卡夫亨氏 (KHC) 2017 Q3 法說會逐字稿

Good day.

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

At this time, I would like to welcome everyone to The Kraft Heinz Company's Third Quarter 2017 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 third quarter of 2017.

With me today are Bernardo Hees, our CEO; George Zoghbi, our former Chief Operating Officer of our U.S. Commercial business and now Strategic Adviser; Paulo Basilio, our former CFO and new President of the U.S. Zone; and David Knopf, taking over for Paulo as CFO, most recently the Head of our Planters 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'll also discuss some non-GAAP financial measures during the call today.

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

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

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

Thank you, Chris, and hello, everyone.

Since our last call, there's been a lot of talk about changes in the industry and how consumer staples, companies will adapt to this new reality.

We believe in this fast-moving environment, the companies that are adaptable, and data- and consumer-driven will have an edge in the marketplace.

With that, I would like to start by saying our plans and our progress remains on track.

Our Q3 results were consistent with our expectations for sequential improvement, and we remain confident in our ability to drive sustainable, profitable growth going forward.

As far as results go, and I believe I said on our last call that while we're not entirely satisfied with our financials, we are confident in our ability to drive further improvement going forward, and that remains the case today.

Our Q3 operating numbers show a good pickup in momentum despite the user mix of ups and downs that come with running a global business.

We saw sequential improvement in all segments, both top and bottom line, despite some category-specific volume losses we have been willing to accept in a few countries, some supply chain issues in the United States and other headwinds that come about in the Rest of the World market.

What's more encouraged is that sales are starting to leverage the business investments we have been making.

For instance, EBITDA growth was solid despite the dire balance of pricing and commodity costs not coming through as stronger as anticipated as bacon and dairy costs picked up during the quarter and pricing has yet to catch up.

And we continue to improve against our goal of maintaining strong margins as savings in each region have continued to come in strong and cumulative savings from our Integration Program went to $1.58 billion at the end of Q3.

Going forward, there is no doubt that the retail environment in most parts of the world will remain challenged.

But as the retail landscape changes from market-to-market, the challenge for us is the same and the same as it's ever been: to adapt quickly and stay relevant in all channels.

It's interesting to note the challenge we are facing in Europe, especially in the U.K. at this time last year.

Today, in U.K., we will once again deliver a sustainable, profitable growth in all channels, including e-commerce and discounters, with significant opportunity across Europe still ahead of us.

The lesson is that the ability to adapt quickly is critical.

For some time now, we have been talking about building out in-house capabilities in innovation and renovation, marketing, category management and go-to-market capabilities for better data-driven insights and faster decision-making.

And you are beginning to see the benefits coming through in the marketplace, from the growth we are seeing in our condiments and sauces portfolio in most every markets we're in, given we have been working at these the longest, to other Big Bet innovations, renovations in whitespace such as frozen meals and snacks in the United States and Planters in China, to this ability in improvement in market share trends we are seeing in developed markets like the United States, Canada, Western Europe and Australia.

In the past several weeks, we have taken additional steps to make sure that Kraft Heinz is organized and resourced in a way that puts intense focus on our biggest opportunities.

We are making these changes based on our culture of meritocracy and ownership.

You've probably seen our public announcements promoting George Zoghbi to Strategic Adviser, Paulo Basilio to U.S. Zone President and David Knopf to CFO.

But we have also been taking additional actions behind the scenes to improve our capabilities.

For instance, we promoted Nina Barton, our Head of U.S. Market Innovation and R&D, to a new role as President of our Global Online and Digital Growth Initiatives, reporting directly to me.

In her new role, Nina is responsible for leading all Kraft Heinz e-commerce platforms, accelerating digital transformation and driving new online business.

We also promoted Michelle St Jacques to U.S. Head of Brands and R&D, reporting directly to Paulo.

In her new role, Michelle is responsible for breakthrough innovation, decentralize part of R&D as well as managing, brand-building, best practice that feed into our category teams at the business unit level.

So to sum it all up, through the first 9 months of 2017, the investments we have been making are starting to have the impact in the marketplace and the P&L that you have been expecting.

And we have good momentum heading into the fourth quarter that should allow us to deliver profitable sales, to deliver strong earnings growth for the full year and set us up for further gains in 2018.

So let's turn to Slide 3 and the details of our Q3 financials.

Starting with net sales, there are 2 things to highlight.

First, total organic sales tilted to positive growth in Q3, with sequentially better performance in every reporting segment.

And second, we had better overall volume/mix performance, driven by growth engines such as condiments, sauces in most markets across the Kraft Heinz world, innovations such as Lunchables and P3 in the United States as well as solid Foodservice gains in a number of key markets.

And this happened even though the United States continued to be weighed down by lower shipments in nuts, cheese, meats and coffee.

And the acceleration we're expecting in the Rest of the World market was held back by some one-off factors that David will discuss later, like the slowdown in Brazil and hurricanes in the Caribbean.

And EBITDA momentum picked up as well.

We delivered roughly 7% growth and 180 basis points of margin in EPS in Q3.

The upside was driven by a combination of: one, gains from our cost-saving initiatives, including $125 million from our North American Integration Program; two, lower overhead costs; and three, favorable pricing.

At adjusted EPS, we were flat with the prior year as our strong EBITDA growth was offset by a roughly 450 basis point increase in the effective tax rate versus Q3 last year.

Going forward, as I mentioned, we do expect business momentum to continue into the fourth quarter, with strong gains at both EBITDA and EPS.

Now I will hand it over to George, Paulo and David to highlight our performance and our outlook in each reporting segment.

But before I do, I would like to thank my partner, George, for the contributions he's already made, leading our West business to a period of significant transformation and to say that I look forward to continue to work together for even bigger and better contributions to The Kraft Heinz Company.

George remains a part of Kraft Heinz and will be deeply involved in our innovation and brand-building initiatives, our regular performance review as well as the development and execution of our strategic plan.

So again, thank you, George.

Thank you very much, Bernardo, and good afternoon, everyone.

As usual, I will start the update for our U.S. business on Slide 4.

Overall, we continued to move in the right direction during the third quarter.

We leveraged Kraft Heinz' scale at retail with a well-executed Labor Day event.

We're seeing solid consumption gains in a number of our largest categories, including continued growth in our frozen business, Kraft American slices and Heinz Ketchup as well as innovation-led growth from Lunchables and P3 and our renovation of Oscar Mayer hotdogs driving improved category performance.

Our shared performance has remained consistent overall, continuing with positive share trends and roughly half the business in measured channels, despite the strong private label push that you've seen in the past few quarters.

And outside measured channels, in Q3, we began, once again, to deliver faster-than-market growth in Foodservice.

And our e-commerce sales are up more than 70% year-to-date.

That's not to say that we don't still have some market share and consumption challenges, but they remain concentrated in the same few categories we've been talking about for some time.

And we understand what needs to be fixed.

They include: cold cuts, which continues to be a largely self-inflicted problem, with delays in new equipment startup that will, in fact, impact Q4 merchandising sales and market share; Natural Cheese, where shares remain under pressure due to increasing price gaps to private label; and finally, ongoing weakness in our Kraft salad dressing business.

Overall, the fact that we're building momentum as we take significant steps to transform our U.S. business gives me comfort and confidence in handing the business off to my partner and friend, Paulo.

So for the outlook, let me pass the baton to Paulo.

Thank you, George, and hello, everyone.

Let me start by saying that I'm very excited to be leading the U.S. business.

And I feel good about our ability to continue delivering profitable growth despite the fact we must keep adapting to a rapidly changing retail environment.

I think the challenges we face and the actions we need to take are clear and straightforward.

It centers on capturing several opportunities we have to drive better consumption trends, including: leverage data to make our marketing as effective as possible, from marketing mix to quality impressions; executing our strong pipeline of innovation and renovation; sharpening our category management skills through revenue management and assortment management capabilities; continue to invest in sales to ensure we have the right product range at the right account in the right geography; as well as ramping up our effort outside traditional channels to capture incremental growth opportunities, including Foodservice and e-commerce.

In the near term, I expect that we will see many of the same underlying trends that George described for the third quarter continue to play out in the fourth quarter and positioning ourselves for a solid 2018, including the completion of our footprint initiatives is a key priority.

But let me turn it over to David to better frame what we've seen and what to expect within the numbers.

Thank you, Paulo, and hello, everyone.

I'll start on Slide 5 with our U.S. financials.

As expected, organic net sales performance continued to improve in Q3 to a 0.4% decline.

Volume/mix performance was in line with what we saw in Q2.

To the plus side were: consumption-led growth in Lunchables and P3; gains in Foodservice; and a roughly 30 basis point benefit from hurricane-related consumer pantry loading.

But these are more than offset by distribution losses in nuts and cheese as well as lower shipments in meats and coffee.

By contrast, pricing began to come through stronger in Q3, reflecting higher prices in cheese and bacon to address rising commodity costs as well as pricing in desserts that were partially offset by the timing of promotional activity versus last year in a number of categories, including Oscar Mayer cold cuts and Capri Sun ready-to-drink beverages.

We also saw stronger EBITDA performance in Q3 than either Q2 or the first half, with adjusted EBITDA of 6.8%.

As Bernardo mentioned, incremental Integration Program savings of $125 million between the U.S. and Canada was a key contributor.

Beyond Integration Program savings, lower overhead costs and favorable pricing were partially offset by unfavorable key commodity costs, particularly in meats and cheese.

On our last call, Paulo talked about a better balance of pricing in key commodity costs in the second half versus what we saw in the first half.

While this did, in fact, happen, it was less pronounced than anticipated due to a step-up in dairy and bacon costs during the quarter.

Going forward, there are a couple of factors that will impact U.S. performance in Q4.

Organic sales growth in Q4 will see a 30 basis point headwind from hurricane-related consumer pantry loading in Q3; as George mentioned, delayed production line startups impacting cold cuts; as well as the fact that we're up against a strong 2016 fourth quarter that included some degree of retail inventory builds that we don't expect to repeat this year.

That said, we do expect solid EBITDA growth to continue, reflecting our ongoing focus on profitable sales as well as further cost savings that I'll speak to later.

Let's turn to Slide 6 in Canada, where, in the third quarter, we continued to see our focus on profitable sales pay off.

Pricing largely reflected increased promotional activity versus the prior year as we're essentially seeing 12 months of merchandising activity being fit into the last 9 months of this year.

This is due to the delay in reaching go-to-market agreements with key retailers in Q1.

Volume/mix mainly reflected ongoing consumption growth in condiments and sauces that was offset by lower shipments of Mac & Cheese versus the prior year.

At EBITDA, similar to the U.S., we had solid mid-single-digit constant currency growth and more than 200 basis points of margin expansion.

Here, gains from cost savings and lower overhead costs as well as improved product mix more than offset the impact of lower pricing from higher promotional costs versus the prior year.

Looking ahead to Q4, we expect a similar picture to Q3 on the top line, with solid underlying growth and a good level of in-store activity, however, with a strong headwind in December as we expect to end 2017 with lower retail inventory levels than seen at the end of Q4 last year.

At EBITDA, grocery continued to improve from a combination of cost savings and a better balance of pricing and input costs versus the prior year.

That brings us to Europe on Slide 7, where we saw a very solid quarter.

Pricing was sequentially better than Q2 but continued to be weighed down by trade investments to address competitive activity in our Italian infant nutrition business.

Volume/mix improved to 4.1% growth, driven by strong consumption gains in condiments and sauces across the region as well as gains in Foodservice, although there was a small benefit within all of this from shipment seasoning versus last year, as we mentioned on our last call.

Importantly, the ongoing stable consumption growth in the U.K. gives us the confidence that the business is on the right path.

At EBITDA, we continued to benefit from volume/mix gains and strong efforts to control costs, and this more than offset unfavorable input costs in local currency, driven by transactional currency headwinds.

Going forward in Europe, we don't expect organic sales growth in Q4 to be quite as robust as Q3 due to a combination of program timing and comparisons.

However, we do expect to see a combination of organic net sales growth and cost efficiencies continue to drive EBITDA growth.

Finally, let's look at our Rest of the World segment on Slide 8. Clearly, the 3.6% organic net sales growth was not the acceleration we had expected and remains a lower rate of growth than we would expect on an ongoing basis.

We did see strong double-digit gains in markets like Indonesia, China and the Middle East, driven by the focused investments we've been making to drive condiments and sauces as well as our Planters nut businesses.

And this was very much in line with our expectations.

That said, for the second quarter in a row, a number of one-off factors contributed to this performance, including an unfavorable impact from distributor network realignment, which we have seen in the past couple of quarters, but should begin to fade as Q4 progresses.

We also saw lower shipments in Brazil as we've seen a general slowdown in the market, but most acutely impacting our canned vegetable business in the quarter, even though we continue to grow market share.

In addition, Q3 was further held back by overhang from the GST change in India, primarily impacting our nutritional beverages business and to a lesser extent, lost sales due to the hurricane impact in the Caribbean.

At EBITDA, we saw the solid underlying growth I mentioned, together with a tight focus on costs, show up at the EBITDA line.

Adjusted EBITDA was up 6.4% in constant currency terms in the quarter, and margin is now moving in a positive direction, consistent with the expectations we laid out on our last call.

Going forward, we do expect the impact of the one-off factors I mentioned to fade in Q4, with organic sales reaccelerating.

And this should happen despite a headwind from Chinese New Year-related shipments shifting into Q1 2018 due to a later-than-normal holiday.

We also expect to better leverage the investments we've been making over the past year, driving stronger growth in EBITDA.

This brings us to our outlook for the total company.

I'll start by picking up on a sentiment Bernardo laid out earlier, that while our numbers have not been as strong as they could have been, the impact our investments are making in the marketplace in our P&L are building the positive momentum we expect and need to continue delivering sustainable, profitable growth.

Our focus from here is to close out the year strong and make sure that we continue to make progress against the things that will drive positive momentum in 2018.

This should play out on 3 fronts: first, seeding and growing organic sales.

In the U.S., this means executing our strong pipeline of innovation, renovation, marketing and go-to-market initiatives; in Canada, to sustain the recovery and our activities at retail as well as innovation-driven gains in our grocery portfolio; in Europe, to continue improving our shared performance where we currently compete as well as capturing the whitespace in front of us, including the repatriation of the Kraft brands; and for Rest of the World's growth to accelerate, with a return to run rate performance in both our EMEA and Latin America regions, each driven by a combination of innovation and whitespace gains.

Second, continuing to build profit momentum.

On cost savings, we're now targeting between $1.7 billion and $1.8 billion of cumulative Integration Program savings by the end of 2017 or $500 million to $600 million of net incremental savings in 2017 versus 2016.

Ramping up supply-chain-related savings will be a key factor.

We're confident that the savings are there, it's more a matter of timing relative to the end of the year.

Another factor at work will be business momentum picking up in the form of sequentially better organic net sales growth in the areas where we've been investing the heaviest and the lever that provides at the EBITDA line.

And finally, we continue to expect a more favorable balance between pricing and input costs as we go forward, with Q4 sequentially better than the third quarter.

The third and final part of our outlook is below-the-line costs, specifically the tax line.

Based on the flow of discrete items we've seen through Q3 and what we're forecasting for Q4, we now expect our full year 2017 effective tax rate to land at approximately 29% versus the 30% we think is representative of our run rate on an annual basis.

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

Thank you.

And now we'd be happy to take your questions.

(Operator Instructions) Our first question comes from David Palmer with RBC Capital Markets.

When you talk about the U.S. food market and the retailing environment getting more difficult, I think there's quite a few versions of what that might mean these days.

There's a lot of theories and problems that people have cited.

Could you zero in on what has gotten more difficult in the U.S. food market in general this year in terms of having profitable, sustainable growth?

And I'll have a follow-up.

Thank you, David.

This is George here.

I'll take the question.

There is no doubt that there is a change in the retail landscape today.

And the change in the retail landscape is not something new.

What is new is the frequency and the speed at which the market is changing.

So we are seeing the majority -- the vast majority of retailers investing to provide consumers with more shopping options.

So we see almost everyone now trying at some stage in the cycle to offer in-store pickup, delivery to home and people coming and shopping inside their stores as usual.

Our job is to be agile enough to deliver the relevant offering and the bundle that consumers -- that caters to a consumer's shopping option.

That's what we need to do, and that's where we're making the majority of our investments.

For us, it is not a question that, for instance, we have to choose between an e-commerce versus a traditional channel.

It is operating in every channel effectively.

And that's the job to be done, and that's the job that we are focusing on.

And does that creeping influence of e-commerce mean less pricing power or just simply that there is a desire from some of the bricks-and-mortar players for you to share in those investments?

Is that simply what's happening, going on right now?

Well, for us, the contribution margin from the sales in the e-commerce channel are comparable to the traditional channel because the physical movement of product is the same from us to the customers.

Where we are making the investment, however, we're making an outside investment to build our capability for the pull factor because the way consumers shop when they are in front of a screen or they're using the mobile commerce or they're using the voice commerce is very different to their shopping behavior when they are walking through the aisle.

And so our focus into making an investment, to be able to cater for that and stimulate demand for us and our trading partners.

So we will see that investment catching -- that return catching up once we build scale in this area.

Our next question comes from Ken Goldman with JPMorgan.

One quick one for me and then a broader one.

I think it was implied last -- on last quarter's call and maybe stated absolutely that it was expected that, sequentially, organic growth would improve throughout the year.

So 4Q would probably be better than 3Q.

David, I think you've been talking about some of the headwinds that we might face in 4Q versus 3Q.

But we have a much easier comp as well in organic sales growth.

Do we still believe -- is it still reasonable to expect that organic sales growth for the whole company will be a little bit better in the fourth quarter than the third quarter?

Hi, Ken, this is David, and thank you for the question.

So to summarize my comments from earlier, I'd say, in Q4, we'd expect organic sales to reflect 2 things: one, some one-off headwinds from the U.S. and Canada, but we do expect this to be offset by acceleration in Rest of the World.

So I think that's kind of the trajectory you'd expect for organic sales.

The other thing I'd say is we continue to expect strong EBITDA growth globally into Q4.

And Ken, just to -- you had mentioned on Q4, I mean, keep in mind that organic net sales growth was up 1.6% last year.

So it's not necessarily an easy comp.

No.

You're right.

I was looking at the wrong year, and I apologize for that.

My larger question in terms of personnel changes, obviously, there have been some fairly major ones lately at the top.

I just -- not to take up too much time, but can we just ask a little bit about why some of these changes were made?

What, Bernardo, you think that individual strengths are in terms of David and Paulo and George and why they're right for these roles?

I'm just trying to get a little bit of a sense for why, at this company's life cycle or this point in the life cycle, these movements were taken on.

Hi, Ken, it's Bernardo.

I think it's a reliable question.

And if you think about it, we saw what's really the right timing to do that, given that it's, I think, the whole integration after 2 years of Kraft Heinz, was already behind us.

We went through a lot of transformational steps, not only from a results standpoint, but a way of doing business, pushing a lot of speed-to-market, to innovation, go-to-market and other things, a lot of different campaigns, to products and renovation.

And George has really done a phenomenal job leading us in the West during this whole period.

And a part of his job as well was to prepare other players that could be his successor in this and he could be helping us in a different role, what he's going to be doing in that, to myself, to Paulo, to the board and so on.

I think, for Paulo, after leaving the finance world from this whole period since the acquisition of Heinz in 2013, it was really a phenomenal opportunity to be running a business and really adding to his Qs.

And the talent he has, he understands the business better than anybody else.

He has worked side-by-side with George, with myself, during this whole period.

So I wouldn't say -- I know people were taken by surprise, but the way like that is very normal for us, to have people in different areas and rotating and really adding to the business for the long run.

And David is really a question of -- is really a result of talent and proven results from the back, being now taken from a different -- completely different role being the CFO of the company, taking a great proof of meritocracy and ownership in action.

So I know it was a lot bundled together, but in a sense that something has been built for quite some time.

It has been -- the transition has been very smooth, and really, Paulo is already running the business, David is already the CFO, George is already helping me in several initiatives.

Like he was mentioning, the e-commerce, the channel mix, things related to innovation, related to our stock plan initiatives.

So I would say, it's really a proof of meritocracy and speed-to-market when we want to move the company to the next level.

Our next question comes from Matthew Grainger with Morgan Stanley.

I just had 2. First, I guess, for David or for Paulo.

I just wanted to ask about gross margin in the quarter.

It was a bit below our expectations.

I'd assume the main driver of any short haul -- the shortfall that might have occurred relative to your own outlook was a function of that price/cost balance improving a little bit less than expected.

But apart from that dynamic, could you just talk about the balance between supporting the brands with trade versus advertising at the moment?

Are you seeing any incremental pressure from competitive dynamics or retailers that's resulting in the need to reallocate a bit of money from brand-building back toward trade spending?

Hi, Matt, this is David, and thank you for the question here.

So to answer your question, I think there are a few things to note on how the P&L is playing versus last year.

So on gross margin, as you asked, the performance versus last year really reflects 2 factors.

So first, we've seen an unfavorable balance in pricing and commodities with commodity inflation that we've talked about in the first half and the last quarter.

I'll reiterate that we did see improvement in Q3, and we expect to see an accelerated improvement in this balance into Q4.

And in fact, with that improvement in Q4, it should enable a better flow-through of savings of our integration savings to the bottom line to EBITDA.

The second factor here to highlight is we did have some increased depreciation and amortization expense within our gross margin line.

If you actually take this out, and it's related to the footprint projects that we've talked about previously, if you take out this increase, our gross margin actually increased in Q3 by 35 basis points.

So again, we started to see an improvement in Q3 which we expect to improve with PNOC into Q4.

Okay.

That's helpful.

And then just one other question, I guess, following up on David Palmer's question earlier.

When we're thinking about the pace of change in the U.S., there's been a huge amount of focus on the expansion of a few, small but growing retailers within the food landscape like Amazon and the hard discounters.

And a lot of the risk factors being discussed are much more forward-looking than something that's really imminent or having a significant, tangible impact right now, or at least it seems to be that way.

So I'm just curious to get your thoughts on what kind of tangible impact you're seeing from those retailers and how they're sort of interacting with the broader industry at the moment and then how well positioned you are to partner with them or in the case of the hard discounters, how confident you are in remaining competitively resilient as they try and expand their presence.

Hi, this is Paulo.

So when you think about the discount -- the hard discounters channel, what we're seeing, and it's correct, you're seeing a push by this channel, it's causing a renewed focus on all product assortments and price-matching by the traditional retailers.

And our objective here, and it's clear for us, is we need to get the right SKUs, the right brands at the right price points that should go for the relevant channel.

So for us, again, it's just pretty much the same deal we have in terms of the new -- when you think about e-commerce and the new digital world.

It's pretty much not a question of, for instance, the discounters versus other channels, but again, be able to operate with the right assortment, with the right SKU, at the right price point, with the discounted and with the other channels.

I think that's our main job here today.

Our next question comes from Robert Moskow with Crédit Suisse.

I guess a couple of questions.

One is, you raised your cost savings target, but my recollection is that that's also net of other costs that you might incur, inflationary costs such as freight.

And with freight rising, how did that factor into your decision to raise the savings?

Wouldn't it be even higher, excluding that, I guess?

And then the second question is, I thought I heard Paulo comment about price-matching by traditional retailers, or maybe I'd misunderstood.

But is that a function of traditional grocers trying to match what the hard discounters are putting out there?

And that's really my questions.

Hi, Rob, this is David, and thanks for the question.

So to answer, I think this increase in integration savings that we saw from the $1.7 billion to a range from $1.7 billion to $1.8 billion, again, this is net of some of the inflation and investments we talked about.

So that's an all-in number.

Okay.

So it would have been higher.

But are you raising your freight number in there also?

Or is it higher...

Again, this is an all-in number, so it's net of some of the inflation investments that we've had.

[

Yes, and in terms of -- sorry, your second question about price-matching.

So we are seeing some private label matching between retailers that are creating a bigger and wider gap versus the branded products in some statistic categories.

Our next question comes from Bryan Spillane with Bank of America Merrill Lynch.

So I guess my question is just around the EBITDA performance year-to-date, right?

So I think currency -- constant currency adjusted EBITDA is up 2% versus last year through the first 3 quarters.

So can you give us a sense of where that stacks up versus, I guess, what your internal plans are?

And also, I guess there's an implication that EBITDA growth will be a little bit better in the fourth quarter.

But kind of where you're tracking versus plan?

And I guess related to that, SG&A was pretty low this quarter.

So I'm trying to get a sense -- I guess some sense in there about how much of that is sustainable.

Or are there some factors that drove SG&A down in the quarter that we should think about maybe not repeating?

Hi, Bryan, it's Bernardo.

Let me take the first part of your question about the performance evaluation.

And then I'm going to ask David to follow up on the SG&A piece.

I think it's reasonable to say that after the first quarter, that, that has been a weaker quarter for us and for the industry in general, right?

And we have been significantly progressed, month-by-month, quarter-by-quarter.

And when you compare the second half with the first half, we continue to make core progress in almost all geographies and all channels, right?

That's something we have been highlighting in all calls.

George has talked about that several times as well.

And we are pleased to see that coming, right?

So when you see our profitable growth agenda to the investments of Big Bet innovations, go-to-market, digital growth, whitespace Foodservice, efficiencies on the marketing side, they are all materializing, right, and it's getting momentum as we speak.

So we're pleased to see that.

On the other hand, you are right to say that we have some short-term headwinds that really doesn't change the whole potential and the way we're seeing 2018 and beyond.

And you're also right to say that we should continue to see the acceleration of our EBITDA growth looking fourth quarter, right, especially the savings curve materializing the way we wanted them to do it.

We're finalizing our footprint initiatives.

We are raising our all-win base of the savings.

So we should see more of that in the fourth quarter, especially in the broader line worldwide.

With that, I would pass to David here to comment on the -- specific on the numbers.

Thanks, Bernardo.

And hi, Bryan.

Thank you for the question.

So on the SG&A line, I'd say we did see a significant decline versus prior year as a percentage of sales.

And that really reflects lower people costs that we've seen as well as ZBB savings versus prior year.

The one thing I want to note to address your question is as you update your models, you should not straight-line the SG&A as a percentage of sales that you saw in year-to-date in Q4 -- or sorry, year-to-date in Q3 into Q4 because we do have some seasonality in this line item.

And just to be clear, in SG&A, has there been any change in, like, comp accruals?

Have you had to take down comp accruals at all this year because you're tracking behind plan?

Or has that been a factor in the lower SG&A, I guess?

Yes, so if you think about EBITDA for the year -- or sorry, for Q3, globally, we saw strong EBITDA growth up $120 million to $130 million.

That is really driven by 2 things: one, cost savings in North America as well as growth in Europe and Rest of the World.

So if you look at North America, we were actually up $100 million, and the difference there, the $30 million, is really driven by Europe and Rest of the World.

So in North America, we have the benefit of $125 million of integration savings.

The delta there, just the $100 million growth in EBITDA was really driven by the unfavorable balance of pricing and commodities that we talked about, which did improve in Q3 but was still a headwind for us.

And that was partially offset by savings in the business.

So that's kind of the rough trajectory of EBITDA versus prior year.

Our next question comes from Pablo Zuanic with SIG.

One question for George and one for Bernardo, please.

So George, we hear a lot from the retailers that private brands are growing, that the good retailers there, Wegmans, Costco, H-E-B, are the ones that tend to have very, more developed private label programs and that others may want to catch up.

Do you see that?

Do you expect that?

And how does it affect your business?

And then a question for Bernardo, and it's a bit philosophical.

I would argue that all your categories, Bernardo, are what I call more of a commodity-type nature, whether it's cheese, cold cuts, even coffee.

Your brands are more on the commodity side, if I look at Maxwell House.

So how do you adapt that portfolio?

A, do you buy other brands, new categories?

Do you enter licensing agreements with brands that are stronger?

Or do you even enter private brands as a business?

And I say that because your skill set, there are some questions on the marketing side, but I'm sure your skills are there, but your skill set clearly is on scale in operations and cost savings.

So given this new retail landscape, why not make a bigger bet on private brands and operate private brands as well as you manage your own brands, have more scale and maybe help margins?

Maybe, George, you can answer the first question first.

Thank you, Pablo.

I will answer the first question, and I will hand it over to Bernardo to answer the second one.

You are right.

This year, we have seen, after a long period of being flat, a renewed focus on expanding the total distribution points or the TDPs of private label and some push on promoting private label as well.

And in a major part, that was to ensure a competition with new entrants expanding in the marketplace.

Now the impact on us varied by category.

In some categories, we benefited because to make way for the total -- increase in total distribution points, some of the brands were taken out of the category, and therefore, the category performance improved when a retailer reduced the number of offering of the low-velocity product and went into a high-velocity product.

So you see that very noticeable in our Ketchup business, in our Kraft American slices business and our beverages mixes business and our ready-to-eat dessert business.

On the other hand, by contrast, when retailers did not play with the assortment but they -- that they resorted to price-matching and having a very competitive private label with the expanding hard discounting sector, the gap between the branded and nonbranded pricing expanded.

And in those categories, we saw loss of market share.

An example for that is the Natural Cheese.

At the end of the day, we still managed to have about 50% of the business maintaining or growing share.

And we will continue to invest in the quality and innovation and renovation to win in the marketplace across all our major categories.

So that's where we landed.

Bernardo?

Hi, Pablo, Bernardo.

About your questions, about what you call more commoditized categories, and so I think it's important to highlight 2 things.

One, those categories that we have been doing a lot of good work on renovation and bringing things to market on a different way, right?

I think the hotdog example is a good example.

The innovation in Planters signature and nutrition and others, another good example.

On the cheese category, with several different offers within, from Philadelphia, but to the Natural Cheese and Singles, it's another.

So -- and those are categories that are really very, very -- tend to be extremely profitable and with high margins in all of them.

So in order to make this analysis we're making, I think it's good to see the profitability and the way to go to the category in a more longer-term view, right?

That's always helped.

The second piece to our question, that we tend to like more the scale and then the things that you're going to need investment and growth, I tend to disagree with that because if you look at the story of the last 2 years since the merger, we were able to really achieve a significant margin increase within our business, keeping the same level of growth as our peers.

Now recently, looking in 2017, in most part of the categories, we're growing better than our peers, right, because of the agenda looking at innovation, the go-to-market, the marketing, the digital channels, the Foodservice whitespace and so on.

So even though I believe, and we've said that in the call many times, we have much more ahead of us not only for the year, looking at the fourth quarter against third quarter and so on, but looking at 2018, '19 and beyond.

Many of the categories we have today, we're in a much better place as we speak, and George had been highlighting that, than we were a year ago or 2 years ago.

What makes us excited about the momentum, we are coming and looking at '18 and '19.

Our next question comes from Jonathan Feeney with Consumer Edge Research.

This morning, there was an article in the London Telegraph about a number of leading CPG companies who are participating in a pilot exchange that effectively cuts out -- potentially cuts out some major retailers.

And I guess it got me thinking, why isn't it -- what stops something like that from happening in North America or more broadly?

And what got me thinking, why isn't it inherently margin-negative for retailers to fragment?

You named -- you just named some brands that have performed very, very well as retailers have been forced to reset shelves.

Why isn't it the case that there's ways to go more direct to consumers, maybe partner more aggressively with existing e-commerce players, to create -- to not only create a more rational market, but create greater leverage for your brands and for yourself, especially in those businesses where you have high brand share, high penetration and the high can't-live-without-it factor for retailers?

Just your thoughts on that.

Thank you, Jonathan.

When we reviewed our e-commerce strategy as we built the team, we looked at all options, and we felt and we decided that the most efficient option from an end-to-end supply chain is to partner with retailers because of the scale that they provide for everybody.

And we decided that for the physical movement of product, we keep using central distribution warehouses to get the physical movement of product to retailers.

And our investment is better made to build a relationship with the consumers and convert these consumers as customers of our trade partners.

And this is where we're investing the money.

This is where we're putting our resources.

And from the pilots that we did, and we had a number of initiatives that we tested in the marketplace, it proved very efficient, profitable and can deliver growth for both of us, ourselves and our major customers.

Our next question comes from David Driscoll with Citigroup.

I had 2 questions.

The first was just a follow-up to David regarding the changes to the assets, the asset footprint.

You said something earlier about if you excluded the higher depreciation, that gross margins would have been up.

And the only thing I'd like you to explain is that I thought the concept is, is that you put all this new fancy equipment in because it gives you lower operating costs.

One of the negatives, of course, is higher depreciation for the brand-new equipment.

But isn't there a significant positive because there's lower operating costs?

So if you take that part into account, can you still do the margin computation that you gave us, saying that ex the depreciation, gross margin would have been up?

Hi, David.

Thank you for the question.

So I think to answer your question, like I said, we had an increase in depreciation related to the footprint, which if you stripped this out, we would have an increase in gross margin of 35 basis points.

So I think the disconnect there is really timing-related relative to the ramp-up that we would see in some of these programs relative to the CapEx that we have to spend.

Okay.

Europe.

You guys mentioned that you were taking back some of the licenses, the licenses that reverted back from Mondelez.

Can you spend a little bit more time and talk about this?

I think this can have a reasonably significant impact over time.

But I would like to hear exactly, well, what brands have come back?

Or what products have come back to you?

And what are your plans going forward to enhance your European business with the licenses?

Hi, David, it's Bernardo.

That's correct.

We came to an agreement with Mondelez and had the brands that were on the Kraft name actually and Bull's-Eye and other brands within Continental Europe to come back to us this fourth quarter, what really, I think, allowed us to already start talking to retailers and to plan properly in 2018 and accelerate our plans moving forward.

We're excited with that because, especially in Continental Europe, gets us more and more presence and scale in the condiments and sauces business.

That's for sure a category that's strategic for us, and we want to strengthen our presence worldwide within that.

And that happens with this, especially when we look at Germany, Italy, Spain and some other countries within Continental Europe.

By having the brands now, like I said, allows us to really move at a faster pace to our plans already for next year.

The biggest product next year that's coming back is really Kraft Mayo, but they also have, perhaps, other sauces in barbecue, even ketchup and others that are also coming back with the repatriation of the brands, especially on the Kraft name.

Can you give us any sense of scale as to what revenue this will contribute next year?

We're not giving the numbers now for sure.

We're working the plans what this can be.

I think the first step is really to have them in-house and really establishing and keeping the commercial relationship as of yesterday.

And then from there, you're going to see what can be growing and how we can scale to our distribution and so on.

It will be more looking at through second half next year, when we can have them completely in-house the way we'd like to.

But I would say, it's a good start to the process.

Our last question is from Andrew Lazar with Barclays.

So I guess my one question is we've seen a pretty severe devaluation in the food space irrespective of the last day or so.

And I guess, as capital allocation is such a large part of KHC's story, I guess I was wondering what you can comment on in terms of the company's ability to take advantage or monetize some of that or some of these stock moves and maybe use it to your advantage.

I guess, in other words, why wouldn't KHC be able to move faster on some of these capital allocation decisions in this kind of an environment where there would seem to be some additional opportunity?

Thank you, Andrew.

It's Bernardo again.

I think your question, it makes a lot of sense.

I think it's important, just without commenting in any specific or hypothetical names or -- to say that our framework has really not changed within the M&A strategy in capital allocation.

You're right to say I don't think it's a question of speed or not speed.

We have proven in the past that we're disciplined and know how to allocate capital and have proven in the past also that we know how to be fast when applicable.

I think it's coming back to the framework.

The 3 things we have been saying for quite some time are still in place today in an important way.

First, we do like brands that can travel, not only to geographies, but to all channels.

That's an important consideration for us.

Second, we do like good categories and business that we believe can be sustainable for the long term.

And third, the right valuation and the right value creation for the long term is critical.

When you find this combination that really allowed us, well, to say that 2 plus 2 is more than 4, we tend to move at a fast pace, one, when we can.

We can add to our portfolio and really create within the Kraft Heinz project something bigger.

Again, when you find the 2 plus 2, that's more than 4. Your question about the right valuation and what's happening in the market, that doesn't change our long-term perspective and our framework.

You are right to say that the companies at those valuations and so really create a much more long-term value creation to be captured if they fit the framework.

You're right to say so.

Thank you.

I'd now like to turn the call back over to Chris Jakubik for closing remarks.

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

For the analysts with follow-up questions, myself and Andy Larkin will be available.

And for anybody in the media with any follow-ups, Michael Mullen will be available for you.

So thanks again for joining us, and have a good night.

Good night.

Ladies and gentlemen, this concludes today's conference.

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