Kraft Heinz Company (KHC) — Q4 2018 Earnings Call Transcript

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. 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 advisers 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.

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 the deployment of new capabilities and a strong pipeline of innovation and whitespace initiatives. And while we expected this to translate into near-term margin pressure in the United States and Rest of the World segments, we anticipated 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 expect. From a commercial perspective, we firmly restarted organic growth. In the 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 the 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 whitespace 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 startup of our new sauces plant in Brazil and our Cerebos acquisition in Australia and New Zealand. Our Foodservice business, on a global basis, is approaching $4 billion in sales and gaining momentum from whitespace initiatives in all markets. And this leads to the second aspect of our scorecard, the significant progress we made developing and deploying strategically advanced capabilities. We had 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 the United States alone, and a 1/10 market share index versus traditional retail. In this setup, springboard and Evolv Ventures are platforms to accelerate our innovation to consumers and find new ways to disrupt ourselves. So when you think about the sustainability of our growth, breakthrough innovation, strong in-store activity, distribution gain, and whitespace expansion are all coming together. In fact, our consumption turnaround in the United States has been driven by brand-building initiatives across the portfolio, not just a few categories. We are sustaining momentum in brands where we have been successful like Heinz, Philadelphia, Oscar Mayer bacon, Classico, Kraft, and our frozen and snack categories at large, all growing mid-single digits in 2018. Turning around other key brands like Kraft Mac & Cheese and Oscar Mayer hotdogs to name one 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 for growth, like P3, which is now a $120 million platform; Devour, a $7 million brand in less than 3 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 operates 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 throughput rates and all-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 Zero-Based Budgeting costs. In fact, Zero-Based Budgeting delivered savings across all fixed-cost packages outside of our commercial investments and helped to fund our initiative. 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 were overly optimistic about 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 adjusting our planning process, procedures, and organizational structure. In the end, we see three takeaways from 2018: one, we successfully drove 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.

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, whitespace 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 pricing 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 price gaps to private label. The remaining 1 point was a combination of opportunistic price investments and 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.

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 several fronts: continued fragmentation of consumer demand, a general lack of affordability to reinvest in 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 maintaining 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 category advantage; and importantly, securing the right talent in areas critical to growth. 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, strengthen our balance sheet as we continue to position Kraft Heinz for industry consolidation. I will cover our commercial growth initiatives, 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 strongest 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 to reignite consumption in peanut butter as well as sauces and condiments. In Europe and Rest of the World markets, whitespace initiatives will focus on driving incremental sauces consumption and opening new geographies. And in Foodservice, all regions have significant opportunities to gain distribution and whitespace. We will support these initiatives with fully funded brand programs, taking advantage of our superior media efficiency or cost per impression and increasing our media effectiveness, our 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 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.

I'll start with our financial expectations going forward on Slide 6. Regarding the 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, whitespace 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. 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 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 a 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 backward 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, Indian 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 our deleveraging towards our ongoing 3x 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, but 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.

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 clarity on necessary product renovation and supply chain integration, taking out costs that drop no benefit to our consumers, establishing retool and routines, and testing and learning new tools to adapt to a rapidly changing environment. Beginning in 2018 and into 2019, we'll focus on leveraging our industry-leading margins to establish key growth pillars through innovation and whitespace expansion, accelerate the global deployment of advantaged 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, as the full leverage of our advantaged brands, cost structure, and investments flows 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 the industry to modernize and consolidate is more evident than it was 5 or even 3 years ago. Now we will be happy to take your questions.

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 mean 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.

Andrew, it's Bernardo, let me take this part of the question. I think we're seeing a large shift in the industry. And we are going through commercially a good momentum, right, with acceleration in consumption, in share gains, in volumes, right? Also, true 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 reward more things than we're 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 the good framework for the things we're looking at today, and that's exactly the point you are right now.

I have two questions related to the progress from the end of 2018 to returning to growth in 2020. First, how much additional investment is included in your 2019 plan? Specifically, what will you be spending beyond what you increased in 2018? Second, I’ve noticed that visibility in your business has not been strong, particularly in the second half of the year. It would be helpful if you could provide more insight on how you plan to achieve growth in 2020.

Thank you for the question. This is David. Let me take a moment to outline our outlook for 2019 and clarify our year-over-year EBITDA expectations. Overall, we anticipate that consumption growth will align with the increased spending associated with our initiatives. The primary factors contributing to the expected decline in EBITDA include net inflation that we expect to encounter again in 2019, the divestitures previously mentioned, foreign exchange effects, and to a lesser degree, variable compensation. Specifically, if we consider the midpoint of our forecast, we expect a decline of roughly $700 million year-over-year. On the commercial front, we expect to remain neutral on the bottom line, as the positive impacts from consumption gains should align with the boosted investments aimed at accelerating our innovation and channel development. Approximately half of the total EBITDA decline, estimated at $300 million to $400 million, is attributed to continued inflation, net of cost savings, in the low to mid-single-digit range, consistent with our experience in 2018. This will be influenced by another year of mid-single-digit inflation growth, excluding key commodities, combined with our recent actions to adjust our savings plan. Furthermore, we anticipate that foreign exchange headwinds and announced divestitures will contribute approximately $250 million in negative impact on adjusted EBITDA compared to 2018, along with an additional impact from variable compensation, accounting for around $80 million year-over-year. However, we are confident that we will maintain the highest margin in the industry, which gives us a strong foundation to build upon. Looking ahead to 2020, we believe we are well positioned for solid organic growth worldwide. We're witnessing genuine growth driven by consumption in the U.S. and globally, which we cultivated in the latter half of 2018. In 2019, we expect to enhance our consumption rates supported by our largest-ever innovation pipeline and increased backing for our core business. Additionally, our international operations are expanding rapidly, particularly in emerging markets, presenting opportunities for global growth acceleration. In 2019, we are investing in support of an even larger innovation pipeline while also advancing our channel development, especially in e-commerce. Our strategic investments in commercial support, capabilities, and marketing will be established this year. We believe that the extraordinary inflation we observed in 2018 and are seeing in 2019, particularly from factors like tariffs and transportation, will stabilize over time, as we are already starting to notice in current spot markets. We are confident that we will be positioned to manage these costs effectively through pricing strategies and our anticipated savings trajectory in 2020. Lastly, regarding EPS, our non-operating costs should stabilize, allowing us to capitalize on organic growth for both EBITDA and EPS advancements moving into 2020.

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

I have one question. What key changes will be implemented to improve the planning and execution of savings to make them more reliable and effective? Will there be management changes, modifications to the methodology, or adjustments in oversight? Can you provide some insights on this?

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 to 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 decline we saw in Q3, okay? And that assumption was based off of the fact that we expect the 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 had 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 didn't have the 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.

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 the United States. We did take several actions to not allow this to happen again, right? Actions in the planning process, in organization structure, and position ourselves to make sure our savings curve really matches the timing and effectiveness for the year. So even though we understand the reasons for the miss, and we saw in Q4, higher cost and more volumes coming through the pipe. And we could not offset the timing of our savings curve, we did take actions, process, planning, and structure to not repeat that again.

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?

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 address U.S. pricing. 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. To put into context, that compares to our overall procurement spend of over $11 billion, which excludes key commodities spend. So this misstatement was not material to our current or prior year financial statements. And finally, we did implement several improvements to 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.

Thank you, Dave. I will start by addressing the private label question and then move on to the pricing for 2019. We have observed that private label products are expanding but at a more measured pace, gaining about 0.2 points of market share in Q4. This marks a significant decline compared to previous quarters. The most pressure is coming from areas where low commodity prices, excess capacity, and competitive retail conditions overlap, particularly in certain subsegments of our cheese portfolio. In the natural cheese category, retailers are employing price matching strategies to attract customers, which aligns with our pricing investments made in the second half to reduce price differences. Following that, we noticed both branded and private label shares began to stabilize. We continuously assess the market's value proposition and remain committed to innovating and differentiating our brands and products. Regarding pricing in 2019, we have already communicated our pricing strategy. We conducted an analysis to identify the appropriate segments of our portfolio to target for pricing, focusing on balancing sales and costs while ensuring the best value proposition to encourage category growth. We anticipate that these pricing adjustments, effective in Q1, will lead to positive overall pricing trends throughout 2019.

Bernardo, one of the core arguments regarding the 3G philosophy has been that the intense focus on cost savings may weaken brand equity over time. While you've seen an improvement in revenue recently, it could be said that it required a $300 million investment to achieve that. More importantly, there was a $15 billion write-down on your largest brands, Kraft and Oscar Mayer, which suggests their brand value has diminished. As investors consider the ongoing financial challenges at Kraft, they may also question whether the cost-cutting strategy has gone too far and harmed the brands. Is there any evidence emerging that supports this concern? I would like to hear your perspective on this matter.

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

Thanks, Bernardo. The impairment write-down was mainly due to revised margin expectations affecting three of our businesses: the Kraft natural cheese business, the Oscar Mayer cold cuts business, where we experienced issues earlier this year, and our Canada retail business. The main reason for the reduced expectations was our performance in the second half of the year, which was largely impacted by supply chain challenges related to costs. Additionally, since the merger, we've faced notable pressure on valuations due to a higher discount rate, which has slightly offset the overall impact. That's the context surrounding the impairment. I'll turn it over to Bernardo to address the rest of your question.

Ken, we firmly believe that our model is effective and holds significant potential for the future. First, we continue to be rated with leading industry margins, and we are experiencing growth comparable to top-tier companies in a similar portfolio, which is crucial to recognize. Second, we acknowledge the operational and supply chain challenges we've faced in the United States. However, the momentum in commercial consumption growth is accelerating as expected. With the investments we've made since 2018, we now have a strong foundation for growth driven by consumption, volumes, and market share, while still maintaining high industry margins. Going into 2020, as David noted, we believe this foundation will position us well for growth in both revenue and profits. Additionally, our active work on the portfolio, combined with the dividend reduction, gives us more flexibility in our balance sheet to deleverage faster and prepare for necessary future consolidation, which we believe is imminent with this model. We remain confident in our strategy, even as we acknowledge the miss in the fourth quarter, as highlighted by David.

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

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.

I have a few questions that I think will be brief. Can you provide an estimate of the size of the assets you plan to sell that haven't been disclosed yet? Would that be around 5% of your revenue base? Also, regarding the savings programs, I recall you mentioned, David, that in your forecast, the implementation of these savings programs has been delayed. I'm a bit unclear about why this is happening and why you can't achieve the internal savings while also generating revenue. Additionally, if you didn't meet the savings targets expected in the fourth quarter, shouldn't those savings be reflected in the first or second quarter of '19? They shouldn't just vanish, but it seems like they're missing from the guidance, and I may not fully understand the situation.

David, it's Bernardo. Let me drive the first part of the question. We're not discussing size or our soul. What you're saying is that we will work our portfolio to strengthen our balance sheet as we're doing the dividend to have more flexibility for future consolidation as we see it. As David said, our objective is to deleverage, right, to 3x in the middle term at a faster pace than we're doing today. With that, and the knowledge you have of the portfolio today, with our competitive advantage by brands and category, allows us to be in a very good position to understand the magnitude of 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, 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 this savings miss was really a combination of two things: under-delivery 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 have 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 and 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.

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 or 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 some of us maybe once envisioned.

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, okay? These are costs that are different and independent from the costs that we took out in the integration, right? 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 drive commercial growth, okay? 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 amounts of FX headwinds that also affected our sales and EBITDA trajectory. And then, finally, the inflation and the inability to execute to the saving curves as we talked about that. With that, I'll hand it over to Bernardo to address it as well.

Jason, I want to clarify that the investments we are making are not linked to the savings we achieved from the merger. Those savings are still in effect, and we expect to provide further guidance as the year progresses. In fact, I believe we are better equipped with enhanced capabilities and are more prepared for industry consolidation and improved performance in the future compared to two, three, or five years ago. In this regard, I think we have more resources and a stronger balance sheet profile.

I wanted to clarify that you mentioned being measured on organic growth, which hasn't materialized as many expected. However, there seems to be some leniency regarding that since you are known for making deals, but we haven't seen any deals completed yet. Can you explain why there should be enthusiasm about future prospects? Is it a deal you believe you can finalize, is it a focus on organic growth, or is it a combination of both?

Lavery, it's Bernardo again. Look, I think if you see the second half performance of our commercial initiatives and returns on our investment, it's going to result in a very positive scenario in that sense, right? We're having volume, consumption, and market share gains in the vast majority of our categories. Even categories that have been declining for quite some time are seeing 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 highlighted is a base we can grow sales and EBITDA going forward. With the actions we're taking on dividend and the work we're doing in the portfolio, it remains 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.

Bernardo, I have a question regarding the supply chain. Your order fill rates were very poor, and in the past, you faced challenges with frozen potatoes and sliced lunchmeat. This year, we’re again encountering supply chain issues. Although there are comments about cost savings within the supply chain, I feel uneasy about this because it seems to suggest a need for increased efficiency. It appears that a larger investment in the supply chain might be necessary, possibly involving an expansion of the operational footprint, enhanced flexibility, and improved capabilities. Will there be a significant financial investment in personnel and infrastructure as part of this restructuring?

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 at the same level as 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 providers in the industry. Our on-time food tends to rise. 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 day that you're asking, it's actually the opposite. We did believe there were more saved timing on the savings curve, and that for that, we're taking full responsibility, 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 the United States today. With that said, let me pass over to Paulo to detail the supply chain cost here in the United States.

Rob, this is Paulo. I want to emphasize what Bernardo mentioned about 2018 being a successful year for our supply chain in terms of service. When considering the four key aspects of the supply chain—quality, safety, service, and cost—we can confidently say that we excelled in three of them: quality, safety, and excellent service to accommodate the strong volume we experienced. However, in terms of cost, we did not achieve the additional savings we had anticipated throughout the year, and we are also facing more inflation than we expected by the year's end.

I have two questions for you. First, I want to clarify the $250 million of EBITDA pressure from divestitures. Does this figure include what has already occurred or what might happen in the future? Secondly, regarding your return on investment noted in the release as strong in the fourth quarter and the year, while measuring that based on market share or top-line growth seems fair, the extent of profit required to achieve that growth is substantial and likely impacts the overall return on investment calculation. I would like to understand better how you define and measure your return on investment and how we should consider that moving forward, especially given the significant costs this quarter.

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, okay? 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 to date, the two deals that Bernardo mentioned earlier.

I will discuss the pricing and the return on our pricing investment. If you look at the second half as a whole, we invested 1% in price, excluding the impact of commodities, and an additional 0.4% specifically to close the gaps in the natural cheese segment. With our volume growing almost 4%, it's clear that while this was not the only factor in the volume improvement, we achieved a strong return on this investment. It's also worth mentioning that our volume growth was supported by a much better service level, strong innovation launches, renovations, and additional brand and channel support, along with a high level of in-store activity and promotions.

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 until tomorrow. And for those in the media with follow-ups, Michael Mullen will be available to take your calls. Thanks very much, and have a great evening.

Thank you all.