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The Kraft Heinz Company (NASDAQ:KHC)
Q1 2018 Earnings Conference Call
May 2, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 first quarter 2018 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

Hello, everyone. Thanks for joining our business update. We'll start today's call with an overview of our Q1 results and our 2018 plans from Bernardo Hees, our CEO, and David Knopf, our Chief Financial Officer. Then, Paulo Basilio, President of our U.S. Zone, and George Zoghbi, Strategic Advisor and Director, 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 due to risks and uncertainties and these are discussed in our press release and our filings with the SEC.

We'll also discuss some non-GAAP financial measures during the call today. These non-GAAP financial measures should 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'll hand it over to Bernardo.

Bernardo Hees -- Chief Executive Officer

Thank you, Chris. Good afternoon, everyone. Let me start by saying that we're feeling more confident about our outlook with Q1 in line to slightly better than our expectations from the February call. If you recall, there were several factors that led us to be cautious on our top line performance for the first half of 2018, including the headwinds in the United States from Planters and Ore-Ida, the impact from retail inventory reductions in Canada, and the risk we saw in Brazil from our SAP implementation.

As to EBITDA, we spoke about near-term pressures in the United States and the rest of the world from a further rate investment in go-to-market capabilities, big debt launches, and increasing working media dollars, and best-in-class customer service, as well as significant cost inflation, especially freight at the beginning of the year.

On the whole, it played out as expected. And we continue to expect many of these same factors to remain in Q2, as we anticipated in the outlook provided in the February call. Outside these transitory factors, we are seeing ongoing improvement in consumption trends in most countries and in most of the key categories that we believe will drive both top and bottom-line growth into the second half of the year.

These include spots of [inaudible] in the first quarter [inaudible] quarter in categories such as nacho cheese, meals, and dessert and ready-to-drink beverage in the United States, cheese and coffee in Canada, condiments and sauces across Europe, soups and meals in the U.K., and baby food in Russia, condiments and pasta sauce in Latin America, as well as soy sauce in Indonesia.

More important to highlight for the balance of 2018, for 2019 and beyond is that these gains are being driven by the investment in progress we are making to build capability for sustainable advantage to our iconic brands. On Slide 3, we show six goals from our framework presentation that we set to fulfill the Kraft Heinz vision to become the best food company growing in that award.

For instance, we set a goal to be the No. 1 in marketing capabilities and are investing our portfolio of brands to a data-driven approach to win with consumers. It's fair to say that you have to spend the last two years on the necessary renovation for out portfolio, widening by focusing on marketing spend efficiency and product renovation. We are [inaudible]. With higher commercial investments, especially behind incremental innovation. In data-driven marketing, we continue to develop proprietary in-house tools to better measure quality impressions across new regions like mobile, and to understand the impact of how digital initiatives have on net sales, all with the factor real-time phase.

In the first quarter alone, our Super Bowl ad kicking off the Kraft [inaudible] brand campaign generated more than 2 billion impressions. We executed a data-driven target digital campaign in U.K. soups, helping us gain more than a point of share during strong soup season in gross sales [inaudible]. Also in the U.K., our company behind [inaudible] in-house products, chocolate flavor mayonnaise during Easter season generated 3.5 billion impressions for Heinz Seriously Good Mayo. Think about that. More than 3 billion impressions in a country one-fifth the size of the United States.

And in a classic definition of adaptable, data-driven marketing, our [inaudible] themes quick response around consumer and social media [inaudible] in [inaudible] generated more than a billion impressions within 48 hours. This coming at a time when we were just launching Heinz Real Mayonnaise in the United States and Canada.

In innovation, we are pushing into new categories, new [inaudible], new occasions. In many cases, to premium positioning. We are doing this with the full [inaudible] mentality, not just gross sales from new items. In the United States, for instance, our innovation [inaudible] has got wider ever single year. In 2018, we plan to launch roughly 60% more innovation projects than we did in 2016.

In [inaudible], I designed it to be incremental to our current base, such as breakthrough innovation in new [inaudible] parts, like we're doing with "Just Crack an Egg" for breakfast, a refrigerated product that's now selling faster than we can make it. Disruptive innovation like Heinz Premium Mayonnaise and building on our presence in the snacking by complementing P3 with Oscar Mayer natural meat and cheese plates, Philadelphia bagel chips, and [inaudible] cream cheese dips, and Planters [inaudible] nuts, as well as partnering with growing equities to bring specialty items to market with our newest springboard platform and through joint ventures.

Items like Momofuku sauce, [inaudible] that's good [inaudible] foods and [inaudible] meal kits and cooking sauces. Outside of the United States, you've already seen the impact of incremental sales from the Kraft brand in Europe and should soon see the same in Australia. In the rest of the world markets, we would expect gains from white space launches under Kraft, Heinz, and Planters, to show more strongly in the second half of the year.

In our effort to maximize category manners, we have significant impact they still had. In retail United States, for instance, we still have room to improve the [inaudible] of all promotional activities. We expect key summary in the winter reset windows to improve SKU adoption, distribution and velocities, to our assortment [inaudible] and plan-o-gram tools. In new ads food service, we have started to streamline our product catalog, emphasizing high-velocity SKUs, which also reduce supply chain complexity. In [inaudible], we recently made our global center for [inaudible], our global hub for assortment management. Adding this capability to the revenue management team to drive value and goals.

In go-to-market capabilities, we continue to take actions that will enable us to improve our ability to get the right product at the right price at the right time for our consumers, and capture what we believe to be significant, incremental, organic growth. Our in-house, in-store sales teams in the United States is now 80% larger than this time last year and we have seen incremental returns we expect versus the previous [inaudible]-only approach in store, everywhere we have implemented this new model.

In food service, we are capturing white space opportunities in some of our most developed markets -- the United States and Europe. A good indication that there is more untapped [inaudible] in this channel. And in e-commerce, our team is developing house data science and consumer analytics expertise with a focus on building consumer baskets that together with [inaudible] can leverage the breadth of the Kraft Heinz portfolio and make us a better partner to our retail customers.

We are also making significant progress in our goal to create best-in-class operations. We are pacing ahead of aggressive, industry-leading targets in quality, safety, and customer service in nearly all geographies we operate. Even as [inaudible], the state-of-the-art factory in Davenport, Kirksville, China, and Brazil, producing to their potential.

And of course, water and veterinary pressures have continued across recruitment, logistics, and manufacturing. We view the solid pipeline of projects in each area to minimize these pressures, which should come true in the second half of the year. In other words, even though we've substantially completed our integration program in Q4, we remain in a strong position to [inaudible] cost inflation and fuel high-return investments in our brand.

These include investing in the development of our people, wherein the first quarter alone, Kraft Heinz employees completed nearly 60,000 courses to our interactive university online platform. We cannot underestimate how critical it is in this rapidly changing environment to develop our people to new competencies in a skilled building in narratives like sales, marketing, leadership, problem solving, and R&D because we know that our people and [inaudible] Kraft Heinz to adapt to these new times and to win in the marketplace.

So, to summarize: (1) we are building capabilities to create brand and category advantage to achieve profitable growth; (2) we are investing aggressively now in order to see the benefits sooner; and (3) these are key factor shaping what's likely to be an atypical balance of net sales and EBITDA between first half and second half in 2018.

So let me hand over to David to explain how these factors impact Q1 results and how the commercial momentum we are investing to build is likely to play out in our financial.

David Knopf -- Chief Financial Officer

Thank you, Bernardo. Hello, everyone. Turning to Slide 4, from a total company perspective, organic net sales were down 1.5 percentage points in Q1, consistent with the expectations we laid out on the last call.

Pricing was positive for the third consecutive quarter of 1 percentage point and driven by favorable pricing in the United States and rest-of-world markets. Volume mix was 2.5 percentage points lower in Q1, due to known headwinds in the United States and rest-of-world markets that overshadowed solid growth in EMEA in Canada, strong Easter programming in the United States, and food service growth in both the U.S. and EMEA.

By segment, the U.S. was slightly better than our initial expectations. Planters and Ore-Ida had a negative 1.5% impact and trade spend timing was a 1.2% headwind to Q1 net sales. Excluding these factors, underlying U.S. consumption was significantly better than reported results and continued to show sequential improvement.

In Canada, as expected, results reflect earlier go-to-market agreements with key retailers. With growth tempered by retail inventory reductions at a key retailer versus the end of 2017. EMEA had a strong first quarter driven by soups and meals growth in the U.K., as well as condiments and sauces growth across the zone, including Southeast and Central Europe, where we are now selling the Kraft brand. In rest-of-world, topline growth was supported by pricing, while [inaudible] was held back by distribution-related issues, primarily realignment in Mexico, and continued disruption in Puerto Rico, a seafood shortage in Southeast Asia, that is impacting our canned business in Indonesia, and the implementation of SAP in Brazil. That said, we do expect sequential improvement moving forward.

At EBITDA, Q1 performance was slightly better than expected, although the drivers were consistent with our expectations. Specifically, solid gains from productivity savings and their pricing, gains that were offset by inflationary pressures, primarily elevated freight and resin costs, as well as costs associated with our aggressive commercial investment agenda.

At adjusted EPS, we were up $0.05 versus Q1 last year, driven primarily by roughly 730 basis point reduction in the adjusted effective tax rate versus Q1 last year, while other below-the-line items largely offset one another. One final note I'd like to make about Q1 results that's not on the page is our cash generation. In Q1, we delivered nearly $500 million of additional cash versus the year-ago period. This came from a combination of lower capital expenditures, lower cash taxes, and lower working capital. In sum, our Q1 financial performance was in line to better than expected and provides a solid start to delivering our full-year outlook, outlined on Slide 5.

To start, we continue to expect 2018 will be a year where just less than half of our net sales and EBITDA will be delivered in the first half of the year, and more than half in the second half. This is compared to 2017, where net sales and EBITDA were roughly equally split between first half and second half. In fact, in Q2, while the set of sales and cost headwinds will be similar to Q1 and we will continue to press our aggressive commercial investment agenda, we will be up against our strongest EBITDA comparisons of the year in every reporting segment versus last year.

But, as Bernardo said, with four months now behind us, we are getting visibility on a number of trends ending drivers, both commercially and operationally, that are giving us confidence in a strong second half and solid momentum heading into 2019. To be more specific, we see 4 tangible drivers of the turnaround in the second half of 2018.

First, the transitory headwinds in the U.S. during the first half should not just fade, but are likely to turn into positive year-on-year contributors, given strong go-to-market plans for Planters nuts, Oscar Mayer cold cuts, and our frozen business.

Second, and also in the U.S., we expect to begin seeing more benefit from the investments in category management and go-to-market capabilities, benefiting both the strong innovation agenda we have planned, as well as our in-store presence with e-customers.

Third is international growth driven by a combination of innovation and white-space initiatives in virtually every market: Canada, EMEA, and rest-of-world.

Fourth is leveraging greater net savings as the benefits from the initiatives we have at work across procurement, logistics, and manufacturing ramp up.

From an overall perspective, we remain confident in delivering positive constant currency EBITDA growth and strong adjusted EPS growth for the full year, as we outlined in February. To be clear, we're targeting EBITDA growth versus the revised 2017 base, following the new accounting standards we've implemented. For earnings-per-share, we now expect an incremental $40 million of depreciation and amortization versus $70 million previously. We continue to expect incremental interest expense of roughly $100 million versus last year, and an effective rate of approximately 23% for the full year.

In terms of cash generation, as evidenced by our strong Q1, we continue to expect a significant step-up in cash generation from a combination of lower capital expenditures, lower cash taxes, and lower working capital.

To close, I'd echo Bernardo's earlier thoughts on the year and our path forward. That we're developing capabilities to create brand and category advantage to achieve profitable growth. That we're investing aggressively now in order to see the benefit sooner, and that these are the key factors shaping what is likely to be an atypical balance of net sales and EBITDA between the first half and the second half in 2018.

Now, we'd be happy to take your questions.

Questions and Answers:

Operator

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press * then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the question queue, please press the # key. Once again, that's *1 on your touchtone telephone to ask a question. To prevent actually background noise, we ask that you please place your line on mute once your question has been stated.

Our first question comes from the line of David Palmer of RBC Capital Markets. Your line is open.

David Palmer -- RBC Capital Markets -- Analyst

Thanks, good evening. You mentioned your investments in feet on the street, the sales in stores. Could you talk about where you are with those investments? Have you seen returns in that and can you give us a sense that you're feeling confident you'll get something for that investment?

Paulo Basilio -- U.S. Zone President

Sure, David. Hi, this is Paulo. So yeah, we're deploying this different in-store coverage model. It basically involves replacing some existing third-party merchandises that we own and we have in our stores to in-house salespeople. What we believe that we can better execute and understand the category needs with that and we are leveraging advanced analytics, we [inaudible] metrics to track this activity. We started doing this in 2017. I can guarantee you that it's paying off and we're actually doubling down on this.

David Palmer -- RBC Capital Markets -- Analyst

Great. Just a question on the big 4: cheese, nuts, lunchmeat, and coffee. Those categories have that pass-through element. They've been 4 categories for you which your brands have been wobbling in terms of their market share lately. It looks like private label has been the beneficiary in some of these. Can you tell us what's going on? Is it something of a price/timing issue? Or is there something else with regard to your promotion strategy that you're looking to adjust? Thanks.

David Knopf -- Chief Financial Officer

All right, David. This is David. Thanks for your question here. Let me step back on pricing a little bit and give you some more color in Q1, and then going forward. So, in Q1, we realized a fair amount of carry-over pricing from last year, so you saw that we're up 1% overall for Kraft Heinz. This is really in the places that we planned, OK? Outside of key commodities. So this is something that will likely last going into the rest of the year. Outside that pricing, pricing out of commodities was pretty stable for the quarter and we expect that to maintain stability going forward. So that's kind of our Q1 pricing.

Going forward, as a matter of practice, we don't talk about potential future pricing action, so I won't get into that. Though what I will say is we continue to be very confident in the strength of our brands and we will continue to strike a balance between market share and profitable volume for each of our categories.

David Palmer -- RBC Capital Markets -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Ken Goldman of JP Morgan. Your question, please.

Ken Goldman -- JP Morgan -- Analyst

Hi, two from me, if I can. You talked about the headwinds in Q2. I just want to make sure I understand what the message is there. Typically, if you look at seasonality, EPS, EBITDA in 2Q, they've been around, EPS anyway, about $0.10 higher than 1Q, which is exactly what the Street's modeling today, $0.99 versus $0.89. So, I know you can't give guidance but I just want to make sure we're hearing you correctly on what that similar headwinds comment meant. Does it mean that we should expect similar EBITDA or should seasonality still lift 2Q's EBITDA ahead of 1Q like it typically does?

David Knopf -- Chief Financial Officer

Hey, Ken. This is David. Thank you for the question. As I said earlier, 2018 is likely to be a bit less first half and a bit more in the second half. That compares to the roughly 50/50 split that we had least year in 2017. So, obviously shifting very few percentage points can cause significant year-over-year percentage changes. On top of that, particularly in Q2, given what we're up against in terms of having the strongest EBITDA comparisons in a margin perspective last year in every geographic segment. So that's something that will be relevant for next quarter.

That being said, again, I think there were three very highly tangible drivers to our second half outlook. First, as I said, the transitory headwinds in the U.S., including nuts, cold cuts, and Ore-Ida. These are three significant factors that should fade into the second half. Second, we have a very strong innovation pipeline and white-space agenda across the company this year that I think EMEA is actually kind of proving out for us, and that will gain traction in the U.S., Canada, and rest-of-world.

Finally, on the bottom line, our savings curve should catch up to inflation that we've seen in the business and the investments that we've made in the business as the year progresses. So, that's kind of, again, our breakdown for the year. Again, just to kind of reiterate what we said. The capabilities we're building in category management, brand building, and go-to-market that we're investing this year aggressively, this will benefit us both later into 2018 and will benefit us in 2019 and going forward.

Ken Goldman -- JP Morgan -- Analyst

Thank you for that. My follow-up is you mentioned, I think if I heard you correctly, the management team is going to have 60% more, and I thought I heard the phrase "innovation projects than a year ago." I wanted to understand what's an innovation project as you define it? How do I reconcile the talk of 60% more projects, which is sort of big bet strategy you told us about in the past?

Paulo Basilio -- U.S. Zone President

Hi, Ken. This is Paulo. What I can talk about the U.S. innovation pipeline here. What I can tell you is that when you compare year-over-year, the number of projects and the number of dollars that we are seeing coming from innovation projects, we expect to have innovation in 2018, is [inaudible] '17 and have many examples now being launched and being shipped. In all of these projects, another driver that we are incorporating here, we are very focused on the incrementality of the innovations that we are launching.

So, we have the "Just Crack an Egg," Heinz Mayo is coming, Planters Crunchers, our partnership with Food Network, a lot of new [inaudible] and that we have the [inaudible] innovation and on top of that, we are already entering Q2. We have in like refrigerated and sauces and meals and also a very strong pipeline in frozen meals that we got from the second half. So, again, we are very happy and confident with the U.S. innovation pipeline that we already got distribution in 2018.

Bernardo Hees -- Chief Executive Officer

Ken, just to complement Paulo, adding to the rest of the world, you're going to have the same, the similar story. There's an extensive number of projects drives innovation and incrementality. In a set of projects that you call the big bet strategy, Ken, that why it's so totally connected. That's what we call the platinum launch, right? Just to name a few on the international markets, we have Max Boost in Canada, we have several in Kraft's territory in Europe, right? Now coming to Australia as well. We have Jif [inaudible] cookies in China. I have the entire Heinz baby food renovation in Europe. In Asia, I have the premium line in soy sauce. In Indonesia, pasta sauce. In Japan.

Those are some of key platinum innovation that [inaudible] big bets also that you just addressed. At the same time, we are widening our innovation pipeline worldwide.

Ken Goldman -- JP Morgan -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of David Driscoll of Citi. Your line is open.

David Driscoll -- Citigroup Global Markets -- Analyst

Great, thank you and good evening. I wanted to ask about gross margins. Can you talk a little bit about how gross margins trended by region. And then specifically, I'd like to understand if retailer pressures are constraining the gross margins and then if it's a developed or emerging market pressure?

David Knopf -- Chief Financial Officer

Hi, David. This is David. Thank you for the question here. As you know, broadly, we manage EBITDA dollars, not to margin, whether it's EBITDA margin or gross margins, so we're very focused on growing our EBITDA dollars. That being said, in Q1, you saw our gross margin overall was essentially flat versus prior year.

Two things to note on that. One, we did have a small benefit from the timing of pension and post-retirement costs, and this something that's not going to repeat. Two, we did have another small benefit from a mixed impact from the Easter shift to the Q1 from Q2 that's going to work against us next quarter.

Going forward, again, I'd expect sales growth to improve before EBITDA growth and before EBITDA improves. Again, coming back to the fact that we have inflation coming into this year and the accelerated investments that we're making in the business that run ahead of our savings curve and the ramp-up in our commercial world.

David Driscoll -- Citigroup Global Markets -- Analyst

David, though, can you just comment a little bit on the regions? One of the most talked about issues right now in the sector is the potential pressure on gross margins. A comment on the U.S. business. The sales growth is weak. So, we're all wondering here. I hear what you're saying about the back half of the year, but just your sense as to the current environment. Is this pressure something that do you actually think it would constrain your ability to manage your margins over time?

David Knopf -- Chief Financial Officer

So, no, so again, I'm not going to speak to gross margin by segment or by zone for us, but again, we're happy with the performance in Q1. We're running consistent with our plan for the year. Again, that plan is going to be very second-half weighted with the 3 tangible drivers that I talked about with the headwinds in the U.S., including nuts, cold cuts, and Ore-Ida fading through the year, with the strong innovation and white-space agenda, and EMEA, and rest-of-world and U.S. and Canada, and our savings curve that should catch up with inflation and investments.

David Driscoll -- Citigroup Global Markets -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Robert Moskow of Credit Suisse. Your line is open.

Robert Moskow -- Credit Suisse -- Analyst

Hi, thank you for the question. I was hoping that you could help me understand how your relationships with the trade have evolved. Last year, there were a series of service issues on Ore-Ida and then you've also had, I would say, some push-back from a major retailer on their pricing scheme for private label and cheese and meats. Then you had the Davenport issue.

Are all these issues kind of being resolved now? Do you feel like the retailers have given you a clean slate? That's why you feel confident you're seeing a bit of a tipping point here in terms of your distribution trends, your innovation trends, and your programs? Or are those issues weren't that big to begin with? Thanks.

Paulo Basilio -- U.S. Zone President

Hi, it's Paulo. Hi, Rob, it's Paulo here. Again, what I can tell you is when you think about our service level for this year, we had a big improvement. As you know, the majority of the footprint work is now behind us. Again, we started the year with a very good and strong service level. We have this focus issue in capacity from Ore-Ida, but beside that, all our products in capacity we're delivering align with what our customers demand. Again, we still are going to experience some service constraints in Ore-Ida, but overall, my total service level and the ability that we are seeing to engage with the customers, to get our innovation distribution, to get our products there, to negotiate and set our JVPs are really well. So, we're feeling good about these relationships for the year.

Robert Moskow -- Credit Suisse -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Andrew Lazar of Barclays. Your line is open.

Andrew Lazar -- Barclays Capital Inc. -- Analyst

Good afternoon, everybody. I guess I read some comments the other day from a recent conference that were made by Jorge Paulo Lemann and basically acknowledging that 3G brands that they thought could last forever, as he put it, but then all of a sudden got disrupted. Those were kind of his words. I realize some comments can be taken a bit out of context and such, but I guess I was hoping to first, get your take on these comments. It's hard to know what to make of them. Then second, maybe better understand how thoughts like this inform or impact certain capital allocation decisions for KHC. I guess, in other words, does this disruption make slower-growth staple assets less interesting? Even if compelling transactions from a financial standpoint.

Bernardo Hees -- Chief Executive Officer

Thanks, Andrew. It's Bernardo. Look, let me try to address your question as directly. I think the disruptive market and channels, consumer habits, and so on, that's been happening for quite some time and that's something we have acknowledged also for some time, right? It's a significant part of our commercial investments that we announced at the end of last year. The $250 to $300 million is behind new digital initiatives, right? Behind e-commerce, behind new channels, behind go-to-market, behind the innovation that's coming to market to support it, and behind working dollars in media, as well as service.

With that being said, I think the big message here is really that we cannot have any compliance with the brands we have. That's really opposite. We believe in the big brands when you support them, right? When you give them the right relevancy, the right product offering. In the marketplace, they go really well. As a case for example, if you think about Heinz in the United States, has been growing 15% every year since 2015. The relaunch of the Kraft brand with the Super Bowl campaign with great family is giving us a lot of excitement. Behind Kraft, the new offers in cheese and other segments that can be very relevant.

But it's also true to say that these big brands that have the scale, that have the profitability, right? They need to come with new offers from different angles and different categories, for instance, smaller brands and so on. We are doing that, if you think about the case of Devour on the frozen territory. If you think about Just Crack an Egg, going for breakfast in refrigerated, right? If you think about the things we're doing with brands like Classico, like Cool Whip, like A-1. If you think about the extension of Planters with Planters Signature and nutrition.

So the combination of the two things are extremely important. So, in a sense, to your question, has it changed our capital allocation and mindset? My answer is no. Actually, I think it's very in-line with what we have been saying for quite some time, our framework for capital allocation, organic and inorganic has not changed. We continue to like big brands. We continue to like businesses that can travel and continue to like business that we can generate efficiencies that can be invested behind growth brands, products, and people.

Andrew Lazar -- Barclays Capital Inc. -- Analyst

Great. Thank you very much for that color. One quick follow-up. If you expect some of the similar topline impacts in 2Q as in 1Q, plus you'll have an added headwind from the Easter shift that reverses a little in 2Q. I guess does that suggest that 2Q organic sales could be weaker sequentially compared to 1Q? Or would you expect some sequential improvement, even with the Easter shift hurting you? Thank you.

David Knopf -- Chief Financial Officer

Andrew, this is David. Thanks for the question there. Let me walk through a little bit zone by zone, geography by geography, for Q2 on the sales side. From a topline perspective in the U.S., we expect to be kind of sequentially similar to Q1, OK? So, we still expect to see the impact of the headwinds from Planters and Club and from Ore-Ida and cold cuts, as we've talked about. Again, this will be about a 1.5 percentage point headwind for us. In addition to that, we have a combination of trade seasoning and the Easter shift, the reverse that we saw in Q1, which combined should be about a 1-point headwind for us. So, overall, pretty similar to what we saw in Q1.

If you look for each of the other zones, in Canada, we will see the most difficult Q2 comparison driven by three factors. First, we had a retailer inventory kind of rebuild in Q2 that we'll be lapping. This was particularly strong in cheese. Two, we had a strong summer 2017 programming, which is primarily in our condiments business. Three, the fact that our innovation pipeline in 2018 is a little more second half weighted than it was in 2017.

Okay, then if you look to rest-of-world, we expect to see kind of sequential improvement through the year as the investments that we're making that we accelerated in 2018 really materialize. Then in Europe, excited and continue to be confident in our strong growth for the year.

Andrew Lazar -- Barclays Capital Inc. -- Analyst

Great. Thanks very much.

Operator

Thank you. Our next question comes from the line of Jonathan Feeney of Consumer Edge. Your line is open.

Jonathan Feeney -- Consumer Edge -- Analyst

Thank you very much, guys. Following up on Andrew's question, could I ask really simply, with all of the cross-currents going on, competitors struggling, valuations coming down, but the 10-year coming up 50 basis points, would you say it's a better, worse, or unchanged outlook for you as you look at the likelihood and attractiveness of doing acquisitions, is my first question. Secondly, if higher freight costs remain or continue to get higher, does that at all threaten things like outsourcing, your co-manufacturing or consolidating plants, that kind of cost savings initiatives you've been so successful with over the past couple of years? Thank you.

Bernardo Hees -- Chief Executive Officer

Hi, Jonathan. It's Bernardo. Addressing the first question you had about M&A. I really don't think it changed the framework and the anything we think about that. We are very long-term focused, right? We are very disciplined in our approach we have about M&A, really looking at things that 2 + 2 is more than 4. Like I mentioned in the question before, our framework to look at of liking brands, businesses that can travel, and synergy that can capture that allows us to [inaudible] is still in place.

So, I don't think those [inaudible] you're talking about, stock price, getting away, or interest rates getting in the way of this framework and this long-term framework. What is right that you said, that the valuations you are seeing today are more attractive than we have seen 6 months ago and 12 months ago, even for us in a relative [inaudible].

Jonathan Feeney -- Consumer Edge -- Analyst

Thank you. And on freight?

David Knopf -- Chief Financial Officer

Hi, Jonathan. This is David. Let me take freight for you. I'll split this into two pieces. First off, on footprint, when we did the initial modeling on each of these footprint projects, we took into consideration potential variable changes, whether it's fuel or other costs that could potentially cause fluctuations going forward, and I'd say, you know, all that being the case, we're still very happy with what we did on the footprint side.

Second, in terms of inflationary pressures we're seeing, not surprisingly, we are seeing inflationary pressures similar to what some of our peers have talked about, whether it's in packaging, whether it's in oil or freight. But what I will say is while these costs are definitely higher, we certainly feel it's manageable within the context of our savings curve and we're still kind of on plan to our 2018 targets despite that.

Jonathan Feeney -- Consumer Edge -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Pablo Zwanik of SIG. Your line is open.

Pablo Zwanik -- SIG -- Analyst

Thank you very much and good afternoon, everyone. Bernardo, my question is more about balance sheet flexibility. If you can comment in terms of potential asset divestitures that give you flexibility to fund future deals, remind us of how high you can go in terms of debt leverage post a deal, and also, would there be a scenario where Kraft Heinz could end up with a dual class share structure in the future so you're controlling group can keep control as the [inaudible] expands.

The second follow-up maybe for Paulo Basilio -- I hear a lot about innovation, about different products: Capri Sun, Oscar Mayer and other things, but nothing really about coffee. Just give us an update in terms of where you are in coffee? With lots of innovation obviously from Keurig, [inaudible] and other companies, but not hearing much from Kraft Heinz. Thank you.

Bernardo Hees -- Chief Executive Officer

Hi, Pablo. This is Bernardo. Let me address the first part of your question, then I'm going to ask David to comment. On the portfolio, what I can say that we, as you have been saying, we're happy the existing portfolio, I think each brand and category does play a role. For sure, they are in a different stage of their life in the category have different performance as expected. But in general terms, we're happy that.

Also, too, that after 2.5 years of integration, our understanding of each one of the categories is much different. What allows us to measure the returns of each one of them and their perspective look in 5, 10 years, in a much better way than we would say that a year and a half ago, right? So, we do look each category and transaction in a different way. But in general, I'd say we're happy with [inaudible].

David, do you want to complement the question, please?

David Knopf -- Chief Financial Officer

Thanks, Bernardo. Thanks for the question, Pablo. This is David. In terms of balance sheet, what I say again, and I've said before, we continue to be very focused on de-levering. We are fully committed to investment-grade status. That is non-negotiable for us. That is top priority for us from a capital policy perspective. So, I just want to reiterate that point. Second, on the year, we may not get all the weights for intended run rate in 2018. That's largely going to be in part due to the fact that we pre-funded our post-retirement medical and part of our pension at the end of last year. But bottom line, we're very happy with where the balance sheet is. We believe our credit is very strong and getting better. We've significantly de-risked the balance sheet. We expect significant cash benefits from the Tax Cuts and Jobs Act that I talked about last quarter. We expect considerably better post-integration free cash flow as well. Again, we feel very good about the balance sheet and are committed to our investment-grade status.

Paulo Basilio -- U.S. Zone President

Hi, Pablo. This is Paulo. On the coffee question, I think you will see that we're going to be launching, you're going to see new products in our coffee category segment in liquid, in [inaudible], in [inaudible] to drink under Max brand, Maxwell House brand, and also you're going to see a lot of more investments behind the brands in the second half.

Pablo Zwanik -- SIG -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Stephen Shircula of UBS. Your line is open.

Stephen Shircula -- UBS -- Analyst

Hi, a quick question for David. Just wanted to get a feel for the phasing of the reinvestment spend. Was first quarter the largest bulk of that to drop or should we expect 2Q to be a little bigger than 1Q? That's my first question, thanks.

David Knopf -- Chief Financial Officer

Hi, Stephen. Thanks for the question. This is David. So, in terms of the investment profile, I'd say from a P&L perspective, it should be pretty consistent through the year. So I wouldn't expect a lot of volatility there. I think it's important to talk a little bit about where we're investing, again which we talked about on the last call.

So, first, we're investing in go-to-market and that's both in the U.S. in-store sales that Paulo talked a little bit about earlier. We're investing in e-commerce, like Bernardo mentioned, as well as distribution expansion in some of our key international markets like China and Latin America. These types of investments will largely be through our SG&A line.

Second, we're investing heavily in service and that's primarily in North America, but we're also investing in Europe as well. This type of investment will largely flow through our cost of goods sold line. Then finally, we're investing in working media dollars, which we plan to drive in 2018. We'll also be more concentrated in our SG&A line.

Stephen Shircula -- UBS -- Analyst

Okay, great. The second question is for Bernardo. Just want to get a sense of your level of confidence in the back-half revenue acceleration this year versus the prior year. In 2017, you seemed pretty confident that a lot of the summer plans were really going to come to fruition. Sales trended a little bit below that. What gives you, I guess, the added degree of confidence this year relative to last year? Thank you.

Bernardo Hees -- Chief Executive Officer

Hi, Stephen. I think it's a fair question. Well, I think a lot what David already highlighted before, the trend ends we're seeing here, David and Paolo, are pretty much related to contracts that we're able to regain on the nuts territory. We'll be behind the constraints you have in capacity on the potato territory. Our innovation is becoming really strong as we speak, right? And even we told the inflation pressure described by David, the actions that we put in place on the cross side, especially on the procurement and manufacturing side, they are very weighted toward the second half of the year.

So when I look at sales and EBITDA, for sure, we need to execute, but all the drivers of the joint business plans with the main client in the United States and Canada and Europe, Asia, in Latin America, are in place. The main trend ends you are seeing in the top categories where we're still suffering decline are in place. Innovation is coming to market. So, by all means, we're seeing consumption to continue to get there in most parts of the countries we operate.

So, there is a lot for us to do. We have our analogy. We know still there are headwinds against us coming in Q2, but we are confident that the actions we are taking today and the investments that are fully in place will start to pay out in the second half of the year, carrying this momentum into 2019.

Operator

Thank you. Our next question comes from the line of Brian Spillane of Bank of America. Your question, please.

Christopher M. Jakubik -- Head of Global Investor Relations

If we can take just one more question, that would be great. Thanks.

Brian Spillane -- Bank of America -- Analyst

Thanks. Good afternoon, everybody. Just two quick ones for me. First, Bernardo, I'd like to get your perspective on valuations and, I guess more specifically, we've seen the equity markets reduce the valuations for consumer staple stock, yet we've seen transactions within the industry sort of not come down as well, but given the transaction [inaudible]. If you can give a perspective on just kind of what you're thinking about the transaction market. Just how multiples have fared. Is that at all sort of affected your sort of appetite, at least in the near term, in terms of maybe where the ask is versus what you'd be looking to bid?

Bernardo Hees -- Chief Executive Officer

Thanks, Brian. Look, as a matter of practice, we don't like to comment on rumors and speculations or our peers' transactions, right? I think what we can say, again, that our framework for M&A has not changed, like I highlighted before. We are disciplined in the sense of seeing prices and return and long-term shareholder value. Because, remember, the way we operate and invest as owners, that leads a very long-term perspective, right? We're definitely not traders in that sense. We look those things that we can hone and create value from a longer-term.

So, in that sense, we do believe the valuations are definitely more attractive today, even if you think about relative valuations. If the price is right, we believe we can move when we do find a situation that 2 + 2 is more than 4.

Brian Spillane -- Bank of America -- Analyst

As a follow-up, does size matter? I think there's a perception that the only type of properties you're looking at would be large transformational, but is that necessarily true? Do you look at small, [inaudible], and sort of large transformational simultaneously?

David Knopf -- Chief Financial Officer

Hi, Brian. This is David. Look, I think our No. 1 goal, as Bernardo said, is to generate shareholder value over the long-term. We'll look at any opportunity that comes our way, but we're not going to speak to any sort of hypotheticals, but again, that's our No. 1 goal and we'll look across a number of different potential opportunities.

Brian Spillane -- Bank of America -- Analyst

Okay, thank you.

Christopher M. Jakubik -- Head of Global Investor Relations

Thanks, everybody, for joining us today. For the analysts who have further questions, myself and Andy Arkin will be around to take your calls. For those in the media with follow-up questions, Michael Mullen will be available for you as well. Thanks very much and thanks for joining us today.

Operator

Thank you for your participation and have a wonderful day.

Duration: 54 minutes

Call participants:

Bernardo Hees -- Chief Executive Officer

David Knopf -- Chief Financial Officer

Paulo Basilio -- U.S. Zone President

Christopher M. Jakubik -- Head of Global Investor Relations

David Palmer -- RBC Capital Markets -- Analyst

Ken Goldman -- JP Morgan -- Analyst

David Driscoll -- Citigroup Global Markets -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

Andrew Lazar -- Barclays Capital Inc. -- Analyst

Jonathan Feeney -- Consumer Edge -- Analyst

Pablo Zwanik -- SIG -- Analyst

Stephen Shircula -- UBS -- Analyst

Brian Spillane -- Bank of America -- Analyst

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