卡夫亨氏 (KHC) 2016 Q4 法說會逐字稿

Good day. My name is Karen, and I will be your operator today. At this time, I would like to welcome everyone to The Kraft Heinz Company's fourth-quarter 2016 earnings conference call.

I will now turn the call over to Chris Jakubik, Head of Global Investor Relations. Mr. Jakubik, you may begin.

Hello, everyone, and thanks for joining our business update for the full year and fourth 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 and 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. 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.

Before I hand it over to Bernardo, please note some changes to our financial reporting that were outlined in our earnings release. In the fourth quarter of 2016, we reorganized our operating segments to better align with our global growth strategy and, therefore, have reflected these changes in our business segment reporting for all periods presented. As a result, our Russian business is now part of our Europe segment instead of Rest of World, and costs associated with our global procurement office have been reclassified from our Europe segment to general corporate expenses.

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

Thank you, Chris, and happy new year to everyone. As I hope you saw in our press release, we had solid Q4 results overall with solid sales and business investments to further improve the health of our brand. But let me start by focusing more on what we have been able to accomplish in the first full year of The Kraft Heinz Company. It formed the base and in many ways sets our agenda for the year ahead. So let's start with our progress against the three objectives of our strategy that we laid out at the beginning of our merger.

In our first objective, the delivery of profitable sales growth. On the top line, we built positive momentum through the year, despite the commodity headwinds that persisted during the year, resulting in profitable sales and flat deposit organic sales growth in all regions except Europe. We generate significant gains from our Big Bet innovation strategy in our efforts to capture whitespace opportunities. This were led by condiments worldwide, specialty ketchup and barbecue sauce. That was soft in North America and Latin America. Soy sauce in China and hot sauces and mayo in Europe.

Our investments also led to better market share trends over the course of the year in core categories such as sauces worldwide including pasta sauce in Canada and Latin America, cream cheese and mac & cheese in the United States, UK beans, baby food in Italy and Australia beverage.

That said, we still have significant areas to improve in 2017. They include Indonesia soy sauces, US cold cuts, baby food in Canada and our (inaudible) channel share in the UK, to just name a few.

We also pushed into place as whitespace where Kraft Heinz did not previously compete. Products such as Devour frozen meals, Cracker Barrel Mac & Cheese and Heinz barbecue sauce in the United States. There was Planters, which now is available in both China and the UK. We also brought Heinz mayonnaise to Europe, Brazil and Australia, and we made significant progress toward extending our food service presence, not just in the West, but through strong performance in Canada, Brazil and Russia as well. Nevertheless, there is much, much more to go after in 2017 and beyond.

It is also clear that our go-to-market investments are paying off and delivering profitable growth through distribution gains and better performance at retail. We supported go-to-market activations with better management or a few teams in Canada, US, Brazil, Russia and China. These efforts result in phased execution improvement in a challenging retail environment all around the world, including Australia, Japan, China, Russia, Egypt, Brazil and Germany.

Under our second objective, we made meaningful progress toward achieving best-in-class margins.

To our retail routines, including zero-based budgeting and many of my objectives, we drove sustainable improvements throughout the year. ZBB savings were a key driver of value creation across the Company, delivering faster than expected savings at the outset of the year and contributing to the Company achieving $1.2 billion in cumulative savings since the inception of our Integration Program.

As of today, we have cascade personal MBOs directly from company leadership to more than 6000 employees worldwide. This is a critical step in aligning everyone behind common goals and improving our day-to-day execution. To put that number in context, these represent more than 50% of our white-collar population around the world. And in supply chain, we invested more than $1 billion into manufacturing upgrades in our footprint program to modernize our facilities and enhance our capacity for innovation and quality.

Through its life with our global business service in Europe, which together with our shared service integration in North America, we will help drive process utilization and improved service levels. Importantly, as all of this was happening, we achieved a global CAGR rate of 98%.

We also invested heavily in our people and our capabilities. For example, we promoted more than 1700 new team members worldwide last year. We expanded our (inaudible) acquisition programs worldwide, growing the volume of applicants by 40%. And in our ongoing effort to grow a better world and through our partnership with Rise Against Hunger, we package and distribute more than 65 million meals to people in need.

Finally, on the capital structure front, our leverage ratio was reduced to approximately 3.6 times EBITDA, and we kept up our strong dividend payout. Paulo will review more on our capital structures improvement in a moment. Overall we made solid progress in our first full year as a merger company, and it set a strong base for us to build upon in the next phase of our development.

So let's turn to slide 3 to review our Q4 and full-year financial results and how the numbers bear out our progress. As it relates to the Company's sales, there are really two things to highlight. First, for the reasons I mentioned earlier, we drove sequentially better organic sales growth, driven by volume mix improvements in all segments. The primary contributions to this growth were condiments and sauce globally and (inaudible) refrigerated meal combinations in the United States. Second, we had solid price realization in most segments during the year, despite a deflation in key commodities like dairy, coffee and meat in the US, as well as the trade investments we made in our UK and (inaudible) business. Adjusted EBITDA full-year growth at constant currency was driven by the strong cost savings from integration and restructuring activities, favorable net price and growth in our Rest of World market. I should note, however, that our rate of growth in Q4 was held back by two factors. First, we began to lap integration savings that began last year in Q4, and second, we accelerate our investment behind growth initiatives late in the year, as well as trading (inaudible) made in our UK and Benelux business.

Dropping down to our adjusted EPS, both Q4 and full-year were up more than 50%, excluding the extra week last year, primarily driven by EBITDA gains and the refinancing of the preferred stock in June.

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

Thank you, Bernardo, and good afternoon, everyone. Let's start with slide 4 and our performance in the United States. The first point I would make is that we had a strong finish to 2016, in many ways giving us good momentum from a consumer takeaway perspective as we head into 2017.

If you look at the charts on the right, there are a few things I would note. First, in measured channels, the negative impact from commodity deflation on category growth persisted during 2016 and longer than we originally thought. Although we currently expect that this is largely to turn to inflation as 2017 progresses.

Second, and more importantly, you can see that we had improved measure channel share performance in Q4 versus our 52-week numbers below, driven by our Big Bets and better retail execution. Specifically, we drove strong consumption improvements from the launch of Devour and Smart-made in frozen meals, mainstream and ground coffee and pods, as well as nice turnaround in sandwich cheese, both Kraft singles and naturals. This was supported by improved execution at retail with an increase in total distribution points, TDPs, versus the prior year in Q4, and better feature and display conversion. In fact, we exited the year with a shorter list of shared challenges than we started the year with.

We also saw a longer list of categories moving into share gains and ended the year with roughly 70% of our categories holding or gaining shares in Q4.

The third factor I would highlight is that sales in Q4 were good. However, they included some one-off benefits that would not repeat. Food service was not a contributor to nonmeasured channel growth in Q4 as whitespace gains gave way to weakening trends in base consumption and store traffic. And although we had further whitespace gains in non-measured retail channels, much of the green bar in the top part of the graph was due to the benefit of trade inventory shifts versus the prior year.

Specifically, we had a relatively weak Q4 of 2015 comparison that reflected retail inventory deloading, as well as the strong shipments in Q4 2016 to support a very robust level of in-store activity during the holidays. In the end, we exited the year with some of our Q4 shipments needing to be worked off in January, and we expect Q1 2017 shipments will see roughly 0.5 point headwind versus consumption because of this. And that's before the impact of the Easter shift that Paulo will talk about later.

So overall we closed 2016 with significant progress in the marketplace and improved execution during a year of significant transformation just as we planned.

Looking forward, our agenda for 2017 is focused on three simple goals: one, on the top line, drive profitable growth and further improve challenged categories; two, better leverage our scale at retail with increased in-store activity, including more scale events and improve our day-to-day sales execution; and three, utilize our supply chain modernization or footprint initiative as a way to increase investments in innovation and renovation, particularly at the back half of the year.

With that, I'll turn it over to Paulo.

Thank you, George, and good afternoon, everyone. I'll start on slide 5 to highlight a few more things on US financials. First, price was higher for the year than in Q4, despite persistent headwinds from deflation in key commodities. Although it appears we've now reached the bottom on commodities and are likely to have to contend with commodity inflation beginning in Q1 of this year. Second, we were encouraged by the improvement in our vol/mix performance over the course of the year. We had better results in meats, ready to drink beverage and nuts leading the year. And this combined with a strong growth in coffee, Lunchables and mac & cheese that we saw all year and drove positive growth.

Moving to EBITDA, the US delivered strong double-digit growth all year, driven by cost-saving initiatives and favorable net pricing. In Q4, although the base of cost savings was in line with our expectations, EBITDA growth was held back by timing of overhead expenses versus the prior year.

Let's turn to slide 6 in Canada where our results played out fairly consistent with what we had talked about on our Q3 call. Pricing trailed input cost fluctuations in local currency throughout the year. By that I mean that from a P&L perspective, pricing was slower to follow deflation in key commodities in the first part of the year and late in following higher input costs in local currency, particularly in the fourth quarter. By contrast, volume mix performance showed more of a steady improvement first half to second half. This primarily reflects solid gains in condiments, sauces and food service, which were partially offset by the volume impact of lower cheese shipments versus the prior year.

EBITDA I think it's important to highlight that despite the ups and downs during the year, Canada's full-year adjusted EBITDA and margin are fairly representative of the current health and profitability of the business.

That brings us to Europe on slide 7. We said on our last call that the health of our European business was better than our Q3 numbers indicated and with or without Russia in those numbers that were out in Q4.

As a general rule of thumb, from a 2016 versus 2015 perspective, the addition of Russia to our Europe segment has the effect of adding roughly 1.5 points of organic net sales growth and roughly 75 basis points to constant currency adjusted EBITDA growth, but reduces segment EBITDA margin by approximately 130 basis points.

That being said, our performance this year in Europe is not what we planned and not what we would expect in any year. It's true that we had strong unfavorable currency translation all year, and that's likely to continue into the beginning of 2017. But from an operating perspective, we made significant trade investments during the year, primarily to jumpstart our UK business in a changing and difficult retail environment. And so far we are encouraged by the results. The improvement in our volume mix trends reflects a combination of gains from Big Bets in condiments and sauces, even without Russia, as well as improving consumption in share trends across most countries, including positive overall consumption in the UK.

Adjusted EBITDA, the decline we saw in Q4 and throughout the year was from a combination of pricing and increased marketing to drive our Big Bets and whitespace initiatives and, in Q4, higher overhead costs due to timing which we don't expect to repeat. These factors more than offset manufacturing savings realized during the year.

Finally, our Rest of World segment on slide 8. Here the underlying drivers of organic growth were fairly consistent throughout the year. Higher pricing was primarily driven by price increases to offset higher input costs in local currency, mainly Latin America. And vol/mix growth was driven by strong years in China and Latin America and solid performance in Australia and Japan with a strong overall growth in condiments and sauces across all regions. Some challenges still remain, including Indonesia soy sauce and some difficult economic conditions to overcome in India and the Middle East. But overall, as we said on our last call, after seeing a slight deceleration in Q3, we continue to expect strong growth in our Rest of World business, both in the near term and long term. Net to EBITDA, as we also mentioned on our last call, in Q4 we faced a strong comparison to the prior year, and we are investing heavily behind whitespace initiatives. This led to the decline in adjusted EBITDA we saw in Q4 in the second half of the year.

For the full year, EBITDA growth was primarily driven by organic sales growth that was partially offset by increased marketing investments to support new products.

Now before we go to our agenda for 2017, I think it's also important to highlight the significant progress we made in 2016, to improve our capital structure and credit metrics. The first point I will make on slide 9 is that our focus on cash is paying off. We generated approximately $1 billion of cash from working capital improvements, mainly driven by an increase in payables and tight management of inventories. In fact, we were able to achieve negative working capital by the end of the year, equal to negative 1.6% of sales, down from 4.5% of sales at the end of last year. And we did this while increasing safety stock in an effort to derisk our footprint activity.

We also redeemed our preferred tax, resulting in roughly $550 million of annual after-tax cash savings for the Company.

In terms of leverage, we've also made similar significant progress in a short period of time improving our credit metrics. Through a combination of EBITDA growth and refinancing, we reduced our leverage from approximately 4.5 times EBITDA at the time of the merger to 3.6 times at the end of 2016. We remain confident in our ability to further deleverage in 2017 to bring us closer to our ultimate goal of below 3 times leverage. And we remain committed to paying down $2 billion of debt when it comes due in July and holding off on any share repurchase plans until debt paydown is complete.

Beyond our deleveraging goals, our priorities of ongoing financial policy and use of free cash flow are straightforward. First, maintain an investment grade credit rating. Second, fund a highly competitive dividend. And third, deploy excess cash against opportunity on a risk-adjusted return basis. Which brings us to our agenda for 2017 and I will hand it back to Bernardo to start it off.

Thank you, Paulo. Let me start by saying that 2016 was a solid year for our Company. We made a great deal of progress in realizing our potential, but we still have a lot to prove in order to deliver our expectations for 2017.

In 2017 we entered year two of our multiyear merger plan. Headwinds remain from highly competitive retail markets to persistent foreign exchange headwinds, especially in Europe. So, at the top of our agenda, is an even sharper focus from profitable organic sales growth. By that, I mean that we will focus our investments in innovation, renovation and marketing on our leading brands, along with prioritizing fewer bigger and bolder bets within our portfolio. This will include expanding our core by innovating into adjacent categories and new segments where Kraft Heinz brands have the ability to win.

It also includes Big Bets in existing categories by aggressively targeting on-trend segments where you are currently under-indexed such as the 2016 (inaudible) in US natural cheese. For comparative reasons, we do not have a list of key initiatives to provide today, but we will certainly highlight them as we roll them out in the coming quarter.

And finally, globally, we are focusing on three key brands -- Heinz, Kraft and Planters -- and in five categories with global potential -- condiments and sauces, cheese, meals, nuts, and baby food. (inaudible) opportunities will be to increase investment levels and improve execution, which includes applying best practice for winning in each channel from traditional retail discounters to food-service and overtime eCommerce. All this will be fueled by significant incremental investment in marketing, both through market capabilities and product development covering North America, Europe and rest of the world. Our agenda also includes achieving best-in-class operating efficiencies with top quality. We plan to reduce complexity to active assortment measurement in the United States and achieve best-in-class operations, efficiency and quality within our manufacturing facilities.

Also, great execution begins with great training, and we are actively building a new (inaudible) training platform to support our performance-driven organization. But let me turn it back to Paulo to wrap up by explaining how our agenda will translate into 2017 financial performance.

Thanks, Bernardo. In terms of cost savings, we are now targeting net Integration Program savings of $1.7 billion by the end of 2017, up from $1.5 billion previously. Keep in mind that we achieved cumulative savings of approximately $1.2 billion through the end of 2016.

And note that our new target is net of an approximately $300 million negative impact in 2017 from a combination of business reinvestments and additional non-key commodity inflation that were not contemplated at the time of the merger.

To achieve these new targets, we expect cost to achieve of $2 billion, up from $1.9 billion previously. This includes $1.2 billion in pretax cash P&L costs, as well as CapEx of $1.3 billion.

Finally, we expect to deliver strong EPS growth driven by EBITDA gains and further accretion from the preferred refinancing. EBITDA growth is likely to be driven primarily by incremental integration savings in North America, as well as strong organic top-line growth in our Rest of World markets.

In addition, our earnings expectations currently reflect an effective tax rate of approximately 30% and assume no change in existing tax regimes and regulations.

As far as seasonality throughout the year, our 2017 plan reflects aggressive upfront investment in growth, followed by significant second-half savings from footprint initiatives.

In addition, please note that several factors will hold back first-quarter organic net sales in EBITDA. They include a shift in higher margin user shipments to Q2 2017 versus Q1 2016, upfront investments in innovation and white space in a number of geographies, as well as our expectation that additional integration-related savings will be second-half oriented.

That being said, we do expect 2017 will be another year of strong sustainable profit growth for The Kraft Heinz Company and another significant step forward in realizing our potential.

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

(Operator Instructions). Andrew Lazar, Barclays.

I guess two things, if I could. One is you talk about profitable organic sales growth going forward, a sharpening of focus on that. I guess how should we externally measure the Company against that goal of profitable sales growth? Is there a minimum amount of growth and sort of EBITDA margin that or a combination of those two that we can use as, let's say, measuring sticks to assess the execution on this goal?

This is Paulo. We are not going to provide like a target (inaudible), but the way that we see this profitable organic growth is to our innovation process and to all the initiatives that we are handling here at the Company, we expect to have sales that really move down to EBITDA over time.

And then if we think about the North American business investments that you talk about that I think you'd mentioned were not contemplated at the time of the merger, trying to get a sense of sort of exactly what you mean by (technical difficulty) netted out of the synergy. And should we take from that the cost of growth essentially is more significant than you might of thought at the time of the merger, or how should we put that business investment step-up in context?

It is Paulo, again. So, what we're talking about here is first off the business investment is pretty much an investment that we are doing in product improvements for the product renovation, marketing (inaudible), new products and more (inaudible). We are investing now behind the gross markets to improve the retail execution that we have and also in our expanded distribution in our food service segment. And, again, all of these investments we are not contemplating to do that. We saw the opportunity to do this now, and we are executing it. And just to be clear, we always decided to provide a savings target that was (inaudible), so we are keeping doing this. We are just highlighting that we found more opportunity in the business than we are doing, and we are executing this. But, again, our target of $1.7 billion is still net of all of these investments.

Thank you.

Steven Strycula, UBS.

Hello, everyone. Good revenue in the quarter. So a quick question, kind of following up with Andrew. The timing of the factory closures, it seems like some of that is getting -- taking a little bit longer than maybe expected or maybe we mismanaged how it would flow into the year. So does that mean there some kind of tail effect of cost savings dipping into early 2018? That would be my first question.

I will take this question. Our manufacturing modernization program is on track to deliver updated technology and low-cost production. We are now in the peak activity and won't be passed net peak until late 2017 as I shared on the last call. We remain in line with expectations and on budget to deliver what we shared with you on prior calls.

Okay. Great. And then my other question would be related to pricing. We definitely saw very strong volumes. So, George, if you could help us understand maybe, would the US business organically still have been positive ex, call it the trade shift, and should we think about, with price mix being just below flat this quarter, should we start to see that improve as you think through revenue management initiatives for the Kraft portfolio this year? And also you were saying that commodity prices might be bottoming. If you could help us think through that, that would be great.

Pricing for Q4 was in line with our strategy all along and in line with our expectations. And you probably saw both sides of revenue management at work. The side where we went dark in some categories and the side where we went heavy in other categories, and we were very happy with the results that we got.

The reason we do that, Steve, is that missed on promotion that traditional lift where you saw the promotion and you measured the growth that it's no longer what it used to be. So we have to resort to a number of flavors to be able to maintain volume. We tried a number of things in Q4. We are very happy with the results, and that would be reflected moving forward. So that's what we want expect from us. Some categories are going to move harder, others move softer. All-in-all we will manage our revenue to always be ahead to improve our margin.

Great. Thank you.

Bryan Spillane, Bank of America Merrill Lynch.

Good afternoon, everyone. Two questions from me. One, as you're thinking about -- as we are looking at 2017 and at some point later this year, you'll start to begin the process, I guess, of repatriating some of the Kraft brands licenses from Mondelez, is there anything that you're doing in 2017 and maybe spending ahead of that, or anything in there that affects what we should be thinking about in terms of 2017 growth or performance?

Hi, Bryan. Good afternoon. It is Bernardo. Look, about the repatriation, you're right. There will be risks coming back to us in January 2018, and there is some work to be done in preparation. But from a cost standpoint or from a revenue standpoint, there is really no benefit or impact in the year. There is a preparation from marketing, from distribution, from our manufacturing capabilities to meet the ground and be running, but I don't think there would be an impact on the costs or the revenue for further repatriation efforts.

Thank you. And then just a couple of housekeeping items. Can you give us a sense of what we should have looked for for D&A for this year, depreciation amortization, interest expense, and maybe just how we should think about transactional foreign exchange?

So starting from the D&A, we are in Q4 (inaudible) related Q4 and [135], that's where we are today. So this will take us in $40 million next year, and on top of that, we believe that we are going to have additional $50 million because of the footprint investment that we are doing during 2016.

And it looks that interest rates, it is pretty much we have an average cost of debt of 2.9% per year, roughly $32 million in gross debt. So this would be around $1.3 billion in interest rates. And again, we expect these to come down a little bit once we pay the $2 billion debt that we're going to have in the beginning of the year. So this is pretty much D&A interest expense.

Regarding the transaction effects, we are expecting to see some headwinds in Europe. But, again, I think our team -- our local team is taking the right measures here to have a balanced approach in terms of setting the (inaudible) price and also -- but also getting the best execution and sales position to offset that. It is important to, again, remember that Europe is 4% of the business and the UK is around 0.5% of that.

Okay. Thank you.

Rob Dickerson, Deutsche Bank.

Good evening, everyone. I just have a simple question just on your pointing to the three core brands to the five core categories globally. So is the expectation I guess mainly in 2017 as you plan to invest more in certain areas of opportunity in North America considering it is you're still about 75%, three quarters of your EBITDA? Is the expectation that that investment will be in North America in those brands and then later you would invest more so in those three core brands on a global basis? So you start in the US, but then you expect to continue to invest in those brands globally to gain scope, then hopefully improve returns, or we just stick with the investment in North America for now because that's really where the majority of the cash flow is coming?

I think it was important to highlight that just to give a sense of the direction of the focus in looking at three global brands in five top categories that really when you mix all (inaudible) 70% business, and you're going to move forward. That's in the United States and North America I mentioned, but also worldwide.

And so I don't think there is a distinction really in an amount of investment between US and international. They were moving together. They are pursuing different states and different -- where the business is by country and by region. But -- and the focus looking midterm, those are the ones.

I think it's important in your question also to highlight that our business is the balance between global brands and local brands. Global brands having made strength in the scale to go multi-categories and multi-regions, and the local (inaudible) like to call customizing to consumer needs on local markets and regions.

So we are really happy with our portfolio and the balance we have today between the global brands and local brands in these specific categories. But those three global -- we are calling global brands in those five categories is really what's going to push us to the next level that we are calling this balance towards profitable growth. I don't think there is a distinction between investment in North America or international. It would be case by case depending on the state of the business and the region well.

Great. Thank you.

Robert Moskow, Credit Suisse.

Thank you. I just wanted to make sure I understood how the savings will flow through as you build up to $1.7 billion. If I assume that the things kind of stay the way they are in the first half of 2017, you would still have quite a bit of benefit versus first quarter a year ago and second quarter a year ago. In fact, I could argue that that gives you the best tailwind in the first quarter. But you are guiding to a weaker first quarter. So can I understand, do you expect first quarter to be your weakest EBITDA growth quarter because of these other Easter factors and such, or is that kind of offset just by the ease of comparison on the saves? Thanks.

This is Paulo. So I think I hear two questions here. So, in terms of how the savings will flow through our P&L in 2017, yes, as we are seeing now with this new updated guidance we are giving, we've seeing more savings come in the second half of the year versus the first half of the year. This is pretty much driven by two things. One that we are having the investments that are (inaudible) the savings number as I mentioned before in the first half of the year, and two, this addition of savings that you found is also going to start more in the second half of the year, as we expected today. So that's one thing.

In terms of seasonality, in terms of Q1, you ask us the full year next year, I think the three things that we are mentioning here I think is, first of all, the Easter shift, Q1 versus Q2, and this big balance, the savings flow that we expect the first half of the year we are going to have more investments, and the back half of the year are going to have more net savings as I just explained to you. So I think those are the two points that I would like to make.

So just to clarify, the investments are included in that net savings number? So does that mean -- fourth quarter you had about $345 million of net savings. Could it possibly go down in first quarter because of the investments sequentially?

I don't want to give the guidance breakdown by quarter, but again, we always believe that we are adding initiatives and savings, and you're adding (inaudible). We believe that our savings are going to ramp up through all the year.

Okay. Just want to make sure we are aligned, but thank you.

Michael Lavery, CLSA.

Good afternoon and thank you. Can you just confirm, I think I called this, but one of the five categories you said you would focus on I think it was baby food. You clearly have a smaller footprint there now. I think it's mostly Italy and a little bit in China. When you talk about that as a whitespace opportunity, is that just organically, or would you consider M&A to be a part of that as well?

We always look with that, the way we think the categories and the brands. We always look and think about profitable and organic growth. So the way you are directing here is all organic.

And the reason for that is actually you are right to say a small part in the total portfolio, but it's very relevant in many countries important for us, including Canada, including Australia, including the UK, for sure Italy, like I mentioned, for sure China, Mexico. You're getting into Brazil. Russia. That's the biggest category you have there. So when you see all this, given even a small presence where we have a presence, it is significant. To the Heinz brand most part of the time, sometimes the local brands like (inaudible) in Italy and so on. And there is a lot of opportunities, like you said in whitespace geography, again country by country, region by region. But there is a role that can be played, and we want to look at that with the right expectation.

Okay. Thank you. That's very helpful. And then just one other clarification. On 1Q you talked about the Easter shift and the entire investments and the savings pacing being more back-half loaded. Is the Easter shift -- that seems more like it affects a shift into 2Q. You also talked about the trade loading in helping 4Q. Is that also potentially one of the headwinds in 1Q, or do you think -- was that more pipeline fill for new products or something that might not have as much of a drag on 1Q?

George here. So, as I said in my early remarks, we have two things that would affect the first Q. One is the Easter shift, and normally we put that at just over 1%, 1% to 1.5%, something like that. And the second one that is unique to this year, because of the strong promotional activities that we've had in the month of December, we put lots of inventories to support that. That inventory is working its way off in January, and as I said in my remarks, that would be about 0.5 point. So that would be to give you an idea what are the headwinds we will going to be facing in Q1. One of them is a shift between Q1 and Q2, and one or the other one is a one-off due to the inventory workoffs.

Perfect. Thank you very much.

Ken Goldman, JPMorgan.

Thank you. Two for me. First, there's obviously a lot of uncertainty in general right now regarding US tax law, currency exchange rates, etc. So I'm curious if that uncertainty -- to what degree does it affect your desire, your ability to pull the trigger on a next deal, whatever that might be? Because obviously it's more challenging and unusual for any company, not just you, to forecast cash flow for any potential target in this kind of environment. I'm just curious, is the macro uncertainty high on your list? Is it not really high on your list of concerns? How do you think about that when you think about potential M&A going forward?

This is Paulo. I Think, first of all, we don't need another acquisition to drive value, and again, as Bernardo mentioned, we have brands that can travel. We have a lot of whitespace in front of us. And, again, we are going to (inaudible) new opportunity that makes sense for the Company, that creates value for the Company. But, again, as a matter of practice, we don't comment on possible politics.

But you can't comment even on the general way of thinking about it?

I prefer not to comment also on hypotheticals.

Okay. Then, Paulo, you've talked to us in the past -- maybe the answer is no comment here as well, but I'll try anyway. You've talked to us in the past about how important it is for this vehicle, Kraft Heinz, to have I think in your words iconic brand. I am just trying to get a sense, not in an M&A sense, but given what you have already, why is this quality so critical? Why do you value it so heavily, and really what does it mean to Kraft? I am just trying to get a sense for maybe why certain assets with -- I guess, call it, good brands that maybe don't qualify in your mind as iconic wouldn't be a great fit for what you're trying to do.

Again, what I always said is that we believe that we like a lot in the industry, and we believe that the most valuable asset and the most valuable asset that we have, the most asset that gives us the most competitive advantage is -- are the brands. So we value a lot of the brands that we own. So that's what's pretty much the mention I made at that time. (multiple speakers) brands in the portfolio.

Thank you very much.

Jason English, Goldman Sachs.

Hey, guys. Thanks for carving out some time for me. Appreciate it. Congratulations on a strong year in totality. A couple questions for me. First, the price and other commodities benefit for the year, where do we stack and rack as the year finished up?

This is Paulo. So when we saw in terms of the commodity, we said that you had 2016 we had a deflationary year. We've mentioned it at the beginning and the middle of the year that we would expect this benefit to fade and it didn't. And in 2017, when we take a look at this (inaudible) rates, we are likely to see year-over-year inflation. And we've already seen the cheese costs taken, as George mentioned. So that's what we are today.

Okay. Any specificity in terms of the benefit, though, that PNOC benefit for the year?

If you think about what we saw in Q4, we have definitely had benefit in price in our results in Q4. But as we implement in revenue management, commodity costs are just one of the inputs of our category strategy. Separating the impact of price of PNOC from the variances of the commodity is not as informative as it used to be. So I can say that we have a price benefit in our results in Q4, but I think what separates the price initiatives that we have from PNOC are not as informative as it used to be.

I think that's a great point. Because some of the skeptics out there are going to take the EBITDA growth, they're going to take the synergy number, they're going to back it out, they're going to take the PNOC benefit through at least the first three quarters, back it out, give you credit for currency, and point to an underlying EBITDA decline net of those benefits all-in and say maybe that is sort of the underlying rate. This is excluding the savings and sort of net savings of $500 million next year, the underlying business is flat to down. And when those savings run out, the business will fall off, and certainly if you look at consensus, consensus right now is modeling more than $500 million of EBITDA growth next year. So they are going to view that with some degree of skepticism given you only have $500 million of savings in the underlying soft. What's wrong with that line of thinking, or is there some validity in that line of thinking, and how should we be thinking about the underlying business, even absent sort of the cost saves on the forward?

We don't think about our model, our overall models. As I said earlier, we expect growth coming from Rest of World. We have the savings flowing through. And you have our other initiatives, revenue management, we have investment in new products, PNOC, that we are doing to burst our sales and our results. So it's a bunch of initiatives that we have that (inaudible) results for next year and the following years.

Okay. Thank you very much.

Alexia Howard, Bernstein Research.

Good evening, everyone. So for investors last quarter, there was a concern about the trends in Europe, and I think things have changed over there, but there is still an element of concern. Basically that's the legacy Heinz business that you've now owned for a little over three years. This time around the EBITDA is still shrinking, I guess attributed to some step-ups in timing of overhead spending. How can you address the concern that European business and maybe particularly the UK seems to be slipping? How much will those overhead timing affect this time around, and when do you expect that business to gain some traction again? Thank you.

Bernardo. Like we mentioned in the last quarter and continue to be the point, our goal in Europe is to return to profitable growth. We really think that our performance, there was a weak performance in 2016, and Europe has absolutely no correlation with the cost side, and like you mentioned the overhead, I think there was a lot of cooperation on the stakes, on the go to market and things on the promo side volume mix that didn't work out as they should. And what we are actually encouraged about is, when you see the Q4, the performance by all businesses, especially the Benelux and the UK, had improved significantly looking at (inaudible) consumption, looking at share, on the main categories -- soup, beans, sauces. And you already have 70% of your innovation for the year already in the market. So the results from the Q4, plus what you're seeing now in January and moving into February, we are really encouraged by a much better performance 2017 in Europe than you had in 2016.

So you are going to be challenged. The retail environment is challenged like (inaudible) between FX rate and everything that is happening in the continent. But that being said, I think the performance in Q4 is really encouraging about we can have a better performance looking in 2017 than our weak performance in 2016.

But will you be able to get some EBITDA growth at some point in Europe? I guess the question is, yes, the top line is improving, but at what cost? That's the question I'm getting.

Look, again, when you talk about profitable growth, like Paulo mentioned at the beginning, our idea of (inaudible) is really sales flowing to the bottom line. We have no intention of gaining sales readouts with the profitability component that comes attached to that. There are investments that need to be done in the marketing side and the go-to-market side that I think we have been doing and we will continue to do it. But that being said, if we are able to create profitable growth sales in Europe, that should come also with a better performance in the bottom line.

Thank you. I'll pass it on.

Chris Growe, Stifel.

Good evening. I just had two quick ones for you. I wanted to ask if I could, first, with reference to the revenue management program, is that contingent on capital investments and footprint rationalizations such that we wouldn't see much of that benefit until the second half of the year, or does that program sort of kick in early in the year?

Thank you. We've been working on establishing the revenue management program infrastructure processes and the benefit of it for quite some time now. And, as we said in a number of key items, we folded what we used to call our pricing strategy, pricing commodity, trade spend, all of it now is part of our revenue management program. So we are not separating where the efficiency is coming from. So the best -- it works best for us, not just in the investments in the footprint, but more in investments in brand and particularly in visiting the brand equity as we invest in marketing activity, as we invest in new products, as we invest in renovation like taking artificial stuff out, like what we did with mac & cheese, what we did with frozen meals. You see categories that were declining at double digits. Now they are all of a sudden increasing at high-single digits. So that's giving us the power to one, price, and two, the ability to increase household penetration through renovation of product and innovation of product. So that for us is the better working model.

That's helpful. Thank you. And then just one quick one for Paulo. You talked about in the quarter some incremental investments. I believe marketing was up in the quarter, as well as some of the overhead timing. Could you quantify those in any way percentages or give us any idea of how much that could have burdened the fourth quarter?

Yes. So when you think about the Q4 North America (inaudible) that we had, part of EBITDA came from savings. We also had, as I said, some benefit coming from price and our EBITDA, and this timing overhead that each of them (inaudible) and they are both in the range of $50 million. That's what we saw.

Okay. Thank you for your time.

Thank you and that concludes our question-and-answer session for today. I would like to turn the conference back over to Chris Jakubik for any closing comments.

Thank you, everybody, for joining us this afternoon. For any of the analysts who have follow-up questions, myself and Andy Larkin will be available to take your calls, and for anybody in the media with follow-up questions, Michael Mullen will be here for you as well.

So thank you very much and have a great evening.

Thank you.

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