Christopher M. Jakubik - The Kraft Heinz Co. Bernardo Vieira Hees - The Kraft Heinz Co. David H. Knopf - The Kraft Heinz Co. Paulo Luiz Araújo Basílio - The Kraft Heinz Co. Georges El-Zoghbi - The Kraft Heinz Co..

Andrew Lazar - Barclays Capital, Inc. Bryan Spillane - Bank of America Merrill Lynch Jason English - Goldman Sachs & Co. LLC Ken Zaslow - BMO Capital Markets (United States) Rob Dickerson - Deutsche Bank Securities, Inc. Alexia Jane Howard - Sanford C. Bernstein & Co. LLC Akshay Jagdale - Jefferies LLC Christopher R. Growe - Stifel, Nicolaus & Co., Inc.

Scott A. Mushkin - Wolfe Research LLC.

Good day. My name is Liz and I'll be your operator today. At this time, I would like to welcome everyone to the Kraft Heinz Company's Fourth Quarter and Full Year 2017 Earnings Conference Call. I will now turn the call over to Chris Jakubik, Head of Global Investor Relations. Mr. Jakubik, you may begin..

Welcome, everyone, and thanks for joining our business update for the fourth quarter and full year of 2017. With me today are Bernardo Hees, our CEO; George Zoghbi, Strategic Advisor to the CEO and Board Nominee; Paulo Basílio, President of our U.S. Zone; and David Knopf, our Chief Financial Officer.

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 replacement for, and should be read together with, GAAP results. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the end of the slide presentation available on our website.

Before we get started today, we hope that you've had a chance to review our post-integration business update that we released yesterday on ir.kraftheinzcompany.com. In it, we provided a broader update on our operating model and business plans, progress on our journey to date and our path forward.

Today, we intend to build on that presentation by digging deeper into how we ended 2017 and what we expect to accomplish in 2018, both in terms of key initiatives and financial performance. And we'll keep our upfront comments today briefer than normal in order to allow more time for Q&A. So let's turn to slide 2, and I'll hand it over to Bernardo..

Thank you, Chris, and good morning, everyone. I will start today by acknowledging that there is no question our financial results in 2017 did not meet our potential. Did we deliver profitable sales and grow our bottom line? Yes. Did we deliver to our potential? No.

We had a slow start, some missteps along the way, and took some decisions to accelerate investments in Q4 that held back 2017 financial performance. At Kraft Heinz, we believe it's critical to take away clear learnings from the past year, and there were four key areas that held back our 2017 operation results. Number one is customer contracts.

Here, we learned that having agreements in place, signed and sealed at the start of the year can avoid first quarter commercial activation misses and lead to better retail execution for the balance of the year. This was the story of our Canadian and Russian business in 2017.

Two, it's faster actions to achieve the right balance between pricing in key commodity costs, particular in a few of our larger U.S. categories as well as our Brazilian vegetable business during the year.

Three, is moving quickly and making the necessary adjustments when executing critical category and brand turnarounds, like Complan in India and our baby food business in Italy.

And finally, number four, is to have better service as we ramp up manufacturing in new facilities in new production lines, eliminating disruptions and achieving benchmark levels through the process. I'm talking here about our frozen potato and U.S. meat business.

The other factor that held back our 2017 financial results were decisions we took during the fourth quarter, where the H.R.1 Tax Cuts and Jobs Act was in process. This new law provides us with additional cash and incentives to accelerate investments to grow our business.

So this, together with opportunity to build advantage, scalable capabilities that we outlined in the management slidecast we posted yesterday led us to decisions to aggressively accelerate our plans. In Q4 we accelerate commercial investments, particularly in marketing, in-store sales teams, e-commerce and supply chain.

And this held back Q4 EBITDA in the United States. From a balance sheet and risk perspective, we also accelerate approximately $1.2 billion of cash contribution to our U.S. post-retirement medical plans and made an additional $150 million discretionary cash contribution to our U.S. pension plan.

This result in a higher leverage ratio at the end of the year than we otherwise would have delivered. The second thing I think is important to acknowledge about our 2017 results is the fact that we generate solid results from investments we have been making to drive sales up and costs down.

On the top line, we delivered trend-bending Big Bet innovations and turnarounds.

Big Bet innovations included Philadelphia Cheesecake Cups, and Bagel (sic) Chips & Cream Cheese Dips, Capri Sun All Natural, DEVOUR frozen meals and branded frozen snacks in the United States; Planters in China and the UK; Heinz Mayonnaise across Europe, Australia, New Zealand and Latin America; Classico Riserva and Cracker Barrel Feta Cheese in Canada, and Kraft Cheese Dressing in Japan.

We also drove strong gains from prioritizing our investments in the powerhouse portfolio bets in turnaround parts of our portfolio. These include significant growth in the United States on Lunchables, Philadelphia, Kraft Singles and Heinz sauces, and successful turnarounds on dry packaged desserts, and frozen meals and snacks.

In fact, the Heinz brand in the United States is now 17% bigger than it was in 2015, which is a good example of the process we are going through with each category. We returned to sales growth in Europe, including the UK, after more than five years of decline, with Europe's foodservice achieving double-digit organic net sales growth.

And in our Rest of the World business, we delivered solid double-digit sales growth in China through go-to-market expansion across all channels, especially foodservice and e-commerce. And now China is the biggest country in our Asia Pacific business.

In Indonesia, a solid turnaround in our ABC soy sauce sachets led to strong double-digit growth and in Brazil we delivered solid market share growth of the Heinz brand. On the cost side, we drove 10% greater media cost efficiency in the United States versus 2016, resulting in almost 40% reduction over the past two years.

We also made significant progress in our goal to create best-in-class operations. We invested $1 billion upgrading our manufacturing facilities around the world to enhance our capacity for innovation and product quality.

These included construction of a state-of-the-art factories in Davenport, Iowa; Kirksville, Missouri; Shanghai in China, and Neropolis, Brazil, plus significant expansion investment in worldwide manufacturing capacity. We expand the reach of our global shared business service into Australia and New Zealand.

We substantially completed our transformational Integration Program, delivering more than $1.7 billion of savings, net of business investment in non-key commodity inflation, and you completed an outstanding year of top tier quality performance with zero recalls.

The third aspect of 2017 that I want to acknowledge is the fact that we established strong, scalable, in-house capability platforms, platforms that you can build further into 2018 and should benefit Kraft Heinz in the years to come.

For instance, we established a new global online and digital structure to accelerate future growth, one that will build upon the 65% growth of our U.S. e-commerce business in 2017. We strengthened our category management tool deployment into the UK and the United States, with revenue management, assortment, discounter and planogram analysis.

We began rolling out our U.S. in-store sales go-to-market model, reaching roughly 20% of our retail business, and expect it to significantly ramp up this effort in 2018. Our Kraft Heinz University training platform roll out sales, marketing, leadership and methodology academies to enable continuous learning and development.

We published our first ever Kraft Heinz Corporate Social Responsibility Report with sustainability goals and targets to reduce water usage, greenhouse gas emissions, energy usage and waste sent to landfills.

And through our signature Micronutrient Campaign, we delivered 135 million meals in 2017 to people in need in our fight against global hunger, part of our commitment to deliver 1 billion meals by the year 2021.

To sum it all up, through the end of 2017, the investments we have been making are starting to have the impact in the marketplace that you have been expecting. We still have much to do and areas to improve, but we have established a number of capabilities and platforms to enable further gains in 2018 and beyond.

So let's turn to slide 3, and I will hand it to David to cover our Q4 and full year financials..

Thank you, Bernardo, and hello, everyone. From a total company perspective, organic net sales performance was again an improvement over the first half of the year and consistent with the drivers we outlined in our last call.

Pricing was sequentially better in Q4, up 1 percentage point driven by price increases in Rest of World markets and the United States.

Volume mix was 1.6 percentage points lower in Q4 primarily due to lower shipments across several categories, particularly nuts, natural cheese, and cold cuts in the United States, as well as cheese and coffee in Canada.

And this masked ongoing growth in macaroni and cheese in the United States as well as strong growth from condiments and sauces in Europe, Indonesia and China.

By segment, the United States was more or less consistent with our expectations, although we made a decision to invest to protect distribution in cold cuts, and that held back the contribution from pricing in Q4.

In Canada, while we expected year-end 2017 retail inventories to be lower than 2016, they came in even lower than our initial expectations and look to be permanent. So this will likely translate into some headwinds moving forward.

Europe was consistent with expectations, benefiting from gains in the UK and strong growth in Southeast and Central Europe where we are now selling the Kraft brand. And in Rest of World, the accelerated growth we expected in Asia from China and Indonesia was held back by more prolonged slowdowns than expected in Brazilian canned vegetables.

At EBITDA, we delivered 3.2% growth and 105 basis points of margin increase in Q4. The upside was driven by a combination of gains from our cost savings initiatives, including $150 million from our North American Integration Program, lower overhead costs and favorable pricing.

That said, two factors came into play during the quarter that were not part of our outlook on our last call and dampened year-over (14:19).

First, while incremental Integration Program savings were $150 million in the quarter and $1.725 billion cumulatively through the end of 2017, this was partially offset by approximately $20 million of accelerated investments, mainly in marketing and service capabilities, and roughly $30 million of higher than expected freight costs.

Second were unanticipated cost increases that came into play during the quarter, especially commodity headwinds in North America, particularly dairy and nuts, resulting in the strongest key commodity headwinds we faced during the year, as well as higher one-time distribution costs in certain Rest of World markets.

At adjusted EPS, we were down $0.01 versus prior year in Q4 but up 6.6% for the full year.

In Q4, EBITDA growth was offset by a roughly 300 basis point increase in the adjusted effective tax rate versus Q4 last year, when discrete favorability resulted in an effective tax rate well below our run rate, as well as other below the line items including incremental depreciation.

As we said at the outset, while our 2017 financials did not reflect our potential, these are levels that we're confident we he can build and grow in a sustainable way going forward. But I'll turn back to Bernardo to begin our outlook..

I will start by saying that two and a half years since Kraft Heinz merger, our journey remains very much on track and is set up for further organic gains going forward. I would characterize our outlook as cautiously optimistic while we aggressively invest to drive profitable sales and consumption growth in both the near and long term.

We're cautious on the short-term top line performance, based on four factors. One, potential headwinds from heightened retail competition in developed markets where we need to strike a balance between market share and profitable volume. Two, some known first half headwinds in the U.S.

from a combination of Planters' exit from unprofitable club channel volume, Ore-Ida supply shortfalls, as well as the impact of some pricing actions and trade spend timing that are likely to mean net sales will be below consumption.

Three, in Canada where carryover impact from lower retail inventories, lower promotion activity and selective build list will hold back organic growth potential in Q1. And four, is an SAP implementation we are undertaking in Brazil.

At the same time, we are optimistic about our ability to drive profitable organic sales growth because we are accelerating investments, putting intense focus on our biggest opportunities to drive consumption gains in both the near and long term.

These investments are focused on building our go-to-market capabilities, including in-store sales teams in the United States, e-commerce and digital investments in selected markets, and leveraging distribution and whitespace gains in developing markets, launching a strong pipeline of Big Bet innovation and renovations in the months to come, leveraging our data driven marketing capabilities, backed by the increase in working media dollars, and delivering best-in-class service to our customers in North America and Europe.

While these will likely translate into near-term margin pressure in the United States and Rest of the World segments, we have been testing, learning and ramping up these programs for some time now, so we are very confident in their scalability and that the returns and profitable growth are there.

As we progress through 2018, we expect to see improving results. But let me turn it over to David who will describe what to expect below the net sales line..

Thanks, Bernardo. From an overall perspective, despite the near-term top line pressures and accelerated investments that Bernardo outlined, our full year outlook is for constant currency EBITDA growth, strong adjusted EPS growth and a significant increase in free cash flow generation. And I'll explain the drivers of each.

At EBITDA, we expect to see a combination of strong net savings from both carryover integration synergies and new programs, tempered by a combination of cost inflation, including non-key commodities, freight, and people costs, as well as $250 million to $300 million we're investing in white space expansion, Big Bet innovations, go-to-market and service capabilities.

Additionally, EBITDA performance is likely to be skewed to the second half, reflecting the upfront acceleration in our investments, cost inflation, particularly freight at the outset of the year, as well as the top line weakness in the U.S. that Bernardo outlines.

For earnings per share, we expect growth to be driven by tax savings and our focus on profitable growth. We expect to benefit from a reduction in our effective tax rate in both 2018 and going forward. We're now forecasting a run rate in the range of 20% to 24% versus the previous 30% run rate expected prior to the passage of the Tax Cuts and Jobs Act.

For 2018, we currently expect to be at the high end of that range or approximately 23%, down from the 28.6% adjusted effective tax rate in 2017. Also note that this will be partially offset by roughly $100 million of incremental interest expense and approximately $70 million of incremental depreciation versus 2017.

Finally, cash generation where we expect a significant improvement in three areas. One is lower post-integration capital expenditures. Here we're forecasting approximately $850 million in 2018 versus $1.2 billion in 2017.

As a percent of net sales, 2018 CapEx will be at the top end to slightly higher than the 2.5% to 3% of net sales run rate we expect over time, again, as we accelerate our investment activity. The second area of improvement is the impact from the lower tax rate, and the third is from opportunities we see to further reduce working capital.

All things considered, we remain confident that a strong earnings profile should continue to show through, driven by a combination of profitable sales, EBITDA growth and tax savings.

Even more important, we're confident that we can do this while we accelerate investments to adapt and modernize our capabilities and our brands for sustainable growth, as we outlined on the business framework presentation we posted yesterday, which I hope you will all have a chance to review. Thank you. And now we'd be happy to take your questions..

Our first question comes from the line of Andrew Lazar with Barclays. Your line is now open..

Thanks. Good morning, everybody..

Good morning, Andy..

I've got just two relatively quick ones, based on last night's presentation, then just one on today's results.

I guess first off just to sort of get this one out of the way, I guess, can you explain the timing of last night's presentation? In other words, why was now the right time to sort of drop that slidecast and particularly right ahead of next week's CAGNY Conference?.

Hi, Andrew. Good morning. It's Bernardo. Thanks for the question. Let me start by saying that I think at the end of 2017, we closed the chapter on the Kraft-Heinz integration.

And after two years and a half, I think we're pleased to say that we've delivered in all our promise that were made at the time at the merger that you all follow closely, right? That being said, now we are focusing on building the business of the future.

In order to do that, we are deciding, and you're seeing that in Q4 and you'll continue to see in 2018 and beyond, to accelerate commercial investments, right? David, talking between $250 million and $300 million, behind the pillars that we believe can generate profitable growth..

Okay. Thanks for that. And then....

We thought it was really important to highlight to the investment community what are the pillars behind those investments and what are the things we're doing in more details than the normal earnings call, we don't have the time to do that. So we all can understand our plans moving forward, given the level of investment we're making.

And after two years, I can say we are very confident in our knowledge and the scalability of the platforms we are doing from revenue management, assortment management, in-store execution, digital investments, marketing working dollars, all those initiatives have been proving to us in the right categories very assertive.

Now we are deciding to scale up our investments in a big way. In order to do that, it was important to highlight those principles. That's why the timing. And a good example of what I'm saying is actually the Heinz brand example, that has grown 15% since 2015 in this country, in the United States.

And a lot what's behind is exactly the pillars that you highlight during the framework. So I highly encourage each one of you to look at that and see, because that's exactly what our money and the commitment we are making to building the business' future is behind..

Okay. Great. Thank you for that.

And then, Bernardo, has the company's framework and thoughts on M&A changed at all based on coming into this new zone of post-Kraft integration and given some of the thoughts in the deck last night?.

Andrew, as an M&A framework, our thinking has not changed. We continue to like strong brands, business that can travel internationally that really have more scale to be captured. And we want to have businesses where two plus two is more than four that we can capture, right? Synergies to reinvest behind the brands, the people, and the product.

That being said, I think also it's fair to say that valuations today are more attractive than they were even two months ago and the chapter of Kraft-Heinz integration is behind us..

Great. Okay. Thanks for that.

And very just quickly, lastly, would be regarding the results in the quarter, I guess I was under the impression that the pricing net of cost dynamic would be increasingly favorable as we went through the back half of the year and into the fourth quarter, and I think from some of the comments, it seems like from some additional unexpected inflation and such that that didn't happen.

And I guess that led to your comment, Bernardo, about needing to be faster on pricing in order to deal with cost.

And I guess I just wanted to get a better understanding of what that meant because I think for many years, Kraft has always kind of struggled a little bit with some of these large pass-through categories and kind of managing the lag that happens on the way up and the way down. And it seems like that kind of caught you a bit again.

So I guess what can be done, if anything, differently there around managing that price and cost dynamic in some of those big pass-through categories? Thanks so much..

Hi, Andrew. This is Paulo. I'm going to take this one as the impact here is coming from the U.S. So when you take Q4 pricing specifically, the pricing came in line with our expectations, okay, but this was partially offset by mainly two things. The first is trade.

We had higher than planned trade spend as we invested to protect the cold cut distribution that we're having and selectively address some retail competition in cheese, okay. So we spent more trade than expected originally.

And also in the commodity side, we saw that the commodity volatility, mainly dairy and nuts, caused a higher commodity cost then we weren't able to price in the quarter, okay. So those are the main impacts that we see in commodity versus our expectations we had before for Q4.

I think, again, going forward we see our big four commodities so far look stable versus prior year..

Okay. Thank you..

Our next question comes from the line of Bryan Spillane with Bank of America Merrill Lynch. Your line is now open..

Hi. Good morning, everyone..

Good morning..

Just two questions I guess related to the outlook. The first one is if you piece together some of the commentary about the first quarter, sounds like sales are going to be soft and also profit.

So maybe, David, if you could give us a little bit more color on kind of the profile of the quarter especially in the U.S., just magnitude in terms of what those pressures will be..

Hi, Bryan. This is David. So let me hand it to Paulo to talk a little about our U.S. outlook and then I'll come back and step back and talk more about Kraft Heinz into 2018..

Okay. Hey, Bryan. Paulo. So that's right. So we are seeing in the short term, specifically Q1, some headwinds that will cause near-term sales to be below run rate consumption. The main drags are pretty much driven by, one, Planters in club and Ore-Ida, and this will be a headwind of between 1.5% to 2% in our sales in U.S.

In addition to that, we expect to see a trade phasing, including time of spend, that will be about 1.2% headwind. This specific trade phasing we expect to have the equivalent benefit late in the year. From a run rate perspective, we are seeing a improvement in our consumption trends for the measured channels during 2017.

So just to give an idea, if you take out Planters in club in Q4, our consumption in the measured channels was minus 1% versus minus 1.9% for the full 2017. So a substantial improvement during the year.

We also continued to see low to mid single digit growth outside measured channels, e-commerce and foodservice, that represents overall just over 20% of our sales.

So we're confident that we can deliver substantial sequential improvement in 2018 as the impact from Planters in club and Ore-Ida fades and the commercial investments that we are making, go-to-market, Big Bet innovation in market starts to gain traction..

Thanks, Paulo. This is David. So I just want to step back here again and look at the total company into 2018 to provide a little more color on our outlook.

So first off, I'd say in contrast to the 2017 profile that was fairly evenly split 50/50 on sales and EBITDA first half, second half, I think 2018 is likely to be a bit less first half and a bit more second half. So what I'd say is I think we're cautious on the short term given a few different considerations. One is what Paulo outlined in the U.S.

and what we anticipate seeing through the year. And on top of that, we'll be accelerating investments in capability building, particularly in the U.S., as well as other factors internationally like SAP implementation in Brazil we talked about.

At the same time, we're very confident in our ability to grow EBITDA for the full year and this is going to be driven by a combination of carryover integration savings, new savings initiatives that we mentioned that we have planned for the year, as well as commercial gains into the back half of 2018.

And this will be despite the $250 million to $300 million in commercial investments we're making upfront in the business, as well as some of the non-key commodity inflation we talked about.

So with that, we believe that with the capabilities we're building in category management, things like marketing, brand building and go-to-market, we'll be in a much better position to deliver sequentially better growth, both into the second half of 2018 as well as into 2019..

Thank you. That's helpful. And I just had one follow-up. Between last night's presentation and this morning, it sounds like the world's changed a bit since 2012. There's some need to reinvest.

Has this at all changed what you have thought about what the ongoing sort of EBITDA growth profile would have been for this business versus maybe what it was when Heinz and Kraft came together? Or is this just more of a temporary step back and you still have the same growth expectations going forward long term?.

Hi, Bryan. It's Bernardo. I don't think it really changed our way of thinking. And as I said in the beginning of the presentation, is we think the journey of Heinz since 2013 up to today is pretty much on track for the things we wanted to deliver and the progress we have made in the past that we have been delivering.

We always thought that there would be a learning curve and more investments to come moving forward, to push the business to profitable growth in many categories. And it's exactly what we have been accelerating since Q4, with the advent of tax reform and having a better free cash flow profile.

And so we did took a decision to accelerate many of the categories and things that we have in mind that were in our timeline to be done. So I don't think there is a change in that sense. It is true what I said that the integration phase is behind us.

And given the knowledge you have today and the instruments and capabilities we have developed in the last two years, Heinz brand is an example, as renovation of our portfolio. And innovation is another example (34:59) that we're able to implement in a very difficult retail environment in non-commodity product is an example.

All this, we're taking that and then scaling up in a big way. We start this in Q4. You already see in our P&L parts of this investment, you're going to see more. I don't think there is a change. I think really it's the next phase, like I said, building the business of the future..

Okay. Thank you..

Bryan, this is David, just to close here. So I think as we look at 2018, we could have foregone the $250 million to $300 million of investment and grown at a faster clip this year, but as Bernardo said, we decisively chose to make these investments. We think it's the best for the long-term trajectory of the business.

And again, we want to be a company with significant competitive advantage going forward, not just a good company today..

Thank you..

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

Hey, good morning, folks..

Good morning..

Thank you for allowing me to ask a question. I guess I have two. First, to understand the savings versus investment balance. I think early on with your commitment to the savings, you always gave that sort of net of investment in the business.

You clearly talked about ramping investment in the fourth quarter, yet you're still talking about the $1.7 billion savings.

Should I look at that $1.7 billion as still sort of net of the incremental $250 million you put in, suggesting that gross savings may have actually been higher, or not? And then second part of that question, I'm hearing a lot about investment next year, not a lot about productivity.

Do you think that we're at a point where the investment may actually outweigh ongoing productivity? Or is there still surplus savings that allow you to fund some of this and drive underlying margin growth?.

Hi, Jason. This is David. Thanks for the question. So the first question I believe was more kind of 2017 looking. So again, what I'd say is we closed the Integration Program, and we're really happy with the performance there, delivering just over $1.7 billion of net incremental savings to the business. And, yes, that's correct.

That's net of investments $200 million of commercial investments behind us that we made in the business as well as net of some non-key commodity inflation that was primarily logistics related that accelerated in the fourth quarter of 2017. So overall, we're really happy with where we closed the integration plan.

As we look to 2018, what I'd say is, again, we're kind of short term cautious and overall confident with the profile of the business and our EBITDA trajectory for the year.

And this is really going to be driven by carryover savings from that Integration Program which is really just annualizing some of the benefits that we ramped up in 2017 as well as the new initiatives that we talked about.

So these are in fact new, what you may call, productivity initiatives but effectively new savings initiatives that we're planning to implement this year.

And these two benefits will really fund the investments for the year, and combined with some of the commercial ramp up that we expect and we talked about, we anticipate delivering organic EBITDA growth for Kraft Heinz in 2018.

And just to close, I think on top of this, with the tax savings we talked about that we've used to personally invest in the business, we'll be able to drive strong EPS growth.

And then finally, with all these factors considered and with the lower CapEx and working capital we anticipate, we expect to have very strong free cash flow in the business in 2018 as well..

That's really helpful. Thank you.

And in terms of where the investment's going, I read through – I went through the presentation last night, and I walked away with an impression that there's going to be a lot of investment internationally, grasping to quotes like "transform Heinz into a more global company", 10% of countries with two or more Global Brands going to 80% in three to five years.

But I'm hearing today a lot of investment in the U.S. So did I maybe walk away with the wrong interpretation last evening about, sort of, globalization initiatives? Or is that still the plan and the U.S.

is really just the investment necessary to kind of keep the momentum, get the business back on track here?.

Hi, Jason. It's Bernardo again. What I can tell you, that's very balanced. I don't think I understand your question, but I would say a little different. There is a large investment in the United States and also international.

If you think about the pillars we're highlighting in the framework and investments David was just describing a couple of minutes ago, there is a lot of in-store execution, a lot of digital initiatives, a lot of working dollars behind brands and campaigns that we want to really take to the next level.

I think the Kraft Super Bowl Family Greatly campaign is another good example of the start of the journey that's happening in Heinz with the Hum campaign three years ago, I think, in the Super Bowl. All of that (40:33) there are also significant investment internationally to take our brands to a more global place.

That would be more on the Kraft and more on the Planters, and also in white space under Heinz. So those are happening as we speak. I wouldn't consider the investment focused more on international market. That's not the case.

Actually, if you think about what's happening now as many of our peers are retrieving from touching the stores and investing in retailers.

We're actually deciding to accelerate that, hiring more in-store execution, putting more money behind on strength of our brands, and that has a big component in the United States, a big component in Canada and a big component internationally..

Thank you. Appreciate it..

Our next question comes from the line of Ken Zaslow with Bank of Montreal. Your line is now open..

Hey. Good morning, everyone..

Good morning..

Good morning..

I'm going to ask a different strategic question. I looked at the presentation, and you stated the increase – the need for the pressure for consolidation. But as you go through it more and more, you talk about innovation needs to be less than $100 million of sales. There's more focus on branding, personalized nimbleness.

So kind of with that as a backdrop, do you think it's possible that the best strategy might be to actually refine and slim down the portfolio to have greater focus on some key brands, rather than just consolidation? I know it's a flip of what you've said, but just, if you can comment on that it'd be helpful..

Hi, Ken. It's Bernardo again. Just to start, the number we have for innovation and renovation worldwide is much higher than the number you mentioned. So I'm not going to – I'm going to get specific, but we were more than double our percentage of innovation of last three years, and we continue to accelerate in a big way looking at 2018.

Actually, one thing that give us confidence that we can maneuver the short-term headwinds we have and looking at a much more stronger profile second half and beyond is exactly the innovation that's coming to market in the United States, Canada, Europe and worldwide, right. So I would say that the number is higher than you mentioned.

On the second part – sorry....

In your commentaries, you said size matters relatively less than it used to, versus scale and speed. New product success is less likely to be defined as much by reaching the $100 million mark. I'm sorry for the misunderstanding..

No, so sorry..

(43:25) more that nimbleness and smallness and being more personalized rather than having a conglomerate of brands that might distract you, I don't know if there's an opportunity to slim down the portfolio. I'm sorry..

No, no, no. Sorry for that, Ken. I misunderstood you. So it's my fault. What I was trying to say and I think is applicable here, that a lot of ideas doesn't need to be extremely high. I'm going to give an example. Heinz BBQ is an idea that goes to the range of $100 million.

But within the brand and the portfolio is white space, what you can deliver to that is very big. So it's not only that smaller brands or not. We can scale up ideas in a big way. Planters in snacking, Kraft penetrating desserts with Philadelphia cheesecake are all ideas that scale up to those range, but scale up brands to the next level.

So that's what we're trying to say. When you think about scale and portfolio, that's the second part of your question, we're happy with the portfolio we have. I think you're right, what you said, that the food industry is one that has not consolidated as much as other industries have. There are reasons why that.

What I can say that within a portfolio we have today, is there will be more forces of consolidation in the industry. If that will happen, we would like to be one of them..

Great. I appreciate it. Thank you..

Our next question comes from the line of Rob Dickerson with Deutsche Bank. Your line is now open..

Thank you very much. So, Bernardo, I just had a question really around M&A.

I know – I realize it's the same strategy, transferable brands, strong brands for the future, but just in terms of your stock price, your valuation, I would argue, that it still sometimes gets a bit of a premium, given that expectation of industry consolidation plays out and you're in this great spot to leverage that.

And then you said earlier, you said your valuations are more attractive than two months ago, integration's over, then the presentation last night there's commentary that you are in a good spot to leverage potential consolidation.

So I'm just curious, any color you can give as to kind of why we haven't seen anything since really the Unilever bid a year ago.

And then is the non-hostile stance, is that reducing the size of the target list or is the lower valuation factoring in? I'm honestly just trying to get a feel as to where you stand now versus a year ago, given your valuation is partially priced off of that expectation. Thank you..

Hi, Rob. It's Bernardo. Thanks for the question. Look, I don't want to get into the valuations and stock price movements and so on. What I can say is that we always have been and our history has shown over 30 years in many other business and the story of their shareholders that we always take those things very seriously.

We always take the shareholder value propositions, long term, extremely carefully, and when we decide to take action, we normally very decisively, right. Also, as I highlight in the beginning, our framework thinking on M&A has not changed.

We continue to like strong brands, business that can travel, and opportunities within combining companies and so where two plus two can be more than four, so we can generate the resources to reinvest behind the products, the people, the brands. That has not changed.

It is true that the chapter of our integration at Kraft Heinz is behind us, like I highlighted, and also it is true that valuations are more attractive today from a very long-term proposition than they were before, if you look at two months, if you look at the near – or the time horizon, you decide it, too.

That being said, we believe the things we are doing here. That's why we're highlighting here the framework of building the things that we're doing, the acceleration of investment, representing – and the things we are doing as an organic company. So we're not just focusing or taking out from everything we need to do on a day-to-day basis.

I think that's framework as M&A, and as you said, continue to be in place, and that if there will be more consolidation in the industry, if that is the case, we want to be a force of that..

Okay. Great. Thanks for the answer. And I'll pass it on..

Our next question comes from the line of Alexia Howard with Bernstein. Your line is now open..

Alexia, are you on mute? Can't hear you..

Good morning, everyone..

Good morning..

Good morning..

Great. Thank you for the question. Can I ask, you opened your commentary this morning with some comments about customer contracts. Could you talk a little bit about exactly what you meant by that? What was not being delivered that you expected? That would be very helpful. And then my follow-up would be around pricing dynamics.

We're noticing in the measured channel scanner data that your pricing is up a little bit over 2%, I think, in the last quarter or so, but your pricing that you reported in the results this morning was only up I think 1%.

Is there a reason for that gap at the moment? Is it a non-measured channel issue, or is there something going on, where the retailers are maybe taking a little bit more pricing on your products than you're actually realizing? Thank you..

Hi, Alexia. This is David here. So I'll answer your first question here, and then I'll pass it to Paulo to talk a little bit about the pricing dynamics. So very quickly on the go-to-market agreements, we've talked extensively about it.

It's really related to our Canadian business where, as we talked about in Q1 in 2017, we're late to the game in really locking those agreements down. So I think that was a lesson for us that we've learned from. And what I'd say is going to 2018, I think the outlook is much stronger. We're securing major client agreements early.

We're focused on the major value drivers for the business, including a solid innovation pipeline and capturing whitespace opportunities in foodservice. So I feel that we're in a much better position to perform in 2018 on the business in Canada. So with that, I'll pass it over to Paulo to talk through the pricing dynamics you asked about..

Thanks, David. Hi, Alexia. Try to – I think I understood the question. So again, when you think about price changes, it's always difficult and always complex to execute in the current industry environment, and today they are even harder.

We always look to strike a balance between market share and profitable volume, and we choose when, where, and how to compete. More specifically, we continue to focus on differentiating our products our brands, and we aggressively defend where we see the need.

What I think important is that, overall, I can say that we have been able to price our brands in line with their value to consumers. So we are feeling good with the achievements we've been having on this side of the business..

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

Our next question comes from the line of Akshay Jagdale with Jefferies. Your line is now open..

Thank you. Thank you for the question, and thanks for the presentation yesterday. I found it pretty useful. I wanted to ask about the increased investments.

So what does this say – the increased investment spending, what does this say about your view on brands and how much they matter to consumers in food? And based on that, your ability to get good or appropriate returns on them, right? There's this sentiment out there that brands don't matter to consumers in food and maybe legacy brands like the ones that you have, the large ones, aren't connecting.

We don't agree with that, but I'd love to get your thoughts on that. And then secondly, are these investments to accelerate, so an offensive move, or to catch up? It seems from your presentation yesterday that you think your capabilities already, from a competitive perspective, are better than most of your peers.

And so it seems like this is an offensive move. But given the 2017 results have been sort of below potential, perhaps the market might view this as more of a defensive move. So just wanted some clarification on those two and I'll pass it on after that. Thank you..

Akshay, thank you. This is George Zoghbi. I will take this question. Well, you couldn't be more right about brands, particularly in this environment.

Brands matter most because the investment behind advertising, the investment behind promotions, the investments behind new products that come to market not only helps the brand, but stimulates overall category demands for everybody who is operating in those categories.

So in an environment where there is changing consumer needs and changing go-to-market model, brands become a lot more important. However, brands need nurturing and nurturing means investment and staying relevant with what consumers' needs are and what consumer wants to buy. So for us, an investment in the brand has always been important.

Now we're even accelerating that to deal with an environment where consumers changing what they buy and where to buy it from. And we are accelerating the investments to deal with that. So we see now increasingly important to have stronger brands in those categories for everybody..

And whether it's offensive or defensive? Thank you..

Well, it's both. For the long-established brands, it's a defensive play to ensure that these brands stay relevant with consumer needs. And the creation of new brands like DEVOUR or like other smaller brands that we created, they are one-dimension brands that deal with one consumer need, these play the offensive part of the strategy..

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

Thank you, Akshay..

Our next question comes from the line of Chris Growe with Stifel. Your line is now open..

Hi. Good morning. I just had a....

Good morning..

Thank you. Just had a couple questions for you. Last night you touted some of your Big Bets and we heard that today as well and some success there. There was a comment you made last night about 7% of your sales are coming from new product innovation in the last three years. I think most food companies are running kind of low to mid-teens.

So I'm just trying to understand, is there that much more to come here? Are you going to be more in line with, say, with an industry average? And is this part of the investments you're making in 2018?.

Hi, Chris. It's Bernardo. You're right on your comment that you continue to accelerate our innovation, not only the Big Bets but the renovation of the portfolio and continue to grow that. If you take those percentage since 2013, when I started at Heinz, we more than doubled.

What I think is important within that is within not only the percentage but the incrementality of the innovation, to start materialize more. As we're adding the Big Bets and so on, a lot of them you're going to see a breakthrough, white space are territories where we operate but not in that specific segment or you don't operate at all.

So not only the percentage that you're talking about, we believe can continue to go higher until we can beat the benchmark in the industry that we're not today. But the level of incrementality of our Big Bet innovation needs to progress..

Okay. And then just one other question, if I could, in relation to having access to, say, the Kraft brand in Europe.

Are there incremental costs this year related to selling that product in Europe, be it internal investments or brand investments or things we need to make sure we account for since you have control of that brand in more areas now of the world?.

Hi, Chris. This is David. So we did have some upfront investments in Q4 and we will invest behind that business into 2018. So you would expect to have some costs around that as we repatriate those Kraft brands..

David, is that a meaningful component of the incremental investment this coming year? I'm just trying to get a frame of reference for how big this could be..

No, Chris. It's not a meaningful component in the overall profile that we provided..

Okay. Thank you very much..

Maybe one more question..

Our last question comes from the line of Scott Mushkin with Wolfe Research. Your line is now open..

Thanks for taking my questions. So I just wanted to frame one thing on the EPS growth. I think you said you said significant EPS growth. Is that double digit or can you size that for us? And I have one other question..

Hi, Scott. This is David. So we're not going to put a specific number around it.

But, again, in terms of the overall profile, on EBITDA, we have a carryover savings coming through in 2018 from the Integration Program, so this is the annualization impact; new savings initiatives and both those combined to help and to fund the investments we're making in the business.

And then, on top of that, the commercial ramp-up we'd expect through the year to deliver organic EBITDA growth. And then, how I think about it is the tax savings we expect to have that helped us make those investments will drive strong EPS growth on top of the EBITDA profile..

Okay. And then my second question, we know we've talked a lot about M&A. But as we research this and obviously we do a lot of work in the retail channel, I'm pretty impressed by what you guys have done with your portfolio since the merger.

So I guess the question is, can you, I guess, kind of walk and chew gum at the same time, it seems like you might be able to do a couple of M&A transactions that would be beneficial. And when you think about M&A, particularly in the U.S., how do you think about the categories? And then I'll yield. Thanks..

Hi, Scott. It is Bernardo. Like I said, we don't want to comment on the specific or hypotheticals here. I think just going back to the framework, this has not changed. We do like strong brands. We like business that travel and we believe when there are – we can find two plus two is more than four.

We have been able to create significant long-term value, what benefits both companies that are involved in the merger. So that being said, if there will be more consolidation in the industry or not is to be proven. But if that is the case, we want to be a force in that..

Perfect, guys. Thanks. I know you have another call coming up, so I appreciate you squeezing me in here. Thank you..

Okay. Well, thanks, everybody, for joining us on the call today, and appreciate you tuning into the management slidecast. And if you haven't, I would suggest doing so going forward. For the analysts who have follow-up questions, Andy Larkin and myself will be available.

And for anybody in the media, Michael Mullen will be available to take your questions. So thanks very much, and have a great day..

Ladies and gentlemen....

Thank you..

Thank you..

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