The Kraft Heinz Company (KHC) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Kraft Foods Group Incorporate Reports Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Chris Jakubik, Vice President of Investor Relations. You may begin.

Good afternoon and thanks for joining our business update for the fourth quarter and full year of 2014. With me today are John Cahill, our Chairman and CEO, and Teri List-Stoll, our CFO. During our remarks, we will make some forward-looking comments that are based on how we see things today. Actual results may differ due to risks and uncertainties. These are discussed in our press release. We'll also be discussing some non-GAAP financial measures during the call today, and you can find the GAAP to non-GAAP reconciliations within our press release and in the Investor Center of kraftfoodsgroup.com. Now, I'll hand it over to John, who will outline our agenda for today.

Thank you, Chris, and good afternoon, everyone. I'm delighted to be speaking with you today as Kraft Foods Chairman and CEO. And while it's still early in my tenure and I'm deep in the learning cycle, and I'll tell you upfront that I'm not far enough along to be able to answer all the questions you may have about our plans for the future today. I will certainly share my perspective on the current realities facing Kraft and our industry. But it's early days as I begin to work with the team to map out our path forward. So this afternoon we will review Kraft's performance in 2014 and some of the factors that are likely to shape our outlook as we head into 2015. And at the end, I'll touch upon my preliminary thinking on our biggest areas of opportunity. By now you will have seen the announcement we've made today regarding some leadership changes, and that Teri List-Stoll will be stepping down as CFO at the end of this month. I'd like to thank Teri for her contributions to our company, her dedication and her professionalism, and her leadership of Kraft's strong financial team. So let me now turn it over to Teri to discuss our Q4 and full-year financial results, as well as some thoughts on 2015.

Thanks John. Hopefully you've all had a chance to review the earnings release we issued about an hour ago detailing our fourth quarter and full-year results. If you did, you would have seen that we landed the year with fourth quarter results that were largely consistent with what we had outlined for you at the end of October. And as we walk down the P&L for the quarter and the year, I think the common thread is that while there were some positive developments in the fourth quarter, it was against a backdrop of a 2014 where Kraft did not deliver against its potential. With both macro environment headwinds and mixed execution on our part affecting our full year results. For instance, at the revenue line, Q4 organic revenue growth of 3.4% was a sequential improvement from previous quarters. Volume mix contributed 1.5 points of growth, while pricing was up nearly 2%. In addition, we outpaced North America food and beverage industry growth of 2.4%. And we held market share in 69% of our businesses in Q4, up from 47% of our businesses in Q3. For the full year, however, we were below our long-term objective. Our 2014 organic net revenue growth of 0.9% trailed North America food and beverage industry growth of approximately 2%. And for the year, our overall market share within the major categories where we compete was down 0.7 [ph] a point. On the cost front, while we made some progress in growing our underlying gross profit dollars in the fourth quarter, we were down for the year. As is our discipline, we priced aggressively to recover what were unprecedented input cost increases and absolute commodity price levels in our cheese and Oscar Mayer businesses. And in both businesses, we were essentially able to offset those cost increases through net pricing. We were also encouraged by the volume elasticity’s we experienced in those categories, which were generally consistent with and in some cases better than what we expected. At the same time, we pushed the promotional pedal down in a number of categories without realizing adequate returns or volume lift. And this hurt overall profitability in our beverages, meals and desserts, and enhancers businesses. In terms of productivity, fourth quarter gross productivity was approximately 5%, and net productivity was approximately 4%. This resulted in full year growth productivity of 4%, and full-year net productivity of just over 2%. And while net productivity was better than our October estimate of 1.5% to 2% for the year, execution missteps earlier in the year prevented us from being where we wanted to be, and need to be, for the long-term. In fact, when we take a step back, the impacts of input costs, pricing and productivity, in aggregate, resulted in a small net benefit in Q4 for the year. As a result, most of the movement in the P&L this year, and some of the biggest influences in operating income, were largely from a combination of factors that we don't expect to repeat. We've talked before about lower spending and cost savings initiatives being a driver of earnings growth in 2014. We ended up spending just over $100 million this year on cost savings initiatives, but below the $125 million to $150 million range that we expected. We also ended the year with $79 million or $0.09 per share of unrealized losses from commodity hedging activities, and a $1.3 billion or $1.41 per share non-cash loss from market-based impacts to post-employment benefit plans. The loss from market-based impacts to post-employment benefit plans was driven by a combination of lower discount rates and updated mortality assumptions that were partially offset by favorable asset returns. Excluding these factors, lower corporate expenses and lower advertising and consumer spending contributed to the strong fourth quarter operating income growth. We continued to reduce our overhead costs in 2014. However, much of the upside from overhead we saw this year versus last came from a combination of items that are largely non-recurring. In the fourth quarter, we saw benefit in the form of lower compensation accruals versus the prior year, and for the full year, in the form of favorable retirement-related benefit adjustments primarily resulting from lower-than-expected claims experience. If you recall, we talked about the favorable benefits experience earlier in the year. This factor alone resulted in $128 million of pretax income this year versus 2013. And while the benefits of this company are “real”, it's important to note that the earnings recognized do not provide incremental cash in the current period. And they can create an earnings headwind going into next year, as the level of improvement in claims experience is unlikely to repeat. Also within SG&A, A&C spending was down roughly 12% for the fiscal year 2014 versus last year. And advertising to sales was down to 3.6% from 4.1% in 2013, in part due to digital efficiencies, but also cutbacks of ineffective spending. That said, we continue to believe that we're not yet supporting all of our brands with adequate copy or an adequate level of funding. But it made no sense to continue to spend without the right plans in place, which is why we pulled back this year. Going forward, we'll need to understand the consumer insights that will improve our messages, and then spend behind execution that will build our key brands. Turning to the bottom line, EPS growth was further enhanced by an effective tax rate of roughly 30% in the fourth quarter, and 31% for the full year, well below the 34% base rate we would expect over time. In the end, while our EPS delivery was indeed consistent with the initial expectations we laid out in February, it was not how we expected to deliver it, and the quality of those earnings is neither sufficient nor sustainable. Before I close out our discussion of the financials, let's cover our cash results. As we highlighted in our third quarter remarks, free cash flow productivity was below our long-term targets, in part reflecting the non-cash nature of some of the earnings drivers we just covered. Absolute free cash flow was about flat to the prior year at $1.5 billion, still comfortably sufficient to cover our dividend requirements and other cash operating needs. As expected, free cash flow in 2014 did benefit from a reduction in pension cost contributions, roughly $150 million this year versus $600 million in 2013. But despite the fact that our cash conversion cycle of 26 days remains at the top of our class, we didn't repeat the significant working capital reductions in 2014 that we realized in 2013. If you'll recall, our working capital performance in 2013 benefited from abnormally low levels of inventory at the end of the year. In sum, as we look back at our performance over the year, we see both some encouraging developments, as well as a number of opportunities to leverage more disciplined execution to improve future results. Speaking of future results, as John mentioned at the outset, we hope you can appreciate that the team has not finalized the 2015 plans and outlook. At the same time, we recognize your desire to discuss Kraft's near term range prospects. And this is what we can tell you. As I think you can summarize, based on the discussion of our 2014 results and what you're seeing on the macroeconomic front, there are many moving pieces to consider. Here are some of the biggest as we see it. On the macro front, it would have to be commodities and currency. Based on the spot market in futures, Kraft's commodity basket is trending down. This brings with it some risk that net price reductions will pressure our top line. But it lessons one of the most significant cost pressures we faced in 2014. In terms of currency, while you wouldn't think it to be a big factor for Kraft given that we're primarily a North American company, this month, we had to implement significant price increases in Canada to offset higher input costs, due to exchange rates and the fact that we source a good amount of our inputs from the US. So this will not only put some near-term pressure on currency translated results, but our results in local currency as well. Further down the P&L, there are also a number of headwinds we face in 2015 compared to 2014. First and foremost is the cost favorability that we've experienced over the past two years from retirement-related benefit adjustments, primarily resulting from lower-than-expected claims experience. Now, these trends aren't likely to continue to decline, and if they don't, it will present a pretax headwind of approximately $180 million compared to 2014. At the tax line, our effective rate is likely to trend back towards our long-term base rate of about 34% versus the 31% in 2014. We've benefited these last several years from some good work to close out long-standing disputes in our favor. With those behind us, we will likely revert to closer to the base rate. We don't have a number at this point, but best to expect it will be a lot closer to our long-term run rate than the 31 % we achieved in 2014. And lastly, as John will talk about, we're completing the cost benefit flow of our supply chain and cost savings initiatives for both 2015 and beyond. That said, it would be fair to point out that the level of activity in 2014 at just over $100 million was abnormally low. So those are the big factors we're thinking about at the outset of the year. Now I'll hand it back to John to share his perspective on where we stand today, and the path forward.

Thank you, Teri. So those are our results for 2014 and some of the more financially oriented factors to consider. On the whole, I think you'd agree that 2014 for Kraft, and for that matter, the broader food industry, was both difficult and disappointing. At the same time, looking at our 2014 results helps us know where to focus as we finalize and begin to implement our plans for the future. So what do I see is the realities of Kraft at this stage? Well, at an industry level, food and beverage grew nearly 2%, as did our Kraft categories. And gas prices until recently were easing financial pressures on our consumers. Now for Kraft, we see some key positives and results that confirm there is an underlying strength in our portfolio of brands. Our aggressive pricing actions in light of commodity increases were largely accepted by customers and consumers, with a lag in pricing by competitors. Our innovation, when executed well, is valued by consumers and customers. Oscar Mayer P3, McCafé coffee and the rejuvenation of our Philadelphia soft cream cheese line have all been well received. And our customers view us as a strategic partner, one of the few companies with the breath and presence to drive and rejuvenate the center of the store. But while our disposition maybe encouraging, it's clear that our world has changed, and our consumers have changed, but our company has not changed enough, and certainly has not kept pace. So it's clear that we need to accelerate our pace of change. We need to evolve our skill sets and our portfolio priorities to capture the opportunities that these changing consumer behaviors present. So what are some of the areas of opportunity we see? Well, first, let's start with our brands. Our brands can be found in 98% of the United States and Canadian households. They are some of the most well-recognized in our markets, if not around the world. Yet Kraft Foods hasn't gained share as a company for some time. And in 2014, we did not grow share in any individual category. We merely held flat at 60% of our US businesses, and lost share in the other 40%. It's clear we are not yet tapping the full potential of our brands. While we're faring better than our center-of-store peers, our consumption is up 0.5% versus down roughly 2% for our peers, we are still losing share of total consumption. Our imperative is to reverse this trend by ensuring our brands are relevant to today's consumers, so that we can grow rather than just hold on. To do that, we must deliver better, lasting differentiation through product quality, relevant innovation and brand building. This means improving our product quality and operating consistently to avoid costly executional missteps and recalls that held back our productivity this past year. It also means building an innovation pipeline that anticipates and addresses changing consumer needs, preferences and channels. We need a more robust pipeline, products of a quality that more people want to buy, and products that meet evolving consumer preferences, while creating value for our shareholders. This also means effectively supporting our brands with communications that can attract the attention of consumers in a fragmented media landscape. And making sure that our brands are funded commensurate with the growth and returns they can generate. As you heard from Teri, our advertising levels have fallen, as effectiveness in marketing spending has deteriorated, and increased promotional spending has not resulted in volume lift or sales growth. We must better-leverage consumer insights and emerging digital tools to achieve an advantage in this area and reach the right consumers at the right time. We also must instill new return-on-marketing disciplines at every relevant level of our organization. We can't continue to spend without adequate returns. It's also clear that we need to improve our execution and lower our cost of doing business. This spans everything from trade spending efficiency and strategic pricing architecture to making sure we have the right level and the right kind of capacity to serve our consumers and customers in the most efficient manner. You've heard us talk previously about PNOC, or pricing net of commodities, which was a metric we initiated to instill more discipline on cost recovery. And while we won't move away from that as a fundamental objective, we need to be more strategic in thinking about revenue management and pricing to ensure we're doing more than responding to commodity moves, and really driving to improve top line growth and returns. And we'll talk more about that in the coming months. And on the supply chain front, our gross productivity levels still lead the industry, but the opportunity remains to translate that into greater profitability, and we need to get after that. At a plant level, the combination of declines in volume produced and freed-up capacity from Lean Six Sigma gains over the past few years means we have an opportunity to streamline in a number of areas. And lastly, given the importance of Kraft to our customers, we have the responsibility to win with all of our customers. Our focus on growth channels is paying off, with high single digit growth for the year. And there remains opportunity as we are still under-represented. But we need to do a better job driving center-of-store growth across the entire retail landscape. As I mentioned earlier, I'm not going to provide a lot of details or plans at this time. But I certainly would like to try to help you understand at least my preliminary thinking. Let me start with what I think will change and what I think will be the same at Kraft. Going forward, we will continue to operate with great support for our incredibly powerful brands, strong connections to our customers, a focus on productivity as fuel for investment in our brands and our people, and a strong cash orientation. What I expect will be different is a greater pace of change; an intense focus on execution; greater return on investment discipline around advertising, trade and capital spending, and innovation rooted in more robust fact-based consumer insights. As I mentioned earlier, we announced some leadership changes today in order to strengthen our execution. I have great confidence in George Zoghbi and Chris Kempczinski, and look forward to working with them in their new positions. They will partner with the rest of our leaders to develop plans that target innovation and brand rejuvenation built on clear priorities and efficient operations. The employments we announced today reflect my commitment and our Board's commitment to accelerate our pace of change. So what's next? As you'd expect, I'm taking these first months to immerse myself in the business and spend as much time as possible listening, learning and partnering with my team to refine and finalize our strategic plans and initiatives for the future. In many ways, the challenges facing Kraft Foods today are not unique to Kraft Foods. But it's important to say that from the start, I've known we have the best brands in the industry. These are brands with rich traditions of quality and strong equities that have held and will continue to hold an important place in people's lives. And while I'm only in this for a few weeks so far, it's become even clearer to me how much our people share that belief. They have a passion for this business and a talent for making the foods people love, and they want to win. My goal is to help transform that desire to reality. Now I may continue to make some decisions along the way, but I plan to use this time to really get under the hood, and spend time with our customers and business partners to develop a well informed comprehensive plan that will accelerate the pace of change. And put Kraft on a clear path to long-term sustainable growth. I look forward to coming back to you with additional perspective on our business and our potential. My target is to provide our plans to investors in the second quarter. Now we'd be happy to take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Chris Growe of Stifel. Your line is now open.

Hi, good evening.

Hi, Chris.

Hi. I wanted to just ask a question if I could about, I mean, one of the things that's gone well especially later in the year and I would say overall since Kraft has been Kraft Foods Group is the productivity savings, I guess I want to be clear though John there was an acceleration in the fourth. Quarter, does that indicate you are kind of back on track to realize in those kind of savings and are you looking for even more dramatic change or more savings from those activities such that you have higher one-time costs? Is that an expectation you have for the business?

Let me answer Chris the second aspect first and then turn to Teri to talk about Q4 and 2014. With respect to productivity in longer-term, in my comments I mentioned that we have – we really do see we have more opportunity there than we've captured so far. And I mentioned our plans and so forth. We do of a good bit of excess capacity which we're mindful of. So, let me stop there and say that just wait for the – let me develop these plans and come back to you at later time, but I'm confident we have more opportunity. So let's talk about 2014.

Yes. So as we said, our gross productivity was about 4% which is still a very strong level of gross productivity, but our net productivity was much lower and what we really need to be focused on is sustaining that delivery of the gross productivity, but translating it into the margin accretion that we need the lower unit cost that we need from those productivity savings. So that's what we're focused on, but the gross productivity continues to be certainly strong on a relative basis.

Okay. And if I can ask just one follow-up question on in relation to marketing and with sales growth coming in below your category growth rates it seems to correlate to the reduction in advertising that occurred, I realize you don't want to spend good money after bad. But I guess and sort to understand developing these marketing plans and putting more money behind marketing, where is the organization in terms of their development of those plans? I kind of thought at this point will be at a point where you could be investing more heavily in marketing across more brands?

Well, I will say Chris, again, and [indiscernible] maybe give you a little glimpse, my view is marketing remains paramount in it's important to Kraft, and we would like to spend more money, but we want to do it in an intelligent way. And so we've got to develop the programs that are worthy of substantial dollars and that's where we're headed.

Okay. Thank you for your time.

Thank you. Our next question comes from the line of David Palmer of RBC Capital Markets. Your line is now open.

Thanks, good evening. John I'm just wondering how you George and the team are generally thinking about how Kraft can invest to grow and then perhaps how quickly you can get back to profitably gaining share. It looks like the promotion spending which was up for some your categories in the fourth quarter and the ad spending which were down were not getting the returns that you hoped. So we're left with wondering what you can do to spend to get back to where you want to be and that in the big picture it feels like big brands are losing due to a quality perception out there? Thanks.

Thank you, David. I think that my perspective at least at this stage is that, that there is plenty of opportunity to spend intelligently and to boost the performance of our brands. What we believe, what I believe is that there's a lot we internally at Kraft can do to improve that around execution. And so that's why I really focused enormously on that in terms of my prepared comments. I think that we need to bring – we have the resources, we need to bring the right ideas and the right decision-making to bear to apply to these brands. We need to be more intelligent. We need to be faster. We need to be more fact-based. And so that's what I am focusing on with George – will be focusing on with George and the team.

Thank you.

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

Hey, good afternoon.

Hi, Brian.

John, just I guess two questions. One, I think you touched on earlier how the industry has changed and I guess from the time of inception with Kraft splitting from Mondelez. So could you just talk a little bit about – little bit more color in terms of what you think has changed and maybe do you expect it to continue to change?

Well, so Brian, you know my view of Kraft was – mostly as being a chairman and a board member, so I – but I certainly watch the industry carefully and the industry has changed. I wouldn't call it dramatic, I'd call a continuous. And so I certainly expect the industry to continue to change. What remains and that is in terms of what's happening at the retail level, what's happening with additional brands in these categories and so forth, and with respect to consumers desire to find great value and high quality. And so I would tell you that, I don't think that Kraft has done as aggressive a job in this regard as we need to do and will do going forward. And so, I don't view the changes in this marketplace to be daunting or problematic particularly for company like Kraft with its incredible trademarks. We just need to execute better.

And then I guess as a follow-up to that, as you go through this process in the context of the industry going through some change and, aside from evaluating maybe where you need to invest more, or where you can go harder on savings, are you also looking at the portfolio places where you might be needing to either, in words, hard for Kraft to win or places where you might need to add something to be – to put yourself in a better position, just if you can address how are you thinking about as part of your process, are you a evaluating the portfolio?

Yes. When I look at the portfolio Brian, I would tell you that, my primary focus is on how we spend our resources. And we have wonderful brands, but they are not all created equal. And so our intention is to resource those brands that have greater margin potential and have great margins to start with and have great upside – top line potential and where we have great ideas. And so, with respect to what we own or we don't own, we'll save that for another day. But suffice to say, we've got our eye on the world. But at the end of the day our brands are phenomenal brands as they are. And so our first and foremost focus will be on making them work.

Okay. Thanks, John.

You're welcome.

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

Good evening, everybody.

Hey, Andrew.

I guess, it's a lot to process, so excuse me if I'm not quite as clear as I want to be. At the time of the split, I think what was broadly sold to investors really was Kraft was going to have this clarity of vision around kind of being much more focused on margins, return of cash to shareholders, not chasing, let's say top line growth just for top line sake, the top line goal was a relative growth target right to food and beverage as opposed to kind of an absolute growth target. And I guess along the way it seemed a little bit like that clarity of vision or that disciplined was sort of lost and Kraft was going far more aggressively maybe than, maybe just than I expected after growth, and you know, all the brands can grow and can grow some things even when they might not seem to be that well aligned with where consumers are at. And I guess, I was wondering do you share that feeling and do you think there really is a need to get back to more of the clarity of vision i.e. either you are more focused on cash and returning that to shareholders, from a margin productivity versus really trying to be more of an organic top line growth story, because that's more what I am hearing tonight. Maybe I'm taking away from it improperly, but I somehow expected maybe to hear something the other way?

Well, let me be clear on this subject Andrew. Certainly I was around at the spin and I'm very mindful of the story that was told at that time and I think it was a good story and in many respect we're staying with the same story. But we'll have more clarity around that in more detail in the second quarter when I display our plans. But conceptually I will tell you that, we're not departing. I don't think we'll depart from the main line of that story and that is we have fabulous brands. We have great opportunities to invest in them intelligently, but you used the term earlier in your comments discipline, I would say we've done fine. This is not a broken company by any stretch. But we do need to adapt a turnaround mindset in many ways and that is going to be mostly around, as I said earlier this pace of change, this focus on execution and this return on investment. And we can do a much better job with that I'm quite confident. And so, stay tuned and we'll have more to tell – talk about that in the second quarter.

All right. And I assume we don't have an actual date yet for the meeting you are planning?

No we do not.

Okay. Thank you.

You're welcome.

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

Hi. Thanks for the question. John, when we sat down with Tony a couple months ago, he was asked by an investor whether he admired what 3G had done with Heinz and he said he did admire their dedication to eliminating redundancies, but that he didn't think it would be appropriate for Kraft to cut cost to such a degree because it would impair growth too much. So not necessarily in terms of 3G or Heinz, but really just in terms of Kraft, is this a statement or a belief you agree with that cutting too deep in the bone would be dangerous and if not necessarily something you would support?

Will, certainly I mean, cutting into the bone doesn't really make sense at the end of the day for consumer products company. I won't opine on what Heinz has done or not done. But with respect to Kraft, I will tell you that as I see it today there remains plenty of opportunity to become more – to take cost out without jeopardizing in any way our top line opportunity. So that's what's exciting to me.

Can I ask a quick follow up? Just to follow up on Andrew Lazar's question a little bit about Kraft was 2.5 years ago and what it is today. Are you still as committed to the dividend that it stands or you comfortable being North America only? I know you maybe can't answer some of those, but any insight you can provide would be appreciated.

You are right in your premise. I'm going to hold off on both those questions for the time being.

Okay. Fair enough.

Thank you. Our next question comes from the line of Jonathan Feeney of Athlos Research. Your line is now open.

Hi. Thanks very much. John, you mentioned a couple of times in your remarks about you need to be, get better I think is it return on your spending and it strikes me that, I'm just curious how you baseline that because its, I mean, one of the reasons I'd argue, I mean, you have these commodity cost declines, albeit less a better commodities situation at least sequentially than it's been, you've made some investments at the price level and those have kind of paid off and maybe here some other reason why you are outperforming the rest of the category. Conceptually, what do you look at and say well, we're not getting much of a return on that because I don't know we could be seeing better profit, we could be pocketing more of that gross productivity could be coming to us. I mean, what would you make of the argument that, that’s just the new reality and you need to – that’s what Q4 had to be as far as in this falling commodity cost environment, because that's what competitors are doing and that's what other – that’s where food volumes are at broadly?

Well, I think the answer Jonathan is that you could look at this from a macro or micro level. I think the root of your question is from the more macro perspective and the good news is we have tools and data to look at this from the micro perspective. When we look at trade spending, we the look at advertising spending and the like. And so when I talk about the need for improved discipline and improved focus on returns it's using that information both to look at specific promotions and the like and then to learn from those and to apply them in the next go around. We're good at that, but we need and can be much better.

Okay. And if I could just ask a question to Teri. These reevaluation's of these postretirement benefit plans that triggered some significant charges this quarter, I mean, are these the auditors that ask you to do that or is this sort of optional reevaluation based on some of the changes you've made?

So, just to be clear, these were actually benefits that were realized in the quarter and on the year. So it is a function of the annual actuarial evaluation that's performed. We did make some planned design changes a few years ago and we've been benefiting from those as they've rolled to the plan and since we're kind of at the tail of that, that's why we don't expect these to be recurring in the future. But it's all very – it's not something that was unexpected. It was part of why we made the design changes, but we wanted to be very clear that the benefits have rolled through and to what degree it creates a headwind for the future.

Okay. I get it. And fourth quarter was just one piece of that?

Yes, and most of it, because the valuations occur once per year typically unless there are other events that's why they come in in the quarter.

Right I understand. Okay. Thank you very much Teri.

Thank you. Our next question comes from the line of Ken Zaslow of BMO Capital Markets. Your line is now open.

Good evening, everyone.

Hello, Ken.

So my question is, what new tools are analytics because you increased confidence on your ability to be able to track the efficiency that the previous management team may not have been able to do. And I guess, in terms of the follow-up there is, is there a point in your valuation that maybe there's a view that, maybe certain brands may be separated or run individually or sold to other companies? Like, how do you think about this process? It seems like you're undertaking a big process and I don't know what new tools and analytics you have?

Well, I'd say Ken, the answer to the question is that the tools are there. I mean, we have tools to understand and Teri I'm happy to turn to Teri to explain some of them. We have tools to understand some of the returns on these. To me this isn’t so much a tool question, as it is a focus disciplined and structural question. And so what we have today was our first foray into making organizational changes and George will take some time to figure out his organization. And the idea is to be more decisive, more fact-based and the like. So – and that's faster in terms of our decision. So, maybe Teri do you want to mention some of the tools?

Yes. I don't know if you really wanted detailed review of our analytical tools. We have the ability for both trade and advertising to very reasonably precisely see the amount of lift that came from the spend and we can use that to then adapt and adjust future program. So the tools are there as John said. We just need to use them in a more disciplined fashion.

And is there a point in your valuation where you would evaluate the potential of cheating the composition of your company where maybe certain brands may be best like obviously Hershey, right, Hershey is all about one brand or more of a unilateral type of company, is there a point that you want to be more focused or do you think that Brett [ph] is the key to success?

I think that, let me point on that a little bit Ken just for the moment, but as a matter, go back to what I said a moment ago. I do not believe all of our brands are the same. I think that the different brands have different roles in our portfolio, therefore we will have different resources applied against them and we will have different expectations for them. And so that's really the focus of where we are. We are mindful of what's happening in the outside world and what may be opportunities or us and we'll watch this very carefully, but our primary focus is on applying the right resources to these brands.

Great. I appreciate it. Thank you.

Okay.

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

Good evening, everyone.

Hello, Alexia.

Hi, Alexia.

Hi, there. Okay. So I am trying to push a little bit further on that question, so what I am hearing here is higher quality ingredients are effective and more disciplined resource allocation, maybe organizational streamlining to drive profits decision-making, would you go so far to say that there may be certain brands in the portfolio where you really just want to manage the cash and maybe pullback on advertising and promotion simply ineffective for those brands. And is there higher-margin brands, the gross is coming from the chilled meats and cheeses and protein kind of stuff that's working really well in this environment. What does that mean for your margin mix? Thank you very much.

So Alexia, I'll wait mostly on the answer to your question until we get together in the second quarter. But I would say in addition to the list that you articulated, I want to make sure we don't lose the productivity aspect of this. There is – it's very important that we become even leaner than we are today and we have an opportunity to do so. And so that will be an enormous focus and very important and powerful element of our plan going forward. With respect to our brands, we will certainly – categories have different margins associated with them. We're very mindful of that and want to optimize this from a shareholder perspective over time and we'll talk more about that in the second quarter.

Great. Thank you very much. I'll pass it on.

Thank you. Our next question comes from the line of Matthew Grainger of Morgan Stanley. Your line is now open.

Hi, thanks. John I just want to come back to your comment earlier on fact base consumer insights being sort of principal driver of innovation. I guess Kraft also had some high profile hits and some misses. And I'm not asking you to pick on anyone product in particular, but part of the organizational goal was to focus on making bets and being a leader rather than a follower. So I guess in that context can you just speak anecdotally to how you'd like that innovation process to change what the risk is of becoming too conservative on the innovation side as you look to become more fact-based and instill that discipline?

Well, I'd point Matthew to a couple things and answer your question. The first is, I'm delighted that Chris Kempczinski is taking this job. He is a exceptionally talented strategist and thinker, as well as an executor. So, he – he has great marketing background and will help us along these lines of linking consumer insights to innovation which is not been necessarily linked as well as they might have been in the past and Kraft in my view. The second thing is to say that, that as I've dug into this in the last couple of weeks, I've found that our consumer insights have – frankly our resources against that particular area have not been a strong as I thought they would be and they have, they've not sort of lessened over time. And so, I think you'd expect that we'll be getting a better consumer insights as the base and the foundation for a lot of these decisions going forward.

Okay, thanks. And if I could just ask a brief Monday [ph] and follow-up, I guess on the innovation side just to go to a sort of more micro level. Could you give us just a brief update on where McCafe stands sort of in the launch process early insights retailer feedback et cetera?

So Chris, why don’t you take that?

Sure. Absolutely. So McCafe it launched in December in the US. It added a couple of points of growth to our beverage business in the fourth quarter. We're quite excited about the national rollout across the US and keep in mind we also – it's been in the market in Canada since late September. In Canada we've gotten good distribution but unfortunately its a little bit early to have any repeat numbers to pass along, but we'll certainly update you as we move forward.

Okay, great. Thank you, both.

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

Hey, good evening folks.

Good evening, Jason.

Sorry it seems there is few things going on tonight, so I've been a little bit distracted throughout the call. But there was something you said a dividend that has a couple of people spoke to; was there a suggestion that you may not maintain your dividend at this current level?

I said no, let me be clear, I said about the dividend in that regards, so no one should read anything into, anything upset about that absolutely not.

So is it dividend growth that’s unclear or we can feel safe that the dividend level is correct?

Really, beyond those comments, the answer is that I'm a cash driven guy and a very mindful of the desire and need to supply ample dividends to our shareholders and we'll talk more about that when we get together.

Yes, I think Jason, I think you have to appreciate that on a number of fronts as we're going through the process here, we certainly don't want to front run any of the good work that’s – that its going to happen by the team. Obviously we've been out there with a strong dividend and that's been there since the outset. But I don't think we really want to start giving guidance on growth rates et cetera.

Okay. Well, let's pick on use of cash than from a different angle. As you probably seen there's been some pressure forwards linking you to some potential M&A interest in various assets throughout Mexico, some of them very sizable. In regards to Bryan Spillane's question on portfolio additions, John I think you said you have the eye on the world. And then I see you elevated ahead of Canada, with the president of international which is really just Canada right now and you cite strategy and M&A as key responsibilities. So I guess were all sort of conspiracy theorists sometimes and I look at that and I say is that right to read into this and think that M&A and international expansion should be something investors think about when considering your strategic direction going forward?

Well, let me be clear. First of all, on Chris Kempczinski title and his role, certainly I do like the linkage of consumer insights and strategy and innovation and he's the perfect guy to do this. And with respect to international, no we have a Canadian business and we have and export business. And the export business is actually is doing quite well and it go back to the Form-10's and you will see we have brands returning to us from Mondelez over time. And so, its suffice it to say that I have an interest. And now, that export business is roughly by 2% of our sales, so it's a huge at this point by any stretch, but it's nicely profitable and I could see that growing quite well. So, that's what you should read into to his title. I'm not going to speculate or comment on what you read or don't read it with respect to particular deals, my focus is on the base business, let's just put it that way.

Okay, thank you.

Thank you. Our next question comes from the line of Priya Ohri-Gupta of Barclay's. Your line is now open.

Thank you so much for taking the question. I mean, I attempt to ask this, but can appreciate it if you can provide too much clarity there. So hoping that you can provide some initial thoughts about how you are thinking about your financial policy with regards to your balance sheet usage, if you think about supporting some of these initiatives. Do you feel that you have the appropriate flexibility within your current rating structure or is that something that might need to be revisited as you go about these plans? Thank you.

So, as John indicated we'll certainly have more to say in the future, but at this point as we look at our debt rating we do see the benefit of investment grade, so that remains an important consideration for us. We have the upcoming debt maturity this summer. We have quite a bit of cash on hand. We have an untapped commercial paper program. We have share repurchase under way. We purchased $740 million there. So you can see as John said we're very mindful of the cash this company can generate and putting it to the best use for shareholders.

That's very helpful. Thank you.

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

Great, thank you. And good evening, everyone.

Hello, David.

I had a couple little questions and it will – it seems to get somewhere, but just they are fast. First one was Teri I think you said there was an incentive comp reduction on the year, can you quantify that for us?

We don't have a specific amount for you, but as you can imagine from the results our compensation is a pay for performance basis. And so the actual bonuses were down versus target.

Okay. And then second question to you is on the restructuring spending. So the initial target for the year was 150, it comes in at 107 so off the pace by $43 million. On the third quarter you had kind of given us a little hint that might happen, talking down the range to 125, what I'm really concerned about there was just that, the failure to spend the money does it fundamentally impact the ability to generate productivity savings in 2015 because you don't get the programs going in 2014? Is the logical?

You know, I think what we would say is that – so debt restructuring spending is a function of how we generate some of the productivity. So, the step down from the 125 is where we actually started, with the growing rate expectation for restructuring isn’t large enough to dramatically impact the gross productivity that we would expect on the year. But of course, to accelerate the productivity we'd have to think about whether restructuring efforts might be necessary and that would be part of the planning being done now.

Thanks for that. Final thing for me just and just to kind of – I think just to pull some pieces together and make sure I heard you right, so benefits you are saying could be as much as $180 million headwind to the company going forward. I think that's like $0.20 a share if that's right. The marketing budget was reduced this year and if it were to go up every one percentage point of sales would be another $0.20 a share headwind. The tax rate is a 300 basis point headwind and that's like $0.09 a share for next year. You called out the foreign exchange numbers that you didn't quantify, but gosh we see at least $0.05 on translation maybe to 2x that on the transactional side. Some quick math here well you guys been laying this out on the call would come up to like a $0.65 headwind going into your 2015 planning period. John simple question here is there any way you actually grow earnings in 2015?

First of all David, as we said we're not in a position to provide any guidance today. I think as we get closer to the second quarter and we can talk about the fuller plan, we'll give you more detail. I think you named a good number of the negative headwinds. Obviously you have the unrealized hedging gain – unrealized hedging loss that came into play this year, can't really forecast that. And then as Teri talked about we had some of the recall costs and missed execution if that doesn't repeat that will be a good degree of favorability. So don't really want to start taking it apart and adding it up or adding it down for you, but we'll provide more details in due course.

I appreciate it.

You mentioned the AMP spending and obviously that spending will only occur to the extent it generates return. So I don't think of that as a headwind per se.

Okay. Thank you so much. I'll pass it along.

Thank you. Our next question comes from the line of Eric Katzman of Deutsche Bank. Your line is now open.

Hi, good evening. Teri best of luck

Thank you.

I guess a couple of shorter-term questions than long-term. Did you actually mentioned Teri how much fourth quarter ad spending was down? Or could you as a percentage of sales?

No, we didn't present that. I don't have that with me. Chris can follow up with you on the details of that.

Okay. And then it sounded like you were talking about having to take some significant price increases for Canada. Your Canada business in the fourth quarter was quite strong. Was that like a buy end so was that a bit of a, kind of concern in terms of the top line out of Canada ex-currency in 2015?

Yes. Great question, very fair. In fact it really wasn't. The activity we saw in the fourth quarter in Canada was largely a great deal of customer activity that really drove legitimate consumption in the market, so there was just higher promotional activity supported by the customer. The pricing impacts are really going to be at current year impact.

Okay, thanks. And then…

So, just one thing on that Eric, as you think about it, as you put in the pricing in Canada you'll probably see the volume impact of that significant pricing come into play in the first quarter.

Okay, thanks for that. And then back to the long-term John, I guess kind of going back to Andrew Lazar's question you were there addressed us Boston, I think at the coming out party and you kind of came up with I would say fairly unique approach to guidance long-term, kind of targets again the relative top line. Is there any like that I guess at the time when you put that together as Chairman of the Board you endorse this, you felt that those targets in that approach was reasonable, and effective in the market. It sounds like your boards change here with Tony as leader was that, they weren’t – he was in executing. So are we to take from that that you are still kind of comfortable with those long-term targets and that approach and it's really more a question of execution to deliver on the targets that you felt was enough to create competitive shareholder value?

Well Eric, I appreciate the question and I remember that session in Boston very well and I do think the world has changed. We certainly didn't expect the kind of top line compression from an industry standpoint at that stage, subsequent three years but it is what it is. But I'm not going to opined today on these long-term targets and the approach. Its suffice it to say though what remains is these brands are incredibly powerful they deserve innovation and support. We continue to have very substantial productivity opportunities and I remain a very cash oriented person executive with the intent of providing intelligent and ample returns to our investors. So stay tuned and we'll give you that answer in the second quarter.

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

Operator, if you could take one more question please.

Of course. Our next comes from the line of Todd Duvick of Wells Fargo. Your line is now open.

Thanks for the question. A quick follow up on the financial policy that pre asked about. Can you tell me if the financial policy comes from the Board of Directors or if its management and if it is from the Board of Directors is that something that is set by the Board of Directors or the Board is more complicit with?

Well, I can assure you that we have had ample discussions with the Board and they have endorsed our strategies, but from a – in all respects certainly from a cash orientation and cash free standpoint, yes.

Okay. So as you look at these plans that you are planning to unveil in the second quarter we can assume that the financial policy is probably one of the items that is not on the table for change?

Well, I'm not going to say that. All I am saying is that, all of our plans are reviewed and approved by the Board and you'll have to stay tuned and see what we come forward with in the second quarter. Having said that, I don’t – I personally don't at this stage do not see substantial change in our financial policies. I mean, I think they are very sound and appropriate for business of this type.

Okay. Thank you very much.

Thank you. And I'm showing no further questions at this time. I'd like to hand the call back over to Chris Jakubik for any closing remarks.

Thanks very much and thanks for joining us today. For any of the analyst who have follow-up questions I will be available after the call and for anyone in the media who has further questions call in Tony Ryan and Basil Maglaris, will be available to take your calls as well. So, thank you and have a good evening.

Ladies and gentlemen, thank you for participating in today's conference. That does complete today's program. You may now disconnect. Have a great day everyone.