Q2 2025 Earnings Call Transcript

Greetings, and welcome to the Kraft Heinz Company Second Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Anne-Marie Megela, Global Head of IR.

Anne-Marie Megela: Thank you, and hello, everyone. Welcome to the Q&A session for our second quarter 2025 business update. During today's call, we may make forward-looking statements regarding our expectations for the future, including items related to our business plans and expectations, strategy, efforts and investments and related timing and expected impacts. These statements are based on how we see things today, and actual results may differ materially due to risks and uncertainties. Please see the cautionary statements and risk factors contained in today's earnings release, which accompanies this call as well as our most recent 10-K, 10-Q and 8-K filings for more information regarding these risks and uncertainties. Additionally, we may refer to non-GAAP financial measures, which exclude certain items from our financial results reported in accordance with GAAP. Please refer to today's earnings release and the non-GAAP information available on our website at ir.kraftheinzcompany.com, under News and Events for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures. I will now hand it over to our Chief Executive Officer, Carlos Abrams-Rivera, for opening comments.

Carlos A. Abrams-Rivera: Well, thank you, Anne-Marie, and thank you, everyone, for joining us today. Listen, I'm pleased to report that our second quarter results came in line with our expectations, with an improvement in year-over-year top line performance. Our investments in product superiority, manufacturing capabilities and key areas of our business are starting to pay off. It's driving momentum and giving us confidence to reiterate our 2025 full year outlook. And while we don't have any new news to report today in our consideration of strategic transactions, I do want to assure you that we are actively progressing on our evaluation, with a focus on unlocking long-term shareholder value. With that, I have Andre joining me, so let's open the call for Q&A.

[Operator Instructions] Our first question is from Andrew Lazar with Barclays.

Carlos, during the quarter, Kraft Heinz put out a release that the company was considering various strategic transactions to create value. As there's nothing specific from the company yet, perhaps maybe we can talk a little bit more in generalities. There is obviously a report from the Wall Street Journal about potential business separation. I know you can't comment on specifics.

But I guess, how would you respond to investors that would say, such actions oftentimes can be nothing more than financial engineering moves that come with higher costs and dis-synergies rather than sort of unlocking value. I'm really just trying to provide maybe a forum where you can talk a little bit about these sorts of things maybe more in general as Kraft looks at a lot of different possibilities, right, to try and unlock value.

Carlos A. Abrams-Rivera: Well, thank you, Andrew. Always great to hear from you. As I said, our Board is working with urgency on an evaluation of those strategic options to unlock, as you said, long-term strategic value creation. And what I will say also is, and I'll remind our investors, is that we will operate with the same financial discipline you have come to expect from us. And so any actions, if any, will be consistent with that goal of unlocking that long-term shareholder value. And that's essentially all I can say at this time. But thank you for your question.

Our next question is from Peter Galbo with Bank of America.

Andre, maybe a bit more of a technical one. But there was a pretty sizable impairment that was taken in the quarter. And I was just hoping to get a little bit more detail. It seemed like it was maybe more at the enterprise level, but I didn't know if that flow down to any of the brands in particular or if it's at all tied to as you contemplate kind of strategic transactions and you think about moving different pieces like that the reporting change triggered the impairment.

And again, it's relatively sizable. So just hoping to get some more detail there.

Thanks for the question, Peter. So look, we recorded a $9.3 billion noncash impairment charge. And the trigger for that was only the fact that we have a sustained decline in the stock price, and that has reduced the carrying value of our intangible assets. We have been monitoring this for some time.

We disclosed in our previously filed 10-Q the risk that this could happen. So it's not really nothing new and nothing beyond that. This does not change the view that we see basic value of the company, including the confidence and direction we have in the strategy.

Our next question is from David Palmer with Evercore ISI.

I am just wondering how you're thinking about your pricing and promotion levels currently. Where do you see perhaps an opportunity to -- or challenge to ramp up promotions or narrow price gaps? And where do you feel like you've taken the steps already that you're comfortable where you are versus your nearing competition, even if that's private label? And then I have a follow-up.

Carlos A. Abrams-Rivera: Thank you, David. Let me start, and then I'll hand it off to Andre, if he want to give additional commentary. But I guess I would just say as context, we are a consumer-centric brand, first of all, which means that we are making sure that our brands are going to continue to build for the long term. And what you see from us is that we continue to invest -- make investments across the board. And that -- some of that investment is actually pricing. We're including about 100 bps in pricing year-over-year. And we also are, on top of that, investing another 30 bps in marketing so that we can reach about 4.8% of marketing as a percent of net sales by 2025 -- by the end of 2025, which will be the highest level in nearly a decade. So -- and in terms of pricing, I guess one clarification that I will make is that if you look at pricing in North America, when you exclude the cost inflation, it's actually negative. So that gives you a sense that we're also being thoughtful about how to think about pricing. Andre, anything else you would add?

Well, as we said before, we have built into the initial plan, about $300 million of investments. We have added a little more towards the second half. We have been concentrating the investments mainly on the key windows. You see more activity now in the third quarter, as we are now at the peak of this summer.

There is some investments that we have saved for this moment as we have a lot of product renovations hit in the market and some core innovations hitting right now. So we concentrated the efforts on that. So we can have the new product, the extra marketing and those investments are hitting at the same time to improve the chance of success. So I mean, beyond that, there is nothing to say.

Carlos, what do you want to say?

Carlos A. Abrams-Rivera: The only thing I would add, David, here is that it's important to note that we are pricing well below inflation. In fact, we expect the inflation to be about 5% to 7% this year. And we're only passing around 1% of the pricing. So we are, in fact, keeping the consumer in mind as we're taking these actions on pricing. I think you had another question, David?

Yes. No. Just one thing I'm thinking about with regard to Kraft Heinz, particularly as you think about strategic actions and presumably, there's parts of the business that might garner a higher multiple than the others. Is this problem we see across food right now where legacy parts of businesses that might be growthier are not doing as well as they might have done over the long term?

And I'm wondering how you're thinking about that with regard to whether it's ACCELERATE, PROTECT or BALANCE. We're seeing on average declines continuing in those businesses. What is your prospects, I guess, to make your growth parts growthy in the near term, particularly if you want to shine a good light on those parts of the business as you think about strategic actions.

Carlos A. Abrams-Rivera: I guess -- let me go back to the -- our strategy that we have been consistent following for the last 18 months or so, which is we are making investments to make sure that we're growing across in emerging markets, North America retail and Away From Home. And in fact, we are continuing to make investments to drive that growth and return capital to our shareholders. And when you look at our pillars, in fact, in emerging markets, you saw, we grew our top line by around 8% through both price and volume, at the same time expanding margins substantially. In fact, we now in emerging markets have the highest OI margin ever. If you look at North America retail and ACCELERATE platforms, we're actually investing also to power by the brand growth system, and we are executing through agile ways of working. And let me just say that if you look at the Nielsen data, IRI data over the last 4 weeks, in fact, when you exclude cold cuts and bacon that drove about 40% of the decline, the rest of the portfolio in total North America retail actually is improving substantially. In fact, in the latest 4-week ex cold cuts and bacon, we are down 2.7%, year-to-date were down 4%. So you are seeing that the actions we're taking in North America retail are also helping us drive the kind of improvements that we wanted to see in the business. And finally, in Away From Home, we're also expanding into footprint, to distribution and driving new innovation into the marketplace. The last thing I would say is that we're not done. We're going to continue to invest in the business, because we are confident in this strategy. We are making sure we spend -- continue to invest in marketing, like I said earlier. We continue to step our investment in e-commerce, which is helping us also drive our improvements in North America. And frankly, we also have a solid balance sheet that allows -- and a strong cash flow that allows us to continue to make these investments. So we feel very good that when you look deeply into our growth pillars, all those actions and investments we're making are in fact taking shape in order for us to be able to continue to drive the company towards long-term success.

And I think beyond that, we have -- as we said before, we have a lot of product innovation hitting the market right now behind Mac & Cheese, Lunchables, Mayo, just to name those three. We have 20% market increase year-over-year expected to the second half. So the vast majority of all the meat increases are all happening now in the second semester. We have, as we said, step up some investments on price towards the key windows that are still to come.

So there is a lot more happening that we should -- and we should continue to see ACCELERATE part of the portfolio in North America improving gradually throughout the remaining quarters.

Our next question is from Leah Jordan with Goldman Sachs.

Just seeing if you could provide more detail on your sales trends across emerging markets? I know there's a big opportunity for distribution gains in Away From Home in the region. So just curious how those gains have tracked versus your expectations so far this year? And how should we think about the pace of those gains in the back half versus the front half?

And really what's giving you the confidence in that double-digit exit rate for this year?

Carlos A. Abrams-Rivera: Great question. Thank you, Leah. Listen, I mean I mentioned that we, in fact, were very pleased to see that the top line now grew about 8%. I think what -- behind those numbers, though, is the fact that the growth coming from both volume and price. And the fact that we are doing that, we're actually increasing our margins at the same time, give us quite a bit of confidence that as we look at the end of this year, we should be able to be hitting a long-term algorithm of double-digit growth. And for us, we continue to see investment in our business and it's not going to stop. Today already, it represents about $2.5 billion business -- of our business overall. And I think what other things that gives me confidence is the fact that when you look and step back and you look at emerging market, it's really a more simple portfolio. If you focus on Taste Elevation, in particular in our Heinz brand, and we have a strong go-to-market model. So when you look at the double click of Heinz in emerging markets, we actually grew about 18% year-over-year. So it is building on the strength of our key brand in a business that we know how to operate with a model that we now have been able to replicate across markets. So it's something that now we have been building on the success that we have in the past historically. And now we're expanding to make sure that we're growing in LatAm, we're growing in our Middle East Asia and Middle East Africa and Asia. And I think for us, we continue to believe that this is a place where we have tremendous opportunity for now and for the long term.

Inflation and promotions that were pushed into the third quarter. Any color on the magnitude of that impact and what drove the timing shift and how you view kind of those cost pressures around inflation today?

Sure. You had called out incremental inflation and promotions that were pushed from 2Q into 3Q. Just any color on the magnitude of that impact we should think about on a quarterly cadence basis? And then what was the driver of that timing shift for those two items? And how are you thinking about inflationary cost pressures today?

Look, magnitude is in the range of 30, 40 bps. It's nothing special. It's mostly the recognition like the -- based on the inventory positions and the throughput, that's how these inventories got recognized in the P&L. So that's why it shifted to Q2, Q3. So nothing really beyond that.

Our next question is from Megan Clapp with Morgan Stanley.

I wanted maybe a follow-up just on the organic sales growth in North America retail. There was a comment in the prepared remarks that you expect gradual long-term improvement in top line trends. And clearly, it seems like just based on your comment around exit rate on emerging markets and food service that the gating factor here continues to be North America retail. So maybe you can just update us on how you're thinking about timing of getting back to just maybe stabilization first and foremost, in North America retail.

Carlos A. Abrams-Rivera: Thank you. For me, what I would say is, and if you go back to kind of the strategy, what's fueling our growth and the improvements in North America performance, it is all the fact that we have now invested through our Brand Growth System back in our products. So we're investing in our growth superiority. We're investing in better marketing, investing in better tool with e-commerce investments that we have made over the last 6 months, and that is giving us the confidence that we continue to see that now play into the marketplace. We ended last year with Brand Growth System impacting about 10% of our business. But at the end of this year, it will be about 40% of our business disproportionately focused in North America ACCELERATE platforms. And you can see how when we are applying that methodology, that actually is driving our improvement in performance. In fact, let me give an example of Capri Sun, which is a business that we renovated. We invested back in the business. We improved the marketing. We improved the products. We make sure that we highlighted the benefit that it have with parents and kids that has no artificial flavors, that we have superior taste, that we have better qualities in terms of things that kids love to have, that we have better promotions, partnering with places like Nintendo, that we bring in new ideas into marketplace like Capri Sun with new promotional limited edition products, whether that is we bring in new -- into new channels, whether it's club, whether it's convenient. So you see how when we apply the Brand Growth System on a brand like Capri Sun that is comprehensive investments we make, the improvement that it yields in our business. So that, along with the fact that we continue to step up our marketing, and as I mentioned earlier, about 30 bps to get us about 4.8% by the end of the year, that combination of the way we are investing, the fact that we're investing more and that we're using agile way to working to then take those learnings and apply it to the portfolio is a combination that we believe is the right tools in order to drive complete continued improvements in our North America retail business.

And then -- and maybe just a quick follow-up for Andre, on the gross margin outlook. Inflation, I think, overall looks to be unchanged for the year, that 5% to 7%, obviously, a wide range. But would you be able to just update us on what base input cost inflation is versus tariffs, if that's changed at all? And then how should we be thinking about what carries into 2026, just what looks to be given a kind of lower exit rate on gross margin in the back half relative to the first half.

Yes. So in terms of inflation, before tariffs, we have the peak of the commodities hitting in Q2, but some of that in terms of P&L recognition got pushed into Q3, and we should expect that some sort of relief started in Q4, so it should start to reach the inflection point. We still have pockets of high commodity inflation, particularly on meat and coffee. Regarding the tariffs, the current expectation based on the latest is an impact of approximately 100 bps this year linked to the tariffs.

And if the tariffs remain as they are right now, it will create a full year annualized impact of approximately 180 bps. So there will be some carryover into that effect in 2026. As I said before, there are a lot of actions in place with our procurement teams and also our commercial teams to mitigate as much as we can, being mindful about the current consumer situation. But some pricing is required, and that's what we are doing.

Our next question is from Max Gumport with BNP Paribas.

Center store peers that have recently established their off-calendar FY '26 outlooks have embedded some pretty meaningful margin pressure over the coming quarters from substantial reinvestment. I recognize, with your marketing going to at least 4.8% of sales and media spending going up at least 20% year-over-year, you are also reinvesting, but it still feels a bit less sizable than what we are seeing from some of these peers. So particularly in light of the continued volume declines, just want to get a better sense for what's giving you the confidence that your investment plans for this year are appropriate.

Thanks for the question. Look, we -- everything we do, we are always very disciplined in our investments, and we like to test investments before scaling them up. So we feel good about the actions that we are doing for this year. I think those are the right ones and the magnitude are appropriate as well.

And as we said in the last earnings, if we see the results we expect from them, we will not hesitate to step up. Keep in mind as well that we are actively expanding the Brand Growth System to more brands as we speak. So this is part of the reason as well we have decided to step up investments a little more beyond what we initially said last quarter. And as opportunities show up, as part of this assessment, we will continue to step up investments.

At this point, we're really trying to grow the business in a way that we think is the healthy like not through price, but through various stronger products and stronger attributes, stronger marketing, which takes more time, but what's the right thing to do. But we are going to step up investments if we deem appropriate. That's for sure.

Anne-Marie Megela: Operator, we have time for one more question.

Our last question is from Alexia Howard with Bernstein Research.

Can I ask about the pace of innovation? If I remember correctly, you were pretty low on the innovation front for much of the pandemic and the global supply chain disruptions. But it sounded as though you exited 2024 at a somewhat higher rate, but probably still quite a lot lower than peers. Can you talk about where you're at today as a percentage of sales?

Where you'd like to get to over time and how quickly you could get there, just so we can get a sense for how quickly that might be ramping up.

Carlos A. Abrams-Rivera: Thank you, Alexia, for your question. I guess, let me just give you a little bit of context, which is for us, it's important that when we define innovation, we're also thinking through what are the places that we can, in fact, renovate many of our key products. So when we talk about our Brand Growth System and the fact that it allows us to focus on us, making sure we bring the attributes to consumers they care about in our core business, that is actually a key part of also thinking through how do we maintain innovation within our business. And I have to say, as you pointed out, I think that if we go back to 2022, I think the number on innovation was around 1.6% of our sales. By the end of the last year, it was about 3% of our sales. So we're going to continue to drive from that investment on innovation to contribute a larger part of our business as we go forward. But I would say it also is already paying off. So if you think about the innovation that we have brought in, like the experience of bringing the Taco Bell restaurant experience to home, it is now the second year in which we're growing the business double digit, and now we're expanding to Canada. I mentioned earlier, Capri Sun bottle that we are now bringing into club. We bring it into a single serve. And now it's achieving high levels of velocities to whatever we have taken that product outside of the pouch. And we're also making sure that we continue to drive innovation in our Heinz business, I mean, whether that is looking at how do we take it into pasta sauce, which is happening across many of our businesses across both Europe and Latin America, but it's also making sure that we continue to expand on the importance of our Heinz Mayo business across our international portfolio and continue to expand into new countries as we go into 2026. So while you're right that we continue to see opportunities for innovation, our focus continues to be making sure we have the right core products with the right renovation in those businesses, and at the same time, being thoughtful about how we are actually bringing innovation to market that has the long-term opportunity to be here for many, many years. And I'm pleased to what I'm seeing. I also think that there's more for us to do. The last thing I would say, yes, is important to recognize. And when we talk about the Brand Growth System, it also creates and highlights opportunity for us to go after new innovation. So you're going to continue to see us going to marketplace, whether that is, with the kind of focus on not only line extension and new exciting flavors, but ways in which we can actually continue to make sure our brands are relevant for now and for the future. More to come.

This concludes today's conference call. We thank you for your participation. You may now disconnect your lines.