will see robust support of Capri Sun Sport and Capri Sun Organic, more activity in our meals business including Cracker Barrel Oven Baked Mac & Cheese as well as the second half of grilling season with our renovated line of Oscar Mayer Hot Dogs. With that, I'll turn it over to Paulo..

Thank you, George, and good afternoon, everyone. I will start on slide 5 with our U.S. financials. As expected, we delivered a sequential improvement in organic net sales performance, a 1.2% decline from a 3.5% decline in Q1.

This was driven by sequentially better volume/mix performance that reflected the Easter shift, which added roughly 40 basis points of growth versus the prior year, as well as solid gains in our frozen, mac & cheese and condiments.

We also continued to see volume/mix headwinds from distribution losses of certain products in measured channels, primarily club that affected our consumption numbers in cheese and meat, as well as lower shipments in foodservice, but we expect these two areas to improve as the year progresses.

On the pricing front, lower pricing in Q2 reflected a combination of higher price in cheese, mainly to address a rise in daily curve that was more than offset by a negative impact from the timing of trade promotion recognition in the prior year. Moving to EBITDA, our second quarter EBITDA was up 3.2% and EBITDA margin rose 140 basis points.

As Bernardo mentioned, this was driven by incremental integration savings that amounted to roughly $180 million between the U.S. and Canada. And this more than offset unfavorable key commodity costs, particularly cheese and coffee in both retail and foodservice channels that continued to hold back gains in Q2.

I will note here that roughly $40 million of the cost savings we realized in Q2 were due to the timing of overhead, and other costs versus the prior year. And looking forward, this will likely mean that we see a lower level of incremental savings in Q3 relative to Q2. Let's turn to slide 6.

In Canada, where in the second quarter, we saw foreign exchange headwinds return, but this momentum began to resume. Volume/mix gains reflected resumption of normal retail activity during Q2, as well as a strong consumption growth in condiments and sauces. These gains were somewhat offset by the discontinuation of select cheese products at retail.

Our volume/mix headwind, that we expect to be a factor again in Q3. In terms of pricing, lower pricing in the second quarter, largely reflected an increase in promotional activity versus the prior year. At EBITDA, we had both growth and margin expansion resume in Q2.

Constant currency EBITDA was up 2.3% and EBITDA margin was up roughly 150 basis points versus Q2 last year. This was driven by incremental cost savings that were partially offset by the impact from an increasing promotional activity.

Importantly, our second quarter performance in Canada shows that the go-to-market agreements achieved with our key retailers are in fact a win-win proposition and it can drive profitable growth going forward.

As a result, we remain confident that we will continue to see improving trends in the growth and profitability of our Canadian business during the second half of the year. That brings us to Europe on slide 7, where we also saw sequential improvement in volume/mix growth.

Similar to Q1, strong currency headwinds continued to be a factor in the results, and pricing declined due to the timing of promotional activity in the U.K., as well as trade investments to address competitive activity in our Italian infant nutritional business.

Volume/mix improved, driven by strong consumption gains in condiments and sauces, as well as gains in foodservice and this came despite the headwind from shipment phasing last year that we mentioned on our last call. Importantly, the ongoing stable consumption growth in the U.K. give us the confidence that the business is on the right track.

EBITDA, we continue to benefit from volume/mix gains and strong efforts to control costs, especially within manufacturing. However, this was more than offset by unfavorable input costs in local currency, driven by transactional currency headwinds, as well as the impact from lower pricing.

Going forward in Europe, we expect to see profitable, investment-driven net sales growth as the key driver to EBITDA growth and this should come from both existing markets and categories as well as whitespace initiatives. Finally, let's look at our Rest of the World segment on slide 8.

In Q2, organic net sales growth decelerated to 3% from 8.1% growth in Q1, and a lower rate of growth than we would expect on an ongoing basis. What I would highlight here, however, is that more than a 100% of the quarter-to-quarter deceleration was due to two factors that we do not expect to repeat going forward.

One, was a negative impact from the general sales tax regime in India, that you have heard a number of our global peers talk about recently. Two, was a holiday-related shipment timing in Indonesia related to the shift in the Ramadan holiday versus last year.

And unfortunately, these more than offset strong double-digit gains in China, Brazil and the Middle East as well as growth in condiments and sauces across most of our other markets. Going forward, we expect organic sales to reaccelerate as comparisons in Indonesia will ease and India should return to more normal shipment patterns with distributors.

However, it's important to note that we are unlikely to regain the Q2 volume loss in India during the third quarter, mainly due to the seasonal nature of a part of our business.

At EBITDA, recall that our plan for 2017 is to invest aggressively in marketing, go-to-market capabilities and product development upfront and that this would hold back margin expansion versus the prior year. We saw these in Q1.

In Q2, results continued to reflect significant commercial investments to drive growth in our EMEA region and to a lesser extent Latin America. However, the distinction I would make is that the decline in adjusted EBITDA this quarter primarily reflected a very strong margin comparison to the prior year.

In fact, this quarter's EBITDA margin was at 21.2%, bringing us to 19.4% for the first half of the year, and just roughly one point below what we saw for the full year in 2016. Looking forward, we expect second half organic sales growth to accelerate from the first half levels, and better leverage the investments we've been making.

Which brings us to our outlook, I will echo what Bernardo and George said earlier. Despite a number of headwinds we faced in the first half and considering that we are operating in an increasingly challenging environment, we remain confident that we can improve our performance going forward.

As we've said before, we expect sequentially better organic growth in the second half of 2017 versus the second quarter just reported. We have a strong pipeline of marketing, go-to-market and product quality initiatives to drive profitable organic growth, including further whitespace gains.

We expect the sequential improvement in Canada to continue, driven by sustained recovery in our activities at retail as well as innovation driven gains in our grocery portfolio. In our Rest of the World segment, we expect innovation and whitespace gains to drive accelerated growth in both EMEA and Latin America.

On cost savings, we are still targeting $1.7 billion of cumulative Integration Program savings by the end of 2017, or $500 million of net incremental savings in 2017 versus 2016.

As far as the timing of savings is concerned, we've achieved roughly $280 million of net incremental savings in the first half of the year and expect the remainder in the second half. As I mentioned earlier, so far this year, savings have come in stronger than anticipated.

But at this point, we are not ready to call upside to the $500 million of net incremental savings for the year. Along these lines, I would also note that a combination of cost saving and the ramping up of footprint-related savings is likely to mean that we see less than half of the remaining 2017 incremental savings in Q3.

Turning to EBITDA and EPS, the obvious question is how we are going to drive strong EBITDA growth in the second half with less than half of our remaining 2017 incremental cost savings. The answer is, a combination of underlying business momentum and comparisons versus the prior year.

In the first half just completed, our strong pace of cost savings resulted in a slight decline in constant currency adjusted EBITDA.

This was due to slower business momentum in the form of rising key commodity costs, organic sales headwinds in Canada, Europe and India and upfront investments ahead of further innovation and whitespace expansion in our Rest of the World markets.

It also reflected comparisons against our first half 2016 that benefited from strong favorable pricing net of key commodity costs in North America. By contrast, the second half of 2017 should in many ways be a mirror image of the first half.

We continue to expect a strong stream of cost savings, but our business momentum should be pick up significantly as we see sequentially better organic net sales growth leveraging the investments we've been making, as I just described.

And comparisons versus the prior year should ease, reflecting a more favorable balance between pricing and input costs. Finally, there is one housekeeping item I should mention related to tax.

Given the favorability from discrete items we've seen through Q2, we now expect our full-year 2017 effective tax rate to fall between 29% and 30% versus the 30% we think is representative to our run rate on an annual basis.

That said, our effective tax rate in Q3, will likely be higher than our full year run rate as we currently expect net discrete items turn unfavorable.

All things considered, we remain confident that the strong earnings growth should continue in the second half of the year, driven by a combination of profitable organic sales growth and margin expansion. Thank you. And now, we'd be happy to take your questions..

And our first question comes from the line of Rob Dickerson with Deutsche Bank. Your line is open..

Thank you very much. So, I'd say good job in Q2, I think the sequential improvement we saw from Q1 is obviously a positive.

Just in terms of your expectation into further sequential improvement that's expected in the back half of the year, I guess one is, you've spoken to Q2 being better than Q1, and the back half being better than Q2, but is I guess, one, should Q3 be better than Q2 and Q4 be better than Q3? And then secondly, as you speak about your leveraging the scale in retail and the investments that you're making, just wondering if you could give us one or two explicit examples of what investments you are making and how some of the innovation has already been playing out well? Thanks..

Hi, Rob. This is Paulo, so in terms of the outlook, yeah, as I said, we're expecting sequentially better organic sales growth and our view is that and the call that we're having today is that we're seeing improvement in the second half versus our Q2 results.

We're not breaking down this number for Q3 and Q4, but we expect today's improvement in the second half versus Q2 in terms of organic growth. Want to ask George to talk about the second question..

Yeah, Rob, this is George Zoghbi. As far as the second half, we believe the performance will improve compared to Q1 and Q2, we'll continue to see sequential improvement driven mainly by three things. One is the innovation that we have launched early in the year is building up to a higher ACV and then we turn on the advertising behind it.

Number two is the in-store execution. We expanded the business development team for in-store execution. And number three, we already announced a number of price increases to cover for the commodities that constituted headwinds for us in Q2, so the three actions here will help us for further sequential improvement in the second half of the year.

I think the same is applicable for the Canadian business and the Rest of the World, in Europe and Latin America already doing better second quarter to continue their journey..

Okay. Fair enough. Thank you..

Thank you..

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

Good afternoon, everybody..

Good afternoon..

So, on the cost save side, it looks like you delivered pretty strong cost saves in the quarter, and I guess my question is I guess why didn't more of that translate I guess dollar to dollar into EBITDA and perhaps as part of that you can give us an idea of the shape of the year in that context?.

Hi, Andrew. This is Paulo. So just to – let me break down the EBITDA in North America for you, so try to give more color on that. So our North America – we had $180 million of integration savings in the quarter in North America.

Our EBITDA in North America grew approximately $62 million, okay? So the offsets that we had pretty much the first and the big one was the commodity unfavorability, $80 million roughly, again against a significant favorability we had in the prior year on that line.

And approximately $40 million in sales performance that being the majority of that coming from the timing of trading accruals, as we said, that we expect to have the benefit in the second half. When you think about the savings, so just to give the reasons why we had a lot of offsets on the savings to the EBITDA.

When you go the second question about the savings, I can tell you that now even discounting the $40 million related to the timing of overhead expenses, it's correct, our savings are coming in faster than expected.

But also – and we are seeing more gross savings coming in that inflation than we originally expected, but our view here is that there's still a lot to happen in the second half. So for now, we're still targeting the $1.7 billion savings for this year. And as soon as we change our point of view on that, we will let you know..

Okay. And then it sounded like in a bunch of the segments, pricing was lower in the quarter year-over-year because of some of the timing around promotional environment and things you talked about, trade spend timing.

Should I read that that we'll start to see or a return I should say to positive year-over-year pricing as we move through the third quarter?.

Andrew, this is George. Yes, you are right about that. So the Q2 pricing was down from a combination of things. One is higher promotional activities versus the prior year, particularly in April, where we are heavy on Easter promotions. And number two is the timing of the trade cost accrual last year, as Paulo mentioned.

So we expect this to improve in the second half from a better balance between pricing and input cost. Also, please note that we have announced already price increases in a number of large categories already, so that's been done and been implemented in the marketplace..

Got it. Thank you very much..

You're welcome..

And our next question comes from the line of David Driscoll with Citi. Your line is open..

Great. Thank you and good evening..

Good evening..

Good evening..

I had two questions on the U.S.; they're related. You called out three different areas as problem areas, but when I look at the Nielsen data, we see volumes in snack nuts down 17%, shelf-stable juices down 9%, coffee down 9%, powdered beverages down 15%, but you also made this interesting comment about the Nielsen data just not being accurate.

So two questions here. The first one is that, are these areas seeing significant weakness and maybe could you talk about them? And then secondly, just bigger picture on the Nielsen data, kind of what's wrong with this data? Is it something that you would dissuade people from relying on too much? Thank you..

Thank you. I mean, this is – let me cut the question into two parts. It's a little bit complicated. First, we still have to rely on AC Nielsen. However, the coverage of AC Nielsen has shrunk to where we are selling our product. So with the changing retail landscape, measuring consumption is not as simple as it used to be.

AC Nielsen cover mainly scanned or a non-census data within traditional and some – and clubs.

However, there is significant growth going on in hard discounters and some big major club players that are not covered by Nielsen and almost the entire e-commerce channel is not covered by AC Nielsen, so just to give you an idea as I mentioned in my remark, rate from small base of 1%, our ecommerce channel is growing at 60%.

It happened to be the two largest segments we have in ecommerce happen to be the snack nuts and coffee segments. So they lend themselves more towards that channel.

The other thing is we are comfortable about where we are at with juices and our plans were delayed somewhat to take full advantage from the new products advertising and promotion as a combined bundle at the same time.

So to summarize, yes, we still rely on AC Nelson, but we tried to focus the AC Nelson measurement in the channel, where we can scan data we add to it our own data to fill the gap to get the picture and that's why we have the diversions between what is net sales revenue and what is consumption from AC Nelson..

So today's data wouldn't suggest an inventory build at retail.

It is saying that the Nelson data is just understating the reality of it because of these unmeasures, is that fair?.

It is fair for us. I can't speak for other companies and in our case, inventory build or decline was not a major factor in our Q2 results..

Thank you so much..

Welcome..

And our next question comes from the line of Steven Strycula with UBS. Your line is open..

Hey, guys. So a two-part question. The first would be for your global route-to-market capability, and you're a little past the two-year mark in terms of the formal deal legally closing.

So could you spend a moment talking about some of the global supply chain investments and CapEx and route-to-market spend, what evidence are you seeing of this yielding revenue synergies for some of your global brand platforms? And then secondarily, how do we think about adding new brands on top of your platform, what's particularly unique about what you've built here to drive incremental scale? Thank you..

Hi, Steven. It's Bernardo. You are right, we're just actually celebrating two years of the merger of The Kraft and Heinz this July, and it has been quite a journey and much more ahead of us.

And to your question about investment in rest of the world, in our five-year strategic plan and the way we're positioned, remember, we talk about having trying to have three global brands with five platforms, and there would be significantly push towards these brands and platforms, and I'm pleased with the progress.

There is a lot of investment being made, especially in the rest of the world business on the supply chain side, not only on the manufacturing, but the capabilities. The approving process of the products, having them ready with local registration, packaging and go-to-market route, marketing, and you're seeing the results from that right.

With the mac and cheese launch in Europe and Latin America, with the Planters being now – being rolled out from U.K. to Continental Europe to say Planters China, what has been 100% e-commerce driven as a launch.

A lot of the – now we're preparing ourselves to the Kraft repatriation for 2018, that will affect our business in Continental Europe and Australia for next year. So I would say it's too early to say, but we're pleased with the foundation of the things to accelerate. Part of the Rest of the World result, we're having is related to that.

Our top line on the second quarter Rest of the World (39:55) of the question has been softer than our Q2 data for really two reasons that's nothing to do with your question on the global brands and the merger, but really the timing of Ramadan in Indonesia that have shift part of our sales to the first quarter and really the change in taxes system in India that has made our distributors destocking our products for some time that also is timing related.

Taking out those two issues, we're very pleased with the progress on the Rest of the World and we should see that in the second half not only on the top line, but also in a better bottom line..

Great. Thank you..

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

Hey, good afternoon, everyone..

Good afternoon..

Good afternoon..

I have a question for you, George, related to the food service business in the U.S., given where the consumer is sort of shifting more and more out of traditional food retail – food services is an important – should be an important component of your business to capture those sales, and so I guess, it's been an ongoing source of weakness here this year, so could you talk a little bit about maybe a little more color in terms of what's happening there and maybe some actions that you're taking to correct that?.

Yes. So you're right about foodservice, and we continue to think we have more whitespace to capture in this area and we are working hard not just in the U.S., but everywhere around the world.

That being said, we did need to course correct, that in foodservice, we had a large number of initiatives that did not yield what we wanted to get out of it, so we found that we were chasing too many small things and we needed to reorganize, so that we were facing the customers, the large customers with large big ideas.

And we made that correction about two months, three months ago and we already started seeing some good results that we are pleased with. Last month was the first month where we start getting net – when we look at the net gain, net loss from customers, we got into the net gain positive territory.

So overall, we expect foodservice business to continue improvement in the rest of the year and it continues to be a strategic whitespace for us..

Have you actually added sales people, like is there – do you just have more sales coverage than you had before?.

We refocused the sales team on where we believed the largest opportunities are.

You see in the foodservice, it's a very large universe, you can get lost where you are chasing ideas, and we went through a program and a project to identify where best to focus our resources and our investments and we made that change a few months ago and we are very happy with what it is yielding, and going forward we expect more positive results..

Okay. Great. Thank you..

And our next question comes from the line of Michael Lavery with Piper Jaffray. Your line is open..

Good evening. Thank you..

Evening..

Just wanted to get some better understanding on Europe margins.

A couple of years or so ago that looked like the sort of benchmark standard of where everything could go, and since then those margins have come back in, do you think they've peaked there, is there a path to how you see visibility on better upside and what's the right way to think about some of the leverage and opportunities you have there?.

Hi, Michael, this is Paulo. So, yes, you're right, we – our European business used to have a much higher business, if you think like one, two years ago, pretty much three things I would mention here, that impacted this. The first one was for sure the depreciation of the pound. That had a big impact (44:34), because part of what we sell in U.K.

comes from Continental Europe, so that was an impact that we have a transaction effects. The second piece also is that we are growing more in the Continental Europe, so there is a geographical mix that changed. And the third also, we need to adjust slightly below lower margin because of – we add Russia on the Europe.

So I think those three would be the main impacts in that order I told you in terms of that impacted the European margin. So I think going forward, I think we should see, as we always mention, our focus is in dollar margin to dollar growth, but as the business recover, I think we should see and should count on some margin accretion for the future..

No. That's very helpful. Thank you. You also called out the higher promotional levels in the U.K. and Italy.

Is there a light at the end of the tunnel? How much is there ability to get some better pricing? And do you see sort of timing on when and how that might happen?.

Yes. Michael, I think there are two different stories here. On the Italy case, we're still going to go to a more extended promotion trends given what's happening in the baby food environment, remember, our sauces business expanding fast in the country.

But baby foods continues to be predominantly the anchor of the business in the country and that has been a more challenged category with different competitors coming from different places outside Italy, or actually, the Italian brand and the Italian producer in the country. The U.K.

is going to depend a lot on where we're going over now to end the sauce season in the summer. Now it's going to come soup and back-to-school with beans that we're going to have some promotional activity, but we don't see that changing that much from the level we are right now. We are performing well in the country.

We're back to growth and seeing volume/mix and activity in the country, I would say, should be very stable even with the change (47:27) between sauces and soup and beans..

That's great. Thank you very much..

And our next question comes from the line of John Baumgartner with Wells Fargo. Your line is open..

Good afternoon. Thanks for the question..

Thank you..

George, I'd like to ask about the mix opportunity in the U.S. I mean looking at some of your recent news, the organic Mac & Cheese is a premium product, the Simply Heinz Ketchup is at a premium price per ounce, and there's a few other examples I can think of.

But when you look at your consumer base, what have you seen and how do you think about the opportunity to keep I guess just walking people up that pricing ladder through mix? Do you exhaust that at some point? Is it contingent on just continuing attractive new product? How do you think about that?.

Yeah. It's a very good question about – particularly we always talk about the changing landscape in retail. There's always that changing landscape in consumers. And what we're finding there is a very large number of consumers in this market. They're happy to move up the value chain, and premiumization was one of our strategies to create growth.

It's worked for us in beverages for Capri Sun organic. It's worked for us in ketchup with the Simply and organic.

It's worked for us in Mac & Cheese by having priced at a 300% premium in Cracker Barrel versus the blue box Mac & Cheese, and you're going to continue to see some of that in the marketplace, so that's one way to create premium in a market where the population is stagnant, inflation is under wraps, and so forth.

The other area is to create new segments to deal with consumer needs, and we've got some exciting news that we'll be talking about that in the next few weeks where we will create new segments in the market that serves new consumer needs.

The combination of these two supported with advertising and higher quality product, fresh and less processed, makes a good proposition for growth..

And I guess it may be just broad generalization, but are you finding that of the mix accretive products, those also tend to be margin accretive more often than not?.

It depends. So we find when we move to a more premium product, it can be margin accretive. In some area, we added costs in to protect the brands, and we could not price up in that category, so we have to do it in another category until consumers see value of it. So it depends on the category, it depends on the project.

Either way, we are always driven by the consumer insights because that's what matters first to keep the brands relevant and keep the categories alive..

Thank you, George..

You're welcome..

And our next question comes from the line of Chris Growe with Stifel. Your line is open..

Hi. Thank you. Good evening..

Good evening, Chris..

Good evening..

Hi. Just a question for you, I think really for George in relation to the U.S. I think you mentioned in the quarter a flattish market share performance overall. So I guess I would confirm that.

And I'm just curious if you see a stronger category performance picking up in the second half of the year, or is it more about your market share performance with all the activity you have coming up in the second half?.

It's a good question. So we have a large number of categories where we grew market share, including American Singles, including bacon, including ketchup, frozen meals, frozen snacks, and we have a number of categories where we lost market share, like natural cheese, cold cuts, and so forth.

And that's why when you look at the balance, market share was not a major driver for a decline of the 1.2%. It was more the categories we're operating in. Moving forward, with the different comps in the second half to what we had last year, that's number one.

Number two, we implemented a number of price increases, which will lift the dollar value per pound in the category. And number three, we have a number of innovations either ramping up or about to announce to the market. That's why we are confident that the sequential improvement will continue in the second half from Q1 and Q2..

And can I ask in relation to that, there's been a number of companies, a number of categories, where you've seen private label make some inroads.

Are you seeing that in any noticeable way in any of your categories in the U.S.?.

Yes, we are. There has been, as you said, a more pronounced focus in leading national retailers on increased private label total distribution point, merchandising, as a way to compete against discounters or separate themselves. For us the results of the focus on private label was mixed.

We benefited a lot when retailers did that through an assortment work where they reduced the number of brands on offer, and it led to a better category performance. A great example of that, Kraft Singles and American Slices.

By contrast, where retailers resorted to pricing private label so low to compete, it simply resulted in a reduction of the category size and profitability for everyone; example of that is natural cheese. So lucky for us, one offset the other. But just to give you an example how one was beneficial, the other one was not.

So at the end of the day, what will win for us is growing our brands and categories by differentiating through innovation, through renovation, and strong communication campaigns..

Okay. Thank you, George..

You're welcome..

And our next question comes from the line of Jason English with Goldman Sachs. Your line is open..

Hey, guys. Thanks for the question..

Hey, Jason..

George, I think I'll keep you talking for a bit longer and build off of I think your response to the last question in terms of private label, market dynamics, et cetera. We're hearing from a lot of your competitors about a lot more friction in terms of implementation of price increases than they've seen.

Many have described it as sort of unprecedented. But you're on the call saying you're implementing, you're getting them through, it sounds like that the degree of friction isn't really what you're seeing.

So can you expand on that a little bit more? From your vantage point with your categories, does the pricing environment really seem that different than it has in years past?.

Well, implementing pricing anytime in any year is never a straightforward process. So, for us, we usually take the approach, whether there is an input cost, cost (54:48) product, or something like that. And we always do it when it's justified. We just don't take price increases if not justified.

So that is, for us, utilizing our revenue management programs, combine that with our assortment management to create category value. That is usually what our selling story is based on.

And in most cases, you see when we implemented using assortment management, revenue management, build innovation around it, we created value for the entire category and not just for our brand. And in these instances, we have been successful doing it. But, again, it's never an easy task at any time in any year..

Great. Thank you for that. And it was a nice segue into a related question. You mentioned revenue management. Some of us, myself included, have a lot of optimism of what it could do for our top line. Clearly categories are slower than they were when the optimism was percolating.

But still even in accounting for the category slowdown, there isn't really a lot of tangible evidence success on that front, especially given that this is kind of the year that it was supposed to start to hit its stride.

So can you bring us up-to-speed on where you stand on those initiatives? Why maybe we aren't seeing tangible evidence? And what we can expect on the forward?.

Yes. For us, we feel good about the implementation of our program. What's happening particularly in relation of where the promotional effectiveness and lift from promotional activity is heading, we feel very comfortable about the investments that we are making. Revenue management is not about just taking a price increase or reducing trade.

For us, sometimes we do exactly the opposite. We find it beneficial to do the opposite. So we're very comfortable where we are.

We believe the effectiveness of our program is very good and we will continue with managing our categories through the tools we created in revenue management, through the tools we created in assortment management, and we will continue to innovate to grow the categories..

Very good. Thanks, guys. I'll pass it on..

You're welcome..

If we could take one more question, that would be great..

Thank you..

Certainly. And our next question comes from the line of Jonathan Feeney with Consumer Edge. Your line is open..

Thank you very much for getting me in. So two questions if you don't mind. One is quick. Is it fair to say that we see in the U.S.

that revenue management is pretty much working outside of that like 20% of your business that's natural cheese and lunchmeats where it seems like you implemented some price increases and that resulted in some volume share loss? Would you agree? Is it fair to say that there's somewhat of a tale of two cities there and it's working outside of there? And secondly, a broader question, is there something perhaps fundamentally different about those particular categories as far as your level of value-add and does that shape the way you think about how you want to grow this portfolio going forward either internally or externally? Thank you..

Okay. So let me break down the question, the first one on revenue management, particularly in natural cheese and cold cuts. And the second one was about different things about shaping the business.

Did I understand it correctly?.

Yes. Category attributes. It just seems like there is a big difference between category attributes..

Okay. So the natural cheese and cold cuts have different sets of issues. On the natural cheese, as I mentioned, there were really aggressive pricing that we did not take a major part in the marketplace, and that resulted in some share losses. And you can see the months when it happened and persisted with us over the last two, three months.

So it was purely based on the elasticity through pricing, and we always keep assessing, moving forward, when we participate and when we do not participate. On the cold cut cuts it's a completely different issue. The cold cuts, as we went through our footprint program, last year we had a major constraint. And we deleted a number of SKUs.

So if you look at the total distribution points, or what we refer to as TDPs, is down year-on-year because of that and our merchandizing is down year-on-year before that. Once we get over August, you'll find that this will change. We overlap that period of time and we feel good about rebuilding that business.

As a matter of fact, the programs we put in the accounts where we accelerated the program, we started seeing a good trend then. Now is there anything different about these categories as opposed to other categories? What we see that we have higher chances of success where the brand equity is stronger and the relative market share is higher.

So these two attributes allow us a little bit of flexibility in terms of both revenue management and assortment management. So building the brand equity is important to us.

That's why we always focus on innovation and communication, and building our relative market shares because we believe these two attributes in any category are strong assets for the organization and the brands..

Very helpful. Thank you..

You're welcome..

Thank you. And this concludes today's question-and-answer session. I would now like to turn the call back to Chris Jakubik for any closing remarks..

Great. Thanks very much and thanks, everyone, for joining us for – any analysts who have follow-up questions, I as well as Andy Larkin will be available to take your questions. And for anybody in the media, Michael Mullen will be available as well..

Thank you..

Good night..

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