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. Bryan D. Spillane - Bank of America Merrill Lynch.

David Palmer - RBC Capital Markets LLC Kenneth B. Goldman - JPMorgan Securities LLC David Cristopher Driscoll - Citigroup Global Markets, Inc. Robert Moskow - Credit Suisse Securities (USA) LLC Andrew Lazar - Barclays Capital, Inc.

Jonathan Feeney - Consumer Edge Research LLC Pablo Zuanic - Susquehanna International Group of Companies Steven Strycula - UBS Securities LLC.

Good day. My name is Lateef and I will be your operator today. At this time, I would like to welcome everyone to The Kraft Heinz Company's First Quarter 2018 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. We'll start today's call with an overview of our Q1 results and our 2018 plans from Bernardo Hees, our CEO; and David Knopf, our Chief Financial Officer. Then, Paulo Basílio, President of our U.S.

Zone; and Georges Zoghbi, Strategic Advisor and Director, will join the rest of us for the Q&A session. Please note that, during our remarks today, we will make some forward-looking statements that are based on how we see things today.

Actual results may differ due to risks and uncertainties, and these are discussed in our press release and our filings with the SEC. We'll also discuss some non-GAAP financial measures during the call today. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results.

And you can find the GAAP to non-GAAP reconciliations within our earnings release and at the end of the slide presentation available on our website. Now let's turn to slide 2, and I'll hand it over to Bernardo..

Thank you, Chris, and good afternoon, everyone. Let me start by saying that we're feeling more confident about our outlook with Q1 in line to slightly better than our expectations from the February call.

If you recall, there were several factors that lead us to be cautioned on our top-line performance for the first half of 2018, including the headwinds in United States from Planters and Ore-Ida, the impact from retail inventory reductions in Canada, and the weak result in Brazil from our SAP implementation.

At EBITDA, we spoke about near-term pressures in the United States and the Rest of World from accelerated investments in go-to-market capabilities, Big Bet launches, and increasing working media dollars, and best-in-class customer services, as well as significant cost inflation, especially freight at the beginning of the year.

On the whole, it played out as expected. And we continue to expect many of these same factors to remain in Q2, as were anticipated in the outlook we provided in the February call.

Outside these transitory factors, we are seeing ongoing improvement in consumption trends in most countries and in most of the key categories that we believe will drive both top and bottom-line growth into the second half of the year.

These include positive trends in the first quarter – it's actually the fourth quarter – in categories such as natural cheese, meals and desserts, and ready-to-drink beverage in United States; cheese and coffee in Canada; condiments and sauces across Europe; soups and meals in the UK; and baby food in Russia; condiments and pasta sauce in Latin America; as well as soy sauce in Indonesia.

More important to highlight for the balance of 2018, for 2019 and beyond, is that these gains are being driven by the investment and progress we are making to build capability for sustainable advantage to our iconic brands.

On slide three we show six goals from our framework presentation that is set to fulfill The Kraft Heinz vision to become the best food company, growing a better world. For instance, we set a goal to be the English number one in marketing capabilities and we are investing in our portfolio of brands to a data-driven approach to win with consumers.

It's fair to say that we have spent the last two years on the necessary renovation of our portfolio largely by focusing on marketing spend efficiency and product renovation. We are playing more offense with higher commercial investments especially behind incremental innovation.

In data-driven marketing, we continue to develop proprietary in-house tools to better measure quality impressions across new mediums like mobile, and to understand the impact that our digital initiatives have on net sales, all at a faster real-time pace.

In the first quarter alone, our Super Bowl ad kicking off the Kraft Maxwell brand campaign generated more than 2 billion impressions. We executed a data-driven target digital campaign in UK soups helping us gain more than a point of share during strong soup season in gross sales 10%.

Also in UK, our company behind a new announced product, chocolate flavored mayo during Easter season generate 3.5 billion impressions for Heinz Seriously Good Mayo. Think about that, more than 3 billion impressions in a country one-fifth the size of the United States, and in a classic definition of adaptable data-driven marketing, our U.S.

team's quick response around consumer and social media interest in Mayochup generated more than 1 billion impressions within 48 hours. This coming at a time when we are just launching Heinz Real Mayonnaise in United States and Canada.

In innovation, we are pushing into new categories, new segments, new occasions, in many cases to premium positioning and we are doing this with a focus on incrementality, not just gross sales from new items.

In the United States for instance, our innovation funnel has got wider every single year, and in 2018, we plan to launch roughly 60% more innovation projects than we did in 2016.

And more launches are designed to be incremental to our current base, such as breakthrough innovation in new dayparts like we're doing with Just Crack an Egg for breakfast, a refrigerated product that's now selling faster than we can make it.

Disruptive innovation like Heinz Premium Mayonnaise and building on our presence in snacking by complementing P3 with Oscar Mayer Natural Meat & Cheese Plates, Philadelphia Bagel Chips and Cream Cheese Dips, and Planters Signature nuts.

As well as partnering with growing equities to bring specialty items to market with our new Springboard platform and through joint ventures. Items like Momofuku sauce, Oprah O, That's Good! Comfort Foods, and Food Network Meal Kits and Cooking Sauces.

Outside of the United States you are already seeing the impact of incremental sales from the Kraft brand in Europe and should soon see the same in Australia.

And in our Rest of the World market we expect gains from whitespace launches under Kraft, Heinz and Planters to show more strongly in the second half of the year in our effort to maximize category managers will have significant impact still ahead.

At retail in the United States, for instance, we still have room to improve the effectiveness of our promotional activities. We expect key summer and winter reset windows to improve SKU adoption, distribution and velocity through our assortment management and planogram tools. In U.S.

foodservice, we have started to streamline our product catalog, emphasizing high-velocity SKUs, which also reduce supply chain complexity. And across our zones, we recently made our Global Center of Excellence in the Netherlands our global hub for assortment management, adding this capability to the revenue management team to drive value and growth.

In go-to-market capabilities, we continue to take actions that will enable us to improve our ability to get the right product at the right place, at the right time for our consumers and capture what we believe to be significant incremental organic growth.

Our in-house in-store sales teams in the United States is now 80% larger than this time last year, and we are seeing the incremental returns we expect versus the previous focus-only approach in store everywhere we have implemented this new model.

In foodservice, we are capturing whitespace opportunity in some of our most developed markets, the United States and Europe, a good indication that there is more untapped potential in this channel.

And in e-commerce, our theme is developing in-house data science and consumer analytics expertise with a focus on building consumer baskets that together with single-item purchase can leverage the breadth of The Kraft Heinz portfolio and make it a better partner to our retail customers.

We are also making significant progress in our goal to create best-in-class operations. We are pacing ahead of aggressive industry-leading targets in quality, safety and customer service in nearly all geographies we operate, even as we ramp up to get new state-of-the-art factory in Davenport, Kirksville, China and Brazil producing to their potential.

And on costs, while inflationary pressures have continued across procurement, logistics and manufacturing, we view the solid pipeline of projects in each area to minimize these pressures which should come true in the second half of the year.

In other words, even though we've substantially complete our integration program in Q4, we remain in a strong position to both offset cost inflation and fuel high-return investments in our brands.

These include investing in the develop of our people, where in the first quarter alone, Kraft Heinz employees completed nearly 60,000 courses through our interactive university online platform.

We cannot underestimate how critical it is in this rapidly changing environment to develop our people to new competencies and SKU building in areas like sales, marketing, leadership, problem-solving and R&D, because we know that our people are what really made Kraft Heinz to adapt to these new times and to win in the marketplace.

So to summarize, one, we are building capabilities to create brand and category advantage to achieve profitable growth. Two, we're investing aggressively now in order to see the benefits sooner. And three, these are key factors shaping what's likely to be on a typical balance of net sales and EBITDA between first half and second half in 2018.

So let me hand over to David to explain how these factors impact Q1 results and how the commercial momentum we are investing to build is likely to play out in our financials..

Thank you, Bernardo, and hello, everyone. Turning to slide 4, from a total company perspective, organic net sales were down 1.5 percentage points in Q1, consistent with the expectations we laid out on the last call.

Pricing was positive for the third consecutive quarter, up 1 percentage point and driven by favorable pricing in the United States and Rest of World markets.

Volume mix was 2.5 percentage points lower in Q1, due to known headwinds in the United States and Rest of World markets that overshadowed solid retail growth in EMEA and Canada, strong Easter programming in the United States and foodservice growth in both the U.S. and EMEA. By segment, the U.S.

was slightly better than our initial expectations, Planters and Ore-Ida had a negative 1.5% impact, and trade spend timing was a 1.2% headwind to Q1 net sales. Excluding these factors, underlying U.S. consumption was significantly better than reported results and continued to show sequential improvement.

In Canada, as expected, results reflect earlier go-to-market agreements with key retailers, with growth tempered by retail inventory reductions at a key retailer, versus the end of 2017.

EMEA had a strong first quarter, driven by soups and meals growth in the UK, as well as condiments and sauces growth across the zone, including southeast and central Europe, where we are now selling the Kraft brand.

And in the Rest of World, top line growth was supported by pricing, while vol mix was held back by distribution-related issues, primarily re-alignment in Mexico and continued disruption in Puerto Rico, a seafood shortage in Southeast Asia that is impacting our canned business in Indonesia and the implementation of SAP in Brazil.

That said, we do expect sequential improvement moving forward.

At EBITDA, Q1 performance was slightly better than expected, although the drivers were consistent with our expectations, specifically solid gains from productivity savings and net pricing, gains that were offset by inflationary pressures, primarily elevated freight and resin costs, as well as cost associated with our aggressive commercial investment agenda.

At adjusted EPS, we were up $0.05 versus Q1 last year, driven primarily by a roughly 730 basis point reduction in the adjusted effective tax rate versus Q1 last year, while other below-the-line items largely offset one another. One final note I'd like to make about Q1 results that's not on the page is our cash generation.

In Q1, we delivered nearly $500 million of additional cash versus the year-ago period. This came from a combination of lower capital expenditures, lower cash taxes and lower working capital. In sum, our Q1 financial performance was in line to better than expected and provides a solid start to delivering our full-year outlook outlined on slide 5.

To start, we continue to expect 2018 will be a year where just less than half of our net sales and EBITDA will be delivered in the first half of the year and more than half in the second half. And this is compared to 2017, where net sales and EBITDA were roughly equally split between first half and second half.

In fact, in Q2, while the set of sales and cost headwinds will be similar to Q1 and we will continue to press our aggressive commercial investment agenda, we will be up against our strongest EBITDA comparisons of the year in every reporting segment versus last year.

But as Bernardo said, with four months now behind us, we are gaining visibility on a number of trend-bending drivers, both commercially and operationally that are giving us confidence in a strong second half and solid momentum heading into 2019. To be more specific, we see four tangible drivers of the turnaround in the second half of 2018.

First, the transitory headwinds in the U.S. during the first half should not just fade but are likely to turn into positive year-on-year contributors, given strong go-to-market plans for Planters nuts, Oscar Mayer cold cuts and our frozen business.

Second and also in the U.S., we expect to begin seeing more benefit from the investments in category management and go-to-market capabilities, benefiting both the strong innovation agenda we have planned as well as our in-store presence with key customers.

Third is international growth, driven by a combination of innovation and whitespace initiatives in virtually every market, Canada, EMEA and Rest of World. And, fourth is leveraging greater net savings as the benefits from the initiatives we have at work across procurement, logistics and manufacturing ramp-up.

From an overall perspective, we remain confident in delivering positive constant currency EBITDA growth and strong adjusted EPS growth for the full year, as we outlined in February. And to be clear, we're targeting EBITDA growth versus the revised 2017 base, following the new accounting standards we've implemented.

For earnings per share, we now expect an incremental $40 million of depreciation and amortization versus $70 million previously and we continue to expect incremental interest expense of roughly $100 million versus last year and an effective tax rate of approximately 23% for the full year.

And in terms of cash generation as evidenced by our strong Q1, we continue to expect a significant step up in cash generation from a combination of lower capital expenditures, lower cash taxes and lower working capital.

To close, I'd echo Bernardo's earlier thoughts on the year in our path forward that we're developing capabilities to create brand and category advantage to achieve profitable growth, that we're investing aggressively now in order to see the benefits sooner, and that these are the key factors shaping what is likely to be an atypical balance of net sales and EBITDA between the first half and the second half in 2018.

Now we'd be happy to take your questions..

Thank you, sir. Our first question comes from the line of David Palmer of RBC Capital Markets. Your line is open..

Thanks. Good evening. You mentioned your investments in feet on the street, the sales in stores.

Could you talk about where you are with those investments? Have you seen returns in that and can you give us a sense that you're feeling confident you'll get something for that investment?.

Sure, David. Hi. This is Paulo. So, yes, we're deploying this different in-store coverage model that it basically involves replacing some existing third-party merchandises that we own, we have in our stores to in-house salespeople.

What we believe that we can better execute and understand the category needs with that, and we have leveraged advanced analytics, we are forming the metrics to track this activity. We started doing this in 2017. I can guarantee you that it's being up and we're actually doubling down on this..

Great. And just a question on your – the big four, cheese, nuts, lunchmeat and coffee, those categories have that pass-through element. They've been four categories for you which your brands have been wobbling in terms of their market share lately. It looks like private label has been the beneficiary in some of these.

Could you tell us what's going on? Is it something of a price timing issue or is there something else with regard to your promotion strategy that you're looking to adjust? Thanks..

Hi, David. This is David. Thanks for your question here. So let me step back on pricing a little bit and let me give you some more color on Q1 and then going forward.

So in Q1 we realized a fair amount of carryover pricing from last year, so you saw that we were up 1% overall for Kraft Heinz and this is really in the places that we planned, okay, outside of key commodities, so this is something that will likely last going into the rest of the year.

Outside that pricing, pricing out of commodities was pretty stable for the quarter and we expect that to maintain stability going forward, so that's kind of our Q1 pricing.

Going forward as a matter of practice, we don't talk about potential future pricing actions, so I won't get into that but what I will say is we continue to be very confident in the strength of our brands and we will continue to strike a balance between market share and profitable volume for each of our categories..

Thank you..

Thank you. Our next question comes from the line of Ken Goldman of JPMorgan. Your question, please..

Hi. Two for me if I can. You talked about the headwinds in 2Q. I just want to make sure I understand what the message is there. Typically, if you look at seasonality, EPS, EBITDA in 2Q, they've been around 10 – EPS anyway about $0.10 higher than 1Q. This is exactly what the Street's modeling today, $0.99 versus $0.89.

So I know you can't give guidance, but I just want to make sure we're hearing you correctly on what that similar headwinds comment meant, right? Does it mean that we should expect similar EBITDA or could seasonality still lift 2Q's EBITDA ahead of 1Q like it typically does?.

Hey, Ken. This is David. Thank you for the question. So as I said earlier, 2018 is likely to be a bit less first half, a bit more in the second half, and that compares to the roughly 50/50 split that we had last year in 2017. So obviously shifting very few percentage points can cause significant year-over-year percentage changes.

And on top of that, particularly in Q2, given what we're up against in terms of having the strongest EBITDA comparisons on a margin perspective last year in every geographic segment. So that's something that will be relevant for next quarter.

That being said, again, I think there are three very highly tangible drivers to our kind of second half outlook. First, as I said, the transitory headwinds in the U.S., including nuts, cold cuts and Ore-Ida. These are three significant factors that should fade into the second half.

Second, we have a very strong innovation pipeline and whitespace agenda across the company this year that I think EMEA is actually already kind of proving out for us, and that will gain traction in the U.S., Canada and Rest of World.

Finally, on the bottom line, our savings curve should catch up to inflation that we've seen in the business and the investments that we've made in the business as the year progresses. So that's kind of, again, our breakdown for the year.

And again, just to kind of reiterate what we said, the capabilities we're building in category management, brand-building, and go-to-market that we're investing this year aggressively, this will benefit us both later into 2018 and will benefit us in 2019 and going forward..

Okay. Thank you for that. And my follow up is you mentioned, I think, if I heard you correctly, as the management team, you're going to have 60% more, and I thought I heard the phase innovation projects than a year ago.

I wanted to understand what's an innovation project as you define it, and how do I reconcile the talk of 60% more projects with the sort of Big Bet strategy you've told us about in the past? Thanks..

Hi, Ken. This is Paulo. What I can talk about the U.S. innovation pipeline here.

So what I can tell you is that when I compare year-over-year the number of projects and the number of dollars that we are seeing coming from innovation for – that we expect to have innovation in 2018 – is growing versus 2017 and has many examples now being launched and being shipped.

We have in all of these projects, one another driver that we are incorporating here. We are very focused on the incrementality of the innovation that we are launching. So we have the Just Crack an Egg, Heinz Mayo is coming, Planters Crunchers, our partnership with Food Network, a lot of new dressings. We have the Capri Sun base renovation.

And on top of that, we are already entering Q2, we have 19 refrigerated and soft frozen meals, and also a very strong pipeline in frozen meals that we brought from the second half. So again, we are very happy and confident with the U.S. innovation pipeline that we already got distribution in 2018..

Just to complement Paulo, adding to the rest of the work, you're going to have the same, the similar story that's an extension of a number of projects, right, renovation and incrementality in a set of projects that we call the Big Bet strategy, Ken. That's why it's all totally connected.

That's what we call the platform launch, right? Just to name a few on the international market, we have MAX Boost in Canada. We have several in Kraft territory in Europe, right, now coming to Australia as well. We have Jif Jaf cookies in China. I have the entire Heinz baby food renovation in Europe and Asia.

I have the premium line in soy sauce in Indonesia, pasta sauce in Japan. So those are some of key platform renovation that match to the Big Bet concept that you just addressed. At the same time, we are widening our innovation pipeline worldwide..

Thank you..

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

Great. Thank you, and good evening. I wanted to ask about gross margins.

Can you talk a little bit about how gross margins trended by region? And then specifically, I'd like to understand if retailer pressures are constraining the gross margins and then if it's a developed or emerging market pressure?.

Hi, David. This is David. Thank you for the question here. So as you know, broadly we manage EBITDA dollars not to margin, whether it's EBITDA margin or gross margin. So, we're very focused on growing our EBITDA dollars. That being said, in Q1 you saw our gross margin overall was essentially flat versus prior year. I think two things to note on that.

One, we did have a small benefit from the timing of pension and post-retirement costs and this is something that's not going to repeat, and, two, we did have another small benefit from a mix impact from a Easter shift into Q1 from Q2 that's going to work against us next quarter.

Going forward, again, I'd expect sales growth to improve before EBITDA growth and before EBITDA improves and again, coming back to the fact that we have inflation coming into this year, and the accelerated investments that we're making in the business that run ahead of our savings curve, and the ramp-up in our commercial growth..

David, though, can you just comment on a little bit on the regions? I mean, one of the most talked about issues right now in the sector is the potential pressure on gross margins and a comment on the U.S. business. I mean, the sales growth is weak so we're all wondering here.

I mean, I hear what you're saying about the back half of the year, but just like your sense as to the current environment and is this pressure something that, do you actually think it would constrain your ability to manage your margins over time?.

Yeah, no. So again, I'm not going to speak to gross margin by segment or by zone for us, but again we're happy with the performance in Q1. We're running consistent with our plan for the year, and again, that plan is going to be very second half weighted with the three kind of tangible drivers that I talked about with the headwinds in the U.S.

including nuts, cold cuts and Ore-Ida abating through the year with the strong innovation and whitespace agenda in EMEA and rest of the world and U.S. and Canada, and our savings curve that should catch up with inflation and investments..

Okay. Thank you..

Thank you. Our next question comes from the line of Robert Moskow of Credit Suisse. Your line is open..

Hi. Thank you for the question. I was hoping that you could help me understand how your relationships with the trade have evolved.

Last year, there were a series of service issues on Ore-Ida and then you also had some – I would say some pushback from a major retailer on their pricing scheme for private label and cheese and meats and then you had the Davenport issue.

So are all these issues kind of being resolved now? And do you feel like the retailers have given you a clean slate and that's why you feel confident that you're seeing a bit of a tipping point here in terms of your distribution trends, your innovation trends, and your programs? Or are those issues weren't that big to begin with? Thanks..

Hi. Hi, David. This is Paulo. Hi, Rob. It's Paulo here. So, again, what I can tell you is that when you think about our service level for this year we had a big improvement. As you know, the majority of the footprint work is now behind us, so, again, we started the year with a very good and a strong service level.

We have this focus issue in capacity from Ore-Ida, but beside that, all of our products and capacity we are delivering and aligned what our customers they demand.

So, again, we feel it's going to place some service constraints in Ore-Ida, but overall my total service level and the ability that we are seeing to engage with the customers, to get our innovation distribution, to get our products there, to get – to negotiate and staff our JVPs (32:49) really well, so we're feeling good about this relationship for the year..

Okay. Thank you..

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

Good afternoon, everybody..

Good afternoon..

Hi. I guess I read some comments the other day from a recent conference that were made by Jorge Paulo Lemann and basically acknowledging that 3G bought brands that they thought could last forever as he put it, but then all of a sudden got disrupted and those were kind of his words.

And I realize some comments can be taken a bit out of context and such, but I guess I was hoping to, first, get your take on these comments. It's hard to know, kind of, what to make of them. And then second, maybe better understand how thoughts like this inform or impact certain capital allocation decisions for KHC.

I guess, in other words, does this disruption make slower growth staple assets less interesting, even if compelling transactions from a financial standpoint?.

Thanks, Andrew. It is Bernardo.

Look, let me try to address your question directly, right? I think the disruptive market and changing channels consumer habits and so on, that's happening for quite some time and that's something we have been in knowledge also for some time, right, a significant part of our commercial investments, right, that we announced at the end of last year.

The $250 million to $300 million is behind new digital initiatives, right, behind e-commerce, behind new channels, behind go-to-market, behind the innovation that's coming to market to support it and behind working dollars in media as well as service.

With that being said, I think, the big message here is really that there will be – we cannot have any compliance with the brands we have. It's actually the opposite. We believe in the big brands when you support them, right? When you give them the right relevancy, the right product offering in the marketplace, they go really well.

It's the case, for example, if you think about Heinz in the United States, it has been growing 15% every year since 2015. The re-allowance of the Kraft brand with the Super Bowl campaign, with family greatly is giving us a lot of excited behind Kraft's new offers in cheese and other segments that can be very relevant.

But it's also true to say that these big brands that have the scale, that have the profitability, right, they will need to come with new offers from different angles and different categories for smaller brands and so on. And we are doing that if you think about the case of DEVOUR on the frozen territory.

If you think about Just Crack an Egg going for breakfast in refrigerated, right? If you think about the things we are doing with brands like Classico, like Cool Whip, like A.1, right. If you think about the extension of the Planters with Planters Signature and NUT-rition, right? So the combination of the two things are extremely important.

So in a sense to your question, it's changed our capital allocation, mindset. My answer, it's no..

Okay..

Actually, I think it's very in line with what we have been saying for quite some time, right? Our framework for capital allocation, organic and inorganic, has not changed. We continue to like big brands.

We continue to like business that can travel and continue to like business that we can generate efficiency that can be invested behind growth, brands, products and people..

Great. Thank you very much for that color. One quick follow-up.

If you expect some of the similar topline impacts in 2Q as in 1Q, plus you'll have an added headwind from the Easter shift that reverses a little in 2Q, I guess, does that suggest that 2Q organic sales could be weaker sequentially compared to 1Q? Or would you expect some sequential improvement, even with the Easter shift hurting you? Thank you..

Andrew, this is David. Thanks for the question there. So let me walk through a little bit zone-by-zone or geography-by-geography for Q2 on the sales side. So from a topline perspective in the U.S., we expect to be kind of sequentially similar to Q1.

Okay? So we still expect to see the impact of headwinds from Planters and Club and from Ore-Ida and cold cuts, as we've talked about. And again, this will be about 1.5 percentage point headwind for us.

In addition to that, we have a combination of trade phasing and the Easter shift, the reverse that we saw in Q1, which combined should be about 1 point headwind for us. So overall, pretty similar to what we saw in Q1. If you look for each of the other zones in Canada, we will see the most difficult Q2 comparison driven by three factors.

So first, we had retailer inventory kind of rebuild in Q2 that we will be lapping, and this was particularly strong in cheese. Two, we had a strong summer 2017 programming, which is primarily in our condiments business. And three, the fact that our innovation pipeline in 2018 is a little more second half weighted than it was in 2017.

Okay? And then if you look to the Rest of World, we expect to see kind of sequential improvement through the year of the investments we're making and that we accelerated in 2018 really materialize. And then in Europe, I'm excited and continue to be confident in our strong growth for the year..

Great. Thanks very much..

Yeah..

Thank you. Our next question comes from the line of Jonathan Feeney of Consumer Edge. Your line is open..

Thank you very much, guys.

Following up on Andrew's question, should I ask really simply with all the cross-currents going on, competitors struggling, valuations coming down but the 10-year coming up 50 basis points, would you say it's a better, worse, or unchanged outlook for you as you look at the likelihood and attractiveness of doing acquisitions is my first question? And secondly, if higher freight costs remain or continue to get higher, does that at all threaten things like outsourcing, you co-manufacturing, you consolidating plants, the kind of cost savings initiatives you've been so successful with over the past couple of years? Thank you..

Hi, Jonathan. Here's Bernardo addressing the first question you had about M&A. I really don't think it changed the framework and the way we think about that. We are very long-term focused, right. We are very disciplined in the approach we have about M&A, really looking at things as two plus two is more than four.

Like I mentioned in the question before, our framework to look that of liking brands, business that can travel, and synergies that can capture that allows us to reinvest is still in place. So I don't think those movements you're talking about in stock price get in the way or interest rates get in the way of this framework in this long-term framework.

What is right that you said the devaluations you're seeing today are more attractive than we have seen six months ago and 12 months ago, even for us in a relatively basis..

Thank you.

And on freight?.

Hi, Jonathan. This is David. Let me take freight for you. So I'll split this into kind of two pieces.

So first up on footprint, when we did the initial modeling on each of these footprint projects, we took into consideration potential kind of variable changes, whether it's fuel or other kind of costs that could potentially cause fluctuations going forward.

And I'd say all that being the case, we're still very happy with what we did on the footprint side. Second, in terms of kind of inflationary pressures we're seeing, so not surprisingly we are seeing inflationary pressures similar to what some of our peers have talked about, whether it's in packaging, whether it's in oil or freight.

But what I will say is while these costs are definitely higher, we certainly feel it's manageable within the context of our savings curve. And we're still kind of on plan to our 2018 targets despite that..

Thank you..

Thank you. Our next question comes from Pablo Zuanic of SIG. Your line is open..

Thank you very much, and good afternoon everyone. Look, Bernardo, my question is more about balance sheet flexibility. If you can comment in terms of potential asset divestitures that give you flexibility to fund future deals, remind us of how high can you go in terms of debt leverage post a deal.

And also would there be a scenario where Kraft Heinz could end up with a dual class share structure in the future, so your controlling group can keep control as the equity base expands? And the second follow-up maybe for Paulo Basílio.

I hear a lot about innovation, about different products, Capri Sun, Oscar Mayer and other things, but nothing really about coffee. Just give us an update in terms of where you are in coffee with lots of innovation from obviously Keurig, Smucker's and other companies, but not hearing much from Kraft Heinz. Thank you..

Hi, Pablo. This is Bernardo. Let me address the first part of your question. Then I'm going to ask David to comment. On the portfolio, while I can say that we, as we have been saying, we're happy with existing portfolio. I think each brand and category does play a role.

For sure, they're in the different stage of their life and the categories have different performance, as expected. But in general terms, we're happy with that. Also true that after 2.5 years of integration, our understanding of each one of the category is much different.

What allows us to measure the returns of each one of them and their perspective looking five, 10 years in a much better way than we would say that a year and a half ago, right. So we do look each category and each transaction in a different way. But in general I would say we're happy with our portfolio.

David, do you want to complement the question, please?.

Thanks, Bernardo, and thanks for the question, Pablo. This is David. So in terms of balance sheet, what I'd say is again and I said before, we continue to be very focused on delevering. We are fully committed to investment-grade status. That is non-negotiable for us. That is top priority for us from a capital policy perspective.

So I think I just want to reiterate that point. Second, on the year, we may not get all the way to our intended run rate in 2018. That's largely going to be in part due to the fact that we prefunded our post-retirement medical and part of our pension at the end of last year. But bottom line, we're very happy with where the balance sheet is.

We believe our credit's very strong and getting better. We've significantly de-risked the balance sheet. We expect significant cash benefits from the Tax Cuts and Jobs Act that I talked about last quarter, and we expect considerably better post-integration free cash flow as well.

So again, we feel very good about the balance sheet and are committed to our investment grade status..

Hi, Pablo. This is Paulo. On the coffee question, I think you will see that we're going to be launching – you're going to see new products in our coffee category and segment in liquid in cold brew, in ready-to-drink under Max brand, the Maxwell House brand. And also you're going to be see a lot of more investments behind the brands in the second half..

Thank you..

Thank you. Our next question comes from the line of Steven Strycula of UBS. Your line is open..

Hi. A quick question for David. Just wanted to get a feel for the phasing of the reinvestment spend. Was first quarter the largest bulk of that to drop, or should we expect 2Q to be a little bit bigger than 1Q? That's my first question. Thanks..

Hi, Steven. Thanks for the question. This is David. So in terms of the investment profile, I'd say from a P&L perspective, should be pretty consistent through the year. So I wouldn't expect a lot of volatility there. I think it's important to kind of talk a little bit about where we're investing again, which we talked about on the last call.

So first, we're investing in go-to-market and that's both in the U.S. in-store sales that Paulo talked a little bit about earlier. We're investing in e-commerce like Bernardo mentioned, as well as distribution expansion in some of our key international markets like China and Latin America.

And these types of investments will largely be through our SG&A line. Second, we're investing heavily in service, and that's primarily in North America, but we're also investing in Europe as well. And this type of investment will largely flow through our cost of goods sold line.

And then finally, we're investing in working media dollars, which we plan to drive in 2018 and will also be more concentrated in our SG&A line..

Okay, great. And then second question is for Bernardo. Just wanted to get a sense of your level of confidence in the back half revenue acceleration this year versus the prior year. In 2017, you seemed pretty confident that a lot of the summer plans were really going to come to fruition. Sales trended a bit below that.

So what gives you I guess the added degree of confidence this year relative to last year? Thank you..

Hi, Steven. I think it's a fair question. Well, I think a lot's what David already highlighted before, right, the trend that we're seeing here, David and Paulo, are pretty much related to contracted or able to regain on the nuts territory. We'll be behind the constraint we have in capacity on the potato territory.

Our innovation is coming really strong as we speak, right. And even with all the inflation pressure described by David, the actions which we put in place on the cost side, especially on the procurement and manufacturing side, they are very weighted towards the second half of the year.

So when I look about sales and EBITDA, for sure we need to execute, but all the drivers of the joint business plans with the main clients in United States, Canada, Europe, Asia, in Latin America are in place.

The main trend that we are seeing in the top categories where we're still suffering decline are in place and the innovation is coming to market. So by all means, we are seeing consumption to continue to get better in most parts of the countries we operate. So there is a lot for us to do like we have our analogy.

We know still there are headwinds against us coming in Q2, but we are confident that the actions we're taking today and the investments we're putting in place will start to payout in the second half of the year carrying this momentum going into 2019..

Thank you. Our next question comes from the line of Bryan Spillane of Bank of America. Your question please..

Hi..

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

All right. Hey. Thanks. Good afternoon, everybody. Just two quick ones for me. First, Bernardo, I'd like to get your perspective on valuations.

And I guess more specifically we've seen the equity markets reduce the valuations for consumer staple stocks, yet we've seen transactions within the industry sort of not come down as well given the transaction multiples. So if you can give a perspective on just kind of what you're thinking about the transaction market, just how multiples have fared.

And is that at all affected your appetite at least in the near term in terms of maybe where the ask is versus what you'd be looking to bid?.

Well, thanks, Bryan. Look, as a matter of practice, we don't like to comment on rumors and speculations on our peer's transaction, right. I think what we can say, again, that our framework for M&A has not changed like I highlighted before, and we are disciplined in the sense of seeing prices and return and long-term shareholder value.

Because, remember, the way we operate and invest as owners there is a very long-term perspective, right. We're definitely not traders in that sense. We look those things that we can own and create value from a longer-term job.

So in that sense, we do believe that valuations are definitely more attractive today, even if you think about relative valuations. If the price is right, we believe we can move when we do find a situation that two plus two is more than four..

As a follow-up, does size matter? Like I think there's a perception that the only type of properties you're looking at would be large transformational, but is that necessarily true? Do you look at small bolt-on and sort of large transformational simultaneously?.

Hi, Bryan. This is David. So, look, I think our number one goal, as Bernardo said, is to generate shareholder value over the long term.

So we'll look at any opportunity that comes our way, but we're not going to speak to any sort of hypotheticals, but again that's our number one goal, and we'll look across a number of different potential opportunities..

Okay. Thank you..

Great. Well, thanks everybody for joining us today. For the analysts who have further questions, myself and Andy Larkin will be around to take your calls. And for those in the media with follow-up questions, Michael Mullen will be available for you as well. So thanks very much and thanks for joining us today..

Thank you. Have a good evening..

Thank you..

Thank you, all..

Thank you for your participation, and have a wonderful day..