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The Kraft Heinz Company (NASDAQ:KHC)
Q4 2017 Earnings Conference Call
Feb. 16, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. My name is Liz, and I will be your operator today. At this time, I would like to welcome everyone to the Kraft Heinz Company's Fourth-Quarter and Full-Year 2017 Earnings Conference Call. I will now turn the call over to Chris Jakubik, Head of Global Investor Relations. Mr. Jakubik, you may begin.

Christopher M. Jakubik -- Head of Global Investor Relations

Welcome, everyone, and thanks for joining our business update for the fourth quarter and full year of 2017. With me today are Bernardo Hees, our CEO, Georges Zoghbi, Strategic Advisor to the CEO and board nominee, Paulo Basílio, President of our U.S. Zone, and David Knopf, our Chief Financial Officer. During our remarks, we'll make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties. 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 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 at the end of the slide presentation available on our website.

Before we get started today, we hope that you've had a chance to review our post-integration business update that we released yesterday on ir.kraftheinzcompany.com. In it, we provided a broader update on our operating model and business plans, progress on our journey to date, and our path forward. Today, we intend to build on that presentation by digging deeper into how we ended 2017 and what we expect to accomplish in 2018, both in terms of key initiatives and financial performance, and we'll keep our up-front comments today briefer than normal in order to allow more time for Q&A. So, let's turn to Slide 2, and I'll hand it over to Bernardo.

Bernardo Vieira Hees -- Chief Executive Officer

Thank you, Chris, and good morning, everyone. I will start today by acknowledging that there is no question our financial results in 2017 did not meet our potential. Did we deliver profitable sales and grow our bottom line? Yes. Did it deliver to our potential? No. We had a slow start, some missteps along the way. It took some decisions to accelerate investments in Q4 that held back 2017 financial performance. At Kraft Heinz, we believe it's critical to take away clear learnings from the past year, and there were four key areas that held back our 2017 operation result.

1). Customer contracts. Here, we learned that having an agreement in place signed and sealed at the start of the year can avoid first-quarter commercial activation misses and lead to better retail execution for the balance of the year. This was the story for our Canadian and Russian business in 2017. 2). Faster actions to achieve the right balance between pricing and key commodity costs, particularly in a few of our largest U.S. categories, as well as our Brazilian vegetable business during the year.

3). It's moving quickly and making the necessary adjustments when executing critical category and brand turnarounds, like cold food in Egypt and our baby food business in Italy. Finally, 4). Have better service as we ramp up manufacturing in new facilities and new production lines, eliminating disruptions, and achieving benchmark levels to the process. I'm talking here about our frozen potato and U.S. meat business.

The other factors that held back our 2017 financial results were decisions we took during the fourth quarter, where the H.R. 1 Tax Cuts and Jobs Act was in process. This new law provides us with additional cash and incentives to accelerate investments to grow our business. So, this -- together with the opportunity to build advantage in scalable capability that we outlined in the measurement slidecast we posted yesterday -- led us to decisions to aggressively accelerate our plans. In Q4, we accelerated commercial investments, particularly marketing, in-store sales teams, e-commerce, and supply chain, and these held back Q4 EBITDA in the United States.

From a balance sheet and risk perspective, we also accelerated approximately $1.2 billion of cash contributions to our U.S. post-retirement medical plans and made an additional $150 million discretionary cash contribution to our U.S. pension plan. These results had a higher leverage ratio at the end of the year than we otherwise would have delivered.

The second thing I think is important to acknowledge about our 2017 results is the fact that we generated solid results from investments we have been making to drive sales up and costs down. On the top line, we delivered trend-bending big-bet innovations and turnarounds. Big-bet innovations included Philadelphia cheesecake cups, bagel bites, and cream cheese dips, Capri Sun All Natural, Devour frozen meals, and branded frozen snacks in the United States, Planters in China and the U.K., Heinz mayonnaise across Europe, Australia, New Zealand, and Latin America, Classical Reserve and Cracker Barrel cheese in Canada, and Kraft cheese dressings in Japan.

We also drove strong gains from prioritizing our investments in the powerhouse portfolio batch and turnaround parts of our portfolio. These include significant growth in the United States in Lunchables, Philadelphia, Kraft Singles, and Heinz sauces, and successful turnarounds on dry packaged desserts and frozen meals and snacks. In fact, the Heinz brand in the United States is now 17% bigger than it was in 2015, which is a good example of the process we are going through with each category.

We returned to sales growth in Europe, including the U.K., after more than five years of decline, with Europe food service achieving double-digit organic net sales growth. In our rest-of-the-world business, we delivered solid double-digit sales growth in China through go-to-market expansion across all channels, especially food service and e-commerce. And now, China is the biggest country in our Asia-Pacific business. In Indonesia, a solid turnaround in our ABC Soy Sauce sachets led to strong double-digit growth, and in Brazil, we delivered solid market share growth of the Heinz brand.

On the cost side, we drove 10% greater median cost efficiency in the United States versus 2016, resulting in almost 40% reduction over the past two years. We also made significant progress in our goal to create best-in-class operations. We invested $1 billion in upgrading our manufacturing facilities around the world to enhance our capacity for innovation and product quality. This included construction of state-of-the-art factories in Davenport, Iowa, Kirksville, Missouri, Shanghai, China, and Nerópolis, Brazil, but significant expansion investment in worldwide manufacturing capacity.

We expanded the reach of our global shared business service into Australia and New Zealand. We substantially completed our transformational integration program, delivering more than $1.7 billion of savings net of business investments and low-key commodity inflation. And, we completed an outstanding year of top-tier quality performance, with zero recalls.

The greatest fact of 2017 that I want to acknowledge is the fact that we have strong, scalable, in-house capability platforms -- platforms that you can view further in 2018 -- and should benefit Kraft Heinz in the years to come. For instance, we established a new global online business structure to accelerate future growth, one that we'll build upon to 65% gross of our U.S. e-commerce business in 2017.

We strengthened our category measurement tool deployment into the U.K. and the United States, with revenue management, assortment, discounting, and planogram analysis. We began rolling out our U.S. in-store sales go-to-market model, reaching roughly 20% of our retail business, and expect to significantly ramp up this effort in 2018. Our Kraft Heinz University training platform, roll-out sales, marketing, leadership, and methodology academies enable continuous learning and development.

We published our first ever Kraft Heinz corporate social responsibility report, with sustainability goals and targets to reduce water usage, greenhouse gas emissions, energy usage, and waste sent to landfills. And, to our signature Micronutrient Campaign, we delivered 135 million in 2017 to people in need in our fight against global hunger, part of our commitment to deliver 1 billion meals by the year 2021.

To sum it all up, to the end of 2017, the investments we have been making are starting to have the impact in the marketplace that you have been expecting. We still have much to do and areas to improve, but we have established a number of capabilities and platforms to enable further gains in 2018 and beyond. So, let's turn to Slide 3, and I will hand it to David to cover our Q4 and full-year financials.

David H. Knopf -- Chief Financial Officer and Executive Vice President

Thank you, Bernardo, and hello, everyone. From a total company perspective, organic net sales performance was again an improvement over the first half of the year, and consistent with the drivers we outlined in our last call. Pricing was sequentially better in Q4, up 1 percentage point driven by price increases in rest-of-world markets and the United States. Volume mix was 1.6 percentage point lower in Q4, primarily due to lower shipments across several categories, particularly nuts, natural cheese, and cold cuts in the United States, as well as cheese and coffee in Canada. This masked ongoing growth in macaroni and cheese in the United States, as well as strong growth from condiments and sauces in Europe, Indonesia, and China.

By segment, the United States was more or less consistent with our expectations, although we made a decision to invest to protect distribution in cold cuts, and that held back the contribution from pricing in Q4. In Canada, while we expected year-end 2017 retail inventories to be lower than 2016, they came in even lower than our initial expectations and look to be permanent, so this will likely translate into some headwinds moving forward.

Europe was consistent with expectations, benefiting from gains in the U.K. and strong growth in southeast and central Europe, where we are now selling the Kraft brand. In rest-of-world, the accelerated growth we expected in Asia from China and Indonesia was held back by more prolonged slowdown than expected in Brazilian canned vegetables.

At EBITDA, we delivered 3.2% growth and 105 basis points of margin increase in Q4. The upside was driven by a combination of gains from our cost savings initiatives, including $150 million from our North American integration program, lower overhead costs, and favorable pricing. That said, two factors came into play during the quarter that were not part of our outlook on our last call, and damped year-over-year [audio cuts out].

First, while incremental integration program savings were $150 million in the quarter and $1.725 billion cumulatively through the end of 2017, this was partially offset by approximately $20 million of accelerated investments, mainly in marketing and service capabilities, and roughly $30 million of higher than expected freight costs. Second were the unanticipated cost increases that came into play during the quarter, especially commodity headwinds in North America, particularly dairy and nuts, resulting in the strongest key commodity headwinds we faced during the year, as well as higher one-time distribution costs in certain rest-of-world markets.

At adjusted EPS, we were down $0.01 versus prior year in Q4, but up 6.6% for the full year. In Q4, EBITDA growth was offset by a roughly 300-basis-point increase in the adjusted effective tax rate versus Q4 last year, when discrete favorability resulted in an effective tax rate well below our run rate, as well as other below-the-line items, including incremental depreciation.

As we said at the outset, while our 2017 financials did not reflect our potential, these are levels that we're confident we can build and grow in a sustainable way going forward, but I'll turn back to Bernardo to begin our outlook.

Bernardo Vieira Hees -- Chief Executive Officer

I will start by saying that in the two and a half years since the Kraft Heinz merger, our journey remains very much on track and is set up for further organic gains going forward. I would characterize our outlook as cautiously optimistic while we aggressively invest to drive profitable sales and consumption growth in both the near and long term. We're cautious on the short-term top-line performance based on four factors.

1). Potential headwinds from heightened retail competition in developed markets, where we need to strike a balance between market share and profitable volume. 2). Some known first-half headwinds in the U.S. from a combination of center exit from profitable cross-channel volume of Ore Ida supply shortfalls as well as the impact of some pricing actions in trade spend timing that are likely to mean net sales will be below consumption. 3). In Canada, where carryover impact from lower retail inventories, lower promotion activity, and selectable list will hold back organic growth potential in Q1. 4). Enacting implementations we are undertaking in Brazil.

At the same time, we're optimistic about our ability to drive profitable, organic sales growth because we're accelerating investments, putting intense focus on our biggest opportunities to drive consumption gains in both the near and long term. These investments are focused on building our go-to-market capabilities, including in-store sales teams in the United States, e-commerce and digital investments in selected markets, and leveraging distribution and whitespace gains in developing markets, launching a strong pipeline of big-bet innovation and renovations in the months to come, leveraging our data-driven marketing capabilities backed by the increase in working media dollars, and delivering best-in-class service to our customers in North America and Europe.

While these will likely translate into near-term margin pressure in the United States and rest-of-the-world segments, we have been testing, learning, and ramping up these programs for some time now, so we are very confident in their scalability and that their returns and profitable growth are there. As we progress through 2018, we expect to see improving results, but let me turn it over to David, who will describe what to expect over the net sales line.

David H. Knopf -- Chief Financial Officer and Executive Vice President

Thanks, Bernardo. From an overall perspective, despite the near-term top-line pressures and accelerated investments that Bernardo outlined, our full-year outlook is for constant currency EBITDA growth, strong adjusted EPS growth, and a significant increase in free cash flow generation. I'll explain the drivers of each.

At EBITDA, we expect to see a combination of strong net savings from both carryover integration synergies and new programs tempered by a combination of cost inflation, including non-key commodities, freight, and people costs, as well as $250 million to $300 million we're investing in whitespace expansion, big-bet innovations, go-to-market, and service capabilities.

Additionally, EBITDA performance is likely to be skewed to the second half, reflecting the up-front acceleration in our investments, cost inflation -- particularly freight -- at the outset of the year, as well as the top-line weakness in the U.S. that Bernardo outlined.

For earnings per share, we expect growth to be driven by tax savings and our focus on profitable growth. We expect to benefit from a reduction in our effective tax rate in both 2018 and going forward. We're now forecasting a run rate in the range of 20% to 24% versus the previous 30% run rate expected prior to the passage of the Tax Cuts and Jobs Act. For 2018, we currently expect to be at the high end of that range, or approximately 23%, down from the 28.6% adjusted effective tax rate in 2017.

Also, note that this will be partially offset by roughly $100 million of incremental interest expense and approximately $70 million of incremental depreciation versus 2017.

Finally, cash generation, where we expect a significant improvement in three areas. The first is lower post-integration capital expenditures. Here, we're forecasting approximately $850 million in 2018 versus $1.2 billion in 2017. As a percent of net sales, 2018 CapEx will be at the top end to slightly higher than the 2.5% to 3% of net sales run rate we expect over time -- again, as we accelerate our investment activity. The second area of improvement is the impact from the lower tax rate and the third is from opportunities we see to further reduce working capital.

All things considered, we remain confident that a strong earnings profile should continue to show through, driven by a combination of profitable sales, EBITDA growth, and tax savings. Even more importantly, we're confident that we can do this while we accelerate investments to adapt and modernize our capabilities and our brands for sustainable growth, as we outlined in the business framework presentation we posted yesterday, which I hope you will all have a chance to review. Thank you, and now, we'd be happy to take your questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you'd like to ask a question at this time, please press *1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing #. Again, if you'd like to ask a question at this time, that's *1. Our first question comes from the line of Andrew Lazar with Barclays. Your line is now open.

Andrew Lazar -- Barclays Investment Bank -- Managing Director

Thanks. Good morning, everybody. I've got two relatively quick ones based on last night's presentation and one on today's results. First off, just to get this one out of the way, can you explain the timing of last night's presentation? In other words, why was now the right time to drop that slidecast, particularly right ahead of next week's CAGNY Conference?

Bernardo Vieira Hees -- Chief Executive Officer

Good morning, Andrew. Thanks for the question. Let me start by saying that I think at the end of 2017, we closed a chapter on the Kraft Heinz integration, and after two and a half years, I think we're pleased to say that we're delivering on all our promises that were made at the time of the merger that would all follow closely.

That being said, now, we're focusing on building the business of the future. In order to do that, we are deciding -- and, you're seeing that in Q4, and you'll continue to see it in 2018 and beyond -- to accelerate commercial investments. David talked about between $250 million and $300 million behind the pillars that we believe can generate profitable growth. We thought it was really important to highlight to the investment community what are the pillars behind those investments and what are the things we're doing in more detail than the normal earnings call -- where we don't have the time to do that -- so we all can understand our plans moving forward given the level of investment we're making.

After two years, I can say we're very confident in our knowledge and the scalability of the platforms we are doing from revenue management and assortment management, in-store execution, digital investments, marketing working dollars -- all those initiatives have been proving to us in the right categories very assertively. Now, we are deciding to scale up our investments in a big way. In order to do that, it was important to highlight those principles. That's the reason for the timing.

A good example of what I'm saying is actually the Heinz brand example, which has grown 15% since 2015 in the United States, and a lot of what's behind it is exactly the pillars that we highlighted during the framework, so I highly encourage each one of you to look at that and see because that's exactly what our money and the commitment we're making to build the business in the future is behind.

Andrew Lazar -- Barclays Investment Bank -- Managing Director

Okay, great. Thank you for that. Bernardo, has the company's framework and thoughts on M&A changed at all based on coming into this new zone of post-Kraft integration and given some of the thoughts in the deck last night?

Bernardo Vieira Hees -- Chief Executive Officer

As an M&A framework, our thinking has not changed. We continue to like strong brands, businesses that can travel internationally that have more scale to be captured, and we want to have businesses where 2 plus 2 is more than 4, where we can capture synergies to reinvest behind the brands, the people, and the product. That being said, I think it's also fair to say that valuations today are more attractive than they were even two months ago, and the chapter of Kraft Heinz integration is behind us.

Andrew Lazar -- Barclays Investment Bank -- Managing Director

Great, OK. Thanks for that. Quickly, the last would be regarding the results in the quarter, I was under the impression that the pricing net of cost dynamic would be increasingly favorable as we went through the back half of the year and into the fourth quarter, and from some of the comments, it seems like from some additional unexpected inflation and such, that didn't happen. I guess that led to your comment, Bernardo, about needing to be faster on pricing in order to deal with cost. I guess I just wanted to get a better understanding of what that meant. I think for many years, Kraft has always struggled a little bit with some of these large passthrough categories and managing the lag that happens on the way up and the way down, and it seems like that caught you a bit again. So, what -- if anything -- can be done differently there around managing that cost and price dynamic and some of those big passthrough categories? Thanks so much.

Paulo Luiz Araújo Basílio -- President of United States Business

I'll take this one because the main fact here is coming from the U.S. When you see Q4 pricing specifically, the pricing came in line with our expectations, but these were partly offset by two things. The first is trade. We had higher-than-planned trade expense as we invested to cut back the cold cut distribution that we're having and selectively address some retail competition in cheese. So, we spent more on trade than expected originally. Also, on the commodity side, we saw that the commodity volatility -- mainly in dairy and nuts -- caused a higher commodity cost than we were able to price in the quarter. So, those are the main impacts that we see in commodity versus our expectations we had before for Q4. Again, going forward, we see our big four commodities so far looking stable versus prior year.

Andrew Lazar -- Barclays Investment Bank -- Managing Director

Thank you.

Operator

Our next question comes from the line of Bryan Spillane with Bank of America Merrill Lynch. Your line is now open.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Hi, good morning, everyone. Just a few questions related to the outlook. The first one is if you piece together some of the commentary about the first quarter, it sounds like sales are going to be soft, and also, profits. So, David, maybe you could give a little bit more color on the profile of the quarter, especially in the U.S. -- magnitude in terms of what those pressures will be.

David H. Knopf -- Chief Financial Officer and Executive Vice President

Let me hand it to Paulo to talk a little bit about our U.S. outlook, and then I'll come back and step back and talk a little bit more about Kraft Heinz into 2018.

Paulo Luiz Araújo Basílio -- President of United States Business

That's right. In the short time, we are seeing some specific headwinds that will cause near-term sales to be below run-rate consumption. The main drags are driven by 1). In Planters, Club, and Ore Ida, there is to be a headwind of between 1.5% to 2% in our sales in the U.S. In addition to that, we expect to see a trade phasing -- including time of spend -- that will be about 1.2% headwind. We expect this specific trade phasing to have the equivalent benefit late in the year.

From a run-rate perspective, we are seeing improvement in our consumption trends for the measured channels during 2017. So, just to give an idea, if you take out Planters and Club in Q4, our consumption in the measured channels was -1 versus -1.9 for the full-year 2017, so a substantial improvement during the year. We also continued to see low to mid-single-digits of growth outside measured channels, e-commerce, and food service that represents just over 20% of our sales, so we are confident that we can deliver substantial sequential improvement in 2018 as the impact from Planters, Club, and Ore Ida fades, and the commercial investments we are making in go-to-market, big-bet innovation, and marketing starts to gain traction.

David H. Knopf -- Chief Financial Officer and Executive Vice President

Thanks, Paulo. I just want to step back here again and look at the total company into 2018 to provide a little more color and outlook. First off, I'd say in contrast to the 2017 profile that was fairly evenly split 50/50 on sales and EBITDA first half/second half, I think 2018 is likely to be a bit less first half and a bit more second half. So, what I'd say is we're cautious in the short term given a few different considerations. One is what Paulo outlined in the U.S. and what we anticipate seeing through the year, and on top of that, we'll be accelerating investments in capability-building, particularly in the U.S., as well as other factors internationally, like SAP implementation in Brazil that we talked about.

At the same time, we're very confident in our ability to grow EBITDA for the full year, and this is going to be driven by a combination of carryover integration savings, new savings initiatives that we mentioned that we have planned for the year, as well as commercial gains into the back half of 2018. This will be despite the $250 million to $300 million in commercial investments we're making up front in the business as well as some of the non-key commodity inflation we talked about. So, with that, we believe that with the capabilities we're building in category management, things like marketing, brand building, and go-to-market, we'll be in a much better position to deliver sequentially better growth, both into the second half of 2018 as well as into 2019.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Thank you, that's helpful. I just had one follow-up. Between last night's presentation and this morning, it sounds like the world has changed a bit since 2012. There's some need to reinvest. Has this at all changed what you have thought about what the ongoing EBITDA growth profile would have been for this business versus what it was when Heinz and Kraft came together or is this just more of a temporary step back, and you still have the same growth expectations going forward long-term?

Bernardo Vieira Hees -- Chief Executive Officer

Hi, Bryan. I don't think it's really changed our way of thinking, and as I said in the beginning of the presentation, I think if you take the journey of Heinz from 2013 up to today, it's pretty much on track for the things we wanted to deliver and the promises we've made in the past that we have delivered. We've always thought that there would be a learning curve and more investments to come moving forward to push the business to profitable growth in many categories, and it's exactly what we have been accelerating since Q4 with the advent of tax reform and having that free cash flow profile. And so, we did make a decision to accelerate many of the categories and things that we had in mind that were in our timeline to be done, so I don't think there is a change in that sense.

It is true what I said that the integration phase is behind us and given the knowledge we have today and the instruments and capability we have developed in the last two years, with Heinz brand as an example of renovation of our portfolio and innovation as another example of a reason that we are able to implement in a very difficult retail environment taking a commodity product. As an example of this, we're taking that and scaling up in a big way. We started this in Q4, already seeing our P&L part of this investment. We want to see more. I don't think there is a change. I really think it's the next phase -- like I said, building the business of the future.

David H. Knopf -- Chief Financial Officer and Executive Vice President

Just to close here, as we look at 2018, we could have foregone the $250 million to $300 million of investment and grown at a faster clip this year, but as Bernardo said, we decisively chose to make these investments. We think it's the best for the long-term trajectory of the business. Again, we want to be a company with significant competitive advantage going forward, not just a good company today.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Our next question comes from the line of Jason English with Goldman Sachs. Your line is now open.

Jason English -- Goldman Sachs -- Managing Director

Hey, good morning, folks. Thank you for allowing me to ask a question. I guess I have two. First, to understand the savings versus investment balance, I think early on, with your commitment to the savings, you always gave that sort of "net of" investment in the business. You clearly talked about ramping investment in the fourth quarter, yet you're still talking about the $1.7 billion savings. Should I look at that $1.7 billion as net of the incremental $250 million you put in, suggesting that gross savings may have been higher, or not? The second part of that question -- I hear a lot about investment next year, but not a lot about productivity. Do you think that we're at a point where the investment may actually outweigh ongoing productivity, or are there still surplus savings that allow you to fund some of this and drive underlying margin growth?

David H. Knopf -- Chief Financial Officer and Executive Vice President

Thanks for the question. The first question was more 2017-looking. Again, what I say is we closed the integration program and we're really happy with the performance there, delivering just over $1.7 billion of net incremental savings to the business, and yes, that's correct, that's net of $200 million of commercial investments behind it that we've made in the business as well as net of some non-key commodity inflation that was primarily logistics-related that accelerated in the fourth quarter of 2017. Overall, we're really happy with where we closed the integration plan.

As we look to 2018, what I'd say is again, we're short-term cautious and overall confident with the profile of the business and our EBITDA trajectory for the year, and this is really going to be driven by carryover savings from that integration program, which is really just annualizing some of the benefits that we ramped up in 2017 as well as the new initiatives we talked about. So, these are in fact what you may call new productivity initiatives but are effectively new savings initiatives that we're planning to implement this year.

These two benefits will really fund the investments for the year and combine with some of the commercial ramp-up that we expect when we talked about -- we anticipate delivering organic EBITDA growth for Kraft Heinz in 2018. Just to close, on top of this, with the tax savings we've talked about that we used to partially invest in the business, we'll be able to drive strong EPS growth, and finally, with all these factors considered and with the lower CapEx and working capital we anticipate, we expect to have very strong free cash flow in the business in 2018 as well.

Jason English -- Goldman Sachs -- Managing Director

That's really helpful, thank you. In terms of where the investment is going, I went through the presentation last night, and I walked away with an impression that there's going to be a lot of investment internationally, grasping to quotes like "transform Heinz into a more global company," "10% of countries with two or more global brands going to 80% in five years," but I'm hearing today a lot of investment in the U.S. So, did I maybe walk away with the wrong interpretation last evening about globalization initiatives, or is that still the plan, and the U.S. is really just the investment necessary to keep the momentum and get the business back on track here?

Bernardo Vieira Hees -- Chief Executive Officer

Hi, Jason. What I can tell you is that's very balanced. I don't think I understand your question, but I would say it's a little different. There is a lot of investment in the United States, and also internationally. If you think about the pillars we're highlighting in the framework and the investments David was just describing a couple minutes ago, there is a lot of in-store execution, a lot of digital initiatives, a lot of working dollars behind brands and campaigns that we want to really take to the next level.

I think the Kraft Super Bowl Family Greatly campaign is another good example of the start of the journey that has happened in Heinz with the Hum campaign three years ago in the Super Bowl -- as those are there, there are also significant investments internationally to take our brands to more global places that would be more in Kraft and more in Planters, yet also in whitespace under Heinz. So, both are happening as we speak.

I wouldn't consider the investments as focused more on the international markets. That's not the case. Actually, if you think about what's happening now as many of our peers are retreating from touching the stores and investing in retailers, we are actually deciding to accelerate that, hiring more in-store execution, putting more money behind the strength of our brands, and that has a big component in the United States, a big component in Canada, and a big component internationally.

Jason English -- Goldman Sachs -- Managing Director

Thank you. I appreciate it.

Operator

Our next question comes from the line of Ken Zaslow with Bank of Montreal. Your line is now open.

Ken Zaslow -- BMO Capital Markets -- Managing Director

Good morning, everyone. I'm going to ask a different strategic question. I go through the presentation, and you state the increased need for the pressure for consolidation, but as you go through it more and more, you're talking about how innovation needs to be less than $100 million of sales, there's more focus on branding and personalized nimbleness, so with that as a backup, do you think it's possible that the best strategy might be to actually refine and slim down the portfolio to have greater focus on some key brands rather than just consolidation? I know it's a flip of what you've said, but if you could comment on that, it would be helpful.

Bernardo Vieira Hees -- Chief Executive Officer

Just to start, the number we have for innovation and renovation worldwide is much higher than the number you mentioned, so I'm not going to get specific, but we're more than double our percentage of innovation of the last three years, and we continue to accelerate in a big way looking at 2018. Actually, one thing that gives us hope that we can maneuver the short-term headwinds we have in looking at a much stronger profile in the second half and beyond is exactly the innovation that's coming to market in the United States, Canada, Europe, and worldwide. So, I would say that the number is higher than you mentioned.

Ken Zaslow -- BMO Capital Markets -- Managing Director

In your commentaries, you said size matters relatively less than it used to versus skill and speed. New product success is less likely to be defined as much as by reaching the $100 million mark. I'm sorry for the misunderstanding. I'm thinking more about nimbleness, and smallness, and being more personalized, rather than having a conglomerate of brands that might distract you. I don't know if there's an opportunity to slim down the portfolio. I'm sorry.

Bernardo Vieira Hees -- Chief Executive Officer

Sorry for that, Ken. I misunderstood you. It's my fault. What I was trying to say -- and, I think it's applicable here -- is that a lot of ideas don't need to be extremely high. I'm going to give you an example. Heinz Barbecue is an idea that's close to the range of $100 million, but to redeem the brand and the portfolio to whitespace -- what you can deliver through that is very big. So, it's not only the smaller brands. We can scale up ideas in a big way -- Planters in snacking, Kraft penetrating desserts with Philadelphia cheesecake -- all ideas that scale up to that range but scale up brands to the next level. So, that's what I'm trying to say.

When you think about scale and portfolio -- that's the second part of your question -- we're happy with the portfolio we have. I think you're right with what you said, is that the food industry is not one that has consolidated as much as other industries have. The reason for that... What I can say is within the portfolio we have today, if there would be more forces of consolidation within the industry -- if that will happen, we would like to be one of them.

Ken Zaslow -- BMO Capital Markets -- Managing Director

Great. I appreciate it. Thank you.

Operator

Our next question comes from the line of Rob Dickerson with Deutsche Bank. Your line is now open.

Rob Dickerson -- Deutsche Bank -- Analyst

Thank you very much. Bernardo, I just had a question around M&A. I realize it's the same strategy, transferable brands, strong brands to the future, but in terms of your stock price -- your valuation -- I would argue that it still sometimes gets a big of a premium given that expectation of industry consolidation plays out and you're in this great spot to leverage that. You said earlier that valuations were more attractive than two months ago, integration is over, and in the presentation last night, there was commentary that you are in a good spot to leverage potential consolidation. So, I'm just curious about any color you can give as to why we haven't seen since the Unilever bid a year ago. Is the non-hostile stance reducing the size of the target list, or is there a lower valuation factoring in? I'm just trying to get a feel as to where you stand now versus a year ago given your valuation as partially priced off of that expectation. Thank you.

Bernardo Vieira Hees -- Chief Executive Officer

Thanks for the question. I don't want to get into valuations and stock price movement and so on. What I can say is that we always have been -- and our history over 30 years has shown in many other businesses and shareholder stories -- that we always take those things very seriously, we always take the shareholder value proposition long-term extremely carefully, and when we decide to take action, we're normally very decisive. Also, as I highlighted in the beginning, our framework of thinking on M&A has not changed. We continue to like strong brands, businesses that can travel, and opportunities within combining companies. And so, when 2 plus 2 can be more than 4, we can generate resources to invest behind the products, the people, and the brands. That has not changed.

It is true that the chapter for integration at Kraft Heinz is behind us like I highlighted, and also, it is true that valuations are more attractive today from a long-term proposition than they were before. If you look at two months or look at the near-term time horizon, you decide it's true. That being said, we believe the things we're doing here. That's why we're highlighting the framework of building the things we're doing, the acceleration of investment we're presenting, and the things we're doing as an organic company. So, we're not just focusing or taking out from everything we need to do on a day-to-day basis. I think that's framework for M&A, and as you said, continuing to be in place, and that if there will be more consolidation in the industry -- if that is the case -- we want to be a force of that.

Rob Dickerson -- Deutsche Bank -- Analyst

Okay, great. Thanks for the answer. I'll pass it on.

Operator

Our next question comes from the line of Alexia Howard with Bernstein. Your line is now open.

Alexia Howard -- Sanford C. Bernstein -- Analyst

Good morning, everyone. Thank you for the question. Can I ask -- you opened your commentary this morning with some comments about customer contracts. Could you talk a little bit about exactly what you meant by that, what was not being delivered that you expected? That would be very helpful. And then, my follow-up would be around pricing dynamics. We're noticing in the measured channels gamma data that your pricing is up -- a little bit over 2%, I think -- in the last quarter or so, but your pricing that you reported in the results this morning was only up 1%. Is there a reason for that gap at the moment? Is it a non-measured channel issue, or is there something going on where the retailers are maybe taking a little bit more pricing on your products than you're actually realizing? Thank you.

David H. Knopf -- Chief Financial Officer and Executive Vice President

Hi, Alexia. I'll answer your first question here and then pass it to Paulo to talk a little bit about the pricing dynamics. Very quickly, on the go-to-market agreements, you talked extensively about it. It's really related to our Canadian business where, as we talked about, in Q1 of '17, we were really late to the game in locking those agreements down. I think that was a lesson for us that we've learned from, and what I'd say is going into 2018, I think the outlook is much stronger. We're securing major client agreements early. We're focused on the major value drivers for the business, including a solid innovation pipeline and capturing whitespace opportunities in food service, so I feel that we're in a much better position to perform in 2018 on the business in Canada. So, with that, I'll pass it over to Paulo to talk through the pricing dynamics you asked about.

Paulo Luiz Araújo Basílio -- President of United States Business

Thanks, Dave. Hi, Alexia. I think I understood the question. Again, when you think about price changes it's always difficult and always complex to execute in the current industry environment, and today, they are even harder. We always look to strike a balance between market share and profitable volume, and we choose where and how to compete more specifically. We continue to focus on differentiating our products and brands, and we will aggressively defend where we see the need. But, I think in quantities overall, I can say that we have been able to price our brands in line with their value to consumers, so we're feeling good with the achievements we've been having on that side of the business.

Alexia Howard -- Sanford C. Bernstein -- Analyst

Thank you. I'll pass it on.

Operator

Our next question comes from the line of Akshay Jagdale with Jefferies. Your line is now open.

Akshay Jagdale -- Jefferies & Co. -- Analyst

Thank you for the question and thanks for the presentation yesterday. I found it pretty useful. I wanted to ask about the increased investments. So, what does the increase in investment spending say about your view on brands and how much they matter to consumers in food, and based on that, your ability to get good or appropriate returns on them? There's this sentiment out there that brands don't matter to consumers in food, and maybe legacy brands like the large ones you have aren't connecting. We don't agree with that, but I'd love to get your thoughts on that.

Secondly, are these investments to accelerate -- so, an offensive move -- or to catch up? It seems from your presentation yesterday that you think your capabilities from a competitive perspective are better than most of your peers', and so, it seems like this is an offensive move, but given that the 2017 results have been below potential, perhaps the market might view this as more of a defensive move. So, I just wanted some clarification on those two, and I'll pass it on after that. Thank you.

Georges El-Zoghbi -- Strategic Advisor

Akshay, thank you. I will take this question. You couldn't be more right about brand. Particularly in this environment, brands matter most because the investment behind advertising, the investment behind promotions, the investment behind new products that come to market not only help the brand but stimulate overall category demand for everybody who is operating in those categories. So, in an environment where there is changing consumer need and changing go-to-market model, brands become a lot more important.

However, brands need nurturing, and nurturing means investment and staying relevant with what consumer needs are and what the consumer wants to buy. So, for us, an investment in the brand has always been important. Now, we're even accelerating that to deal with an environment where consumers are changing what they buy and where to buy it from. We are accelerating the investments to deal with that, so we now see that it's increasingly important to have stronger brands in those categories for everybody.

Akshay Jagdale -- Jefferies & Co. -- Analyst

And, whether it's offensive or defensive? Thank you.

Georges El-Zoghbi -- Strategic Advisor

Well, it's both. For the long-established brands, it's a defensive play to ensure that these brands stay relevant with consumer needs, and the creation of new brands like Devour or other smaller brands that we created -- they are one-dimensional brands that deal with one consumer need. These play the offensive part of the strategy.

Akshay Jagdale -- Jefferies & Co. -- Analyst

Perfect. I'll pass it on. Thank you.

Operator

Our next question comes from the line of Chris Growe with Stifel. Your line is now open.

Chris Growe -- Stifel Financial Corp. -- Analyst

Hi, good morning. I just had a couple questions for you. Last night, you touted some of your big bets, and we heard that today as well, and there's some success there. There was a comment you made last night that about 7% of your sales are coming from new product innovation in the last three years. I think most food companies are running low to mid-teens, so I'm just trying to understand -- is there that much to come here? Are you going to be more in line with the industry average, and is this part of the investments you're making in 2018?

Bernardo Vieira Hees -- Chief Executive Officer

Hi, Chris. You're right in your comment that we continue to accelerate our innovation -- not only in the big bets but in the renovation of the portfolio. To continue to grow that, if you take that percentage since 2013 when we started with Heinz, we have more than doubled. What I think is important within that is redeeming not only the percentage but the incrementality of the innovations -- we start to materialize more.

As we're adding the big bets and so on, with a lot of them, you're going to see a breakthrough in whitespace territories where we operate, but not in that specific segment, or where we don't operate at all. So, not only the percentage that you're talking about, we believe we can continue to go higher until we can meet the benchmark in the industry that we're not meeting today. But, the level of incrementality of our big-bet innovation needs to progress.

Chris Growe -- Stifel Financial Corp. -- Analyst

Okay. And then, just one other question, if I could. In relation to having access to the Kraft brand in Europe, are there incremental costs this year related to selling that product in Europe, be it internal investments, brand investments, or things that we need to make sure we account for since you have control over that brand now in more areas of the world?

David H. Knopf -- Chief Financial Officer and Executive Vice President

Hi, Chris. We did have some up-front investments in Q4, and we will invest behind that business into 2018, so you would expect to have some costs around that as we repatriate those Kraft brands.

Chris Growe -- Stifel Financial Corp. -- Analyst

Is that a meaningful component of the incremental investment this coming year? I'm just trying to get a frame of reference for how big this could be.

David H. Knopf -- Chief Financial Officer and Executive Vice President

No, Chris, it's not a meaningful component of the overall profile that we provided.

Chris Growe -- Stifel Financial Corp. -- Analyst

Okay, thank you very much.

Bernardo Vieira Hees -- Chief Executive Officer

One more question.

Operator

Our last question comes from the line of Scott Mushkin with Wolfe Research. Your line is now open.

Scott Mushkin -- Wolfe Research -- Managing Director

Thanks for taking my questions. So, I just wanted to frame one thing on the EPS growth. I think you said "significant EPS growth." Is that double-digit? Can you size that for us? I have one other question.

David H. Knopf -- Chief Financial Officer and Executive Vice President

Hi, Scott. We're not going to put a specific number around it, but again, in terms of the overall profile, on EBITDA, we have the carryover savings coming through in 2018 from the integration program, so this is the annualization impact, new savings initiatives, and both those combined to help fund the investments we're making in the business. And then, on top of that, the commercial ramp-up you'd expect through the year to deliver organic EBITDA growth. And then, I would think about it as the tax savings we expect to have that help us make those investments will drive strong EPS growth on top of that EBITDA profile.

Scott Mushkin -- Wolfe Research -- Managing Director

Okay. My second question -- we talked a lot about M&A, but as we research this -- and obviously, we do a lot of work in the retail channel -- we're pretty impressed by what you guys have done with your portfolio since the merger. So, I guess the question is can you...we'll call it "walk and chew gum at the same time." It seems like you might be able to do a couple M&A transactions that would be beneficial, and when you think about M&A -- particularly in the U.S. -- how do you think about the categories? Thanks.

Bernardo Vieira Hees -- Chief Executive Officer

Hi, Scott. Like I said, we don't want to comment on the specifics or hypotheticals here. Going back to the framework, these have not changed. We do look strong brands, we like businesses that travel, and we believe when we can find places where 2 plus 2 is more than 4, we have been able to create significant long-term value that benefits both companies that are involved in the merger. So, that being said, if there would be more consolidation in the industry -- it's yet to be proven, but if that is the case, we want to be a force of that.

Scott Mushkin -- Wolfe Research -- Managing Director

Perfect, guys. Thanks. I know we have another call coming up, so I appreciate you squeezing me in here. Thank you.

Christopher M. Jakubik -- Head of Global Investor Relations

Thanks, everybody, for joining us on the call today, and I appreciate you tuning in to the management slidecast, and if you haven't, I would suggest doing so going forward. For the analysts who have follow-up questions, Andy Larkin and myself will be available, and for anybody in the media, Michael Mullen will be available to take your questions. So, thanks very much, and have a great day.

Operator

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

Duration: 62 minutes

Call participants:

Bernardo Vieira Hees -- Chief Executive Officer

Georges El-Zoghbi -- Strategic Advisor

Paulo Luiz Araújo Basílio -- President of United States Business

David H. Knopf -- Chief Financial Officer and Executive Vice President

Christopher M. Jakubik -- Head of Global Investor Relations

Andrew Lazar -- Barclays Investment Bank -- Managing Director

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Jason English -- Goldman Sachs -- Managing Director

Ken Zaslow -- BMO Capital Markets -- Managing Director

Rob Dickerson -- Deutsche Bank -- Analyst

Alexia Howard -- Sanford C. Bernstein -- Analyst

Akshay Jagdale -- Jefferies & Co. -- Analyst

Chris Growe -- Stifel Financial Corp. -- Analyst

Scott Mushkin -- Wolfe Research -- Managing Director

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