卡夫亨氏 (KHC) 2018 Q3 法說會逐字稿

Good day.

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

At this time, I would like to welcome everyone to the Kraft Heinz Company's Third Quarter 2018 Earnings Conference Call.

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

Mr. Jakubik, you may begin.

Hello, everyone, and thanks for joining our business update.

We'll start today's call with an overview of our third quarter and 9-month results as well as our view on the path forward from Bernardo Hees, our CEO; and David Knopf, our Chief Financial Officer.

Then Paulo Basilio, President of our U.S. zone, will join the rest of us for the Q&A session.

Please note that during our remarks today, we will make some forward-looking statements that are based on how we see things today.

Actual results may differ materially 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 end of the slide presentation available on our website.

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

Thank you, Chris, and good afternoon, everyone.

Three months ago, we said that we expected organic growth from Q3 onwards, driven by a stronger, more incremental marketing and innovation pipeline, leveraging investments in category management and go-to-market capabilities and supported by incremental merchandising spend and best-in-class customer service.

Today, we believe and are confident our Q3 results show that the turnaround of our top line performance is firmly underway not just in terms of headline organic growth but also real volume growth.

The transitory factors that negatively impacted first half sales are fading, as expected, and we saw a further improvement in consumption trends in most countries and most key categories.

In fact, on a global basis, more than half of our categories saw consumption growth in Q3.

And our categories in the United States are going through a trend bend, with aggregate consumption across our categories improving nearly 2 percent points in Q3 versus Q2.

Excluding trends across entity, they are slipping from negative to positive.

Our market shares are also improving.

Across the total company, Kraft Heinz is holding or growing share in more than half of our categories, including very strong market share gains in our rest of the world market.

And finally, we continue to see solid performance in non-measured channels, including e-commerce and global foodservice.

Breakthrough innovation, strong in-store activity, distribution gains and white space expansion are coming together.

Overall, while we did provide solid in-market support for these activities and pricing in Q3 was down versus the prior year, it's important to note that our commercial growth is positive.

Commercial profitability or the profit contribution from price, volume and mix is positive and growing.

Execution is improving.

And our pipeline is getting stronger both in terms of innovation and go-to-market initiatives.

At the same time, third quarter profitability was held back by several one-off factors, including commercial investment, net unfavorable impact of bonus accrual versus 2017, and supply chain inflation as we expected, but also by our decision to prioritize customer service as we saw volumes ramp up and forego some degree of profitability in the short term.

In the end, we are confident pushing commercial growth higher given the greater visibility we have on both retailer support and consumer interest in our programming as well as below-the-line favorability from both tax and lower-than-expected interest expenses that we see coming through.

And as David will discuss, we are equally confident that profitability will improve going forward as one-off negative factors from Q3 fall away.

But before I hand it over to David, I think it's important to recognize that the commercial growth you are now seeing and now we believe that are on the path to sustainable profitable growth are driven by the fact that we're adapting the company with speed and doing this to investments in both our people and in-house capabilities.

On Slide 3, we show the 6 goals from the post-integration framework we introduced early this year.

During the third quarter, we continue to make good progress in each one of those areas.

More important, the different investments in in-house capabilities we have built are now coming together for measurable, sustainable gains in making our brands more relevant than ever.

For instance, look at our effort in data-driven marketing and brand building and innovation.

We can see in United States that our ratio of quality impression to total impression is high at 75%, significantly outpacing the industry average.

Earned media impression, I expect it to be up 9% in 2018 versus the prior year.

And year-to-date, we have had 14.5 billion PR impressions versus 13.5 billion of all of 2017; all good numbers but more powerful when you consider how these 2 areas come together to drive incremental gains.

For instance, again, in United States, our PR campaign to generate awareness for the launch of Heinz Mayo not only led to strong share gains in mayo but gave birth to a new product, Heinz Mayochup, which just landed on the shelves of American retailers and will be going to the U.K. next.

This summer, Country Time rallied people to save lemonade stands, contributing to the strong gains we see in our beverage mix business.

And now, our renovated all-natural Capri Sun lineup is taking on bullying in school cafeterias through the #SitTogether pledge.

The data-driven insight and the in-house capability that drive these results are scalable and shareable across our categories and geographies.

I mentioned on the last call that we felt that we had the strongest pipeline of activities in place in our short history as Kraft Heinz and the numbers are starting to prove it.

In a similar fashion, our efforts to reinvent category management by deploying tools like revenue management, assortment management and planograms are supporting and informing everything we do as we expand go-to-market capabilities around the world.

For instance, we have more than doubled our in-store headcount in the United States.

Now fully trained Kraft Heinz employees armed with insights from our category management tools are helping to drive faster product velocity.

In areas where we have greater in-store coverage, we are seeing better performance in our key power windows, lower rates of out-of-stock merchandising and brand activation through display and shelving initiatives.

This has helped us push our total dollar velocities ahead of category average.

And in both meals and sauces, our combination of powerhouse brands and optimized category management activities is driving lower velocities 40% and 28% above their respective category average.

And we have been able to push strong incremental gains with innovation like Just Crack an Egg, which, in the third quarter, had velocity that outperformed its entire category.

Beyond United States retail in foodservice, we are seeing the benefits from assortment management as we work to expand distribution and drive incremental gains in each region of the world while reducing complexity in our supply chain.

And in the digital space, our year-to-date e-commerce sales in the United States are up roughly 80%.

We are capturing our fair share.

And in many focus categories like snacks, nuts and condiments, we're significantly ahead of our fair share.

That being said, we still see a long runway for global growth, the ability to further leverage our data-driven insights and category management knowledge, and we're investing aggressively in the next generations of capabilities.

These initiatives include deploying the next generation of our Kraft Recipes website, a cornerstone of our relationship marketing efforts; building easy-to-use mobile technologies that learn about you and your family, recommends meal plans and seamlessly connects you to grocers; and establishing a venture capital fund that can invest up to $100 million in emerging tech companies to further strengthen our business model.

From a capability building perspective, these initiatives can improve our ability to engage consumers in an environment characterized by expanding retail channels and fast-changing shopping patterns.

Finally, what make all of these come together is our effort to build best-in-class operations as well as recruit, develop and align our people.

In operations, we continue to deliver against industry-leading targets we've set for ourselves in quality, safety and customer service in all geographies where we operate.

Cost is one area we are falling short this year.

This is due to a combination of greater-than-expected cost inflation in the United States, our desire to invest and protect customer service as we ramp up volumes as well as related decisions to delay some savings projects to avoid operational disruption.

That said, we believe we have the right people, the right training and the right level of engagement to execute with excellence in all areas going forward.

Specifically, our employee recruiting remains strong with more than 85 candidates for each spot in our United States trainee and MBA program and more than 400 candidates per spot internationally.

And our vertical promotion ratios are up versus prior year, showing meritocracy in action.

To summarize, we feel good about our commercial performance, sales and profitability and our ability to sustain this positive momentum.

We continue to build and deploy new capabilities and adapt with speed.

And while we have seen and accepted more volatility in EBITDA in the near term, we believe our investments will allow our brands to be there in a bigger way tomorrow.

I will now hand it over to David to provide more color on our results and our path forward.

Thank you, Bernardo, and hello, everyone.

Turning to our results on Slide 4. Total company organic net sales were up 2.6% in Q3, bringing year-to-date organic growth into positive territory.

This was driven by 3.5 percentage points of volume/mix growth in Q3 and bringing volume/mix to essentially flat through the first 9 months.

Encouragingly, this performance was driven by volume/mix growth in every reporting segment and led by consumption growth in a majority of U.S. categories.

Pricing was down 90 basis points in Q3, driven by increased promotional activity and key commodity-related pricing in the United States that more than offset higher pricing mainly to offset local inflation in Rest of World markets.

By segment, the U.S. had a strong volume/mix-led quarter characterized by consumption-led growth across a majority of categories.

As expected, the change from positive first half pricing in the U.S. to lower pricing in Q3 was primarily driven by a combination of 3 factors: one, lapping carryover pricing from last year; two, increased in-store activity to support our commercial pipeline, including higher year-over-year support in natural cheese and ready-to-drink beverages; and three, passing through recent declines in some key commodities during the quarter, mainly bacon.

In Canada, while we saw solid growth in coffee and mac and cheese, sales were down, as anticipated, from a combination of select product discontinuations, higher promotional expenses in the current year as well as comparisons with prior year, limited-time condiment offers and activity that were not repeated.

As we mentioned on our last call, however, we do expect a solid pipeline of activities to return Canada to growth in Q4.

EMEA stayed in positive growth territory in Q3 as strong growth in Southern Europe and Germany, where we continue to grow the Kraft brands, more than offset some one-off headwinds in Middle East and in Russia, where we ran into destocking activity related to World Cup-related promotional products.

That said, we expect EMEA to improve sequentially in Q4 as the headwinds in Middle East and Russia follow it.

And in Rest of World, in addition to the strong contribution from pricing we've seen all year, Latin America drove strong organic volume/mix gains from a combination of pasta sauce and condiments growth in Brazil as well as white space expansion across the region.

And this more than offset lower shipments of canned seafood and cordials in Indonesia.

Moving to EBITDA.

Q3 adjusted EBITDA was, in fact, lower than expectations we'd outlined in our previous earnings call, resulting in year-to-date adjusted EBITDA now being down 7.2% on a constant currency basis.

We certainly benefited from organic net sales growth, and in fact, our commercial profitability or the profit contribution from volume/mix and pricing combined was positive despite all the stepped up merchandising activity we carried out during the quarter.

However, several factors, factors that we do not expect to repeat, negatively impacted both EBITDA growth and our absolute level of profitability in Q3.

As expected and as we outlined on our previous call, year-on-year EBITDA growth was negatively impacted by a combination of the commercial investment programs we've talked about all year, the swing from overhead favorability last year to a more normal bonus incentive compensation accrual this year and the non-key commodity inflation we've previously noted.

In addition to that, our absolute level of profitability in Q3 was negatively impacted by 3 factors: The first was higher-than-expected one-off operating cost in the U.S. from our decisions to prioritize customer service, delay some saving projects to avoid disruption and buy more spot market freight during the quarter than we otherwise would in the normal course of business.

Second was the disproportionate impact from commercial investments, particularly marketing, as we stepped up our investment levels in the second half of the year.

And third were some unanticipated one-off supply chain costs mainly in the Middle East.

Looking forward, we expect both EBITDA growth and our absolute level of EBITDA margin to improve beginning in Q4.

Specifically, we expect to sustain our organic top line momentum.

The one-off factors that dragged Q3 EBITDA down should fall away.

And on top of that, we expect to see a better year-on-year balance between cost inflation and savings.

Finally, at adjusted EPS, we were down $0.05 versus Q3 last year as lower taxes on adjusted earnings in the current period mitigated part of the adjusted EBITDA decline.

I would also add here that for the full year in 2018, we now expect an effective tax rate of approximately 20% versus 21% previously, and incremental interest expense in 2018 should be roughly $70 million versus the $80 million we previously outlined, which leads to our outlook on Slide 5.

I'll start by reiterating what we said before that we believe the pipeline and capabilities are now in place for us to push a more aggressive growth agenda from innovation that drives incremental consumption to distribution gains across channels and expanding our brands into geographic and category white space.

We continue to believe we're in a strong position to deliver organic growth for the full year and sustain that momentum into 2019.

We also expect a much better balance of top and bottom line growth going forward.

2018 has clearly been a year where results have been more or less dominated by a number of transitory issues on both the sales and cost sides of the equation that we do not expect to repeat.

At the same time, we've essentially accelerated what would have been 3 years of commercial investments into 2018, pushed commercial grow even farther than originally planned, giving greater visibility over the likely success of our pipeline.

And this was largely offset by tax savings.

Going forward, we feel good about our ability to continue driving commercial growth and our ability to drive EBITDA dollar growth and industry-leading margins as one-off factors fall away and the contribution from our savings initiatives accelerate.

To close, I think it's worth repeating the thoughts that we've expressed all year: that we're developing capabilities to create brand and category advantage and achieve profitable growth; that we're investing aggressively now in order to see benefits sooner; and that these are the key factors shaping our near-term results into 2018 and, we believe, will drive sustainable, profitable growth into 2019 and beyond.

We think our focus on EBITDA dollars and our return-based discipline in sales, marketing and innovation will lead us well positioned to deliver top-tier organic growth at industry-leading margins.

We have good visibility on considerably better post-integration cash flow.

We have and will continue to strengthen our balance sheet and credit standing through both derisking and other activities, such as divestitures of noncore assets when consistent with our strategic framework, as we recently announced.

And our ability to continue building brand and category advantage through differentiated capabilities will not only be a key enabler but will make 2 plus 2 equal more than 4 in the event of a transformational deal.

Now we'd be happy to take your questions.

(Operator Instructions) Our first question comes from the line of Ken Goldman of JPMorgan.

I'm wondering if you can help us quantify the magnitude of what you would consider a onetime or nonrecurring cost in the P&L.

There's a lot of different costs.

There's a lot of different things that drag down your EBITDA this quarter.

I think some of them, like marketing, probably don't go away.

Some of them, like maybe the customer service issues, maybe do go away.

I'm just trying to get a sense of that because it's difficult to maybe model ahead unless we have a better understanding of sort of what just happened.

Ken, this is David.

Thanks for the question.

So as I break this down for you, I think the first thing to reiterate here is commercial profitability for Q3 where the profit contribution from vol/mix and pricing combined was positive, okay, which is good, considering all the growth initiatives and stepped up merchandising activity that we had in the quarter.

So we're very happy with that.

Beyond that, there are really 4 main drivers of the year-over-year decline, many of which were one-off in nature.

So first, we had to step up commercial investments that we previously outlined, with Q3 seeing the heaviest quarterly impact within the year.

Second, you have the swing from overhead favorability we mentioned last year to more normal incentive compensation accrual this year.

So that is one-off in nature.

Third, we had additional cost inflation that we previously noted.

However, the impact was worse in Q3 from our decision to prioritize customer service as our volumes ramped up through the quarter, which, in turn, led us to delay certain supply chain savings projects and also buy more spot market freight than we otherwise would have.

So a lot of those factors were, in fact, kind of one-off in nature for the quarter.

On top of that, we had some unanticipated, one-off supply chain costs that were mainly related to the transition of the Middle East business to our European business.

All that's to say we're not going to provide precise numbers around it, but we expect both EBITDA growth and our absolute level of profitability to improve significantly beginning in Q4 and into next year versus what we saw this year and in the first half.

Okay.

And then can you, as a follow-up, just -- the prioritizing of customer service is a headwind.

Can you just walk us through what that means in practical terms?

I'm not quite sure I understand in this case.

Yes, sure.

Ken, this is David again.

So I'd say some of the savings projects that we anticipated for this year were very much variable cost in nature, so things like yield and variable labor.

So -- and this is versus fixed cost that we've captured over the last 3 or so years.

So we decided to delay some of those productivity initiatives that we're executing across our factories and that this is really to ensure that there is no disruption as volumes ramped up in the quarter and ramped up more than frankly we had expected.

On top of that, the additional volume that we didn't anticipate above and beyond what we planned for came at additional cost, and a lot of those costs are logistics or freight-related.

Our next question comes from the line of Bryan Spillane of Bank of America.

Two questions from me.

One is just a follow-up to Ken's question.

I think on the last earnings call, the expectation was the EBITDA split for the year would be roughly 50-50, first half, second half.

So given that we missed by, I don't know, about $100 million or so in the quarter, I guess the question is, is the split for the year now more like 49-51?

Or is the split different now?

Just trying to get a sense for kind of where things stood relative to maybe where your fourth quarter expectations were.

And then I have a follow-up.

Bryan, thanks for the question.

This is David again.

So as we said on the last call, as you pointed out and as we said today, we do expect both EBITDA growth and our absolute level of EBITDA margin to improve in the back half and further improve in Q4.

And this is based on the sustained organic top line momentum that we're seeing, the one-off factors that I talked about that dragged EBITDA this quarter which will fall away next quarter, and a better year-on-year balance between cost inflation and savings.

Relative to your specific question that we talked for the last quarter, I think given unexpected one-off factors in Q3 that we experienced, it may be difficult to get all the way back to the 50-50, first half, second half balance of EBITDA that we targeted, but we should see a very good sequential improvement into Q4.

Okay.

So order of magnitude, it's around that $100 million sort of miss in the quarter.

It's sort of -- it's the one-off piece that you may or may not be able to close the gap on?

Yes, I think around that range would be appropriate.

And then just one other question in terms of asset sales.

I guess, the asset sale in India, is that sort of indicative of larger sort of strategy of maybe potentially selling more assets down the road?

Just some color or some context around that as well.

Bryan, it's Bernardo.

Look, we -- like we always said, we like our portfolio.

I think each brand has its role in its specific country and region.

But we do evaluate every business and brand on its own and see the returns and what we can do with that, right.

In the India case, I think it was very clear for us that we didn't have really the competitive advantage in the new market and the beverage portfolio we have in the country.

It could not scale, right, for the level you wanted to.

And the value we're receiving from the proceeds are really higher than we could have been doing with the business.

Like you said, I think there are other things to be considered within the portfolio in general.

And we always evaluate very careful on a case-by-case situation.

I think an important side effect of this is really the fact that we -- obviously, with the proceeds, we're able to strengthen our balance sheet, right, and give us more firepower, especially in a moment where industry valuations are more attractive, right.

And that, I think, is a positive in this case.

Our next question comes from the line of Steve Strycula of UBS.

So similar to the previous 2, I wanted to dig into the $100 million EBITDA miss that we saw in the quarter.

At what point did you realize that things were tracking below plan?

How did you react to it?

And can you walk us through what of that $100 million actually washes away in the fourth quarter?

And I have a quick follow-up.

Sure.

Steve, this is David again.

Thanks for the question.

So we said that we expected Q3 adjusted EBITDA dollars to be down a greater order of magnitude than what we saw in the first half.

So that gets you to more than $140 million at the start, so kind of 2 big factors in the quarter that took us lower than what we had originally expected.

Again, we had a higher-than-expected one-off operating cost in the U.S. again to prioritize customer service.

We delayed some of those savings projects to avoid disruptions.

And we bought more on the freight market, which increased our logistics costs than we otherwise would have given the additional volume and then on top of that, the unanticipated one-off supply chain costs.

But again, as I said, we expect both EBITDA growth and our absolute level of profitability to improve significantly into next quarter.

But unfortunately, we're not going to provide any more specifics around the magnitude of that into Q4.

Okay.

And given what you've seen right now, is there any reason to think that EBITDA dollar growth can't expand in calendar 2019?

I know it's early to talk about 2019, but given the inconsistency of recent performance, I think maybe investors deserve a little bit of clarity as to how confident you feel about the sustainability of what the trends you're seeing develop in the fourth quarter.

And is the tax rate sustainable at 20%?

Sure.

Steve, David again here.

Thanks for the question.

So for 2019, we do expect a much better balance of top and bottom line growth going forward.

In 2018, we've had a number of transitory issues that we don't expect to repeat.

We really accelerated implicit commercial growth harder, given the greater visibility on the investments that we're driving and putting in the business.

And then on top of that, the tax favorability was -- mitigated a number of these headwinds on the bottom line.

Going forward, we feel good about that balance for several reasons.

Our ability to continue driving real volume/mix driven organic growth; our ability to drive EBITDA dollars and at industry-leading margins as one-off factors fall away and the contributions from our savings curve accelerate; and finally, I think our ability to build the brand and category advantages and capabilities that we've been talking about, the same thing will make 2 plus 2 greater than 4 in the event of a transformational deal.

And then finally, with respect to your tax rate, I think we started the year a bit higher budget.

Based on further clarity on the new tax laws, I think we're really expecting to get it to that 20% for the full year.

Our next question comes from the line of Dara Mohsenian of Morgan Stanley.

So I just want to focus on U.S. pricing.

I understand that some of the decline was probably pass-through-pricing, but I'm assuming you were still down x that or at least not up substantially, which is surprising just given the level of gross margin pressure and EBITDA pressure we're seeing here at the corporate level.

So I just wanted to get your thoughts around what sort of drove the sequential deceleration in pricing.

Obviously, a lot of your direct and even more so indirect peers in the CPG land have been talking about taking more pricing recently given some of the margin pressures in the sector.

So do you have plans to increase pricing going forward?

And as you look at your price premiums in the categories you compete, given they moved up over the last few years, do you think you need adjustments in those price premiums?

Or are you comfortable you can get more pricing going forward?

Dara, this is Paulo.

Thanks for the question.

So when we think about the price and the profile we had in the quarter, it was really consistent with our expectations.

The change from the positive pricing we had in the first half to a lower net pricing in the third quarter was primarily driven by 3 factors.

The first one was the stock-led and the carryover pricing we have from prior year.

Second, we passed through recent commodity declines mainly in bacon.

And given our strong innovation pipeline and portfolio position, we believe that was the right time to expand trial consumption and write strong volume gains, which repeated.

As David noted before, our commercial profitability or our profit contribution from pricing and vol/mix was solid.

We believe that we have a very strong portfolio of brands with ability to price as we've been showing over the past several quarters, as we mentioned.

And for your last point and you look forward to the next year, for sure, price will be an important lever we will consider in managing our cost profile.

Okay.

And then the comment on 2019 EBITDA, I just want to be clear.

You talked about a better balance.

Did you mean year-over-year growth in EBITDA in 2019, just to be clear?

Or are we talking about sort of level of improvement relative to 2018?

I just want to be precise there.

Dara, this is David again.

Thanks for the question.

So when we talk about our ability to drive EBITDA dollars, we do mean year-over-year.

Our next question comes from the line of Andrew Lazar of Barclays.

Just 2 things from me.

One quick one first.

Sometimes, when -- I think when investors hear sort of the term spending to ensure customer service and things like that, I mean, sometimes, the notion comes up of, is it slotting or paying more to keep product on the shelf or retailers sort of asking for more dollars or those sorts of things.

So I was hoping you could just address that just to take that off the table if that's not the case.

And then I guess, more importantly, putting the one-offs and the one-off spending aside, you still did -- it looks like -- or it sounds like increased sort of commercial spending, spending around capabilities, spending that's ongoing that will be in the base, if you will.

And it sounded like after the second quarter that you had a pretty good read on that and it -- obviously, it increased in the third.

So really, I guess what gives you that comfort level that this is the right number and that in '19, there's not ultimately the need for another significant step-up?

Because we have seen some other food companies already starting to talk to '19 and saying, "Hey, 1 year of reinvestment spending that was tax reform-led," actually isn't enough to get the top line going.

It really needs to be a multiyear time frame.

So any color on that would be really helpful, too.

Andrew, this is David.

Thanks for the question.

So let me take your first question, and then I'll take part of your second question and hand it to Bernardo.

So in terms of the cost, the additional cost that we incurred that were one-off in nature to support the volume, these were not any sort of trade or slotting cost.

These were twofold: One, kind of logistics freight costs, which were higher than what we anticipated given whenever we have more volume than what we planned for, you need to go to the spot market and typically more expensive.

Going forward, as we planned the higher volumes, you wouldn't expect to see those same level of cost.

The second piece was actually less about cost inflation and more about our savings projects, which we chose to delay.

So in short, it was not related to anything like freight or slotting fees.

In terms of the commercial spending, I think just one important caveat here.

We did talk about the incremental investments this year.

We did have some kind of one-off costs associated with the fact that as you release this into the P&L, it did come in higher in Q3 than what would be reflected on a run-rate basis.

So there is kind of some lumpiness from the quarter-to-quarter perspective that drove EBITDA down that is one-off in nature.

But that's on top of the investments that we talked about and anticipated this year.

And then I'll turn to Bernardo to answer your last question.

Andrew, in respect of the level and thinking already about 2019, we do believe it was the right call in the beginning of '18 to take the decision to go to the $300 million commercial investment given the benefit in the strong balance sheet we have, the tax reform and so on.

And this number is already in our base.

So to be honest, looking to 2019, we do believe the investments we're doing now is not only for '18, but there are significant benefits coming in the quarters to come in '19 and beyond.

I think the commercial results with volume/mix growth especially in the United States is a good testament to that.

So as we're seeing today, I think the numbers are already in our base.

We are not seeing the reason to increase that into 2019.

Our next question comes from the line of David Palmer of RBC Capital Market.

Just one question on pricing and promotion effectiveness.

You've talked about and we've heard about your sales team making pitches for promotion changes out there with retailer customers using data to do that.

It's not always easy to get retailers to change the promotions that they currently do.

They feel like they know what they're going to get.

And we see in these results it's tough to see the effectiveness really coming through.

You talked about cheese and ready-to-drink promotions as drags on margins.

So can you just speak to the traction you're getting?

Maybe provide some examples or maybe some evidence of how you're getting smarter in convincing retailers to take this journey with you on promotion effectiveness.

David, this is Paulo.

I think the main driver here to see this is the comments that we saw, the commercial profitability that we saw in the quarter.

So we are really comfortable and happy with the efficiencies we got in the moment that we decided to do the investments we did but -- so in the start of the promo discussion, I think we are -- yes, we've been investing in revenue management strategy.

We've been getting more and more smarter in terms of which type of promotion to execute.

And an example, I think we were very successful in the beverage promotions that we did in ready to drink, and all of these ended up -- appear in our commercial profitability.

Our next question comes from the line of Chris Growe of Stifel.

Just had 2 questions for you, if I could.

The first would be, as we think -- in relation to the gross margin performance, you mentioned before, David, some comments about positive commercial profits and -- but I was surprised with the weakness in the gross margin.

So I want to make sure I understand some of those unique factors, how they would have affected gross margin versus, say, SG&A.

I feel like some of those were -- could have gone either way.

Do you have any color on that you can provide?

Chris, this is David.

Thanks for the question.

Yes, so we did see both gross margin and SG&A increase that weight on EBITDA margin, again driven by the same factors that I talked about with the higher-than-expected supply chain cost in the U.S. okay, so more related to the operations side; disproportionate impact from the commercial investments that we made, which is going to be on the SG&A line; and then unanticipated one-off supply chain costs from the Middle East that we moved to Europe, and that will be more of a gross profit, gross margin impact.

But again, as many of these one-off factors fall away, we would expect to see the dollars and the profitability improve significantly in Q4 and going into next year.

And that's going to be across both gross margin and SG&A.

Okay.

And then just a question in relation to your U.S. sales.

We had obviously a very strong performance there, volume-driven.

I don't see that level of growth in the measured channels.

But I wondered if you could say anything unique that's helping boost the U.S. sales in this quarter, being new products, that kind of thing, or maybe also how your unmeasured channels performed in the quarter to help kind of round out that performance for the U.S.?

Chris, this is Paulo.

Thanks for the question.

We estimate that our underlying consumption growth in Q3 was roughly 1.3% across all retail channel splits with service.

This excludes the Planters in club where we lapped shipment losses in July.

The strong trend bend we saw in the first half was pretty much driven by frozen, snack nuts, beverage, meats and sauces businesses.

The other drivers in Q3 -- there have been key growth for Q3, were a combination of inventory shifts and timing of trade spending versus prior year.

Net-net, these other factors ended roughly 50 basis points to authentic growth in Q3.

Our next question comes from the line of Akshay Jagdale of Jefferies.

I wanted to delve into this time you've been using commercial profitability.

Can you just talk through, like, what is included in that number?

And why is that a good measure of sort of the ongoing profitability of the business?

That would be helpful.

And I have a follow-up.

Sure.

Akshay, this is David.

Thanks for the question here.

So in terms of commercial profitability, as we look at it, we define it as the contribution from pricing and vol/mix, okay, so EBITDA together.

And this is before things like investments and inflation on the business.

Now the reason that we're calling it out is because we think it's important to understand that even with the lower negative pricing year-over-year, the significant volume pickup that we had that was significantly positive leading to organic growth was positive on EBITDA and not negative.

That being said, we're still seeing inflation and we need to address the inflation in the business, which, in the near term, we're managing with our savings curve.

And going forward, we'll evaluate other levers, like price.

Got it.

So in other words, I mean, when the market is seeing pricing down and profits down, they're assuming you've got the profit from taking pricing lower, right, and what you're trying to say is that's not what happened basically?

Yes, Akshay.

I think the key point here is that profitability, from a dollar perspective, actually increased even despite negative pricing because our volume/mix was so strong in the quarter, which we're very happy with.

Our next question comes from Jason English of Goldman Sachs.

Sorry about that.

Can you guys hear me?

Yes, yes, absolutely.

Awesome.

A little phone malfunction over here on my end.

I wanted to come back at trying to sort of unpack the drivers of the decline maybe from a slightly different angle.

Looking at the EBITDA year-on-year decline in the U.S., it's been accelerating, obviously.

We've at least another $100 million-plus of year-on-year erosion this quarter.

It sounds like that that's predominantly driven by these onetime factors, right, as well as maybe a little bit of bonus accrual?

Jason, this is David.

Thanks for the question.

That is correct.

So the same factors that I outlined on a global basis are very much the drivers for the U.S. year-over-year, and a big piece of that is going to be the bonus accrual that we're lapping from prior year has an impact on our year-over-year growth.

And then the other items were more related to our kind of current year margin profile, all of which, together, is why we feel confident that we'll see that sequential improvement in Q4.

And maybe you can help me size the bonus piece thing because if I look at $100 million -- I hear you on marketing, but geez, with the amount of marketing you spend in the U.S., an incremental $10 million would be a really high percent.

So it's hard to see that incremental marketing a material driver.

And it's difficult to wrap our head around the logistic side being of another $100 million or so that it would kind of have to be the bridge there.

So maybe I'm just not fully appreciating the magnitude of this bonus accrual.

Can you contextualize that for us with some real numbers?

Jason, this is David.

So unfortunately, we can't provide specific numbers on the bonus and some of these other drivers.

But what I'd say is the bonus is quite a large driver in the year-over-year delta, as you can imagine, the magnitude, the variable compensation that we have.

On top of that, the operational costs are also quite significant in the quarter rate, both the logistics cost that I talked about as well as the savings projects that we didn't anticipate in Q3 but we're ready to execute at the right moment.

And then finally, there were the supply chain costs that we talked about related to Middle East and Europe.

So I think there are a few different components.

The 2 largest, I guess, I can go ahead and say are the bonus and the higher operational cost that we talked about.

Our next question comes from the line of Robert Moskow of Credit Suisse.

I thought that your shipments in the U.S. were shipping slightly above the consumption that we were measuring in Nielsen.

Presumably, I think it's because you're getting more shelf space, but I tried to find that in Nielsen data and I couldn't really get it.

Maybe it's on a lag.

Can you speak a bit about the shelf space that you might have gained from all of these new product introductions?

Are you seeing it in your tracking data?

And also, are you taking steps to make sure that you're not causing an environment where maybe there could be an inventory de-load in the fourth quarter, which has happened before but maybe not with all these new products.

This is Paulo.

So again, if you think about the breakdown between the 1.8% growth, 1.3% is coming from what we are seeing as underlying real consumption in Q3.

The other 50 bps is one of the factors that I mentioned about combination of timing of -- to expand the inventory shipped.

So the real consumption we see for the business is 1.3%.

And this is pretty much a combination of management channels growing around 0.8% and un-corporate channels, including foodservice growing another 50 bps.

So that is how we're seeing our consumption happen.

So we are very happy, confident with the consumption improvement.

We are seeing this in Q3.

We are also seeing this in Q4.

So we are seeing our real, as I said, underlying consumption growth in Q3 in the level of 1.3%.

Our next question comes from the line of David Driscoll of Citi.

So I just wanted to confirm.

Paulo, I think you said that shipments in the quarter were ahead of the consumption, including the unmeasured channels.

Is that correct?

And then will that reverse out in the fourth quarter?

No, no.

What I said now is that our underlying consumption overall is around 1.3% growth year-over-year.

And this 1.3% is a combination of measured channels, 0.8% growth, plus 50 bps coming from other unmeasured channels, including foodservice.

Okay.

Just a follow-up on the bonus question.

So in most companies, when we see companies miss profit targets, usually, the bonus accruals are -- they go to the opposite way.

There's not more bonuses.

There's less bonuses.

Why is it working that way here?

I just don't understand something.

And then I just had a final question on market share.

Can you give us some sense on your read on Kraft Heinz' market share movements across its major categories and major geographies?

Big picture question.

A lot of companies have some nice, simple metrics to give us an understanding as to whether or not you're gaining or holding share in certain percentages of categories.

I don't know if you guys can provide that, but it would be helpful.

Rob [sic] ( Dave ), it's Bernardo.

Regarding to metrics of compensation and so as we have been discussing quite some time, we're a very performance-driven organization, right.

In our case here, since the beginning of the year, we have a combination of different KPIs between top line growth that had been accelerating, EBITDA and cash flow.

And we deem the strength, the variable compensation established by -- with this in mind and looking at our balance sheet, our performance this year have been surpassing significant performance last year, not in all KPIs but in general.

And that's related to our variable compensation.

With that, I'm going to ask David to take the KPI overall metric that you're requesting.

Sure.

Thanks, Bernardo.

I think there are a couple of data points that I think Bernardo said earlier on the call.

On a global basis, more than half of our categories are consumption growth in Q3, okay.

And the second point to point out, I think a particular relevance in the U.S. are categories are going through a trend and with aggregate consumption across our categories improving nearly 2 percentage points in Q3 versus Q2, which obviously excludes the one-off impact of nuts that we talked about.

But we've seen a sequential improvement both in measured channels and, as Paulo pointed out, on overall consumption.

But on a global basis, more than half of our categories are consumption growth in the quarter.

Paulo, I don't know if you can...

All right.

I can comment about the U.S. What we can see is that in the first half, we were losing -- and pretty much the same happened in 2017.

We are losing around 0.6% share in our -- across the portfolio.

In Q3, we reduced this to 0.3%.

And if we exclude the nuts business that we are lapping shipments since July, this number would go to around 0.1%.

So it's a significant improvement in share performance that we see in moving -- when in moving through the year.

And Rob, just to complement on that, I think that's what make us actually positive about what's coming because you see consumption and share in most parts of the world really improving behind the commercial initiatives and the investments, right.

With the results representing now and we believe they can be sustainable in the coming months and quarters, we'll continue to see acceleration in share, in volumes and in commercial performance in general.

Thanks, everyone.

I think we'll stop it there.

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

And if anybody in the media with follow-up questions, Michael Mullen will be available.

So thank you very much for joining us, and have a great evening.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and have a wonderful day.

You may disconnect your lines at this time.