Kraft Foods Group, Inc.'s (KRFT) CEO William Anthony Vernon on Q1 2014 Earnings - Call Transcript

Kraft Foods Group, Inc. (KRFT) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014


PARTICIPANTS

Corporate Participants

Christopher M. Jakubik - Vice President-Investor Relations, Kraft Foods Group, Inc.

William Anthony Vernon - Chief Executive Officer & Director, Kraft Foods Group, Inc.

Teri L. List-Stoll - Chief Financial Officer & Executive Vice President, Kraft Foods Group, Inc.

Other Participants

Matthew C. Grainger - Analyst, Morgan Stanley & Co. LLC

Bryan D. Spillane - Analyst, Bank of America/Merrill Lynch

Christopher R. Growe - Analyst, Stifel, Nicolaus & Co., Inc.

Jason M. English - Analyst, Goldman Sachs & Co.

John J. Baumgartner - Analyst, Wells Fargo Securities LLC

Alexia J. Howard - Analyst, Sanford C. Bernstein & Co. LLC

Andrew Lazar - Analyst, Barclays Capital, Inc.

Kenneth B. Goldman - Analyst, JPMorgan Securities LLC

Robert B. Moskow - Analyst, Credit Suisse Securities (USA) LLC (Broker)

David S. Palmer - Analyst, RBC Capital Markets LLC

Eric R. Katzman - Analyst, Deutsche Bank Securities, Inc.

Diane R. Geissler - Analyst, CLSA Americas LLC

Kenneth B. Zaslow - Analyst, BMO Capital Markets (United States)

Cornell R. Burnette - Analyst, Citigroup Global Markets Inc. (Broker)

MANAGEMENT DISCUSSION SECTION

Operator: Good day, ladies and gentlemen, and welcome to the Kraft Foods Group First Quarter Results 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.

I would now like to turn the call over to your host, Chris Jakubik, Head of Investor Relations. Please go ahead.

Christopher M. Jakubik, Vice President-Investor Relations

Good afternoon, and thanks for joining our business update for the first quarter of 2014. I'd like to start by apologizing for the delay here. We used to only get about 100 or 150 people dialing in to this. It looks like we got about more or like 300, 400 people dialing in. So we figured it was either because Teri is arrived or because we've made everybody a shareholder in the company. Either way, we're happy with that.

So, with me today are Tony Vernon, our CEO; and Teri List-Stoll, our CFO.

During our remarks, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties. 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 Tony and Teri to discuss our first quarter results, as well as the current state of our business.

William Anthony Vernon, Chief Executive Officer & Director

Thanks, Chris, and thanks to everyone for joining us to discuss our results. For those of you on Twitter, a 140 character version of our business update can be found in the three bullets on slide three of today's presentation. First, as expected, and as we flagged last quarter, 2014 got off to a soft start for both Kraft and our industry. Second, our first quarter financial results were largely driven by the timing of certain factors, including a shift of shipments into Q2 for the Easter holiday and costs related to our brand building investments. Frankly, there is quite a bit of noise in the analysis of our financial performance versus the prior year, noise that Teri will cover in a minute.

And third, but most importantly, we continue to make headway in executing against our playbook, the same playbook we laid out at CAGNY in February. As we said before, we are managing our business for the long-term and not quarter-by-quarter. We expect that you'll see the benefits of our investments and our efforts as the year unfolds and our comparisons get cleaner.

Now, that's the short form of our quarter, but no doubt you're interested in a little more color on each aspect of what we've been up to. So, let me first talk about some of the marketplace and timing dynamics that affected sales and consumption in the first quarter of 2014 and what we can expect to see in the coming months.

As we said on the fourth quarter call, we expected to see some of the same headwinds that impacted the North American food and beverage market in 2013 continue as we enter 2014. And what we saw in quarter one was indeed consistent with our expectations; industry consumption growth, lagged population growth both of the U.S and Canada and we would expect unit growth to remain below population growth in the near-term. The causes and the state of the consumer are much the same as we've talked about of late.

The impact of reductions to the SNAP program continue to be significant for the many American families receiving those benefits, and the employment ratio and under employment continued to lag the improvement in the headline unemployment rate. More recently, we've even seen evidence of cost pressures on lower and middle income households due to higher heating bills and even middle and upper middle income consumers incrementally impacted by larger 2013 tax bills, and this was most visible as we got into March and April. But we would expect these more recent factors to fade as we move forward into the remainder of the year.

Our retail customers also continued to cope with the effects of decreased traffic. If you recall from our fourth quarter commentary, we believed our retail customers ended the year with upwards of one more day of inventory than they normally carry, because of a weaker holiday sell through. During the first quarter of this year, we believe retail customer inventories returned to more normal levels versus the higher than normal yearend levels. And this adversely affected our shipments in quarter one.

And finally, as we also mentioned on our fourth quarter call, the Easter shift negatively impacted Kraft consumption, our sales growth, and our market share performance in the first quarter. Teri will cover the magnitude of the sales impact in a minute, but on market share, as you expect, leading brands tend to over index during holiday drive periods in general, and comparing against that period that included Easter, last year negatively impacted our recent market share data.

For instance, during the first three months of this year, slightly more than half of our U.S. businesses held or grew share versus what we said was roughly two-thirds of our businesses during the 52 weeks of 2013. In part, this was due to Philly cream cheese, one of our big Easter holiday categories falling off the list. That said, we would expect to see improvement in April scanner data as Easter sales come into play.

So from a top line and share performance perspective, our first half results should be a much better indicator of our growth and our progress versus the industry. The same can be set for the broader set of our quarter one financial results, which is a great place to hand it off to Teri.

Teri L. List-Stoll, Chief Financial Officer & Executive Vice President

Thanks, Tony, and good afternoon, everyone. Certainly, the Easter shift held back organic revenue growth and consequently impacted total profit. In February, we talked about a shift of as much as $150 million of high margin sales into the second quarter of 2014 versus what it occurred in the first quarter of last year, and ended up being somewhat less than what we had anticipated.

The problem we have with isolating just Easter however is the coincident impact of the retail trade inventory reductions from year-end levels that Tony mentioned. It's not really a precise sign. So what I would say is, our consumption analysis included both the Easter shift and the normalization of trade inventories, which was approximately three percentage points, meaning Easter was a little less than that.

So while we would certainly expect the Easter shift to benefit our year-over-year growth in the second quarter, we're unlikely to see a full 300 basis point benefit. Our results in the first quarter also reflected important investments in our brands, the benefit of which we expect to realize in the quarters ahead. You would have seen this as a bit of a spike in our SG&A line versus the prior year. This reflects two factors, both related to marketing. The first was advertizing spending coming into the P&L earlier than last year due to the timing of our spending plan this year versus how things played out last year.

Recall last year we ramped up our spending during the year. Overall, what you're seeing in the quarter are higher advertising expenses versus last year, but as we look across the year, we expect advertising expenses will be more evenly spread across the quarters this year than what you saw last year.

The other factor is the marketing related to expenses that we capture within overhead costs. Here the higher cost versus last year include investments and marketing services capabilities that are part of our broader plans to reinvent marketing, which we talked about at CAGNY. So in the case of first quarter revenue and SG&A, timing worked against our growth rates and our comparisons in Q1.

That said, several favorable timing factors benefited Q1 EPS for to be specific. And I know there is going to be quite a bit here, so I'll try to walk through in enough detail for you to follow the flow. First was the market based impact to post employment benefit plans. This was the result of the re-measurement at the end of December last year. We capitalized an aggregate benefit of $49 million from market based impacts related to our pension and post retirement plans into inventory at that time. That's because, we allocate labor costs on a per unit basis in each period and some of the units produced in the fourth quarter went into inventory. As that inventory was sold in the first quarter, the benefit flowed through our P&L. As of the end of March, the entire $49 million benefit previously capitalized within inventory, was recognized in cost of sales.

Second was spending on our cost-savings initiatives. As we expected, our project stream was pacing at a slower rate in the first quarter than we expect for the full year. As a result, while we only booked $14 million in the first quarter, we continue to expect that total spend could be upwards of $150 million for the full year.

Third was an unrealized gain from hedging activities. Again, another timing factor, this one influencing and flowing through cost of goods sold in the first quarter. It amounted to a $47 million or a $0.05 earnings per share favorability in the quarter.

And finally was the timing of discrete tax items that led to a tax rate in the first quarter that was lower than the 34% annual run rate that we've talked about in the past. The way I would look at the impact of these last three factors; the spending on cost savings initiatives, the unrealized gain from hedging activities, and the lower effective tax rate is that they're really just a pull forward of earnings that we would have expected in the subsequent three quarters of the current year.

So, as you can see, there were a good number of both favorable and unfavorable factors affecting our year-over-year growth on almost every line of our P&L. In the end, however, despite all these puts and takes in the quarter, we do think that our typical first half, second half revenue and profit seasonality will hold in 2014. Specifically, that is a dollar revenue split that's roughly 50-50 first half versus second half, and earnings per share that are a bit more weighted toward the first half of the year.

Now, I'll turn it back to Tony to talk about some of our key initiatives in the first quarter.

William Anthony Vernon, Chief Executive Officer & Director

Thanks, Teri. Now back to what we're doing to drive profitable growth for the full year and beyond. When we met with many of you at CAGNY, we talked about how we're evolving our playbook. And in the first quarter of this year, we continue to make steady progress. First, we've taken our best-in-class innovation model and have been extending into brand renovation. A great example is Lunchables. This franchise continues to be on a role as the launch of Lunchables Uploaded has expanded the brand's appeal to an older teen demographic and led to strong growth throughout last year and continuing into first quarter this year.

This success is complemented by the launch of our newest innovation in quarter one, Lunchables/Kabobbles. Kabobbles, that's just fun for me to say as it must be for the kids to eat. We're planning to take that kind of success and extend it to our protein platforms. As we pointed out at CAGNY, protein continues to be hot and we're delivering innovation and renovation in response to this growth trend.

We launched P3 in quarter one, Protein Power Packs that bring together Kraft's Holy Trinity, Oscar Mayer Selects meat, Kraft Natural Cheese and Planters nuts. P3 is bringing buyers to the Oscar Mayer franchise, new ones like Millennials as it extends the brand into the wholesome protein snacking area. It is early days, but as P3 continues to build trial in market, we're encouraged and that we're seeing a successfully source volume from a variety of protein snaking categories, while also creating new protein usage occasions.

In cold cuts, we're renovating our Deli Fresh Line with a new look, bold flavors and a new campaign launched on March 31. Our goal, bring excitement and traffic back to the cold cuts category. And our Deli Fresh renovation is launching on the back of a more positive set of numbers over the last 13 weeks, an improvement in our share trend, consumption growth for Oscar Mayer and category growth for our customers.

And in cheese, we're renovating our Kraft Singles franchise with Kraft American Singles now made with no artificial preservatives and a new marketing and public relations campaign, showcasing the goodness of Singles. This renovation serves as part of a larger good, better, best strategy in cheese slices that is driving consumption, volume and share gains for Kraft.

Outside of protein in solid dressings, we're making good progress fixing our base product quality and improving our share of voice with stronger advertising. It's a first step, but we like the progress we're seeing in consumer response and the trends in our consumption data. We know we won't bet a 1,000 in this scheme. We will always need to evolve our brands and messaging to reflect our changing consumers and while I know that I have expressed optimism in the past, JELL-O is one example that's gotten less traction than we'd like to have seen so far. We're still diagnosing what aspects of the rejuvenation are on target, and which ones aren't, but I have great confidence in our team and the potential of this iconic brand. More to come on JELL-O.

In addition to renovation and innovation, we're also redefining great marketing with breakthrough and buzz-worthy public relations and social media campaigns. For example, Oscar Mayer's Twitter campaign to lease the iconic Wienermobile for a day and its disruptive wake up and smell the bacon app, which got all sorts of press and social media word of mouth, and the continuation of edgy and impactful new TV ads from Miracle Whip, with an added focus on recipes. And our most successful Hockeyville campaign to-date for Kraft Canada, where we had more than 500 communities in Canada nominated to become this year's Hockeyville, more consumer voting than ever, and Kraft scale in store merchandising coast-to-coast across Canada, but we are not stopping there.

Here is a preview of what we have cooking in quarter two, a Maxwell House rejuvenation campaign with new packaging and a focus on the good things in life, like a good cup of coffee that's good to the last drop. Mr. Peanut is at it again, launching new Planters flavored peanuts, a clever and targeted new A1 ad campaign and the roll out of our Philadelphia soft cream cheese, a renovation that we shared with you at CAGNY. In total, we are breaking new ad campaigns on 13 franchises or big bets between quarter one and quarter two this year.

Overall, there is still more work to do. But we continue to make progress, rejuvenating our portfolio brand by brand. Now, we also know that we have to pay for it while still growing our earnings. Teri?

Teri L. List-Stoll, Chief Financial Officer & Executive Vice President

Thanks, Tony. As we talked about at CAGNY, the fuel for all these programs is effective total cost management. As you saw in our earnings report today, productivity was again a meaningful positive contributor in the quarter and helped to fund our investments in marketing. Beyond the numbers, we've continued to make progress in areas like collaborative supplier integration that will set us up well for the future. For instance, in pallets, we partnered with an industry leader to standardize pallet specification from suppliers true to us, to our customers. And this should reduce our pallet cost by 20% over the coming year or so.

In cashews, we formed a strategic partnership to create a seamless supply chain from origin to our plants, which we expect will reduce breakage by 80% and improve our yield of whole cashews. And in cornstarch, by working collaboratively with the supplier we've named our category captain, we found ways to reduce specifications, streamline logistics and eliminate waste. The bottom-line being a reduction in our use of cornstarch by up to 30% in certain applications. While these may not seem like large items in the absolute, we have hundreds of these opportunities. Total cost management is about leading no stone unturned and no lever unfold.

Now, when you're climbing the commodity cost curve, productivity is not sufficient, particularly with businesses like cheese, meat, and coffee, that are either experiencing or will soon be experiencing, upward cost pressure. In fact, we're seeing truly unprecedented price levels, in certain parts of our commodity baskets.

As examples, average barrel cheese market prices were $2.21 in the first quarter this year, up 37% versus Q1 of last year, and the highest rate in any first quarter we have on record. Pork bellies averaged $1.81 in April, up 27% from $1.43 a year ago, and the highest price we've ever seen for any month. And Turkey Breast prices averaged $3.22 in April, up more than 100% from the $1.56 a year ago, and also the highest for any month on record. To meet these challenges, we're taking swift and significant actions.

In March, price increases of between 5% and 12% took effect across most of our cheese portfolio. Despite that, we're expecting another sold performance on both the top and bottom-line from our U.S. cheese business in 2014. And as recently as this past Monday, Oscar Mayer announced pricing across approximately 50% of its cold cuts portfolio, with an average increase of 10%, due to the sharp run-up in meats and grains. List price increases on cold cuts will be effective May 25.

And in bacon, we continue to price bacon relative to the recent highs we're seeing in the pork belly market. In fact, year-to-date we've implemented or announced price increases on products representing approximately 45% of our portfolio. And I know that there haven't been any list price increases announced this year in the coffee category by either us or the category leader despite higher green coffee prices.

Obviously, we likely will see some temporary dislocation in market share performance and the timing of cost versus price realization due to these pricing actions. Having said that, we feel good about our ability to manage our cost over time and still deliver against our long-term growth algorithm.

We also continue to see the benefits of emphasizing the importance of cash in our daily operations. This led to free cash flow of $175 million in the first quarter of this year. That's $28 million higher than last year and the second year in a row that we've generated positive free cash flow versus our historical norm of being a net cash user in the first quarter. And consistent with our commitment to a strong dividend, we paid out $313 million this quarter in support of the 3.7% yield on our stock.

We also began share repurchases under our $3 billion program that we put in place last December. We've purchased approximately 2.2 million shares for approximately $124 million under the program. So, we continue to be pleased with our progress on cost and on cash, but there is more road ahead of us and we can't take our foot of the pedal.

With that, I'll turn it back over to Tony to close things out.

William Anthony Vernon, Chief Executive Officer & Director

Okay. I'll warp up our opening comments by saying that despite all the noise in our first quarter financials and the tough environment we all face, we continue to make solid progress in remaking Kraft Foods to an industry leader. More impotently, while we anticipated the soft start to the year, we stay true to our approach, relentlessly focused on our playbook and driving profitable top-line growth. As a result, we remained well positioned to grow our portfolio of great brands, faster than the North American food and beverage industry. Yes, we have more work to do and no, we're not yet firing on all cylinders. But, we are very confident that our focus on brand renovation, marketing excellence and total cost management will drive the profitable growth that we all expect.

Now, we'll be delighted to take your questions.


QUESTION AND ANSWER SECTION

Operator: [Operator Instructions] Our first question comes from Matthew Grainger from Morgan Stanley. Your line is open.

<Q - Matthew Grainger - Morgan Stanley & Co. LLC>: Hi, good evening, everyone.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hi, Matthew.

<Q - Matthew Grainger - Morgan Stanley & Co. LLC>: Hi. Teri, I guess, could you give us a sense of where PNOC came out across the overall portfolio for Q1. And, yeah, I think it seems like, it was clearly positive in cheese despite the fact that last quarter your language is maybe a bit more cautious about being behind the curve. On a few commodities, what enabled you to pass that through a bit more or were you able to pass that through a bit more efficiently than you might have initially thought?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Yeah. What's interesting about the quarter is in fact our total commodity costs were actually down in the quarter, which is largely reflective of where coffee cost were this year versus last. So, we did have a higher dairy cost flowing through. So, there isn't a real good quantitative number for me to give you in response to your question. But, what I can tell you is that, you can see, if I just t he speed with which we've move forward on the pricing that our commitment to the PNOC discipline that we've instilled here at Kraft remains very strong. And we also have good confidence in the strength of our brands to carry those price increases, and we're seeing it in the cheese results, and we expect to see it on the remainder of the business as well.

<Q - Matthew Grainger - Morgan Stanley & Co. LLC>: Okay. Thanks. And just to quickly follow up on the cheese dynamic. Are there any initial thoughts either you or Tony can offer on the consumer reaction to the price increases, how private label or other competitors are responding, and whether there has been any short-term market share implications that you're already seeing?

<A - Tony Vernon - Kraft Foods Group, Inc.>: Mathew, I'd say definitely too soon to see, but of all the franchises that have the playbook in place, I would point to cheese as the top, a good, better, best, the price steering, the innovation and renovation, great equity advertising. I think that as Teri said, the PNOC discipline, combined with the full implementation of the playbook will make this a very smart decision.

<Q - Matthew Grainger - Morgan Stanley & Co. LLC>: Okay. All right. Thank you, both.

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

<Q - Bryan Spillane - Bank of America/Merrill Lynch>: Hey. Good afternoon.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hey, Bryan.

<Q - Bryan Spillane - Bank of America/Merrill Lynch>: So, just two questions. One is Teri, if you can just help us we're trying to reconcile the operating profit bridge from 1Q 2013 to 2014, and if you strip out the mark-to-market benefits, operating profit was about flat, about $105 million benefit from lower spending on restructuring initiatives. And in productivity, we've been positive. And I guess there was some deleveraging because of volume. Could you just give us a sense for how much maybe productivity would've contributed to the quarter, and then also maybe how much there the marketing, and advertising expenses were up?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Yeah. So, I might as well take you through a detailed reconciliation, particularly against your own models and expectations. But you've got the right components. You can see the productivity benefit if you focus on the gross margin linea And if you take out the one-time items there, you can see improvement in gross margin, which is a reflection of the productivity we're realizing in the quarter. And then as you go through down to operating income, you're exactly right that there's a little less restructuring in the first quarter versus what you might have modeled. And then don't forget to take out the unrealized hedging gains as you think about that too, because that's a bit of a one timer. So at the end of the day gross margin is up, when you take out the non-recurring kinds of adjustments and operating income is about flat.

<Q - Bryan Spillane - Bank of America/Merrill Lynch>: So -- and I guess, what I was after was that the productivity component that you saw in the first quarter, is it consistent with what you were seeing in the second half, were there any change in trend in terms of how much productivity was delivering?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: The productivity in the first quarter is at a slightly slower rate than it was at the end of the year, which is pretty consistent. You saw it also in our cost savings initiative spending where that's a little slower at the beginning of the year and then we expect it to ramp up as the year goes on.

<Q - Bryan Spillane - Bank of America/Merrill Lynch>: Okay. Thank you. And then, Tony could you just -- now that you should know that where Easter kind of sell out, could you give us a sense of where market shares or where you think market shares might have shook out now that Easter has occurred and maybe just some sense of how April trended relative to the first quarter? Thanks.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah. I'm always going to encourage us not to look at one week, two weeks on holiday. Until we're able to compile all of the post-Easter sale data, we won't really have a real crisp picture on consumption. We think we have strong programs in place. I do realize I'm saying this and you guys are looking at IRI's as I'm talking, but I would rather not have bulls or bears run. It was an important holiday, but Memorial Day July 4, and Labor Day, back-to-school are just as important.

Operator: Thank you. Our next question comes from Chris Growe with Stifel. Your line is open.

<Q - Chris Growe - Stifel, Nicolaus & Co., Inc.>: Hi, good evening.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hey, Chris.

<Q - Chris Growe - Stifel, Nicolaus & Co., Inc.>: Hi. I just had a question for you, a bit of a follow-on to Bryan's question and that in the quarter you had some higher marketing costs. And I guess, also some higher overhead-related marketing costs. So, I'm just curious if you have more of a stable level of marketing quarter-to-quarter through the year, are there some of these ongoing sort of overhead-related costs that will be with us through the year? Can you quantify that?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Yeah. We don't break out the split of the marketing spending, but I think it is fair to say that what we're doing this year because we have the plans in place at the beginning of the year as we are getting that more ratable recognition. So, I do think the pattern of spending that you see in the first quarter is fairly predictive of what we would see throughout the year.

<A - Chris Jakubik - Kraft Foods Group, Inc.>: Yeah. And really, Chris I think as you look at the year-over-year, the pop in SG&A had as much to do with the prior year level. So if we have more of a level spending throughout the year this year, you shouldn't see that magnitude of pop that you saw in the first quarter.

<Q - Chris Growe - Stifel, Nicolaus & Co., Inc.>: Sure, okay. And just a quick follow-on, Tony, you had outlined at CAGNY about sort of Kraft 2.0 and some of the aspects of that program being - getting some new channels, new product opportunities and healthier varieties. I'm just curious if - does that develop through the year? I'm not looking at a perfect timeline, and I'm sure every category is different, but just curious how that plays out through the year?

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah. I'm actually glad you asked, Chris. You'll remember 2.0 for us was basically a 5-point plan to go after what we saw as growth in our industry, growing cohorts, number one, Millennials and Hispanics, especially the opportunity for health and wellness choices for consumers. Number two, financially strapped household and families that we want to make sure we offer pricing to both ends of the barbell. The tech-savvy consumers, where we feel we have an advantage with our billion recipe interactions a year. And last and what you mentioned is the alternate channel shopper. It's going to be through the course of the year. I gave some examples in my speech of how we're targeting millennials. The reality is that on all five of those points, we feel we made steady progress. And we didn't call out the alternate channel's growth, but we're going to grow faster than what Kantar says, alternate channel says. And we thought first quarter gave a hint of that, but we're in it for the long-term and all five of those points are key to restoring Kraft to greatness in marketing.

<Q - Chris Growe - Stifel, Nicolaus & Co., Inc.>: Okay. Thank you.

Operator: Our next question comes from Jason English with Goldman Sachs. Your line is open.

<Q - Jason English - Goldman Sachs & Co.>: Hey, good afternoon, folks. Thank you for the question.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hi, Jason.

<Q - Jason English - Goldman Sachs & Co.>: I wanted to probe a little more on input cost outlook. I for one was surprised that you actually experienced a bit of deflation all in the quarter. As we think forward, what sort of magnitude of inflation do you expect growth of the P&L based on what you see today and what made the cadence of that look like?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Yeah. So, we're better at pricing for commodities than we are at actually predicting them out into the future, but based on what we see today we're seeing coffee prices up now, we talked about meats being up now. And the cheese obviously has already started to be reflected. So, I don't know, Chris, if you have a specific - I don't have a specific number to really give you in terms of how to project that forward. But I can tell you that the commodity cost escalation will be more pronounced in the second quarter, but fortunately so will some of our pricing. But it's going to be not perfectly matched in the short-term here as we work through cost increases, pricing, market share effects. It does make for a little bit harder to get to stability.

<A - Chris Jakubik - Kraft Foods Group, Inc.>: Yeah. I think what you saw in the first quarter, Jason was that the run up in coffee that we're seeing right now that you see in the spot markets has been pretty dramatic over the course of the year. So, in the first quarter we were still comparing against a period where the green coffee costs were still rather low. It has run up and I think in - as we move forward the whole picture on year-on-year commodities is going to be probably pretty dramatically different than what you saw in the first quarter.

<Q - Jason English - Goldman Sachs & Co.>: I can appreciate that. Moving in quickly to holding share as you raise price, I guess a little bit back to Grainger's question. Last time we went through the upward pricing cycle in coffee. You've really took it on the chin in roasting ground with market share. What's different today that may cause that share pattern to be different?

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah. Good question, Jason. I mean, I think we all know that pricing in the absence of product news, great equity advertising, good-better-best hearing is recipe for bad elasticity. But this - what's changed is that point I made about 13 new ad campaigns this quarter and next. Maxwell House is one of the big campaigns and it went on the air just a month ago. We know it tested well. We know we got the packaging and pricing and promotion calendar that we want. So, I think it's quite a difference. We also feel great about the other coffee offerings, right, Gevalia, the pods that have been frankly our best new product in five years. So, coffee is hot at Kraft right now. The trends are good and we think the elasticity and confidence we have is much different than the last time.

<Q - Jason English - Goldman Sachs & Co.>: Good stuff, guys. Thanks a lot. I'll pass it on.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Thanks, Jason.

Operator: Our next question comes from John Baumgartner with Wells Fargo. Your line is open.

<Q - John Baumgartner - Wells Fargo Securities LLC>: Great. Thanks for the question. Yeah. Tony, just a follow-up there in terms of the coffee portfolio and your efforts there on premium, can you just walk a little bit more through the cafe rollout and the test market there and your progress in single serve?

<A - Tony Vernon - Kraft Foods Group, Inc.>: You bet. So, we're excited about this partnership, as you can imagine. If you were in Chicago, these are two great Chicago companies coming together in a great growing category with the caffeinization of America as a wind at our back. We like what we've seen in the test markets. It's early. These are four test markets. We know there is a lot of interest across all of our trade customers from value to club and we see a great demographic fit. And yes, it is in both sides of the offering, not just roast and ground, but pods. And so, couldn't be more excited, but obviously, we got to have a winning test market.

<Q - John Baumgartner - Wells Fargo Securities LLC>: Thanks, Tony.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah.

Operator: Our next question comes from Alexia Howard with Sanford Bernstein. Your line is open.

<Q - Alexia Howard - Sanford C. Bernstein & Co. LLC>: Good evening, everyone.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hi Alexia.

<Q - Alexia Howard - Sanford C. Bernstein & Co. LLC>: Hi there. Couple of questions. You've obviously being going through the restructuring program for the last couple of years. Other companies seem to be getting maybe a little bit more intense with their cost cutting efforts at the moment, all the ways that you could take that to another level or are you confident that you're pretty much done with it when it's completed?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Alexia, maybe I'll start there and Tony you can chime in. The thing about our total cost management approach is that it isn't an episodic program, it doesn't really have an end. So as we think about it, productivity is a fact of life for us. And so, we're really - and that's why some of the examples I gave today were not huge one-time kinds of projects, but rather examples of the opportunities we have across our cost structure to identify efficiencies and turn up those savings as fuel to invest in some of the marketing and people programs that we put in place. So we think of it as ongoing kind of prior to what we need to be doing day-in and day-out.

<Q - Alexia Howard - Sanford C. Bernstein & Co. LLC>: Great. Yeah.

<A - Tony Vernon - Kraft Foods Group, Inc.>: The only thing I'd add Alexia is we feel we have a good line of sight to top tier productivity as this plays out. And you know I used to call this the third inning of a nine inning game and when Bob Gorski joined us, he scolded me and told me, Tony, it's cricket. Our savings and leanness can go on forever.

<Q - Alexia Howard - Sanford C. Bernstein & Co. LLC>: Fair enough. And can I just do a follow-up on the JELL-O category, you've obviously had some success with cheese and meat in getting the innovation pipe like going, but with JELL-O, is it realistic to turn that brand around given the competition for shelf-space and the importance of clean label these days? Thank you and I'll pass it out.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah, thank you Alexia. We certainly are not getting the velocities we want across customers that we're looking for in this. I will say the advertising just went on the air in November. It is early in this game after 15 years of this great brand not getting the attention it deserved. We have a lot of things going in JELL-O, and a very good team. And, I will tell you, I think whether it's pudding or gelatin, it has a place in American families. And, while sweet yogurts and Chobani have done a beautiful job, and our formidable foes, I think JELL-O is a brand we believe in. So, stay tuned.

<Q - Alexia Howard - Sanford C. Bernstein & Co. LLC>: Great. Thank you. I'll pass it on.

Operator: Our next question comes from Andrew Lazar with Barclays. Your line is open.

<Q - Andrew Lazar - Barclays Capital, Inc.>: Good afternoon everybody.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hi, Andrew.

<Q - Andrew Lazar - Barclays Capital, Inc.>: Two things, first one, one clarification. Just in terms of the cadence around earnings for the year, I guess if you keep the cadence of the first half EPS slightly more than the second half, I guess that would imply that the second quarter would be down a whole lot more from where current consensus is, because of I guess how the first quarter came in, if you include the $100 million benefit and such. Am I accurate in thinking that way?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Yeah. You're going to hate my answer, Andrew. But we're not really going to comment on consensus, and where things are. We wanted - you can do the math, and the math plays out the way it plays out. The relationship we provided, which is the historical relationship is the right thing to think about.

<Q - Andrew Lazar - Barclays Capital, Inc.>: Got it. But the first quarter that you're using in that relationship does include the kind of $100 million benefit you talked about, is that right?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Yes. It includes the....

<A - Tony Vernon - Kraft Foods Group, Inc.>: $100 million...

<Q - Andrew Lazar - Barclays Capital, Inc.>: Those factors.

<A - Tony Vernon - Kraft Foods Group, Inc.>: ...of what?

<Q - Andrew Lazar - Barclays Capital, Inc.>: Meaning it includes the mark-to-market gain, and you're using the $85 million or what have you?

<A - Tony Vernon - Kraft Foods Group, Inc.>: I think...

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Yeah.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah.

<Q - Andrew Lazar - Barclays Capital, Inc.>: Okay.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Probably the only thing that none of us really would have anticipated necessarily was the pension favorability.

<Q - Andrew Lazar - Barclays Capital, Inc.>: Right.

<A - Tony Vernon - Kraft Foods Group, Inc.>: So we tend to take out the pension favorability as we look at our long-term growth algorithm, because it's rather unpredictable.

<Q - Andrew Lazar - Barclays Capital, Inc.>: Yep. That's helpful. I just want to make sure I had clarity on that. And then the second thing would be Tony, is there a way to characterize of the 45% of the portfolio for which you've I guess priced or announced pricing so far. Maybe what percentage of that has it been Kraft leading the pricing, meaning where others haven't announced it yet and have to kind of wait and see how quickly people follow versus where you're kind of following such that you know it will be a rational environment pretty quickly?

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah. I think to-date, because we're the number one brand in the ones we've already taken price on and announced, I think it's a vast majority.

<Q - Andrew Lazar - Barclays Capital, Inc.>: Okay. So it's a matter of obviously staying close to it and getting a sense of how quickly others follow based on where people are hedged, but obviously over time, people are seeing the same general upward trend as you are. So is your thought process - I mean are there certain categories where maybe you're more worried about that lag of other's pricing versus others or what's your sense?

<A - Tony Vernon - Kraft Foods Group, Inc.>: I'm going to turn the question to - I've got my lawyers looking at me across the table. So I want to make sure that I answer this very carefully. I'm confident in our ability to take price. I do think there will be some temporary share dislocation given that we lead, but I do think it's all about pricing with the rest of the playbook.

<Q - Andrew Lazar - Barclays Capital, Inc.>: Yeah.

<A - Tony Vernon - Kraft Foods Group, Inc.>: And that's why innovating, renovating, reinventing marketing, particularly cheese, meat, coffee, and nuts, those are four that we've executed most of the aspects of our playbook that are going to count here. So I think we're making the right call given the profitable growth that we committed to you.

<Q - Andrew Lazar - Barclays Capital, Inc.>: Great. Thanks very much.

Operator: Our next question comes from Ken Goldman with JPMorgan. Your line is open.

<Q - Ken Goldman - JPMorgan Securities LLC>: Thanks. Tony, some of the K-Cup manufacturers, talking to them, they actually seem fairly happy about the rise in coffee cost, right, because at least according to them, our beans are so much more part of COGS in roast, ground than K-Cups, right. So theoretically that will lead to more pricing in roast and ground versus K-Cups and price gaps will narrow. Is that something you'd expect to happen that narrowing in the gap of price between K-Cups and roast and ground or do you think they'll take pricing across the board category wise by similar amounts?

<A - Tony Vernon - Kraft Foods Group, Inc.>: It's tough to speculate, Ken. I think it's an interesting question. It is quite a distance from a $0.06 cup of coffee to a $0.50 cup of coffee. And then you go to that big retailer and go up to $4 a cup. But, no, I don't necessarily think pods is - we know we're seeing more promotion, some irrationality, we're trying not to be one of those people. But the reality is I think pods is still got a huge wind at its back and is relatively pricing sensitive given the promise of convenience.

<Q - Ken Goldman - JPMorgan Securities LLC>: Okay. And then one more K-Cup question, we're getting closer to the time when Keurig 2.0 is introduced and obviously no one knows whether it will be successful or not. But I was just curious, you talked in the past about being very happy with producing your own K-Cups. Is that still the situation? Are you still very happy with the margins and the returns you're getting there? Just curious to think about how you might deal with if Keurig 2.0 is successful manufacturing versus perhaps you could go in the licensing route?

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah. I always say I get more questions on K-Cups than everything else combined. And you're making sure, Ken. Okay. So I'm very happy with the profitability in the growth of K-Cups. I'm very happy that we staked out a - set the goal of being a strong number two, and I think I mentioned, it says big in innovation, it's the biggest innovation at Kraft since I've been here. And so, it's going very well, and it's one of those rising type categories. As we look into the future and who can predict it with lawsuits and everything else, I want to maintain the optionality that we have, and that I think just to tell you, we're going to explore our all options.

<Q - Ken Goldman - JPMorgan Securities LLC>: Thank you.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Okay.

Operator: Our next question comes from Robert Moskow with Credit Suisse. Your line is open.

<Q - Rob Moskow - Credit Suisse Securities (USA) LLC (Broker)>: Hi, good afternoon. I wanted to ask you, Tony, if you would take a shot at quantifying your total kind of average market share. You said that half your categories took share, but I remember last year, even though 65% took share, your overall market share still declined. I want to know if that trend is still happening and what do you think needs to be done to kind of get that going in the right direction.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah. So the absolute goal here is for Kraft to grow faster than our industry. And until then we're not satisfied. So this - we all have a traditional way of looking at the business, to say this percent of categories are growing and gaining share. We've certainly improved that a lot over the last 18 months by about 25 points. But until we get to the point, where we're growing faster, than our competitors' average and growing our customers comp, we won't be satisfied. I've said in the past that I feel about 40% of the portfolio is in good shape. I never say fixed, because everything changes every month, right. We want to be ever vigilant, but 40% is there, and Rob it's executing the playbook, it's the people, the recruiting, training and development, it's getting the right people on the right brands. I always say think about this conversation when we had it five years ago on cheese or three years ago on nuts or two years ago on coffee. I mean these were categories that people doubted that Kraft would ever win again and we're winning. And so I say these brands, they're all my children. By the way, they are 580 people listening on the phone. So a lot of our children are listening and I believe in each one of them and I believe that we can turn around cheese, nuts and coffee. We can turn around any of these brands.

<Q - Rob Moskow - Credit Suisse Securities (USA) LLC (Broker)>: Let me ask a follow-up Tony like, do you have a timeframe if you went back to the spin-off date, did you have a timeframe in mind like two years, three years where you thought you'd be heading in that direction and where do you think you are in relation to that?

<A - Tony Vernon - Kraft Foods Group, Inc.>: My timeframe is consistent sequential improvement over the long-term.

<Q - Rob Moskow - Credit Suisse Securities (USA) LLC (Broker)>: Okay.

<A - Tony Vernon - Kraft Foods Group, Inc.>: And it certainly is as fast as possible, but we're in this for the long-term. We hit our marks on cost, cash and EPS and we reinvest half of every dollar into growing these brands. It took a lot of years for example for JELL-O to get where it is. It's going to take some years to turn it around.

<Q - Rob Moskow - Credit Suisse Securities (USA) LLC (Broker)>: Okay. Thank you.

Operator: Our next question comes from David Palmer with RBC. Your line is open.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hey, David.

<Q - David Palmer - RBC Capital Markets LLC>: Thanks. Good evening. Just to follow-up on the price increases on 45% of your portfolio. Could you comment on the average of price increase across all of that volume? And how do you see that price realization flowing through the year, I would imagine there will be promotion windows that will keep the flow through in some of these categories?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Yeah. So, the good thing about how we've executed the pricing is, the average isn't necessarily reflective of the technique with which we've priced. So, we've tried to really be thoughtful about what's going on in the brand, as Tony talked about what parts of our playbook are working well, how will the consumer perceive the price increase. So, the range of price increase is much broader than maybe it historically had been as we try to make sure we're matching it up with the brand's ability to carry the price.

<Q - David Palmer - RBC Capital Markets LLC>: Is there a sense that the type of price increase that we will see in terms of the price mix that we'll see coming through, through this year and?

<A - Tony Vernon - Kraft Foods Group, Inc.>: We wouldn't want to really put a number on it, David. I think as Teri said, there's a range. I think what we've mentioned today was 10% on parts of the cold cuts portfolio, cheese ranged from low-single digit to double digit. So, it's kind of difficult to really do an aggregate number on that. I don't really have anything for you right now, but I would expect that you're going to start seeing the contribution from pricing begin to pickup in the second quarter and then as we move forward obviously.

<Q - David Palmer - RBC Capital Markets LLC>: Okay. Thank you.

Operator: Our next question comes from Eric Katzman with Deutsche Bank. Your line is open.

<Q - Eric Katzman - Deutsche Bank Securities, Inc.>: Hi, good evening.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hi, Eric.

<Q - Eric Katzman - Deutsche Bank Securities, Inc.>: I guess, Tony, I want to, I guess, maybe push back a little bit on your commentary around the industry consumption trends because I thought at CAGNY you did a much more balanced job of recognizing that. A lot of consumers are choosing to move away from center of the store packaged food for non-macro related reasons whereas you kind of gave mostly macroeconomic oriented challenges. So has your thought changed at all there? It seems like the simple ingredient message that you had given at CAGNY alternative channels, et cetera just seemed to me to be more balanced.

<A - Tony Vernon - Kraft Foods Group, Inc.>: I take the critique. It's more just fitting into a 25 minute presentation. I mean, it's very important to reinforce that, yes, we believe health and wellness, the perimeter of the store, the ability to offer choice, the importance of getting our fair share of alternate channels where this consumer is shopping, the capitalizing and the growing cohorts that none of us have really done well with Hispanics, Millennials, I think, we're all learning together how to do this.

But Eric, I take the critique very well. You're absolutely right. Consumption is going from the center of store to other areas. We feel strongly when we introduced a Kraft Singles with no preservatives or double the protein in Deli or bring out P3 with fresh meat, fresh cheese and fresh nuts, that we're addressing some of these growth trends. And so, you're right.

<Q - Eric Katzman - Deutsche Bank Securities, Inc.>: Okay. I guess, thanks for that. And then, I guess, let me just ask about Teri about maybe some non-operating items and some forecasting that hopefully doesn't disrupt your mantra of not giving any guidance, but...

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: You know I'm pretty firm on it so...

<Q - Eric Katzman - Deutsche Bank Securities, Inc.>: Yeah. Well, I've got to try. So I think one of - like you're emphasizing free cash flow return a bit to shareholders, but your share count is up sequentially and year-over-year. I mean, do you expect that your buyback program will bring shares outstanding net down. Did the tax item in the first quarter or is that affect the outlook for your tax rate for the full year? How do you feel about interest expense? If you could like give some guidance on those three things it would be helpful?

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Sure, sure. So let's start with the shares question that you surfaced. You're right, you did see an increase in shares on both basic and fully diluted basis and that's really a function of timing of our share repurchase program. So, if you remember it was approved by our board in December. When we announced it, we still in the market simply because of the windows were trading. And so, that program didn't ramp up right away at the beginning of the quarter. So probably an artificially low quarterly number if you think about our going program, so we definitely expect share repurchase to more than offset the impact of options and restricted stock that comes through our incentive programs. And so, we would expect that to be accretive over the year, not in a huge way, but certainly more so than this one quarter of activity would reflect, and it's partly just timing of start-up.

<Q - Eric Katzman - Deutsche Bank Securities, Inc.>: Okay.

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: And your question on tax. That's a discrete item that's really driving the tax rate down in the quarter, and we don't control the timing of when those drop in. And so, we think about that as being something that we had assumed in our overall run rate assessment, and it just happened to drop in and out officially reduced the first quarter rate. So, I wouldn't think of that as being reflective of the going rate for the company.

And then on interest expense, as you know, our debt portfolio is largely fixed rate. So, we should be reasonably good at predicting. Now, there is currency and some other small things in there, but - so, that's not a huge driver at this point, given our debt portfolio.

<Q - Eric Katzman - Deutsche Bank Securities, Inc.>: Okay. See, that wasn't so bad. Okay. Thank you.

<A - Teri List-Stoll - Kraft Foods Group, Inc.>: Now if you can handle that. Didn't give you a single number.

Operator: Our next question comes from Diane Geissler with CLSA. Your line is open.

<Q - Diane Geissler - CLSA Americas LLC>: Good afternoon.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hi, Diane.

<Q - Diane Geissler - CLSA Americas LLC>: Hi. Just to ask about the performance of some of the items that you've launched within the last, call it, I don't know 18 months to 24 months. I know that the target rate, I think you've said in the past is kind of low-teens as a percent of sales for items that have been launched within the last three years or whatever that your window is, up from high-single digits. Is the performance of the items that you've launched within this last timeframe in line with your expectations? And just kind of not to beat the dead horse on the IRI debt, it looks like some of the products that were sort of initial successes, for instance, MiO, which was great out of the box, and even great in through its second year seems to be lagging now. Can you talk about those products that are maybe into their second or third year since launch.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Sure, sure.

<Q - Diane Geissler - CLSA Americas LLC>: Their performance...

<A - Tony Vernon - Kraft Foods Group, Inc.>: On a macro basis, that the Nielsen measure you talked about. We actually started in 2009 at about 6% of three year sales credited to innovation and we were lowest here in the industry. We're now actually up in the 13% to 14% range. And it's three year trend, so when you get MiO, and the MiO platform all totaled including Kool-Aid and Crystal Light is $300 millionish. We have about a 50 share. But to your point, it's slowed down for sure. It's a very high margins 50 share business that does over those three brands, $300 million most of them right now. MiO, I think we're very satisfied with it and I think right now, you're seeing a huge number of new SKUs within the category.

So, imitation is a sincere form of flattery, lots of new entries, they maybe are not spending to grow the category, shelf spaces are getting pretty messy, and we are facing a spring summer selling season that's really critical to us. We are working with our best realtor, our best retailers to ensure that we get the features in this crowded space that we deserve. But I'm bottom line, very satisfied with MiO, we just got to continue to grow and continue to innovate. By the way, the Kool-Aid version has done very, very well. And you can imagine that is a high margin business. And it's also got potential some day outside North America. In general, I would say we are satisfied, I mean the pods as I mentioned are probably bigger than Skillets and MiO were at the same point in time by 25% and 50%, and we won innovations of the year from most retailers for those two.

You're going to see a lot of renovation honestly, because so much of this health and wellness trend demands simpler ingredient lines and removal of preservatives and colors. So, though they fall into the renovation bucket. But, in general, we made this a pillar of how we turnaround Kraft and I'd say we continue to believe we're making great progress.

<Q - Diane Geissler - CLSA Americas LLC>: Okay. And then, can you just give us an idea about where you are in terms of the ACB on P3 and then I think you said the launch of the new Philly cream cheese in the new containers and with more fruit, et cetera, is that the second quarter launch?

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah. That's happening now. I - I haven't looked it honestly, ACB on the launches lately. I mean, Doug can follow-up with you. They're going very well, very well. Retailer excitement - I mean, those are categories that retailers believe are going to grow traffic whether it's protein, double the protein, a new renovation to packaging in Philly, we're excited about. But...

<Q - Diane Geissler - CLSA Americas LLC>: Who are you taking that shelf...

<A - Tony Vernon - Kraft Foods Group, Inc.>: That'll get you some ACB.

<Q - Diane Geissler - CLSA Americas LLC>: Sorry, who are you taking that shelf space from? Are they largely in that refrigerated meat category like the linear cheese that are devoted to protein because how of popular protein is...

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah. I think you're going to see protein - Diane, I think that's a great question. I think you're going to have to see protein snacking segments in major retailers. It's not just us that is introducing and jumping on this. And I think you'll see there is an impulse shelf and a lot of its front of store and you can imagine how this excites C stores, dollar stores, drug, but these are grab and go items that are healthy meal substitutes. In terms of Philly where we get shelf space, we got a lot of scale on Philly and a lot of flexibility.

<Q - Diane Geissler - CLSA Americas LLC>: Okay. I'll leave it there. Thank you.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Okay. Great, Diane.

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

<Q - Ken Zaslow - BMO Capital Markets (United States)>: Hi, good evening, everyone.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hi, Ken.

<Q - Ken Zaslow - BMO Capital Markets (United States)>: So, my question is, you talked a lot about renovation versus innovation. And my sense is that renovation does not get the same sort of return that innovation does, although innovation obviously is more expensive. So, I guess my first question is, do you agree with that? And the second part of it is, how long do you think your portfolio needs to be renovated before you ramp up the innovation as you go?

<A - Tony Vernon - Kraft Foods Group, Inc.>: Okay. They're not - first, they're not mutually exclusive. By the way, they're just labels. I would tell you that most people would say that renovation is more profitable than innovations because innovation requires building a new meal brand, for example, big spending effort we did to build that category. Renovation, to double the protein on Philly, it's a natural, right. You got a proprietary R&D innovation. You put it into the line. You're the only one that has it. Private label races to catch up. It's a very efficient way to grow the business.

How long was the second question -- how long before innovation? I don't want to leave Ken to believe that we're replacing innovation with renovation, it's both, right. It's sort of the difference between incremental, profitable, substantial and transformational. I do think meal was transformational. I think pods is transformational. But, we're basically extending innovation to our base brands to renovate them. And a lot of it, I want to emphasize, has to do with offering consumers choice in the health and wellness ingredient powering up area, right.

<Q - Ken Zaslow - BMO Capital Markets (United States)>: Yeah.

<A - Tony Vernon - Kraft Foods Group, Inc.>: And so that's how we look at renovation versus innovation.

<Q - Ken Zaslow - BMO Capital Markets (United States)>: And then a quick follow up is, advertising you said is more distributed evenly throughout the quarters. Is that a function that you're now, your pipeline and everything is offset and that's how we should expect it? Or going forward throughout the years, you'll have some times that advertising is skewed one way or the other way or will you be more systematic about having it consistent throughout the quarters?

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah, it's a great - we're not a hugely seasonal business, but we do have some big seasonal brands, Capri Sun. I do think as we get to the level of advertising we won. It's going to deliver more of a consistent pattern of advertising spend and growth. But I'll also want to tell you, we're still only spending $0.75 on the dollar versus that benchmark company that I always talk about. And that's why growing our advertising consistently is a long term mission. And so, but I think your assumption is right, it's going to be spread evenly, in general it will depend Ken somewhat on the idea. If you launch a meal in the fourth quarter, it's going to have a big ad budget and it will affect the growth of that quarter.

<Q - Ken Zaslow - BMO Capital Markets (United States)>: Great. I appreciate it.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Great.

<A - Chris Jakubik - Kraft Foods Group, Inc.>: Maybe one more question.

Operator: Our last question comes from David Driscoll with Citigroup. Your line is open.

<Q - Cornell Burnette - Citigroup Global Markets Inc. (Broker)>: Hey, thanks a lot. Good evening. This is Cornell in with a few questions for David.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Hi. How are you doing?

<Q - Cornell Burnette - Citigroup Global Markets Inc. (Broker)>: All right. Well, the first one I just wanted to get into was, we've heard from a number of other companies in the space that shopping trips and traffic throughout the grocery and general were down a bit in the first quarter, and perhaps this had a little bit to do with some of the bad weather that we saw. I was wondering if you saw that too and as we have gone into April and May, have you started to see things turn around a bit?

<A - Tony Vernon - Kraft Foods Group, Inc.>: I don't want to ever [ph] bet the (01:05:22) anyone who uses weather as an excuse or be forced to give you weather forecast every quarter. For Kraft, blaming it on the weather is sort of like saying, I would be 10 pounds lighter if I were able to work out on those cold days. So, in general, weather was a factor and I understand our retailers saying it, we got to be able to get pass that, right, and I'm looking forward to great barbecue season and a lot of you guys barbecuing.

<Q - Cornell Burnette - Citigroup Global Markets Inc. (Broker)>: Okay. And then just another question is, you made some fairly I think negative comments about the state of the consumer. Obviously we know what's happening with the lower end consumer because of the reductions in SNAP and then you also mentioned maybe higher tax bills hurting maybe middle and upper class consumers. And I just wanted to know what type of challenges do you think this will provide you in light of all of the pricing that you are recently taking?

<A - Tony Vernon - Kraft Foods Group, Inc.>: Yeah. Well, first thing, I don't necessarily think it is getting any worse. I think it's just universally challenging for us and our customers, and I would tell you that you guys, a lot of you've written about the improving elasticities at Kraft as we invest in brands with innovation, renovation, advertising and tier pricing and the ability to execute that playbook will be the best mitigation against the challenges of having to take price to deliver the profitable growth that we promised you. When we have the playbook there, we seemed to do quite well in our ability to take price.

<Q - Cornell Burnette - Citigroup Global Markets Inc. (Broker)>: Okay. Thank you.

<A - Tony Vernon - Kraft Foods Group, Inc.>: Thanks, Cornell. I think we're good, operator.

Operator: Yep. No more questions. I'll turn it back to management for closing remarks.

Christopher M. Jakubik, Vice President-Investor Relations

Okay. Well, thanks everybody for joining us. For those of you that have follow-up questions, Doug DuMars and myself will be available to take your calls and for anyone in the media that has any follow ups, Basil Maglaris will be around for you as well.

So, thank you very much for joining us and have a good night.

Operator: Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.

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