卡夫亨氏 (KHC) 2016 Q3 法說會逐字稿

Good day.

My name is Latif and I will be your operator today.

At this time, I would like to welcome everyone to the Kraft Heinz Company's third-quarter 2016 earnings conference call.

I'll now turn the call over to Chris Jakubik, Head of Global Investor Relations.

Mr. Jakubik, you may begin.

Hello, everyone, and thanks for joining our business update for the third quarter of 2016.

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 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 in our filings with the SEC.

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

These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results.

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

Now, let's turn to slide 2 and I will hand it over to Bernardo.

Thank you, Chris.

And good afternoon, everyone.

I will start by repeating what I said in today's earnings release that I think our third-quarter results are very representative of where we stand as a Company.

We had some normal timing impact this quarter, which one hand benefit Canada sales and EBITDA and on the other hand made Europe's finance results look worse than our internal assessment would indicate.

Overall our Q3 results show that to have delivery respect for financials, but we still have significant room for improvement.

We're doing a good job in a difficult environment, working effectively to navigate a combination of headwinds from the stationary commodities to increased retail competition in some of our biggest markets.

We are pulling more in-store activity into the marketplace that in the first half.

But remain disciplined with our go-to-market activity, balancing price, promotion, and distribution while we innovate to drive profitable growth.

As a result, we are holding or improving market share in the majority of our categories and our key markets.

Much of this is due to our big back strategy and their ability to bend trends and capture whitespace.

For the allowance of Heinz series good mayonnaise in many markets to Heinz barbeque sauces in the United States, spicy ketchup into new markets, and soy sauce expansion in China.

Our global sauces franchise continues to drive category growth in our share in markets around the world.

At the more local level, the introduction of Heinz's Beanz Creation led to more than 2 points of share gain in Australia during Q3.

We are now investing behind a launch of Planters in China and Kraft's Mac & Cheese in Brazil.

And you are seeing some significant trend bending from our big batch in the US thanks to George and his team.

That being said, we still have opportunity to turn around several problematic categories, which George and Paulo will highlight in a minute.

In Europe in particular, I would add that while our shares are in decent shape overall, and whitespace initiatives on the continent are doing well, we have been slow to get the right offering into what is our more competitive and evolving retail environment, the UK.

We are getting aggressive to jumpstart our categories in the country and do expect better results next year.

On the cost front, we remain on track with our saving initiatives.

Our integration program delivered roughly $330 million of savings in Q3, or roughly $1.3 billion on a run rate basis and close to our goal.

But we will not stop looking for additional savings.

Not only is it important to cure investment to drive top-line growth, it has been the main driver of the 20% growth in adjusted EBITDA in both Q3 and year-to-date.

Our focus now is to set the table for 2017.

Delivering high quality operation results and in-market execution in the fourth quarter as we move to build a strong momentum going into next year.

In terms of greater returns, this is an important time for us internally.

We are fully emerged in our second annual planning process as a merged company.

We continue to grow and learn from each other.

And our people are in the process of aligning behind our clear vision by setting challenging goals for 2017.

Soon more than 6,000 Kraft Heinz employees will finalize their objectives for the year ahead, which are cascaded down directly from my objectives in cooperation with our Board of Directors.

This also incorporates specifically TPI's commitment, including significant cost target, finalizing our big batch initiatives for the year ahead, and determining the exact whitespace areas to push into.

As a company of owners, we take our commitment and our results personally and we make it a point to reward those who deliver on their goals.

In just the third quarter alone, we promoted more than 550 Kraft Heinz employees.

This is what it means to work in a performance driven company.

It is an exciting time.

We feel good about the opportunity to drive profitable growth and we look forward to updating our expectations for 2017 in the months ahead.

But now let's turn to slide 3 to review the Q3 financial results that we are building upon.

On the top line, we finally seem to be getting some relief from the foreign exchange headwinds we have been experiencing for the past several quarters.

In Q3, currency was essentially nil till, only 0.5% negative versus the roughly 4% point drag we saw in the first half of the year.

On an organic basis, net sales were down one point, a surprising turn that was unfavorable having been positive in the first half.

Versus the prior year, pricing was down 0.7 percentage points, largely reflecting one, the inflation in meat and coffee in the United States and coffee in Canada.

True, higher promotion may be driven by timing of expense in Europe as well as the stepped up support behind new product launches in markets around the world.

Volume mix was down 0.3 percentage points, an improvement versus the 70 basis point declined we saw in the first half of the year.

Versus the prior year, volume mix reflected the lower shipment particularly in cold cuts and food service in the United States.

This more than offset significant gains from innovation in Lunchables and our Mac & Cheese portfolio in the US and continued growth of condiments and sauces globally.

EBITDA we drove extreme dollar growth in margin performance year-over-year from a combination of our solid cost savings performance and, to a lesser extent than we saw in the first half, favorable pricing relative to key commodities cost in North America.

As a side note here, while our Q3 EBITDA margins were down sequentially from Q2 in the first half of the year, this was due to the normal seasonality of our business mix, particularly in North America.

In fact, we are quite comfortable with our margin progression and how the year is playing out at the EBITDA line.

At the EPS line, adjusted EPS was up almost 90% versus the prior period to $0.83.

This reflects three factors: one, our solid EBITDA growth, two, the benefits from refinancing the preferred stock, and three lower taxes driven by some discrete items coming into play in the current period.

Now, I will hand it over to George and Paulo to talk more about how we did in each reporting segment and what we are expecting going forward.

George?

Thank you, Bernardo, and good afternoon, everyone.

Let's turn to slide 4 and our performance in the United States.

Consistent with our goals for the year, in Q3, we had gained delivered stable if not improving top-line performance during significant transformation of our business.

First and foremost, our new product initiatives are working well and having a measurable impact.

Our Mac & Cheese renovation is bringing people back into the category, boosting consumption and household penetration.

Cracker Barrel Mac & Cheese and the varied frozen meals are addressing previously unserved segment of the market.

Capri Sun Organic continues to build distribution and is doing well.

Our Heinz sauces business had a very successful summer season led by our new Heinz barbecue sauces and the second year of Heinz mustards.

And in cheese, Philadelphia Cream Cheese continues to grow strongly and we are seeing good improvement in the natural cheese segment.

We also expect the impact of our new product activities to build into Q4 with advertising about to go live behind the launch of Velveeta mini block and our all-natural Jell-O Simply Good dry package dessert.

The second factor I would highlight is our Q3 shipment versus consumption bridge where we continued to see improvement.

As you can see in the chart, our categories were essentially flat and our main challenge continued to be net market share losses.

Behind the numbers, I can tell you that more than 80% of our impact from share losses are due to cold cuts, roast and ground coffee and snack nuts, a significantly shorter list than we have seen in the past.

And in each of these areas, we either have initiatives already in the marketplace or soon to be launched to reverse those trends.

So overall, we are feeling good about our momentum in measured channels.

With regard to non-measured channels and changes in the retail inventory, there are three things at work.

First, we continued to see strong growth in non-measured retail channels like club and value stores.

Second, we continued to add new food service customers as we go after whitespace opportunities.

However, total food service in Q3 was down slightly due to the traffic decline that you have heard about from the restaurant companies as well as some proactive trimming of less profitable contracts in our ingredients business.

And third, we had new product pipeline shipments of the Velveeta and Jell-O innovations that I mentioned as well as a few others that benefited Q3 shipment.

The final piece of my update is our integration program where we are well underway and, more importantly, on plan.

During Q3, we maintained 98% case per rate despite some service issues that continued to negatively impact cold cuts and Lunchables and held back our sales in those two parts of the business.

That being said, we are improving those service issues in Q4.

More importantly, the overall integration project will make us more competitive in 2017 and beyond from simplifying our network and co-locating similar types of production line to modernizing our production processes and improving product quality.

In summary, we have a full plate of opportunities to drive profitable growth in our US business and I look forward to updating you in coming quarters.

With that, I will turn it over to Paulo to wrap up our comments.

Thank you, George, and good afternoon, everyone.

I will start on slide 5 and add some more detail on Q3 US financials.

In the third quarter, US organic sales were down 1.2%.

We think that pricing was down 0.7 percentage points due to roughly 1.5% of key commodity deflation mainly in meats and party.

Volume mix was down 0.5 percentage points, an improvement from the 1.5% decline we saw in the first half of the year.

We delivered strong gains from innovation led by Lunchables and our Mac & Cheese renovation as well as improved volume in mix benefits in our coffee business.

But these were offset by lower shipments in cold cuts, Foodservice and nuts.

In terms of adjusted EBITDA and margin, while margins were down sequentially due to normal seasonality of the US business, significant year-over-year growth in margin expansion was similar to what we saw in the first half of the year.

This was driven by integration program savings and, to a much lesser extent, favorable pricing relative to lower key commodity costs.

While we have seen the benefit of pricing relative to key commodity costs for the first nine months of the year, we expect commodities favorability to fade even more in the fourth quarter.

Let's turn to slide 6 and the significant gains we saw in Canada's Q3 numbers.

Currency turned neutral on the top line and was a small benefit to EBITDA in the quarter, much better than the significant drag it was in the first half of the year.

Organically, volume mix swung to 3.4 percentage points of growth, up from negative 2 percentage points in the first half and driving Q3 organic net sales growth of 2%.

By contrast, pricing was down 1.4 percentage points having been up 3.4 percentage points in the first half of the year due commodity driven pricing actions in coffee.

Now, before we get to EBITDA, I have to note that the Q3 volume mix gains were driven by a combination of early event-related shipments versus the prior year and Foodservice gaines.

And while the gains in Foodservice have a good chance of repeating, we are likely to give back a good portion of the positive Q3 volume mix in Q4.

At the front line, adjusted EBITDA was up 32.7% versus the year-ago period in constant currency terms.

This was driven by a combination of gains from cost saving initiatives and the favorable volume mix I just described.

I would also note that, consistent with what we said on our last call, there was no material impact at EBITDA from key commodities in Q3.

And I will add that we may see it turned into an unfavorable impact in Q4.

That brings us to Europe on slide 7. Overall, it is fair to say that we have been up and down in Europe over the past few quarters.

Results this quarter were sequentially worse than Q2 after Q2 were sequentially better than Q1.

However, we do not believe that the underlying trends are as bad as the Q3 numbers suggest.

Let me deconstruct the results to give a clearer picture of underlying trends.

Pricing was down 2.9 percentage points, primarily due to the timing of promotional expenses versus the prior year.

Volume mix decreased 4.9 percentage points, reflecting a combination of shipment timing versus the prior year and ongoing consumption weakness in several categories, primarily in UK and Netherlands.

So from both a pricing and volume mix perspective, roughly half of the decline in each was due to timing that we would not expect to repeat going forward.

Early results of that factors I just described, we saw constant currency EBITDA and margins down slightly both on a sequential basis and versus the prior year.

This reflected the combination of unfavorable volume mix and pricing I just described and increased market investments that offset ongoing manufacturing savings.

And again, roughly half of the constant currency decline was due to timing that we do not expect to repeat.

So overall, we think that the health of our European business is better than our Q3 numbers indicate and with some changes in the works, we expect the business to be a meaningful contributor in 2017.

Finally, we will look at the rest of the world on slide 8. Here, for the first quarter in many, foreign currency was not a significant headwind.

In fact, it was slightly positive as we left recognition of Venezuelan bolivar devaluation.

In terms of organic growth, we saw some decelerations versus the second quarter.

Much of it came from pricing, which increased 1.9 percentage points.

While this was driven by pricing to offset higher input costs in local currency, particularly in Latin America, it also included higher promotional expanding to support new product initiatives, like launching Planters in China and re-launching our soy sauces line in Indonesia.

On a sequential basis, we experienced less local input cost inflation to offset with pricing as well as a step-up in support behind new product activity.

And we would expect each of these factors to come into play in the near-term.

Volume mix was up 1.7 percentage points versus last year.

Again, a deceleration from the first half, primarily reflecting three factors: one, continually strong growth in condiments and sauces in our region; two, a decline our ABC soy sauce business in Indonesia; and three, a temporary disruption in distribution within our Middle East and Africa business due to retailer consolidation in the region.

Overall, while we did see some deceleration in sales this quarter, going forward, we expect the distribution issues to be resolved and have investments in place to accelerate growth.

So we don't see any reason to change our expectations for strong growth in our rest of the world business either in the near-term or longer-term.

As adjusted EBITDA, it was down 3.9% in constant currency terms, as organic sales growth was not enough to upset higher input costs in local currency and our investments in new product initiatives.

In a sense, we invested in Q3 ahead of growth.

Going forward, while we face a strong comparison in Q4, we do expect better performance at the EBITDA line in our rest of the world business in 2017.

Now, before we go to Q&A, on slide 9, I want to cover a few more factors that may impact our financial performance over the near- to medium-term.

To start, and more as a reminder than a comment on our operating performance, from a comparison's perspective, I think it is important to note one specific factor that will effect our Q4 results.

That is we will experience comparisons to a Q4 2016 that included a 53rd shipment.

Recall that when we reported Q4 2015 results, we mentioned that the 53rd week benefited net sales by 4.7% and adjusted EBITDA by 4.5 percentage points.

The second factor I want to highlight is our expectations around our integration program.

Right now, we are keeping all of our targets the same: savings and cost to achieve.

We are still targeting integration program savings of $1.5 billion net of inflation by 2017.

As we have said before, savings have come in faster than we expected and we do expect that input cost inflation outside of key commodity costs in North America is likely to be a partial offset to savings going forward, especially as 2017 progresses.

That said, as Bernardo mentioned, we are currently firming up our 2017 plans, both cost and savings expectations, so we will be in a better position to provide a robust update in the coming months.

Along those lines, we are also finalizing our plans and investments behind our 2017 pipeline of big batch and whitespace initiatives to drive profitable growth.

Based on what we have already seen in the marketplace, we remain confident in our ability to drive improvements in our top-line trends in existing markets.

And invest behind whitespace expansion opportunities for Kraft and Heinz brands in both Foodservices and international channels.

And we look forward to talking about these initiatives in the months ahead.

The last item I want to highlight is our progress and our expectations with regard to debt leverage.

Through the end of Q3, we have reduced our leverage to the 3.7 to 3.8 range and this is down from roughly 4.5 only a year ago.

So we are making great progress on our goal to achieve below 3 times ratio over the medium-term.

And expect this to continue at a strong pace as we move forward.

This includes fulfilling our commitment to pay off $2 billion of debt when it matures next year.

That completes our update through the third quarter of 2016.

There were certainly a number of puts and takes in our Q3 results, but overall, the progress we've continued to make improving our operations and performance in the marketplace gives us confidence that the profitable growth we've delivered to date is sustainable and that we can build on this going forward.

Our focus from here is to finalize a strong agenda for 2017 and finish 2016 in a way that gives us good momentum heading into the next year.

Thank you and now we would be happy to take your questions.

Thank you.

(Operator Instructions)

Ken Goldman, JPMorgan.

Good afternoon, everyone.

You said you were sticking with $1.5 billion in synergy guidance, I think the words were quote, right now.

Is it safe to say, given that you are already at $1.3 billion and you're five quarters ahead of your target date, that it's really no longer a question of whether the $1.5 billion number will be raised, but I guess rather by how much and when you might raise it?

Hello, Ken.

This is Paulo.

Again, I think what I can say for you now that we are still targeting the $1.5 billion net for next year.

I can share with you that yes, we have a good visibility on strong stream of future savings, but we're still finalizing our expectations around things like cost inflation, product and brand investment, and I think that we will be in a better position to provide a more complete update in the coming months for you.

Okay.

And one more for me.

You mentioned, I think two or three quarters ago, that maybe you had, and correct me if this is wrong, cut a bit much out of some spending in the UK.

I think, if memory serves, it was related to some soup promotions and maybe you felt it was prudent to add some of those promos back.

As the year has progressed, is there anywhere else you really cut into the bone and you've had to add back, whether it is in terms of number of people, capabilities, promotions?

I'm just trying to get a sense because you've been very aggressive and it seems all to have been so successful.

Are there any areas where maybe you have had to tweak your expectations or practices perhaps?

Hello, Ken.

Here's Bernardo.

Thanks for the question.

Let me start by the end.

I don't think that the UK performance, and we're going to comment about that in a minute, has anything to do with the level spent or that we cut too much or the model.

I can guarantee you, I really don't see it that way.

What I think is important when I see here open, especially the UK that you mentioned, is to separate.

Because we continued to have a solid performance in continental Europe with the exception of the Netherlands I would say all other countries having a positive year and with a good buildup of plans for 2017.

But our performance in UK has been poor, right?

The environment has been difficult, but that has been the case for a couple of years and we really don't see that changing in the next coming months, quarters, or even years.

I really believe we have slow to react and get the right price mix and offering in the marketplace.

If you see our market shares, especially on key categories like beans, sauces, and others, and also to some smaller degree, fruit.

It has that changed that much, has been quite solid share performance, but we have been suffering from a category decline and a channel mix change in the country.

There is a lot happening now, especially with the new soup season right now as the winter approaches the country.

So we are really changing a lot: our balance price, promotion, distribution in this very shaky retail environment in the UK.

We had that change in leadership in the country as well.

We moved one of the most talented commercials people we had from Australia and New Zealand that's an even more difficult to concentrate retail environment to the UK and Europe to lead our business there.

So I am really confident that we can have a better performance looking at 2017 and beyond.

We will see all the seeds of the performance that is already happening as we speak.

That being said, the mistakes we did on price mix and distribution were a good warning for us to have a much more solid plan coming 2017.

Thanks very much.

Chris Growe, Stifel.

Thank you.

Good afternoon.

My first question for you just in relation to the net cost savings that you reported of $330 million in the quarter.

I just want to get a sense, does that incorporate any of the measurable benefit from lower input costs or lower cost in general?

And then would you expect that to turn, for that to be more of a drag on that figure in the fourth quarter?

Was it more in 2017 when you expect that to occur?

Hello, Chris.

This is Paulo again.

It incorporates all the savings and cost base we have.

It does not incorporate any type of the big four commodities that we have.

But all the other costs are inside this number.

Okay.

Thank you.

And then I just want to make sure I followed it on Ken's question in relation to Europe.

I think you had mentioned around half of the decline in organic sales was due to some unique factors.

[This full adjust] sales is down 4%.

I think you have some easier comps coming up, but you also mentioned having more plans in place to accelerate that growth in Europe.

Is that a near-term opportunity?

Or 2017?

And I think you guys mentioned how the UK remains quite weak.

Are these more UK related plans or more around the continental Europe?

Hello, Chris.

This is Bernardo.

Fully update the question before, like I said, if you see our continental performance, again with the exception of the Netherlands, it is actually quite solid in all countries including Italy where we have been experiencing more difficulty in past years and we have been improving.

So that being said, we are not changing our plans for Continental Europe in all means.

The performance in UK that for us has been disappointing, like I mentioned before, it is true that 50% has been one-offs like Paulo said and the fact.

But we are working on the categories we have a strong presence like soup and so on, we'd come in completely different product offering and volume mix promotions and so on.

And also remember that you are coming with other big batch looking 2017 and beyond that I think really can move the needle in the country.

A good example of that would be Heinz Seriously Good Mayo that we just had a start in the last seven or eight months and it is doing quite well from a market share standpoint and you see more of that coming 2017 and beyond.

Is that is going to be enough to the turnaround the margin of the country is for us to prove.

But the early seeds of the things we are doing there are definitely showing much better results and getting us optimistic about what's happening for the coming quarters and years in the country.

Okay.

Thank you.

Ken Zaslow, Bank of Montreal.

Good afternoon, everyone.

Hello, Ken.

You discussed that there have been some mistakes in terms of the pricing and the promotional spending.

Can you talk about where you are on your analytics of this process?

Because when I think about you guys, I think that you guys are probably the most, furthest along on the analytics of understanding where your promotional spending will get the greatest lift and it sounded like throughout the world, there were some issues, spotting issues.

I was just kind of curious to see what analytics you're working on, where you're going with this, and how far along you think you are.

Thank you, Ken.

This is George.

I will speak in general because one feature of our business model is there are very similar processes we use in the United States and around the world.

And one of them, utilization of analytics to really manage revenue, manage cost and so forth.

Where we are now, we are very happy that we have had capability built already to look at more granular understanding of category drivers and performance.

We have done that for about 30, 34 categories so far.

It has had some positive effect, but limited to few categories, one or two in each business unit, and we like the results we are seeing.

It will take time, though, to execute all the opportunities we identified by category or by geography.

And for us, this is an area where we would like to get it done right rather than move fast because it is a very delicate area and it requires a number of things to come together within the organization and as working with external parties.

Great.

And my second question is you talked about commodity inflation.

Which commodities are you seeing inflation or are you talking about labor costs are healthcare cost?

Because it seems like there is at least the meat cost seems very deflationary.

Can you talk about that?

Thank you.

Look, I will talk about the commodity and I will pass to Paulo to talk about other costs and give you color about that.

So the big four commodities that have impact on our business are mainly in dairy, in meat, in coffee and in nuts.

And we have seen a different direction depending on the category, so as of late, we have seen coffee has edged up a little bit.

So has dairy, where meat went into the other direction.

For us, it's very hard to try to call where it is going to be in the future.

We are better off at managing the actual outcome of it than actually trying to forecast it, especially the movement, whether up or down, that we are seeing has no fundamental, but we feel very good about our ability to manage it regardless which direction it went to.

As for the rest of the cost, I'll pass it on to Paulo to give you some color.

Yes, George.

If you think about some inflation I'll have to look here.

We are expecting some input cost inflation outside our big four commodities installed in 2017.

I think we're going to have a better color of that in the few months ahead.

But just remember that when you track our savings, all of these costs beside the big four are included in the number that we provide to the market.

Great.

Thank you very much.

No problem.

Matthew Grainger, Morgan Stanley.

Hello.

Thanks, everyone.

I wanted to ask two category specific questions to George.

First is on the meats business.

I was hoping you could elaborate a bit on the drivers of the weakness and to what extent, if any, has that been driven by competitive dynamics in the category as opposed to service issues?

And while you are taking these steps to fix the business, have these fulfillment issues resulted in any sort of distribution losses that we should expect to take longer to correct?

Thank you very much Matt.

And let me answer your question.

Within the meat business, we have a number of categories.

Let me break it down and give you the commentary around each one of them.

The service issues that we have are restricted to two categories, happen to be large categories for us.

One is what is what we call the cold cuts, which is the sliced meat and the other one is Lunchables.

Lunchables is driven by a very, very strong demand.

We saw mid-year some double-digit growth in that business and while it's still growing, it's ability to supply has been somehow constrained and we are working now at getting out of it, but the business is still growing.

In cold cuts and the sliced meats, we have had capacity issues and this is the area where we are investing the most in our footprint changes.

We essentially are building brand new factories, two brand new factories.

One in Davenport, one in Kirksville, as an addition to the other factors we have there.

And we started working on getting out of the service level but that was severely affected with service levels.

And we have some distribution losses in some of the customers and that was jointly managed and agreed between us and our trade partners and within time and as our ability to supply increases, you will see us moving forward in that.

As for the hot dog category, that is a category issue.

So our market share is in line with where the category and our growth rate or decline is in line with the category and we feel very good about our bacon business where we are doing well.

Okay.

Thank you, George.

And just one other question.

Could you talk a bit more about the approach to nutritional meals and the Smart Ones brand in particular?

Just curiously if you are proactively walking away from SKUs or product lines there and whether there is any plans in place to reposition or upgrade that business?

Thank you.

What we did over the past few months, we re-framed the frozen meat category to broaden the customer base that we are serving.

Historically, we only service a very small segment within the broader frozen meals and that is what we call nutritional, but really it was the diet segment, the people who are on a diet, and we used the Smart Ones brand to service that consumer segment.

We had a look at the category about seven or eight months ago and we felt we are in a strong position to broaden the segments we are serving and, essentially, we are servicing now three consumer segments.

One is the Smart One segments and the diet segments for people who are managing weight losses.

The second one is the Smart Made.

It's a slight difference to that one by utilizing more product that are natural or venturing into the real food category while maintaining good calorie content.

And the third one is purely on taste and that is Devour and we launched in the marketplace only a few months ago and where it has distribution, we have seen market share at mid- to high-single-digits and it's doing very well and it is servicing a segment that is where weight management and calories is less relevant and taste is the key criteria.

And we are very happy where we are so far.

That segment, for us, the frozen meal was in a severe decline and every time we venture in serving customers, we cut that decline significantly and we feel very good about its prospect moving forward.

Okay.

Thanks very much, George.

You are welcome.

David Palmer, RBC.

Great.

Thanks.

Good evening.

You have spoken in the past and a little bit on this call about you approaching a period of shifting dollars to more effective promotion programs and you mentioned that you did a analytics, I think you said earlier, across 34 categories.

Are you still in the selling period to retailers for improved promotion constructs?

In other words, do you believe that promotion effectiveness is going to show up more in your net revenue in 2017 and beyond than perhaps what we are seeing in the second half of this year?

Thank you, David, for your question.

I will add some commentary to that.

Revenue management or, if you want, trade promotion and some promotional, it is part of our broader revenue management program.

What we focused on, since we came together as one company, is truly building the capabilities.

We felt the focus on building the capabilities had far long-term impact on what we do than having a project to get a quick wins out of it.

And the second, once we built that capability, we started testing in a number of business units and we tested one or two categories in each business unit.

We liked what we saw and it is not just the promotional activities.

It is a number of flavors that we looked at and, in some cases, we saw ourselves investing more rather than investing less and in some places, we took prices up and in others, we infused and took prices down, but we are very happy with the capabilities we are building.

The reason I said this is a long-term and we want to do it right rather than doing it fast because it has wider impact on your product mix.

It has impact on your supply change.

It has an impact on the competitive set and it has an impact on the discussion with the retailers.

So far, our discussions with our trade partners has been very good because it has been mutually beneficial for them and us.

And just a quick follow-up on the innovation front.

You have had some successes that you can see in the data: Cracker Barrel, Mac & Cheese and the Kraft barbecue sauce, but obviously, I am sure you like to have more of those big bet successes.

Do you feel like your pipeline into 2017 versus 2016 at this time last year is more robust, more big bets next year than this year?

Yes, I do.

Simply, I do feel that 2018 is much stronger than 2016 in terms of innovation -- I'm sorry 2017 is much stronger than 2016 and 2018 is much stronger than 2017.

This is an area that, despite all the transformation and integration work that we did, we never lost sight that this is an area that is going to sustain our performance into the future.

As with every new product, you never have 100% success rate so the way we look at it, to get and X number of dollars out of innovation, we plan launches much higher than that allowing to a success rate and when we look at the probabilities of success for 2017 compared to 2016, we are starting with much a larger pipeline so if we applied the same probabilities of success, we would be in a stronger position.

Thank you.

Thank you, Dave.

David Driscoll, Citibank.

Great.

Thank you and good evening.

Good evening.

Thank you.

Could you guys quantify the year-to-date benefits from P knock?

And then could you just comment upon the repeatability or sustainability of those benefits?

Hello, Dave.

This is Paulo.

You peer have said that in our past calls that you have a big benefit from P knock in the first half of the year.

When you think about Q3 fiscally, the benefit we have from P knock is smaller and as it was communicated before, it is around $11 million we have in the North America business benefit from P knock, so this benefit was steady as expected.

We'll ask George to comment on that.

Yes.

Thanks, Paolo.

Let me talk a little bit about the repeatability.

This is something that it is part of how we manage revenue and at some stage, the line is going to blur between what is P knock, what is trade efficiencies, what is revenue management?

It is going to be part of all that.

But so far, we have managed very well in both on the ups and downs of commodity and our expectation is to continue doing so.

Okay.

And then just one other question.

The integration is expected to be completed by the end of the year, I think.

I think it is a stated comment, but I do believe that you have got some manufacturing plants that are slated to be closed but will occur in 2017.

So I am a little bit confused on exactly when all of the quote unquote integration efforts are done.

The purpose of the question is just to ask when do you have capacity such that you could start to contemplate another deal in that you would have the capacity to actually begin an integration?

Does that make sense?

Hello, David.

Here's Bernardo.

You are right on the footprint for the question.

We will continue to have a couple of manufacturing changes and so on already announced and planned, so it is going quite well.

George mentioned here the two facilities that we are building are on the meat side, but you have others on the warehousing and other categories that we are expanding.

So all this work, it boils up to 2017 as planned, so that is not changing.

There are important milestones in integration that is already behind us, like the systems and already operating all the planning on the commercial side and other in the same environment, so it really, Kraft Heinz, I would say, already operate as one.

And most part of the issues that we had are behind us.

On the other question about revenue and M&A, we never like to comment on hypothetical and we really believe we have a solid organic staff here to create value and we are working really hard on that.

That being said, we also believe our model is highly scalable and integration results of Kraft Heinz are proving it.

So watch for us during the day today we want to be focused on that for now.

Thank you so much.

Jason English, Goldman Sachs.

Good afternoon, guys.

Thank you for the question.

I want to come back to Bernardo, your last comment on the organic growth of the asset you've assembled from a bottom-line perspective and some of the other questions that have anchored around the UK.

I think some of the skeptics of your model are probably going to look at the results and look at year-to-date EBITDA and the rest of the world down 8%, Europe down 13.5% and I know the UK has got some unique situations, but still, you combine those two businesses, which are probably our best approximation of legacy Heinz and EBITDA is down 11.

And I think some will look at that and say gosh, is there risk that two years from now in North America looks similar?

I was hoping maybe you could comment on some of those, what I think will be questions, from some investors and also maybe add on top of that some of what you've learned from those markets that you are applying in North America to ensure that the North America growth is more sustainable.

Thanks for the question.

I think you understand that the way we are grouping different things and so on, but I think it's important here to separate.

First, on the rest of the world part, we continue to see really very solid near- and long-term growth perspective for the business.

As Paulo said, there were temporary behind, temporary issues behind this quarter like distributors disruption in Middle East and Africa.

We invested much more behind the growth you are already seeing, for example, the allowance of Planters in China is a good example and others.

So, we are seeing this in a very, I would say, solid way.

On the respect of the model, and I again, I fully understand your comment.

I think they are learnings from the UK situation that are really specific to the country, especially remember what happened to the UK in the last two years is that the leader of the retail environment really faced a lot of problems and disconnect to the market for quite some time for different issues and now it is coming back in a very strong way and this retail shaking that happened in the country, I truly believe we have not been fast enough on the offerings which were coming.

I cannot see any correlation to your question to the model given that everything we did, we didn't, if you see all our lines connected to the market like marketing, salary, and other investments, they all grew up in the country in the last four years.

Got it.

So from a model standpoint, there is absolutely no correlation.

There is a lot of absence for us.

That's your last question.

Can you learn from the UK?

And to be applied in other places like the US and others?

There, I could not agree more.

I think there are important lessons for us, for me, for George, for Paulo and for the entire team here that we're going to need to protect especially when you have a situation like happened in the UK.

It's not that they are offering that that happened for us to be ahead of the game and not reactive, keeping the market share in the positions we have in the country.

So I think the situation is a great, your bundle are very different.

In rest of the world, I'm investing for more growth.

So I'm coming for China with a different plan.

I'm coming for Indonesia.

I'm coming here from a true mark as with whitespace like Australia and New Zealand and the UK is a different story.

My volume mix and everything, I am working behind my promo activity is to get it right what is the offering my distribution so I can come back to profitable growth strategy.

From a model standpoint and the question you cut too much or cut too little, I can't have any correlation given what it I did, because in a sense, my marketing is going up and my selling is going up within the country.

Okay.

The right criticism I would say to us is to say hey, if I have money invested as I did this year in UK, I probably would back off.

But my offering didn't come true as it should and I don't think it is the right thing to do as well because we are looking for the UK for the next 10, 15, 20 years.

So the brands we have in the country are so strong and our equity is so solid that you are never going to sacrifice the middle- or long-term for any short-term gains.

We don't do that.

So in a sense, I don't think it is a model issue.

I think it is, for sure, a question of the balance of product mix and offering and so and those learnings, we should take and apply in other markets.

I think that is fair.

The question obviously needs to be asked, so thank you for the explanation.

I really appreciate it.

I'll pass it on.

Thanks, Jason.

John Bumgardner, Wells Fargo.

Good afternoon.

Thanks for the question.

George, I wanted to come back to the cold cuts business in that the last time Kraft made capacity improvements to the US network, it was done in cheese.

And that drove some pretty material efficiencies and flexibility to invest back in the network for some nice competitive separation.

So, as these meat plants are commissioned, how should we think about any sort of step change it will create in terms of capabilities or cost to serve, innovation or otherwise?

Thank you, John.

I think this question for me is easy because I did that change in the cheese capabilities, if you remember.

I ran that business six years ago and this is when we made the step change in cheese and since then, we never look back and you have been seeing the results of that.

We actually are fitting a very similar model in the meats business and what we are trying to do, we are trying to get two things at once.

One, modernize the manufacturing capability and the technology to be able to make the products of the future rather than the products of the past, and two, try to get a cost advantage compared to anyone in the marketplace.

And we believe we are in a strong position to do so.

It is just going to take a little bit of time for us to complete that project and once we are out of it, no different to the model we did in cheese when we modernized and reduced our cost and became world-class cost effective and the meat business would be in a similar situation.

Once you get past the meat investments, are there other categories you can call out that may have been starved for investment over the years similar to meat and cheese?

It is a very good question.

Yes there are, actually.

While meat has taken the lion's share of our footprint investment, there are a number of other manufacturing parts we are making investments.

As a matter of fact, about 15% of our active lines are affected between transfers, decommissioning of lines and installing new ones.

What we are also doing, we are outsourcing a number of non-core low-falling SKUs across the board and we are in sourcing from higher volume SKUs again across the board not exclusive to meat and we also are reducing the number of warehouses and distribution centers.

So altogether it is a very large investment across the entire network.

The meat happened to have the larger portion of it, but we are doing it across the board.

Thank you, George.

Thank you very much, John.

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

Alexia Howard, Bernstein Research.

Good afternoon, everyone.

Can I just ask about the promotional activity again?

It looks as though your proportion of sales on promotion in the US are down several hundred basis points this year.

And you have gone through how you have been optimizing that, but with Walmart and other retailers asking for reinvestment back in pricing back in 2017, do you anticipate that the promotional activity will really start to ramp up next year?

And if so, what does that do to your margins?

Thank you and I will pass it on there.

Thank you, Alexia.

I will take that.

Our promotional activities and the intensity of our promotional activities keep changing depending on a number of factors.

One is the competitive environment, two is the strategic position of that category.

So when we look at our categories, we classify them as an invest category, protect category or bet on or manage for margin and so we do not just have one view of promotional activities and we go and implemented.

So if you look deeper into our sales, if you go one layer down or two or three, you would find a very different direction and that is why we try not to take, as an overall view, whether it is going up or down.

And as for the investments moving forward, we would continue exactly utilizing that same strategy.

What we are finding, though, it is not just the promotional activities or the sales generated from promotional activities, rather than the return that we get from promotional activity.

We have become, through data analytics, a lot more competent in the ability to select which promotion and which category with which account and we are finding a very, very different return and that by itself is allowing us to actually do more with less.

So we are not going to somebody and just saying we are cutting across the board promotional activities.

We are just doing more with less.

Thank you very much.

I'll pass it on.

Thank you, Alexia.

Thank you.

At this time, I would like to turn the call back over to Mr. Jakubik for any closing remarks.

Sir?

Thanks, Latif.

And thanks, everyone, for joining us this afternoon.

For any of the analysts that have additional questions, I will be around as well as Andy Larkin and for anybody in the media who has additional questions, Michael Mullen will be available to take your call.

Have a good afternoon and thanks again for joining us.

Thank you very much.

We appreciate it.

Ladies and gentlemen, that does conclude your Kraft Heinz Company call.

You may disconnect your lines at this time.

Have a wonderful day.