卡夫亨氏 (KHC) 2015 Q4 法說會逐字稿

Good day.

My name is Sabrina, and I will be your operator today.

At this time I would like to welcome everyone to the Kraft Heinz Company's fourth-quarter 2015 earnings conference call.

I will now turn the call over to Chris Jakubik, Vice President of Investor Relations.

Mr. Jakubik, please go ahead.

Good afternoon, and thanks for joining our business update for the fourth quarter 2015.

With me today are Bernardo Hees, our CEO; Paulo Basilio, our CFO; and George Zoghbi, the Chief Operating Officer of our US commercial business.

During our remarks, we'll make some forward-looking statements that are based on how we see things today.

Actual results may differ due to the risks and uncertainties, and these are discussed in our press release and our filings with the SEC.

We will discuss some non-GAAP financial measures during the call today.

And you can find a GAAP to non-GAAP reconciliation within our earnings release and at the back of the slide presentation available on our website.

Also please note that in 2015 we had a 53rd week.

So on the charts in today's presentation, we've excluded the extra week from our organic net sales growth figures, and we've provided our estimate of the impact on adjusted EBITDA and adjusted EPS within each of those bars.

With that out of the way, let's turn to slide 2, and I'll turn it over to Bernardo.

Thank you, Chris, and good afternoon, everyone.

Before we review our results and talk about the year ahead, I want to provide context to today's conversation by reviewing our goals and the strategy.

As you know from our last call, our strategy is based on three objectives: profitable sales growth, achieving and maintaining best-in-class margins, and a superior return of capital as an investment-grade Company.

This is our multiyear plan on one page, and it is important to understand that not everything starts to deliver at once.

In some cases, like revenue management, it's not a project.

You must build an internal capability before you can achieve sustainable results and returns.

So with that as a background, let's turn to slide 3 to talk about where are we on our journey.

Overall, 2015 was a year of significant accomplishments for Kraft Heinz.

We came together as one global organization and began building on the rich history of our dynamic Company.

The integration team executed an extensive action plan with two main objectives: one, operating as one Company with one set of goals and business objectives; and, two, achieving solid alignment for the 2016 budget, built from the bottom up by country and field teams.

In many ways, we are pleased with what did not happen in 2015: namely, business disruption.

We made difficult but necessary decisions around the organization restructuring that will improve our efficiency, making Kraft Heinz more competitive, and accelerating our investment in our brands, products and people.

We have already made solid investment in our people, promoting more than 2,400 team members worldwide and introducing a new long-term incentive program that gives many employees the opportunity to increase their ownership in the Company.

In short, our vision, values and process are building the culture of ownership and empowerment necessary for the long-term achievements of our Company.

We have also made significant investment in our world-class brand.

We were successful with big bets and innovations like Lunchables, P3, Heinz yellow mustard, sauces in Europe and mayo in Brazil.

And we continue to support strong levels of investment in R&D to carry forward big bets in 2016 and 2017.

Finally, we made meaningful progress across our global operations.

We significantly improved our case fill rate in United States, and Europe to over 97% -- our best performance in both the legacy Heinz and legacy Kraft business in quite a while.

We delivered solid EBITDA and margin gains based on savings from manufacturing footprint efficiencies and improved product mix.

And we achieved strong performance in the US cheese and meats business, effectively managing pricing net of commodity costs.

This led to the establish of a solid financial base for the new Kraft Heinz Company that we believe can grow strongly and sustainably.

Before I go through our agenda for 2016, I'm going to ask George and Paulo to talk about how we landed 2015 and provide a deeper update on the overall status of our key businesses.

George?

Thank you, Bernardo, and good afternoon, everyone.

Turning to slide 4, I will begin by saying that we are feeling good about the state of our US business and our ability to generate profitable growth in 2016 and beyond.

And that, despite a sizable step down in volume and mix performance in Q4.

Why am I optimistic?

Several reasons.

First, regarding profitable net sales with significantly lower promotional activity versus Q4 2014.

As you can see on the slide, we drove solid 1.2% non-promoted consumption in Q4 and 1.5% non-promoted consumption for the full year for our combined portfolio in the United States.

This was driven by innovation, new product news, and an increase in working media behind ketchup, pasta sauces, Lunchables, P3, cold cuts, single-serve coffee and cream cheese.

Secondly, our shipments were below consumption in the fourth quarter.

This was due to shipment timing versus prior periods, and mainly related to comparisons with Q4 last year when, for instance, we were filling the retail pipeline ahead of our launch of McCafe.

As well as the business losses in the food service highlighted on our last call.

But this is now behind us, and we are pursuing a solid development plan for our food service business in 2016.

Third is the fact that our integration initiatives are beginning to have an impact, with organizational structure savings contributing to EBITDA growth in Q4.

And looking forward, savings from ZBB should begin to be realized across our combined operation, and modernization and capability building within our manufacturing footprint should ramp up significantly.

Finally, I am also confident about our prospects because of our robust innovation pipeline, big bets, and my belief that we are well-positioned to build on our 2015 accomplishments in 2016.

In particular, we've become even more equipped and more focused on putting product and investable marketing ideas into the marketplace against some of our biggest turnaround opportunities.

I'm not going to tell you that we have a solution for every part of our portfolio just yet, but I do believe our pipeline is in better shape to commercialize trend-bending products into the marketplace.

And we will be in even better shape as we execute our footprint initiatives over the next two years.

Let me give you a few quick examples of what to look for on your next round of store checks.

Capri Sun Organic is now in the marketplace, with advertising scheduled to hit later in the second quarter.

We are making changes to ensure that mac and cheese is more relevant today than ever before, with no artificial flavors, preservatives or synthetic colors.

And you will hear us making noise about this very soon.

Also, we are working to improve our nutritional frozen needs offering, which we will talk about later in the year.

We will support these and other big bets with a solid increase in working media dollars.

I hope you all saw our meet the ketchups campaign that we kicked off during the Super Bowl.

It is part of a major marketing campaign behind Heinz ketchup.

We expect 2016 will be a strong marketing year for us, including a further shift of our advertising spend from nonworking to working media, with our goal of increasing working media to at least three-quarters of our marketing budget.

With that, I will turn it over to Paulo to walk through the numbers in more detail.

Thank you, George, and good afternoon, everyone.

Let's turn to slide 5 to talk about the key factors impacting our total Company performance for both Q4 and full-year 2015.

One of the biggest factors impacting our reported results all year was the strong negative currency translation, an impact that grew to the 6% range on the top line and 9% to 10% of EBITDA beginning in the third quarter, when we recognized devaluation of the Venezuelan bolivar.

And we expect this to continue through the first half of 2016.

Net pricing was neutral to favorable in all segments in both Q4 and for the full year.

This was driven by a combination of price increases and taking out inefficient trade spending.

Partially offset by lower net pricing related to lower net commodity costs across our Big 4 commodities in the US and Canada.

And with dairy prices remaining low, this is something we are likely to see continue into the first half of 2016.

We had negative volume mix in the US, Canada and Europe that offset strong growth in the rest of the world.

The volume mix decline accelerated in Q4, but mainly due to factors not expected to repeat.

And I'll talk more about those with our segment results.

At the EBITDA line we delivered a strong growth in Q4 and the full year, driven by restructuring and integration savings, expanding our adjusted EBITDA margins by more than 200 basis points for the full year.

Dropping down to adjusted earnings per share, adjusted EPS of $0.62 did benefit by approximately $0.03 from the 53rd week.

But this was more than offset by roughly $0.10 from unfavorable tax impact.

In Q4 this year, we incurred tax expenses related to the repatriation of foreign earnings, done as part of our legal structure integration process.

This pushed our Q4 implied tax rate into the mid-30s and, for the full year, to just over 30%.

By contrast, in 2014 we had favorable tax impacts that drove implied tax rates on adjusted EPS into the mid-20% range for both Q4 and full-year.

That being said, we continue to believe that an effective tax rate of approximately 30% is very representative of our average rate on an ongoing basis.

That's the total Company.

Let's turn the slide 6 in our US segment results.

You can see here that we have sequentially weaker organic net sales growth in Q4.

This was due to weaker overall volume mix.

The primary sources of the volume mix decline were consistent with what you have seen all year: category trends and a volume loss associated with higher net pricing in ready-to-drink beverage, powdered beverages and boxed dinners.

Category and market share declined in nutritional frozen meals and lower foodservice shipments due to lost bids at some key customers.

In Q4, two other factors resulted in unfavorable comparison and a further year-on-year decline in volume mix.

One, shipment timing meaningfully impacted by the pipeline shipments for the launch of McCafe last year.

And two, we executed significant promotional activity in Q4 2014, particularly in parts of our cheese and spoonable portfolios that we chose not to repeat this year.

Looking forward, we don't expect either of these factors to hold back our Q1 volume mix performance.

By contrast, growth in pro forma adjusted EBITDA in the US accelerated in Q4 as did adjusted EBITDA margins on both year-over-year basis and sequentially versus Q3.

Consistent with the full year, the US benefited from a combination of favorable pricing net of costs and lower overheads.

In Q4, our adjusted EBITDA growth and margins picked up momentum from a combination of increased integration savings and better overhead cost performance as the unfavorable bonus accrual comparisons we faced in Q3 faded.

In Canada, on slide 7, our results continued to reflect a double-digit currency translation headwind that grew as the year progressed, as well as challenges to increase prices to offset higher input costs in local currency terms.

Our price realization improved in Q4 relative to full year.

However, volume mix declines drove organic net sales growth into negative territory.

For the year, this was mainly caused by lower shipments in food service, refreshment beverages and infant nutrition.

In the fourth quarter, the decline in volume mix was greater, primarily due to comparisons with prior year in food service and coffee, including last year's launch-related shipments of McCafe.

Adjusted EBITDA in Canada was relatively flat for the year, but up mid-single digits in Q4.

This reflected the fact that our price realization had caught up to higher local input costs.

That being said, our Canadian business is facing further local cost inflation in many categories.

And this month we are implementing additional pricing actions to offset the higher costs.

Turning to Europe on slide 8, while currency translation remained unfavorable, it was slightly less of a drag on our reported results in Q4 than what we had seen most of the year.

Beyond currency, the drivers in Europe remained largely the same in Q4 as it had been year to date.

Net pricing gains from a strategic pricing in ketchup and mayonnaise across a number of markets offset by lower volume mix.

In terms of volume mix, despite a significant improvement in our product mix, volume mix was down in the mid-single digits for both the year and Q4.

This was primarily driven by volume declines related to cutting inefficient promotional activities in UK beans, price increase in ketchup and ongoing consumption declines in Italy infant nutrition.

In addition, we experienced lower UK shipments in Q4 due to a combination of three factors.

One, our own efforts to reduce low-return promotional frequency.

Two, competitors moving to increase price based competitive activity to gain market share.

And three, all these happening during unseasonably warm weather at the start of the soup season.

While this scenario will likely remain a challenge for us in Q1, we are now putting in place plans to drive better soup consumption and defend market share.

In the end, improved product mix, along with manufacturing and overhead cost savings, combined to deliver double-digit constant currency adjusted EBITDA growth for both Q4 and the year.

And we did this while significantly increasing working media during the year.

So overall, we feel good about the health of our European business, and we will continue to invest in profitable growth as we move forward.

Finally is rest of the world on slide 9. Here, negative currency translations remain at elevated level in Q4.

Roughly 33% of net sales and 56% at EBITDA, consistent with the increased mpact we saw in Q3 when we recognized the devaluation of the Venezuelan bolivar.

And at current exchange rates, this is likely to continue during the first part of 2016.

Organic net sales grew more than 9% in both Q4 and the full year, with volume mix gains getting stronger as the year progressed.

For the year, volume mix growth was driven by strength in ketchup, condiments and sauces across all regions, and these gains more than offset declines in our Complan nutritional beverage business in India.

In the fourth quarter, better consumption trends in both Asia and Latin America drove increased volume mix growth.

At EBITDA, we posted strong constant currency adjusted EBITDA growth for both Q4 and the full year.

Driven by volume gains, mix improvements, as well as cost savings from ZBB and manufacturing footprint efficiencies.

Before I hand it back to Bernardo to close out, I wanted to provide you with a quick update on both synergies and capital structure.

I will start with synergies on slide 10.

Overall, we remain on track in each of the three areas of our integration program: organizational structure, ZBB and manufacturing footprint.

In 2015, we incurred $829 million of costs, with roughly two-thirds of those costs related to severance and employee benefits.

And we spent only about $225 million in CapEx related to the program.

Our estimate of the total costs to achieve our target savings remains the same.

$1.9 billion of pre-tax costs consisted of approximately $1.1 billion of cash costs and roughly $800 million in non-cash expenses like asset write-offs and accelerated depreciation.

And roughly $1.1 billion of CapEx for footprint optimization.

I would also note that in 2016, we expect capital expenditures to ramp up considerably as we begin to roll out the bulk of our footprint initiatives.

As a result, the majority of the costs to achieve our program will be spent in 2016.

As far as savings, we realized roughly $125 million of savings in 2015.

And we continue to target and remain confident in our ability to deliver aggressive cost savings of $1.5 billion, net of inflation, by 2017.

Turning to slide 11, I am pleased to share that our Board of Directors declared a dividend of $0.575 per common share today.

In addition, we ended 2015 at just over 4 times net debt to adjusted EBITDA, including preferred stock, and are confident we can deliver against our goal to reduce leverage to less than 3 times adjusted EBITDA over the medium term.

An important step in that process will be refinancing our preferred stock when it becomes callable in June.

And at current interest rates, this will be a highly accretive action from both an earnings and cash flow perspective for the Company.

I will now turn it back to Bernardo to wrap up our prepared remarks.

Thank you, Paulo.

Turning to slide 12, let's talk about what we expect to face in the year ahead.

Similar to what we saw in 2015, we expect currency and consumption trends to remain meaningful headwinds across most markets in the year.

And, as Paulo told you, our general managers from Canada to Asia will continue to face pressure to increase prices in many categories to offset higher input costs in local currency.

There is also the ongoing need to drive better consumption in the face of both consumer weakness and consumer desire for fresher, less-processed foods.

All that said, we are very excited about how Kraft Heinz is positioned.

To unleash growth, we continue to focus on innovation, go-to-market capabilities and increasing working media dollars.

We will build on our innovation pipeline through Big Bets in each market.

And as the year unfolds, you'll see us launch advances in areas where consumers are migrating.

Importantly, we are continuing to take a portfolio approach within the key categories in which we compete, from premiums to value offerings to meet consumers' demand across the spectrum.

On the cost side, we expect to make significant progress on delivering best-in-class margins through, one, delivering ZBB savings; two, making progress on our manufacturing footprint initiatives; and, finally, building a real performance-driven culture in Kraft Heinz.

It's still early, and as we evolve I will continue to share our plans.

Overall, it's an exciting and challenging time for the Kraft Heinz family.

In 2015, we took steps to build a solid base for sustainable growth.

We are executing a strong pipeline of initiatives in 2016, and our synergy plans are laid out through 2017, which will create an even bigger opportunity to invest in our people, our brands and our product.

Overall, we are confident that the Company is on track towards our vision: to be the best food company growing a better world.

Thank you.

And now we would be happy to take your questions.

(Operator Instructions) Ken Goldman, JPMorgan.

I wanted to ask about the comment that you've realized $125 million in savings, but you are still targeting $1.5 billion overall, because $125 million is a pretty small percentage of that $1.5 billion.

So I'm curious how are you getting such a big EBITDA margin improvement if you barely scratched the surface on that $1.5 billion?

Are the benefits and margins -- or maybe this is an obvious answer, but are they coming from drivers outside that number?

Lower promotions, or what?

I'm just curious to get a little bit of color on that one.

Hi, Ken.

This is Paulo.

Thanks for the question.

I think, actually, when you think about our EBITDA margin improvement, it comes from mainly three items.

The first thing is price net of commodity that you have in the quarter.

We also had some footprint optimization that we realized in Europe, and also the reduction in promotions that we stopped doing un Europe over the prior year.

So on top of that, we also had this $125 million in the quarter, integration number.

Wee saw the benefit of $125 million in the quarter, so it's one quarter of savings.

But those were the main items that we got to increase our EBITDA margin.

Okay, thank you.

I'll pass it on.

I know the call is long.

Bryan Spillane, Bank of America.

Question about the revenue.

I think one of the things we've heard quite a bit over the last few months is a concern that as the cost savings -- the margins start to expand, that you will get a downdraft on revenues similar to what you have seen at Heinz.

And I think today the organic sales growth was a little bit below where people were expecting.

So could you just talk about how this is different from what you experienced at Heinz?

And then also if you just clarify how much the shipment timing affected the overall sales comp.

Thanks.

Hi, Brian.

It's Bernardo.

I think it's important, as we highlighted in the remarks, to go to the specific items of the fourth quarter.

Paulo already went from all the regions on the specifics.

And there were some challenged categories like frozen meals or soup in the UK.

But when you see our market share performance (inaudible) and so one, it has been growing quite stable in most parts of the world.

So, most parts of what you are seeing, were a lot of us leaving negative ROI initiatives that really didn't support the Company for the long run as we continue to build the pillars and push us to a really profitable sales agenda.

As I always said, and it is important to remind, we are a sales organization.

And with that in mind, what I can tell you that I think is from the type of comparison you mentioned in the beginning, I think there are a lot of differences that apply today . First, we are pushing this agenda of innovation, of go-to-market capabilities and higher marketing dollars in a much faster pace than we did at that time.

And second, we are actually feeling good about the first quarter of the year and our objectives for 2016 and beyond on pushing this agenda.

Okay.

Thank you.

That's helpful.

And if you could clarify how much of the shipment timing in the US -- what effect that had on the comp.

Brian, this is George Zoghbi here.

The shipment timing in the US in Q4, as I stated in my brief prepared remarks, was affected by three things when you look at the comparison.

One is one-off items that we did last year in preparing to the launch of McCafe.

That was a big one for us.

The second one is we did not do promotional activities that we did in Q4 of 2014.

And the third one, in alternative channels, we exited businesses that we won't be overlapping moving forward.

So moving forward, you're going to see that the shipment sales and the consumption sales would be closely aligned.

Okay.

Thank you.

Andrew Lazar, Barclays.

This is the second quarter in a row where KHC saw positive pricing net of costs in every region despite obviously pretty negative input cost trends.

So I'm trying to get a sense of how this has been achieved given it is kind of a different outcome than maybe we would have seen from Kraft in the past.

And is this sustainable in this type of input cost environment?

That's the first.

And just second would be just what did you mean on that one slide about some execution or improvement in sales force execution?

Just curious if that's changed.

Is that in-store activities at the corporate level?

What was meant by that would be helpful.

Thank you.

Andrew, this is George.

Thank you for your questions.

Yes, we are very pleased with the work we did on PNOC.

And not just in Q4 over the last two quarters that you have mentioned but right throughout 2015, particularly in dairy, in meat, in coffee.

And we believe the strength of our brand equities and the investment that we have been making and we continue to make in these brands is allowing us to do that.

Do we feel this is sustainable?

Yes, we do.

And the reason we feel it's sustainable is because while we are doing this and the PNOC is being healthy and positive for us, if you look at the market share, which you have access to, we managed to grow share in all these categories.

For example, we grew share in cream cheese.

We grew share in processed.

We grew share in American slices.

We grew share in Oscar Mayer beef combos.

We grew share in snack nuts and seed.

We grew share in coffee.

Dairy is where we lost some share -- softening in natural cheese and hot dogand it was our willingness not to chase the market down.

So that -- if you want the reasons why we believe what we did is sustainable and with strong brands, we will be able to do that.

That's the first part.

The second part of your question, we are now of the size where we believe that assessing our market -- go-to-market model and sales by focusing on our capability to cover more areas and be more extensive, and the frequency of calls would be higher, would allow us to do more.

So we are experimenting with some models that we will be in a better position to share with you later on in the year.

Thank you.

Eric Katzman, Deutsche Bank.

I guess I have first like a basic question or broad question than a more specific one.

In terms of the -- I think Paulo, you mentioned higher CapEx to deal with the footprint.

So I assume the way that savings in 2016 and 2017 are going to flow as a result of that, first, will be more SG&A related.

And then maybe in 2017 it will be more cost of goods given the footprint changes.

And so I'm wondering what -- is that correct?

And then, two, can you say what are the incremental savings you expect in 2016 so we have more of a bridge between the two years?

And then I have a technical follow-up question.

Hi, Eric.

We are not breaking down the phasing of the savings, because that cannot be (inaudible) lot and just trying to match the quarter if the savings is not one week or one month delayed.

So what we have normally happen is and what happened last year is we start with the org restructuring.

And we saw already in the last quarter the savings flowing into our results.

And then we have together the ZBB and the footprint happening just right after.

And the ZBB is going to be in the long tail.

So, again, we expect to have the balance of the savings happen during 2016 but appearing in the full P&L in 2017.

We do not break out the phasing of the savings.

Okay.

And then just as a quick follow-up, I'm just trying to understand a little bit more.

If you've got $40 billion of goodwill on your balance sheet, is it a function of how the merger was accounted for that there isn't much more non-cash goodwill expense running through the P&L?

Because Kraft and Heinz both had big food-service businesses, and I would have assumed that those would've triggered more non-cash amortization expense.

Then I'll pass it on.

Thanks.

Hi, Eric.

It's Chris.

I think as -- once you get the 10-K, I think it will be a little bit clear because what you had was most of that goodwill going to indefinite live assets -- a lot in terms of markup of brand values because within the transaction, it was Kraft being acquired.

So that's where most of the goodwill would have been assigned, and largely to indefinite-lived assets.

But I can follow-up with you in a little bit more detail after the call.

Okay.

Thanks.

David Palmer, RBC Capital Markets.

Thanks.

Good evening.

Bernardo, you know from having your time in the fast food world that companies there will often open-market test the new product launch so the companies and the franchisees will understand how a big bet will work before the big bet is made and the dollars spent.

I'm reflecting on that because I feel like packaged food companies often have a sketchy track record on big-bet innovations.

They kind of give it a try.

When you think about the bets you are making this year, how comfortable are you that the incrementality and returns will be there?

And any color why would be helpful.

Thanks.

David, thanks for the question.

It's quite interesting.

In a sense, what we've tried to do with the big bets, not only here in the United States but Canada, Europe, and all.

We are going to fewer bets, but really bolder and stronger in that sense.

So in order to get their and mitigated the risk, we need really to test the profile in the pipeline from consumer insight up to the shelf as a program in a much more effective way.

And what you have been seeing from the experience in 2015 -- George mentioned some of them and so on that really have been paying out.

Look at the performance of Heinz yellow mustard.

You look at P3 and look at hot sauces in Europe, and there are others coming to market in 2016.

What's fair to say, to your question, that you're going to need to be much more robust on the testing, design, understanding consumers and really coming big in supporting to make it a win in the marketplace.

If you say that's a more risky strategy than the fragmented innovation pipeline, you're probably right.

On the other hand, I think if you do all the tests prior to the launch -- assessing, consumer insights and well-designed innovation pipeline, and robust innovation pipeline -- I think can be quite significant.

But you really can move the needle in the Company from a sales standpoint, and that's what you're looking for here.

Thank you very much.

Michael Lavery, CLSA.

Could you talk a little bit about your marketing spending?

And the 75% working spend that you are targeting, does that imply a net increase in marketing, or can you actually get costs still down overall?

And then just a little bit related to that, can you talk a little bit about the Kraft Kitchens database?

Are you able to take advantage of that as well given that you have that proprietary property?

Michael, this is George.

Thank you for your question.

The first one about the marketing spend, we look at marketing in two buckets, if you want.

One is nonworking media, and one is working media.

The nonworking media -- things such as production costs, undersize agency costs, and that sort of thing -- and working media is actually what we pay for the ads to be aired or put on digital, carrier, or in print and so forth.

That part of marketing will be growing by about $50 million this year versus prior year in the United States.

The other part we have -- we are getting efficiencies from the scale that we have, and that would give us the savings.

So these are the two different parts.

The second (multiple speakers) -- sorry, go ahead.

And in total, it's net savings, though, you're saying?

So the savings more than offset the working increase?

Yes.

In total would be a net savings.

That will continue to be in the mid-single digits, so that's our advertising spend.

The second part of your question on Kraft Kitchens, as you know, that is the largest website for downloading recipes not just in the United States but in the world.

And absolutely, we are already in motion to include all the Heinz products on it, and we are doing more in that in terms of digital database that we capture from visitors to this site that we can start forming a primary database to use for our own marketing directly to the consumers.

Thank you very much.

(Operator Instructions) Chris Growe, Stifel.

I just had a question for you if I could; a bit of a follow-on to an earlier question in relation to the input cost inflation you see in 2016.

Not sure if you can quantify that, but maybe could you just give an idea of the degree of pricing that may be required to offset that inflation.

And do you expect [PNOC] globally to be a drag on the gross margin this year given you are starting to take pricing up?

Hi, Chris.

We give no guidance in terms of commodity inflation.

Okay.

Can you talk at all about PNOC, then, in relation to the increases you have to take in some of the global markets?

You mentioned there being some FX-induced cost inflation.

Okay.

Let me -- this is George here.

Let me take the PNOC as a follow-up from what I talked about earlier.

We had a very good year from PNOC, and a question was asked before about that.

And we believe this is sustainable.

And the reason we believe it's sustainable, because of the investment in our brand, the investment in innovation, and the investment in renovation that we are making to be (technical difficulty) able to command a premium for the product.

So that will continue in the current year as well.

And as you know, the US is the majority of the revenue of the worldwide market.

So you would expect a positive in this regard.

I don't know if I could compete here (inaudible) George with -- I don't know if you asked about the FX translation impact that we are seeing going forward.

But we still think that we're going to face similar type of headwind and FX in the next two quarters.

We had around 6.5% headwind in the last quarter, one-third of this coming from the Venezuelan devaluation we did at the end of second Q. And we expect to face this same type of impact at least during the first half of 2016.

Okay.

Thank you for that additional color.

Robert Moskow, Credit Suisse.

Bernardo and George, I think a lot of people have tried to pin you down on sales trends and what to expect in 2016.

And I know that you don't want to give us specific sales guidance.

But this is a metric that you care about a lot in your executive comp.

We have to try to figure out on our end how to think about sales, at least the pace of recovery.

Can you give us any help, though, at all on -- should the first half of 2016 look kind of similar to the back half of 2015?

Is it going to be negative for a while and then progressively get back to flat?

Is there -- we just want to try to help your investors not be surprised if sales are going to be negative for an extended period.

Thank you, Robert.

This is George.

Maintaining stable top line for 2016 is our priority.

So this is where we are looking at in the full year.

And to do that, we are ensuring that business stability as we go through the footprint, the launch of new product development successfully, realizing the benefit that we promised.

And as I said earlier when we were talking about the Q4, that separation between consumption and shipment is going to ramp up significantly as we move forward.

And our performance will be more to what we are selling.

So we see an improvement in 2016.

We don't give guidance about the top line, but we are confident about maintaining a stable top line moving forward.

Okay.

That was very helpful.

Thank you.

John Baumgartner, Wells Fargo.

I would like to ask about your trade promotion efficiencies and your adjustments there.

As you dig into that with your retailers, can you maybe summarize the tone of those conversations in terms of where you have encountered any sticking points, where there's been more pushback?

And then any particular areas where both parties are seeing mutually beneficial opportunities?

Just (inaudible) how those conversations are progressing.

Thank you, John.

I'm going to give you some color about what we do with trade promotion.

What I won't be giving you is what we talk with retailers about.

This is something we do with our trade partners; we won't share publicly with the world.

As far as trade promotions go, we continuously evaluate all trade promotions based on the history and based what we did in return on investment.

And like everyone else, what we would find -- some promotions have a positive return on investments; other promotions have a negative return on investments.

So what we have tried to do -- we have tried to replicate more of the positive return on investment and take out and minimize the negative return on investment one.

Of course, there is a negotiating effort that goes on with retailers.

We always try to work in a mutually beneficial way to ensure we are growing the category and providing value to consumers, and that's what is important to both the retailers and ourselves.

Is that process proving to be a bit more volatile than you would have thought, or is it more kind of a glide-path, straight-line adjustment that you are seeing?

I've been doing this for 24 years and it's the same anywhere in the world.

I operate in a number of markets, and this is like sport -- contact sports anywhere in the world.

So we do not , and it differs by category, by category.

It differs by retailer, by geography, by personality.

But that's what we get paid to do; that's our job, and we believe we do it very well.

Thank you, George.

Jason English, Goldman Sachs.

I want to pick up on that line of questioning around TBO, or trade budget optimization.

First, can you comment about Europe a little bit more?

You mentioned competitors maybe getting a little bit more aggressive and you haven't needed to respond.

The way it sounded was actually potentially putting more trade money back in.

Is that true?

And secondly, what are the learnings that you have from the initiatives you deployed at Heinz on this front that you are applying to Kraft?

So what might you do differently based on that learning?

Hi, Jason.

This is Bernardo.

Let me comment on the European part of our question, then we'll go to the lessons.

I think when you see for the fourth quarter, it's true; we experienced a little more challenged environment in the market in Europe.

And that's pretty much pushed by really the soup segment in UK.

What we went through to really a lower-level promotion, and we experienced some problems in the distribution with some of our retail partners in UK.

And the fact that the infant category in Italy, where you have a stable and growing market share but continue to decline at the fast pace.

When you think about reacting to that, and we are already seeing that reaction, it's not really only including more trade that's a question, but actually getting the right level of promotion with the positive returns.

And being with the right mechanism of trade was something George just mentioned -- the question before.

So we can have a win-win situation with our partners in the UK and Europe.

I think there is a solid plan in place to really push Italy to a different level in 2016.

So it's true that we experienced more challenge than we face in the fourth quarter in Europe, especially the UK situation I mentioned.

It is also true that you continue to grow market share in that market except for soup.

So what we are seeing now in first quarter and especially moving forward from here is the fact that we are investing more but we are investing the right instrument with positive return.

On the second part of your question about the lessons from Heinz and so on, like I said before, I think a lot of the agenda in Heinz is that we pushed innovation and in--market capabilities, higher media spend and so on.

It took us almost a year when you started to push this agenda.

I think now, given some knowledge you had before, the integration going well, and a lot of other elements of the Kraft-Heinz merger, make us push this agenda in a faster pace.

So -- and there are some lessons from instruments and where we had to do initiatives and other things within SKU rationalization and footprint initiatives and so -- that we learned the lessons to be applied here.

I'm sure you're going to learn other lessons in this merger that would be applied some point in time.

But that being said, I believe we are doing things different in some cases and repeating also things that we believe had done well in the past.

Thank you.

That's helpful.

One quick more question and I will pass it on.

When you made the acquisition you guys highlighted the opportunity for Kraft brands abroad and the ability to use the Heinz infrastructure.

Can you update us on where you stand with actually acting against that opportunity?

Yes, we continue to be quite optimistic about that.

We always knew that 2016 would be the year to build the supply chain and infrastructure.

What we did, I think, was the right move to select 10 countries and four categories that you really want to push the agenda than trying to do everything at the same time everywhere, that wouldn't be effective.

And now we should come to market already looking second-half 2016 already with some of these initiatives.

But we are definitely building the infrastructure and the supply chain to take advantage of our distribution and footprint internationally to land the Kraft brands in different markets around the world.

So we're probably going to talk more about that as the quarters progress.

Good stuff.

Thank you very much.

Alexia Howard, Bernstein.

Can I hone in on Europe here?

The legacy Heinz business in Europe, the margins have been up at 37%, 38% on an EBITDA basis for the last couple of quarters.

I think that's up from the low 20%s at the start of all this.

Am I right in thinking that a lot of that recent step-up that we saw this quarter and last quarter is reductions in promotion spending?

That's I think what was the gist of the comment, and that that wouldn't be included in the $1.5 billion of cost saving within the P&L?

And then the follow-up question is why couldn't margins in North America go to a similar level since we usually see margins higher in North America than in the European region?

Thank you.

Hi, Alexia.

This is Paulo.

Thanks for the question.

I think in Europe -- I think Europe, we have a very strong implementation not only of the revenue management side and SKU rationalization, as you comment, but also a very strong ZBB.

And also the footprint that we did there went really well.

All of this helped to improve the margins of the company .

Besides that, when you compare -- so again, the promotion activity -- the selection of the right promotions also helped with the margin increase there.

When you compare Europe with other countries, I think each country -- the footprint of categories that we have, the geographies and the brands that we have in the different countries, that it does not allow us to kind of try to infer the same type of opportunity margin that we saw in Europe and other places.

I think in Europe today , we are in a stage that we are going to get much more from sales growth than from margin increase in EBITDA.

Thank you very much.

I will pass it on.

If we could take one more question, please.

David Driscoll, Citigroup.

Can you talk about volume growth and the effect that it has on margins?

Because I think from most of the companies that we talk to within the peer said, they always talk about wanting to see volumes up 1%, 2% or 3% because of the incremental margins that they gained from the volume growth leverage through their manufacturing facilities.

But with your fourth-quarter and your full-year volumes down heavily, yet your margins are up, is this a story of there's just so much unprofitable volume that you can eliminate first before we worry about volume declines negatively impacting margins?

So there's a lot of room there for some discussion.

Please do what you can to help us understand.

Thank you.

Yes, David, this is George.

Thank you very much for your questions.

Our focus is on profitable growth.

We repeated that a number of times, and we will have some categories where you will see volume growth.

And while we have other categories where we see a volume decline.

Overall, because of our size and the diverse businesses and categories we operate in, we will probably reflect what would go on in the marketplace.

The focus on growing volume for us would be largely done through the following.

One is renovating our product range.

You have seen a lot of activity in this area in making -- reformulating product to reflect the consumer trend.

The second one -- we are innovating and accelerating the rate of innovation both in center stores to bring back the traffic to that part of the stores.

And in the perimeter where we have two large businesses, the cheese and dairy and the refrigerated meats businesses.

And now that the food service business have a very strong white space program -- what I mean by that white space program is when we merged the two food services' business units, we saw that our legacy businesses were not overlapping a lot, were actually complementary to each other.

That presented us with potential revenue synergies that we refer to as the white space.

And we have strong programs for 2016 to do that.

Final follow-up for me is just is there an Easter shift effect in the first quarter of 2016 that you could call out for us?

Yes.

So you know for those of us who lived through a number of Easters, we know that period of time really well.

Last year's Easter was not too far removed from Q1.

As you remember it was early in April where most of the orders of last year's Easters went into Q1.

However, if we see a one-day shift in ordering between one year and another, that could be the difference -- that would be helpful to us this year.

So it won't be a high magnitude, but it will be a little bit helpful for us in Q1 compared to last year.

Thank you.

Thank you.

I would now like to turn the conference back to Chris Jakubik for closing remarks.

Thanks very much, and thanks everyone for joining us today.

For those in the media that have follow-up questions, Michael Mullen will be available to take your calls.

And for analysts who have follow-up questions, [Rashid Nadarajan] and myself will be around.

So thanks very much and have good evening.

Thank you.

Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, you may all disconnect.

Everyone have a great day.