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The Kraft Heinz Company  (NASDAQ:KHC)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 5:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day. My name is Chelsea and I will be your operator today.

At this time, I would like to welcome everyone to The Kraft Heinz Company's Fourth 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.

Chris Jakubik -- Head of Global Investor Relations

Hello, everyone and thanks for joining our business update.

We'll start today's call with an overview of our fourth quarter and full year results as well as our view on the path forward from Bernardo Hees, our CEO; and David Knopf, our CFO. After that Paulo Basilio, President of our U.S. zone will join us for the Q&A session.

Please note that during our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ materially due to risks and uncertainties and these are discussed in our press release and our filings with the SEC. We will also discuss some non-GAAP financial measures during the call today.

These non-GAAP measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and at the end of the slide presentation available on our website.

Lastly, as you may have seen in today's press release, we conducted an internal investigation into our procurement area with the assistance of external legal and accounting advisors and found we should have recorded $25 million in prior periods, which we booked in Q4 2018. To be clear, we do not expect this to be material to our current period or any prior period financial statements.

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

Bernardo Hees -- Chief Executive Officer

Thank you, Chris and good afternoon, everyone.

With the closing of one year and the start of a new one, I think it's best to begin our update today similar to how we do things internally, with a scorecard, to better understand where we delivered, where we did not and why. At this time last year, we set plans to drive profitable sales and consumption growth by investing in deployment of new capabilities and a strong pipeline of innovation and white space initiatives. And while we expected this to translate into near-term margin pressure in United States and Rest of the World segment. We anticipated a stronger net savings to deliver constant currency EBITDA growth for the year. Overall, we successfully drove profitable sales and consumption growth accelerated, but we fell short in delivering the net savings we expected.

From a commercial perspective, we firmly restarted organic growth. In United States, our second half performance came back to offset the self-inflicted losses from the first half of the year. We became one of the few within our industry posting real volume-driven growth, growing volume mix nearly 4%. In Canada, similar to United States, we ended the year with positive consumption growth from improvements in coffee and cheese. Our EMEA business built momentum on the back of white space gains in condiments and encouraging share trends across our U.K. base.

In Rest of the World, we are gaining traction in driving real growth with the start-up of our new (inaudible) plant in Brazil and our Cerebos acquisition in Australia and New Zealand. And our Foodservice business, on a global basis, is approaching $4 billion in sales and gaining momentum from white space initiatives in all markets.

And this leads to the second aspect of our scorecard, the significant progress we made developing, deploying a strategically advanced capabilities. We have strong returns on investment in marketing, category management and e-store sales. We continue to expand in e-commerce and reach driving 79% channel growth in United States alone and a 1/10 (ph) market share index versus traditional retail.

And we setup Springboard and evolv ventures as platforms to accelerate our innovation to consumers, to customers and find new ways to disrupt ourselves. So when you think about the sustainability of our growth, breakthrough innovation, a strong in-store activity, distribution gain and white space expansion, are all coming together. In fact, our consumption turnaround in the United States had been driven by brand-building initiatives across the portfolio, not just a few categories. We are sustaining momentum in brands where we've been successful like Heinz, Philadelphia, Oscar Mayer bacon, Classico, (inaudible) in our frozen snack category at large, all growing mid-single digits in 2018.

Turning around, other key brands like Kraft mac & cheese, Oscar Mayer hot dogs and A1 to low single-digit growth after several years of decline, stabilizing historically challenged brands like Kraft salad dressing, Mayo and our kids single-serve beverage business after years of mid-single-digit declines and building new brands into meaningful platforms of growth like (inaudible) which now $120 million platform; Devour, a $7 million brand in less than three years and Just Crack an Egg at $50 million after only 12 months.

While some of this was supported by incremental promotion and price investments to improve consumption and distribution trends. We saw strong LOIs and created a solid base of support and commercial momentum for 2019.

Where we fell short in 2018 was operations, specifically, our entire EBITDA miss was driven by net savings versus expectations within our United States supply chain. To be fair, we must first recognize that our team operate at industry-leading levels globally; in quality, with top-tier performance in the industry; in safety, with our best results ever; and in customer service, achieving industry-leading case fill rates and on-time, in-full delivery rates as we saw volumes ramp up.

The core cause of our shortfall in 2018 was forecasting the pace and magnitude of our savings curve in 2018, not merger-related synergies and not an increase in DDB cost. In fact, DDB delivered savings across all of fixed-cost packets outside of our commercial investments and helped to fund our initiatives.

To put our performance in context, we started 2018 expecting approximately 3% growth inflation, excluding key commodity costs with savings programs expected to offset gross inflation. We ended the year with approximately 3% inflation net of savings, specifically driven by higher supply chain costs and low operational savings in the United States. There is no question, we are disappointed that profitability did not ramp up with consumption gains as anticipated. We are overly optimistic on delivering savings that did not materialize by year-end. For that, we take full responsibility and we have taken steps to ensure this does not happen again by touching planning process, procedures and organizational structure.

In the end, we see three takeaways from 2018; one, we're successfully driving sustainable consumption growth; two, we have the ability to deliver top-tier organic growth at industry-leading margins; and three, we need to better plan and execute our operational net savings initiatives.

Before we outline the 2019 plans, David will provide more details on our 2018 financials.

David Knopf -- Chief Financial Officer

Thank you, Bernardo and hello, everyone.

As we show on Slide 3, while our overall performance fell short of our expectations, the year-on-year drivers are straightforward. Consumption-driven growth negatively impacted by cost inflation net of savings in the U.S. with tax savings offsetting lower EBITDA, higher depreciation and interest expense. From a trend perspective, there are a few important details to highlight. On the top line, consumption-driven growth momentum continued to build through Q4. For total Kraft Heinz, Q4 volume/mix growth was 4% with growth in every reporting segment driven by innovation, marketing, white space and go-to-market investments and led by improved consumption in a vast majority of U.S. categories.

Total company Q4 pricing was down 160 basis points, including 80 basis points from key commodity pass-through in the U.S. Also note that the sequential decline in pricing versus Q3 was accentuated by a deceleration in contribution from price in our Rest of World Segment. And regarding U.S. pricing trends, as Bernardo mentioned, we were happy with the returns and results on this front.

To provide more context and adjust for program timing, it's useful to understand the key drivers of U.S. pricing from a second half perspective. U.S. pricing in the second half of 2018 was down 2.4 percentage points with 1 point from passing through lower key commodity costs. So U.S. pricing net of key commodity impacts was down 1.4% in the second half. Out of this, 40 basis points of the decline was primarily related to defending our natural cheese business by closing freight debts to private label. The remaining 1 point was a combination of opportunistic price investments in support of our innovation pipeline to stimulate incremental consumption with good lift and solid returns. Looking forward, and excluding the impact of key commodity pass-through, we do not expect pricing to be down in 2019 either in the U.S. or globally.

Moving to EBITDA. We said on our last call that we expected our EBITDA growth rate to improve beginning in Q4. While this turned out directionally accurate, Q4 constant currency adjusted EBITDA was significantly below the expectations we previously outlined. As Bernardo mentioned, this was driven by shortfalls in the United States. To be more specific, while the one-off factors we outlined in Q3 by and large fell away as expected, anticipated savings did not materialize, particularly in our procurement area and to a lesser extent, we had higher-than-anticipated costs in both manufacturing and logistics.

Taken together, top line trends and bottom line results lead us to the key factors we considered over the past few months in finalizing our 2019 plans outlined on Slide 4.

And I'll hand it back to Bernardo to start it off.

Bernardo Hees -- Chief Executive Officer

Now it's time for us to focus on the year ahead, what we see in front of us and how best to grow our business for the long term. Our industry has been and is likely to remain challenged on the forefront. Continued fragmentation of consumer demand, a general lack of affordability to reinvesting brands, retail competition where assortment is likely to grow in importance and finally, in the short term, ongoing cost inflation. Given our savings shortfall and the high inflation we're seeing, we could focus on maintain or expanding margins, but risk forfeiting commercial growth and market share by slowing our pace of innovation and channel development, focusing on marketing efficiency versus incremental marketing presence and compromising talent development at a critical time. We have not and we will not. We are choosing to focus on improving our long-term growth trajectory and returns by; driving consumption and market share, leveraging next-generation capabilities for brand and categories advantage, and importantly, securing the right talent in areas critical to grow.

In fact, in light of the industry backdrop, we have concluded that there is no better time for Kraft Heinz to improve our growth profile. And looking forward, we have set three objectives for 2019; first, leverage our industry-leading margins to sustain our commercial momentum; second, more actively manage our portfolio; and third, expand (ph) our balance sheet as we continue to position Kraft Heinz for industry consolidation. I will cover our commercial growth initiative and David will outline our portfolio, capital restructure and financial expectations.

By far, the biggest and the best thing you can do to build the long-term value of our portfolio is to capture sustainable commercial growth by building on the sales momentum from 2018. And we have the stronger global pipeline we ever had to go after incremental consumer demand. In the United States, we'll be launching a record level of innovation, improving base consumption, velocities and leveraging brands and go-to-market investments.

In Canada, the priority is (inaudible) consumption in (inaudible) as well as sauces and condiments. In Europe and Rest of the World markets, white space initiatives will focus on driving incremental sauces consumption and opening new geographies. And in Foodservice, all regions have significant opportunities to gain distribution and white space.

We will support these initiatives with fully funded brand programs, taking advantage of our superior (inaudible) efficiency or cost per impression and increasing our immediate effectiveness or sales lift per impression, by deploying new creative tools in digital marketing. In a nutshell, we plan to go to market in 2019 with a stronger innovation pipeline than we ever had, backed by more marketing dollars while leveraging advantaged category managed and go-to-market initiatives to win assortment and improve distribution across all channels, including e-commerce. And we plan to do this while we maintain industry-leading margins.

Now let me turn back to David as the remaining objectives are a big part of his 2019 goals.

David Knopf -- Chief Financial Officer

I'll start with our financial expectations going forward on Slide 6. Regarding top line, we are now well positioned to continue organic net sales growth driven by incremental consumption gains. This will reflect volume/mix growth from innovation, distribution and white space initiatives and pricing actions that balance cost inflation and our market share objectives. On pricing, note that we exited 2018 at strong levels of merchandising support and distribution and price gaps are currently in a better place. So we do not expect pricing to be a drag year-on-year for 2019 as a whole. In fact, our U.S. business recently announced list price increases that are scheduled to take effect late in Q1.

From an organic growth perspective, in the very near term, Q1 is likely to decline versus the prior year due to unfavorable trade timing and a shift in Easter-related shipments to Q2 this year from Q1 last year. Trade timing in Canada, comparisons with a very strong winter soup season in the U.K. and destocking in Asia Pacific. For the year, we are targeting positive organic net sales growth with commercial gains partially offset by price elasticity. And on a nominal basis, a combination of currency headwinds and divestitures is likely to result in a 3 percentage points to 4 percentage point headwind to net sales.

Regarding profitability, we fully expect to maintain industry-leading margins. At the same time, we think it's prudent to begin the year by properly level-setting expectations. To do so as a one-off for 2019, we are breaking with our established guidance practices and setting a range for expected adjusted EBITDA of $6.3 billion to $6.5 billion for this year. This includes; commercial gains offset by stepped up support of marketing innovation, e-commerce and people; another year of low to mid-single-digit percentage non-key commodity inflation net of cost savings; as well as foreign exchange rates and the two divestitures already announced.

In addition, we currently expect to begin 2019 with the first quarter that is likely to see a high teens decline in adjusted EBITDA in percentage terms. We will be up against our toughest EBITDA comparisons for the year, particularly in light of our expected net inflation curve, stepped-up commercial spending levels and with pricing not taking effect until late Q1.

Finally, at the EPS line, while we continue to believe that we can deliver top-tier growth, it will take hold from 2020 onwards. This is because in addition to our EBITDA outlook, 2019 will see approximately $0.25 of non-operating headwinds versus 2018. This will come from a combination of several factors; $80 million of incremental depreciation expense; a roughly $120 million reduction in the other income line, mainly due to rising interest rates, increasing pension interest costs and less favorable market returns on planned assets assumed versus 2018, approximately $40 million of additional interest expense and a full year effective tax rate between 20% and 22%. Taken together, top line EBITDA and EPS drivers, while we expect to take a step backwards in 2019, we remain confident in delivering consistent profit growth from 2020 onwards, driven by fully leveraging our advantage brands, cost structures and capabilities.

The rest of our plan is focused on how we can take additional steps to improve our portfolio's growth trajectory, strengthen our balance sheet and position ourselves against inorganic opportunities. It starts with the potential for more active portfolio management, specifically through divestitures, as a way to further improve our growth and returns as well as accelerate our deleveraging.

The recent transactions we have announced India beverages and Canada natural cheese provide a good template of precedent for additional actions to exit areas with no clear path to competitive advantage and sell assets with strong valuations with some earnings dilution. We have now dedicated more resources, adding experience with Carlos Piani fully focused on our portfolio management efforts. And as we're able to execute such actions, we will look to deleverage with the proceeds, which leads to our next objective, further strengthening our balance sheet.

I think it's important to first recognize that we have the capacity to drive industry-leading cash generation along with industry-leading margins and expect to hold existing working capital and CapEx levels even as we drive the growth agenda we've outlined. In addition, given the industry backdrop and opportunities in front of us, we now see even greater strategic advantage in accelerating or deleveraging toward our ongoing 3 times leverage target and strengthening the term structure of our debt.

To do this, we're undertaking two specific actions. First, we intend to dedicate the divestiture proceeds from the sale of our India beverage and Canada natural cheese businesses to debt reduction. We also intend to do the same with proceeds from additional divestitures we are currently considering. Second, today we're announcing a reduction in our quarterly dividend to $0.40 per share or $1.60 per year, down from a rate of $2.50 per year. This will not only provide us greater balance sheet flexibility, it will also establish a base dividend that we can grow consistent with EBITDA growth over time. And we are comfortable that this level of dividend can accommodate the two divestitures we have already announced as well as those we are currently considering. These initiatives will accelerate the strengthening of an already solid balance sheet with a fully funded pension plan and continue to position Kraft Heinz for industry consolidation.

Now I'll turn it back to Bernardo to close.

Bernardo Hees -- Chief Executive Officer

Thank you, David. Before we take your questions, I think it's useful to put our progress to date, our plans and priorities, as well as our expectations beyond 2019 into context. When we put Kraft Heinz together in mid-2015, our focus through 2017 was (inaudible) necessary product renovation and supply chain integration, taking out cost that drops no benefit to our consumers, establishing, retool and routines, and testing and learning new tools to adapt to a rapidly changing environment. Beginning 2018 and into 2019, we'll focus on leveraging our industry-leading margins to establish key growth pillars through innovation and white space expansion, accelerate the global deployment of advantage capabilities across all channels and geographies and now more actively managing our portfolio for better growth and returns. From 2020, we expect to see growth on both the top and bottom lines at the full leverage of our advantage brands cost structure and investments close to the P&L.

So to summarize, we have continued to invest and focus on building our highly scalable operational model to position ourselves for sustainable organic growth and returns. And doing so at a time when the need for industry to modernize and consolidate is more evident than it was five or even three years ago.

Now we will be happy to take your questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question will come from the line of Andrew Lazar with Barclays. Your line is open.

Andrew Lazar -- Barclays -- Analyst

Good afternoon, everybody.

Bernardo Hees -- Chief Executive Officer

Good afternoon.

Andrew Lazar -- Barclays -- Analyst

I guess I'll kick it off with -- you mentioned, I think David that you thought that there was an opportunity for greater strategic advantage, I think were the words you used, for greater divestiture activity today than previously. I was hoping to get a little more clarity on what you meant by that. Is it a matter of just simply strengthening the balance sheet because you see more opportunities for more transformational deals now than you did before? Is it that valuation opportunities on those potential assets for sale are greater than maybe what you would have expected previously? I'm trying to get a better handle on that. Thank you.

Bernardo Hees -- Chief Executive Officer

Hi, Andrew, it's Bernardo. Let me take this part of the question. I think we're seeing a large (technical difficulty) in the industry and we are going through, commercially a good momentum, right, with acceleration in consumption, in share gains, in volumes right. Also too that you're coming out of the integration, we know more about the categories and the competitive advantage of each one of our brands than ever before. So with that in mind, our decision here was to execute the strategy on deleveraging faster so we can better position the company for future consolidation, right?

As usual, we (inaudible) than we are actually doing. But as we did in the second half of last year, we did divestiture of India beverage and the Canadian natural cheese business. I think it's a good framework for the things we are looking today and that's exactly the point there right now.

Operator

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Your line is open.

Bryan Spillane -- Bank of America -- Analyst

Hi, good afternoon, everyone.

David Knopf -- Chief Financial Officer

Good afternoon.

Bryan Spillane -- Bank of America -- Analyst

I guess two questions or two points, I guess related to the, I guess the build from -- through -- from the end of '18 through getting back to growth in 2020. One is just how much incremental investment is contemplated in your 2019 plan? So how much more are you spending in addition of -- in terms of what you stepped up in 2018?

And then second, the visibility in your business has not been very good. I think we've experienced that here in the second half. So I think it would be really helpful if you could provide a little bit more color in terms of sort of how you see a bridge to actually getting to some growth in 2020? Thank you.

David Knopf -- Chief Financial Officer

Hi Bryan, thanks for the question, this is David. So let me step back for a second and I can break down our 2019 outlook a bit more and get a sense for our EBITDA expectations year-over-year.

So overall, we expect gains from consumption growth to be in line with the stepped-up spending behind our initiatives. So really the main drivers for the expected EBITDA decline year-over-year are a few factors; first, the net inflation that we talked about that we expect to see again in 2019; the divestitures I talked about; FX and to a lesser extent, variable compensation. So to be more specific, if you assume the midpoint of our range or roughly $700 million decline year-over-year, let me elaborate on the four main drivers behind that.

So first off, on the commercial side, again we should be neutral on the bottom line as we expect the positive contribution from further consumption gains to be in line with the stepped-up investments as we accelerate the pace of our innovation, base business performance and channel development.

Second, beyond that roughly half of the total EBITDA decline or roughly $300 million to $400 million is driven by continued inflation net of cost savings in the low to mid single-digit range consistent with what we saw in 2018. So this will be driven by another year of mid single-digit growth -- low to mid single-digit growth inflation excluding key commodities and given the recent experience, actions we've taken to replan the savings and pushing out the savings curve.

Third, we expect the combination of foreign exchange headwinds and the divestitures we've already announced that should drive another $250 million headwind to adjusted EBITDA versus 2018.

And then finally, we have an impact from variable compensation which is another roughly $80 million year-over-year. So taking together, this will put us where we saw the highest margin in the industry and we believe that is the right base to build from. So to elaborate more on why we're confident even with the miss in expectations that we saw in Q4 and the decline in EBITDA that we're seeing in 2019, let me elaborate a little bit on why we're so confident in 2020.

First on the top line, we should be very well positioned for solid organic growth globally, OK? We're already seeing real consumption-driven growth in the U.S. and globally today that we're able to create in the second half of 2018 and in 2019 we expect to further improve our consumption rate behind the largest innovation pipeline that we've ever had and more support on the core business. And we have a rapidly growing international business with significant exposure to emerging markets and white space opportunities to accelerate that growth globally.

At EBITDA, in 2019 we are spending ahead to support an even larger innovation pipeline than I mentioned and accelerating channel development, particularly in e-commerce. So the right spending in commercial support levels, capabilities and marketing will have been established this year in 2019.

And then on the cost side, the extraordinary inflation that we're seeing in 2018 and that we're now seeing in 2019 from things like tariffs and transportation should mitigate over time as we're starting to see in the spot markets today. And we're also confident that we will be able to -- we'll be in a much stronger position to manage those costs through pricing in our savings curve going forward in 2020.

And finally at EPS, our non-operating below-the-line cost that I talked about should be at run rate levels so that we can leverage the organic growth into both EBITDA and EPS growth 2020 going forward.

Bernardo Hees -- Chief Executive Officer

Bryan, just to add to what David just said, to the numbers. We are seeing a strong consumption-driven growth in our business today that we plan to accelerate and the base we're assessing for 2019 get us to the right metrics and KPIs in all our key investments, marketing, innovation supply chain, channels, digital. So with that base we are very confident as we grow the business in 2019 and '20 that EPS and EBITDA grows together with that perspective.

Operator

Our next question comes from the line of Ken Zaslow with BMO. Your line is open.

Ken Zaslow -- BMO -- Analyst

Hi, good evening, everybody.

Bernardo Hees -- Chief Executive Officer

Hi, Ken.

Ken Zaslow -- BMO -- Analyst

I have one question. What are the key changes that will take place to change the planning and execution of the savings so we can become more -- so they can become more reliable and kind of put it into a better action? Are they going to be management changes, is it going to be a change to the methodology oversight? Can you talk about that?

David Knopf -- Chief Financial Officer

Hi, Ken, thanks for the question, this is David. So again, let me step back for a second and kind of walk through our Q4 performance versus our original expectations, provide a little more context and then I'll hand it over to Bernardo to provide a little more color on what we're doing differently to make sure this doesn't happen.

On the Q3 call, we did expect Q4 EBITDA growth to improve sequentially as I talked about versus the 14% year-over-year (inaudible) saw in Q3, OK? And that assumption was based on the fact that we expected transitory headwinds and one-offs in Q3 that would fall away, which would effectively bring our run rate growth to more of a high single-digit decline year-over-year. And then on top of that, we expected savings to accelerate, leading to a significant sequential improvement from Q3 to Q4.

Obviously, in the end, the transitory one-off factors did fall away as expected but we have three negative impacts in the quarter that we didn't expect. First, we had roughly a 3.5 percentage point impact of unanticipated cost headwinds, which I can explain further. Second, we did -- we didn't have any anticipated savings curve that we expected to materialize in the quarter to partially offset the inflation we're seeing. And then finally, we did have an incremental FX drag of about 1.5 percentage points in Q4 versus Q3.

So given all these factors, the year-on-year decline in Q4 is much closer than Q3 and we didn't see the sequential improvement.

With that I'll hand it over to Bernardo to answer your other question.

Bernardo Hees -- Chief Executive Officer

Ken, I think it's a very fair point and even though we're disappointed with the miss, that's pretty much focused, like David said, in the supply chain operations in United States. We did took (ph) several actions to not allow this to happen again, right? Actions in the planning process, in organizational structure and position ourselves to make sure our savings curve really match, right, the timing and the effectiveness for the year. So (inaudible) we understand the reasons of the miss and we saw in the Q4 higher cost and more volumes coming to the pipe. And we could not offset to timing of our savings curve, we did took (ph) actions, process, planning and structure to not repeat that again.

Ken Zaslow -- BMO -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Dara Mohsenian with Morgan Stanley. Your line is open.

Dara Mohsenian -- Morgan Stanley -- Analyst

Hi, good afternoon, guys.

Bernardo Hees -- Chief Executive Officer

Good afternoon.

Dara Mohsenian -- Morgan Stanley -- Analyst

Could you -- first just for clarification, can you provide a bit more detail on the circumstances behind the SEC subpoena on the procurement side? It sounds like it originated externally as opposed to finding something internally. So just curious for the circumstances there.

And then on the pricing front, you mentioned increases in the U.S. by the end of Q1. Can you give us a rough idea of what percentage of your business that represents? And given we've seen the price gap move up versus private label in a lot of your key product categories in the U.S. over the last few years, do you think there might need to be a broader reset of price gaps at some point, particularly with the market share momentum we're seeing at private label? Thanks.

David Knopf -- Chief Financial Officer

Hi, this is David. Thanks for the question. So, I'll answer the first part of your question and then hand it over to Paulo to U.S. pricing in the U.S.

So the Company was notified by the SEC regarding an investigation into the Company's procurement area. Following this, we conducted a very thorough internal investigation with the support of an independent law firm and accounting firm. And we determined that we should have recorded $25 million in prior periods, which we booked in Q4 2018. And to put it into context, that compares to our overall procurement spend of over $11 billion which excludes big four commodity spend. So this misstatement was not material for our current or prior year financial statements. And finally, we did implement several improvements, internal controls and took remedial measures to mitigate the likelihood that this happens again.

So with that I'll hand it over to Paulo to address pricing.

Paulo Luiz Basilio -- Unit President

Thanks, Dave. Let me start from the -- answering the private label question and then we can -- we move to the 2019 pricing. While we're seeing the private label expanding, and it's doing so at a more -- we are seeing this happening in a more restrained pace, around 0.2 points of share in Q4, it was a material step down from previous quarters that we're seeing.

And we are seeing the most pressure is mainly in areas where low commodities, excess capacity and with competition come together, mostly in our -- in some subsegments of our cheese portfolio. In natural cheese, we see also the retailers have used price matching to drive traffic. And we're being able to invest back, that was part of our price investment we'd had in the second half to narrow the price gaps. And after that we saw branded and private label share starting to stabilize. So again, we're always monitoring the value proposition of the market and where (inaudible) innovate and differentiate our brands and products on that matter.

When you think about 2019 pricing, we already have announced our pricing. We did an analysis in terms of -- to define the right part of the portfolio that we are pricing, being very cautious about the balance between sales and cost to provide the best value equation and helping to drive category growth. And we are seeing -- already announced we -- this thing is going to take effect in Q1 and we expect overall -- our overall pricing to turn positive over the course of '19.

Operator

Thank you. Our next question comes from the line of Ken Goldman with JPMorgan. Your line is open.

Ken Goldman -- JPMorgan -- Analyst

Hi, thanks so much. Bernardo, as you know, one of the bare thesis over the years on the 3G philosophy has been that I guess the intense cost-saving efforts will over the long run sort of erode brand equities. And I realize you've had a better top line lately but one could argue it took $300 million spending infusion to get there. And I think more importantly, you took a $15 billion writedown on two of your biggest brands, Kraft and Oscar Mayer. And to me that literally means the brand equity there aren't what they used to be. So when investors are looking at the consistent financial disappointments at Kraft, maybe even bring (inaudible) into the discussion, and if they ask why is the 3G belt-tightening strategy goes too far and that could damage brands, is there at least some evidence starting to point to yes there? I'm just curious for your thoughts on that.

Bernardo Hees -- Chief Executive Officer

Hi, Ken, let David talk about the impairment here that you just mentioned. Then I come back here to talk about the model that's what is implicit in your question here. Thanks for that. David, can you start?

David Knopf -- Chief Financial Officer

Thanks, Bernardo. So, in terms of the impairment, the writedown was primarily reflected -- it reflected revised margin expectations and this was for really three businesses of ours; first, the Kraft natural cheese business; second, our Oscar Mayer cold cuts business where we talked about issue that we had in the first part of the year; and then third, our Canada retail business. And really the fundamental driver behind the reduction in expectations was driven by our second half performance, OK, which was primarily driven by supply chain issues that we had in the cost side as you know.

And then just to provide a little more context, since the merger, we've also seen significant pressure on valuations from a higher discount rate come into play, which was partially offset (technical difficulty) taxes, but that's really the context around the impairment.

And I'll hand over to Bernardo to answer the rest of your question.

Bernardo Hees -- Chief Executive Officer

Ken, look, we still believe in and strongly that our model is working and has a lot of potential for the future, right? First, let's remember, we continue to create with a leading industry margins, right, and now we are growing right at the same level as the top-tier companies redeem similar portfolio, right? So that's very important (inaudible) perspective. Second, the niche we have and we're acknowledging here, properly has been focused on operations, supply chain in United States. The commercial momentum with consumption growth continue to accelerate (inaudible). We think that's (inaudible) we're doing since 2018, now 2019, we can say we have the right base to be growing through consumption volumes and share at the same time, maintaining high leading (ph) margins to the industry.

Into 2020, like David highlighted to the (inaudible) numbers, right, we do believe to that base, we have been in a very solid position to be growing top line and bottom line. Not only that, we are working more actively the portfolio and now with the reduction of the dividend allowed us to have more flexibility in our balance sheet to really deleverage faster and position ourselves to more consolidation in the future that we believe is necessary and will happen with that model. And so, we are confident in the things we're doing even though we acknowledge we did have the miss in the fourth quarter like highlighted by David.

Ken Goldman -- JPMorgan -- Analyst

Can I ask a very quick follow-up? David and Bernardo, thank you for that. That's helpful.

David Knopf -- Chief Financial Officer

Yes, please.

Ken Goldman -- JPMorgan -- Analyst

David, I think you mentioned that it was more of a short-term like the last couple of quarter issue with the two brands and maybe discount rates have risen. The companies generally don't take writedowns because recent performance was bad and because discount rates have risen. Isn't there something broader and longer term that usually leads to these kind of impairments?

David Knopf -- Chief Financial Officer

Yes, that's a great question and thanks for that. Just to be clear, by far and away, the majority of the impairment, which was really concentrated in these three businesses that I mentioned, it was by far and away driven by the second half performance and the new level of margin and profitability that we're talking about versus what it was before. So the margin profile and what we established in the second half was really the key driver behind the impairment.

Ken Goldman -- JPMorgan -- Analyst

Thank you.

Operator

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

David Driscoll -- Citi -- Analyst

Great. Thank you and good evening.

Bernardo Hees -- Chief Executive Officer

Good evening.

David Driscoll -- Citi -- Analyst

I just had a couple of questions, but I think they're reasonably short. Can you give us some sense of the size of the assets that you wish to sell that haven't been announced? Would it be something like on the magnitude of 5% of the revenue base?

And then I had a question about the savings programs. I think you made a statement, David, in your script that in the forecast, the savings programs had been quote-unquote, pushed out. So I'm a little confused as to kind of why that's happening and why can't you achieve the internal savings at the same time that you're generating the revenue performance?

And then related to that, if you didn't hit the savings that you expected in the fourth quarter, don't those savings programs show up in like the first quarter of '19 or second quarter of '19, I mean, I don't think there's a -- they shouldn't disappear, but it feels like within the guidance that they did and I just may be don't understand what's happened right there. Thank you.

Bernardo Hees -- Chief Executive Officer

Hi, David, it's Bernardo. Let me address the first part of the question. We're not discussing here size or so. What we're saying that we will work our portfolio to strengthen our balance sheet as we're doing with the dividend to have more flexibility for future consolidations as we see it. As David said, our objective is to deleverage, right, to 3 times in the middle term at a faster pace than we're doing today.

With that and then all that you have in the portfolio today, with our competitive advantage by brands and category, allowed us to be in a very good position to understand the magnitude that what we can do or we cannot do. I don't want to elaborate more than we are doing right now. With that David, can you open again the '18 and '19 to clarify here to David?

David Knopf -- Chief Financial Officer

Hi, David, this is David. Thanks for the question. So on the savings side, we were overly optimistic on our ability to offset significant inflation in the quarter. And again that drove a significant part of the miss. So the savings miss was really a combination of two things; underdelivery from supplier negotiations and delayed manufacturing projects. And to give you a little bit of color on what some of those projects were like, they included line optimizations, yield improvements and assumed even better performance on some of our footprint plans that we discussed previously. So because of this miss, as Bernardo said, we took significant action to address our processes, planning and structure internally and simultaneously spent a lot of time and focus really revisiting our savings projects and we replanned.

As a function of that, our savings curve is being pushed out as we implement those changes, as we revisit our savings programs going forward. So that's really what's driving the delay in the savings curve and that's embedded in my 2019 expectations.

David Driscoll -- Citi -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Jason English with Goldman Sachs. Your line is open.

Jason English -- Goldman Sachs -- Analyst

Hello, good evening, folks. Thank you for squeezing me in.

Bernardo Hees -- Chief Executive Officer

Good evening.

Jason English -- Goldman Sachs -- Analyst

Your guidance for next year suggests that the majority of the synergies you realized on consolidating Heinz and Kraft will have effectively been wiped out. In that context, I'd love to hear your thought process and rationale on continuing to pursue a strategy of consolidation. Where do you see the value creation coming from? This would certainly suggest that maybe there's not as much opportunity as someone maybe once envisioned?

David Knopf -- Chief Financial Officer

Hi, thanks for the question, this is David. So since the merger, EBITDA has been held back by more than $1 billion versus what we had really kind of set out for. And within that we had nearly $0.5 billion of costs that we put back into the business, OK? These are costs that are different and independent from the cost that we took out in the integration, right? So most of the synergies and the integration savings that we captured were non-consumer, non-commercial related cost savings, OK? So, the synergies that we realized are very much intact.

The costs that we put in are squarely within different areas and we're putting costs in that are consumer-facing and drives commercial growth, OK? So these are things like expanding our innovation pipeline, our go-to-market infrastructure in the U.S. and international, our digital and e-commerce capabilities and while there's a significant amount of investment we put behind us, we are starting to see the returns, which is why we're growing in the second half.

On top of that, we also had significant amount of FX headwinds that also affected our sales and EBITDA trajectory and then finally, the inflation and the inability to executing it to savings curve as we talked about that.

With that I'll hand it over to Bernardo to address as well.

Bernardo Hees -- Chief Executive Officer

Jason, I actually -- as Dave said, the investments we're doing and the things we're doing are not correlated to the savings we got through the merger, that will be still here and (inaudible) more as the year goes. I actually would say the opposite. I think we are more prepared with the capabilities and we are more ready for industry consolidation to better performance in the future than we were two, three or five years ago. To that sense, I think we're having more firepower with a better balance sheet profile is important.

Jason English -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Michael Lavery with Piper Jaffray. Your line is open.

Michael Lavery -- Piper Jaffray -- Analyst

Good evening.

David Knopf -- Chief Financial Officer

Good evening.

Michael Lavery -- Piper Jaffray -- Analyst

Just wanted to understand, you mentioned your -- that you should be measured on organic growth and that hasn't come through the way I think people might have expected. But I think there's been forgiveness around that because you are deal guys and (technical difficulty) about the outlook?

Bernardo Hees -- Chief Executive Officer

Michael, I'm sorry, you faded a bit there. We didn't quite hear the question.

Michael Lavery -- Piper Jaffray -- Analyst

(multiple speakers) deal-driven --

Christopher Jakubik -- Head Of Investor Relations

Michael, could you repeat the question? You kind of faded there a little bit.

Michael Lavery -- Piper Jaffray -- Analyst

Yeah, sorry, no problem. You've said a couple of years ago that you should be measured on organic growth for your business and that obviously has had some struggles. You're also known as deal guys but we haven't seen a deal yet either. Can you just help us understand why somebody should be excited about the prospects from here? Is it a deal that you know you can get done? Is it organic growth or is it a combination?

Bernardo Hees -- Chief Executive Officer

Hi, Lavery, it's Bernardo again. Look, I think if you see the second half performance of our commercial initiatives and returns of our investment, it's going to see a very positive scenario in that sense, right? We're having volumes, consumption and market share gains in the vast majorities of our categories. Even categories that have been declining for quite some time are seeing a momentum, right? And we do know there is more to come. Not only that, even with the miss of the fourth quarter, we continue to operate at industry-leading margins and we think the 2019 base that David just highlight is a base we can grow sales and EBITDA going forward. With the actions we are taking on dividend and the work we're doing in the portfolio is to manage to be successful and we are confident we can be.

We will have a balance sheet that's more flexible and more prepared for future consolidation. So in that sense, I think the commercial momentum is happening. In that sense, I think even with the miss in U.S. operations, we still have the base of the margin here that allows us from this base to build 2020 and beyond and the balance sheet flexibility for future consolidation for us to be a consolidator if the industry goes our way.

Operator

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

Robert Moskow -- Credit Suisse -- Analyst

Hi, thank you for the question. Bernardo, I had a question about the supply chain. It was a -- you had very poor order fill rates, I think a year or two ago you had issues in frozen potatoes, you had issues with sliced lunch meat. And now this year, we're having more supply chain issues. And the commentary that there's some cost savings going on in the supply chain, I'm still I guess uncomfortable with it because it indicates that maybe you need to try to make it more efficient. It sounds like you need a bigger investment in the supply chain. Maybe you need to expand the footprint, increase flexibility and increase capabilities. Is there going to be a big dollar investment in people and in the footprint that's necessary as part of this rebase? Thanks.

Bernardo Hees -- Chief Executive Officer

Thanks, Rob for the question. No, actually I think it's important to understand what did not happen in the fourth quarter was this ramp-up of the savings, right? We are in the same level of the third quarter and actually, let me put perspective a little bit to what you said. We came into 2018 as one of the best service provider in the industry. Our on-time and in-full (inaudible) like we said in the original highlight is really now at top quartile worldwide. So in that sense, the whole investment in footprint, right, capacity and service is already behind us. Do we have more -- we always have things to do and improve, but to the base that you're asking, it's actually the opposite. We did believe there was more saved timing on the savings curve and that for that we are taking full responsibility that did not materialize and they will come to life in 2019 '20 and beyond. But there is no bigger investment in supply chain, to your point, because I'm operating better or in the same level of the third quarter, with one of the best service in United States today.

With that said, let me pass over to Paulo to detail the supply chain cost here in the United States.

Paulo Luiz Basilio -- Unit President

Hi, Rob, this is Paulo. So no, I just want to reaffirm here what Bernardo was saying that 2018 was a great year for supply chain in terms of service. Think about the four pillars of supply chain; quality, safety, service and cost. It's completely fair to say that our supply chain delivered very well three of the four pillars; quality, safety and a great service to support the strong volume that we had in the year. In cost, we all (inaudible) we are not able to deliver the additional saves we expect and then we had -- we ended up having more inflation, also (inaudible) expecting the end of the year.

Robert Moskow -- Credit Suisse -- Analyst

Okay. I'll follow-up later. Thank you.

Operator

Thank you. And our next question comes from the line of Chris Growe with Stifel. Your line is open.

Chris Growe -- Stifel -- Analyst

Hi, good evening.

Bernardo Hees -- Chief Executive Officer

Good evening.

Chris Growe -- Stifel -- Analyst

Hi. I have two questions for you. A real quick one would be, just to be clear on the $250 million of EBITDA pressure from divestitures, does that include -- incorporate what's already happened or would also could happen going forward?

And if I could just ask a second question in relation to a comment you make in the release about your return on investment being strong in the fourth quarter and the year. Obviously, if you measured that based on market share or even top line growth, that's a fair comment. But the degree of profit that it took to achieve that growth is quite significant. And I think it would really weigh on that overall calculation of that of return on investment. So I just want to get a better sense of how you're measuring your return on investment as you call it and how to think about that going forward given the extreme cost in this quarter? Thank you.

David Knopf -- Chief Financial Officer

Hi, Chris, this is David. Thanks for the question. So I'll answer the first part and then hand it over to Paulo to address your second. So the $250 million you mentioned, approximately $70 million of that is related to the divestitures that we've made to date, OK? And then the remaining amount is really the FX headwinds that we're seeing in some of our international markets. So this does not include any future divestitures that we're considering. It only includes the divestitures that we've executed today, the two deals that Bernardo mentioned earlier.

Paulo Luiz Basilio -- Unit President

Hi. So I'm going to talk a little bit about the pricing and the return on the pricing investment that we had here. If you consider -- if you think about our second half as a whole, OK and you consider that actually we invested 1% in price when you exclude the impact from commodity and the 0.4% that we invested specifically to close the gap in the natural cheese. And you see the performance in volume that we had growing almost 4%. I think it's clear to see that even though this was only -- it was not the only lever of the volume improvement, you can see that we have a very strong return on this particular investment. But also it's important to say that our volume improvement was also supported by the much better service level as we're talking, a strong innovation and launches, renovation and additional brand and channel support, besides the high level of store activity and promotions that we are (inaudible) here.

Operator

Thank you. And this concludes today's question-and-answer session. I'd now like to turn the call back to Mr. Chris Jakubik for closing remarks.

Christopher Jakubik -- Head Of Investor Relations

Thank you everybody for joining us this evening. For analysts that have follow-up questions, myself and Andy Larkin will be available for follow-ups all evening and into tomorrow. And for those in the media with follow-ups, Michael Mullen will be available to take in calls. Thanks very much and have a great day.

Bernardo Hees -- Chief Executive Officer

Thank you, all.

Operator

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

Duration: 64 minutes

Call participants:

Chris Jakubik -- Head of Global Investor Relations

Bernardo Hees -- Chief Executive Officer

David Knopf -- Chief Financial Officer

Andrew Lazar -- Barclays -- Analyst

Bryan Spillane -- Bank of America -- Analyst

Ken Zaslow -- BMO -- Analyst

Dara Mohsenian -- Morgan Stanley -- Analyst

Paulo Luiz Basilio -- Unit President

Ken Goldman -- JPMorgan -- Analyst

David Driscoll -- Citi -- Analyst

Jason English -- Goldman Sachs -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Christopher Jakubik -- Head Of Investor Relations

Robert Moskow -- Credit Suisse -- Analyst

Chris Growe -- Stifel -- Analyst

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