Greetings, and welcome to The Kraft Heinz Company First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Anne-Marie Megela, Head of Global Investor Relations. Thank you. You may begin.

Thank you, 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 statement and risk factors contained in today's earnings release which accompanies this call, as well as our most recent 10-Ks, 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, over to you.

Thank you, Marie. And thank you everyone for joining us today. At The Kraft Heinz Company, we are proud to be a trusted partner in kitchens everywhere, providing confident connections particularly in these moments of uncertainty. Now despite growing market pressure in the first quarter, we delivered top-line results in line with our expectations, with strong cash flow performance and a healthy balance sheet. We are also encouraged by the progress we are making in improving brand superiority. While these advancements are not yet reflected in the financial results, they do give me confidence that we are putting in place the right building blocks. Our commitment to making the necessary investments to deliver quality and value offerings to our consumers is unwavering. At the same time, we are closely monitoring market tension and have adjusted our guidance accordingly. With that, I have Andrew joining me. So let's open the call for Q&A.

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. The first question comes from Andrew Lazar with Barclays. Please proceed.

Great. Thanks so much.

Carlos, you mentioned in the prepared remarks that the revised outlook provides the necessary flexibility to dial in on investments as deemed appropriate. And that said, this is not the first time, right? The Kraft Heinz Company has sort of used this language around proposed investments. And so far, it's not proved enough, although, admittedly, in a very dynamic consumer environment. You know, many industry players, I think, have taken the approach of kind of, like, increasing investments on seems to be more of an incremental basis to see how the consumer reacts, almost like a test and learn approach. The magnitude of today's guidance cut is larger than previous ones. I'm still getting a lot of questions from investors, I guess, as to whether this is more of the same sort of approach or if you see it as more comprehensive in some way. Thanks so much. Good morning, Andrew. Thanks for the question. First, let me just say, we are continuing to invest in the business despite what we are seeing in terms of the macroeconomic uncertainty, because frankly, we are confident in the strategy that we have. And I think in moments like this, a company can be sometimes overly cautious and defensive, or play offense. We are choosing to play offense with discipline. So we are, in fact, prioritizing investments in marketing, R&D, and technology. The way we are doing that, Andrew, is we focus on increasing returns on our marketing dollars by shifting more towards consumer-facing marketing. We are also making sure we are optimizing the location across the brands and media types so that we can, in fact, make sure we have the best ROI. We can improve the quality of the messaging at the same time. I mentioned investing in R&D. We are going to continue to invest behind the innovation pipeline. We are making sure we are closing the gap to our investment levels that is 1% of net sales. I mentioned technology. We are going to continue investing in our technology as well because that actually has helped us in terms of driving efficiencies in the business by investing in things like automation and enhanced digital tools. But you also spoke to, you know, why is this different? What's different now versus in the past? I'll tell you one of the important parts of what is different is the fact that we are also investing through the brand growth system. And if you recall, the brand growth system is our repeatable global model for understanding how we see opportunities within our brands, and how do we make sure we drive superiority on those brands through both pack products and packaging and making sure that every brand has the right brand resonance value equation, and on the execution. So it's not just what we are spending, but how we are spending too. And we mentioned in the past that we have done this with about 10% of our brands in 2024. Out of way to pilot. That is, in fact, now being scaled up to 40% of our business by the end of this year. So that idea of us having more confidence in us investing because we now we have proven that the brand growth systems help us identify the right opportunities and allow us to make sure we take the right steps in order to fuel the investments. I think it's part of why we are going to be playing offense with discipline. So you'll see us actually step up our investments in marketing also to make sure that as we renovate our products, we are supporting it with the right focus on the consumer communication. So we invest behind the BGS. We make sure we have the great products, packages, and quality. Then we make sure we have the right communication to support that and drive that forward. It's something that helped us work with our Philadelphia brand in 2024. It helped us in the highest UK business in the last year. And now we are going to be seeing that across all of our brands as we move towards 2024 and 2025 here in the US.

I think good morning, Andrew. Just to add to Carlos, remember that in our prior guidance, we already had contemplated a step up in price investments. And just roughly speaking to the extent of hundred basis points on the top line. So was a relevant investment and concentrated on those categories we have previously described. And we also had in the prior guidance already contemplated a double-digit increase in media. So we were still retaining our marketing percentage of revenue at 4.5 in the prior guidance, and we by reallocating expenses within the marketing bucket, we could free up a double-digit increase in media. Now in this new guidance, we have opened the room to further accelerate our market investment. Remember that in our long-term algorithm, we want to be approximate at 5%. We have the midpoint of the guidance around 4.8% of marketing, so a 30 basis points step up. There is still this number might still fluctuate a little bit up or down depending how the dynamics happen throughout the year, including final impact on tariffs. But we want to accelerate the step up to reach the 5%. We also have in the guidance some impact in COGS linked to product renovation, as Carlos said. As we continue to deploy the brand growth system we have seen opportunities not only to improve the quality of messaging and have more media pressure, but also to renovate the products and ensure stronger superiority. Right. Thank you both.

The next question comes from Yasmeen Wandi with Bank of America. Please proceed.

Hi. Good morning, everyone, and thank you for the question. So I kind of wanted to dig in a little bit on North America and you know, the organic sales guidance update for this year. So just for Q2 specifically, there's a few items here to consider. You know, you talked about the Easter timing shift, and then there's a plant closure lap. But there were also impacts last year on Lunchables from the consumer report, and then you had the Capri Sun reformulation impacting consumption. So could you help size those impacts, if any, to the second quarter? And if there's anything else that we should consider that will drive a gap between North America shipments versus consumption.

Sure. Good morning. Thanks for the question. Look, we expect second quarter top line to be better than the first quarter top line. The effect of Easter, as I said before, is approximately 90 basis points to a hundred basis points. So that will be a tailwind in the second quarter. In addition to that, we have emerging markets not part of the US, but we have emerging markets further accelerating from where we were in Q1. And inside the US, aside from Easter, we are going to see improvement in the accelerated platforms. So cream cheese and Oreo, for example, they declined in Q1, and that's this was totally expected because we are lapping competitors with out of stock issues last year. But now we expect growth, and you're going to see growth in those two categories in the quarter. And to your point, we will see some improvement in Lunchables. It’s still not at the levels that we believe we can achieve. As part of as the main renovation hits the market at the end the second quarter. But you should see Lunchables improving, particularly after mid-May and June. So that's when we really start to fully lap the consumer reports from last year. On the Muscatine factory, we are lapping that as we head into the second quarter. But taking to mind that the industry food service has slowed down quite a lot this year. So we are not going to see necessarily growth in away from home in the second quarter. But beyond that, you will see the accelerated platforms sausage, cream cheese, meals, and snacking with a better performance comparison to Q1.

Okay, great. Thank you. That's really helpful. And a quick follow-up to that. Just looking into the second half of the year, obviously, understanding that in February, you'll see some nice improvement on volumes given, you know, the one-time items that you just mentioned. You know, your organic sales cut was basically all volume since the price and contribution was left unchanged. Do you see a need for North America volumes to inflect positively in the second half in order to hit your guidance? Or do you expect growth in international, particularly in emerging markets, to be enough to hit your guidance for the year?

No, we don't need. In fact, in the midpoint of our guidance, the total company does not get you positive in any quarter.

Alright. Thank you, guys. Great. Next question comes from Tom Palmer with Citi. Please proceed.

Good morning and thanks for the question. I wanted to ask on the COGS inflation, the revised outlook. Just any breakdown of how much of that is related to tariffs versus maybe other drivers of that increase? And then just the timing of when we really start to see that step up. Thank you.

Sure. So in our prior outlook, we had inflation at 3%. So before any tariffs, our guidance is stepped up to 5% of COGS. Particularly in some commodities like coffee and meat. We saw a big increase in comparison to the last time we met. So the base inflation was already up to 5%. And now with the tariff impact, there are obviously a lot of uncertainties still around that, but we do estimate with what we know so far an impact in 2025 of 50 to 200 basis points on the COGS. Timing wise, we don't know for sure. Right? We are assuming that this would be concentrated in the second half. Maybe there'll be some impact in the second quarter. We build some inventory where possible in certain items as we anticipated that to happen. So that gives a little relief of a month or maybe two in some of the items. But the impact should be mostly concentrated in the second half.

Perfect. Thank you for that. And I noted or sorry, I noticed that there wasn't a change in kind of that pricing outlook, as Yasmeen just noted. But it sounds like there's price investment in some areas and then there are incremental pricing in other areas? Maybe just any detail you can provide there.

No. In the midpoint of the new guidance, we don't have further investments in price in addition to the approximately hundred basis points we already had contemplated in the initial outlook. So the incremental investments, as I said, are mostly on marketing, particularly media, product renovation, and there are some sampling investments because we remember that as we renovate the products, including the ones that we have renovated this year, like Capri Sun, we really need to step up the trial curve. So we are stepping up sample investments heading into the summer.

Thank you. The next question comes from David Palmer with Evercore ISI. Please proceed.

Thanks. A couple of questions. You updated that your inflation guidance, thanks for your comments there on the tariffs. Being incorporated in that. I wonder how you're thinking about pricing offsets to that. And know, when it gets to a certain level of input inflation and your willingness to price that away, are there levels where you have to be cognizant of rising price elasticity perhaps over a few percent, for example, where you're more aware of any sort of list pricing, and you have to start moving towards other types of adjustments or offsets. And then I separately and, Andre, I know you've been very active in thinking about, you know, promotional activity and returns on that promotional activity. We look at our data, it looks like The Kraft Heinz Company has been a little bit different than some of the other larger food companies and that it's well below 2019 levels in terms of its volume on promotion, whereas many other companies look like they're at those levels already and continuing to rise. I'm wondering if you kind of recognize that juxtaposition and how you think about the promotion strategy going forward. Is that something that you're noticing as well? Thank you.

By the way, let me start with the second part, Carlos, and then have Andrew comment a little bit on the first part of your questions. You know, first of all, what you're seeing is the fact that it follows our strategy. I mentioned earlier that we are going to continue to make investments and play offense with discipline. I think for us, it's the opportunity to make sure that when we are investing we are doing this in a way that is thoughtful about the return of that investment and that we are building something that supports our strategy and allows us to grow not only in the short term, but really in the medium and long term. What we're investing in pricing for a promotional event is because we believe that actually creates the kind of base volume opportunities as we go post that particular event. So you'll see us continue to invest in times of the year that consumer needs us—whether that is now Memorial Day, whether it's July 4, or whether it's back to school. Just going to do it in a disciplined way to make sure that, again, it's supporting the stride that we have and not just change a short term volume that actually doesn't essentially, all you do is kind of rent volume for a short period of time. The other piece that is important to notice that, when we're making those investments, we're also doing it in concert with our brand growth systems investments. So that when we are going for a back-to-school time period and we have now a renovated new Lunchables, whether we have a renovated new Capri Sun, that's a moment for us to not only stimulate the demand but also making sure that then consumers get to try the best product that we have ever made in those categories. So I think it's that combination that is kind of guiding our principles versus how competitors are playing at this particular time. They're choosing a different strategy. You know, we believe we want to make sure that we're doing things smartly because our focus is to continue to drive profitable growth for the future. Andrew, you want to comment on the first part? Yeah. So hi, Dave. Look. On the promo side, Carlos said, we will continue to be disciplined and really seeking those promotions with good returns. You will see a step up in promotion activity during the key windows, particularly now in summer. So it will that number stepping up as part of our initial guidance. Again, we have approximately a hundred basis points of incremental price investment in the US. And regarding pricing the tariffs, look. We are trying to do everything we possibly can to minimize the amount of price necessary. So even things like delaying, we have anticipated some purchases. We are looking at alternative sourcing. There is opportunity for, in some cases, reformulation, which takes a little bit longer. There are opportunities on the mix side. There are certain SKUs within a category that are less impacted than others when it comes to tariffs. So all of that is at play. We are stepping up productivity in the year. We started the year expecting 3.5% of COGS. Now we're expecting a little more than that. So we are taking all the possible levers, but pricing might be necessary. But again, I think this is that it is a work in progress.

Thank you.

The next question comes from Chris Carey with Wells Fargo. Please proceed.

Hi, everyone. I wanted to ask you a question about gross margins and just a follow-up elsewhere. From a gross margin perspective, specifically the Q2 weakness that you're expecting and in the context of just how this typically works, you know, is the primary driver of Q2 gross margin weakness coffee inflation? And I guess I asked that question in the context of, you know, historically, is really a pass-through category? Where, you know, pricing comes through to offset the inflation. Understanding there's always going to be quarter-to-quarter volatility, but are you seeing perhaps less ability to pass through the coffee inflation just given the overall coffee inflation backdrop? And then I, you know, just secondly, are there any areas within your portfolio or broader portfolio where you're seeing, you know, more bright spots from a market share perspective? Because I think, you know, it's similar to last quarter. Where we continue to struggle is, you know, the categories have clearly softened, but market share performance has come under more pressure. So what are those things that you've been doing over the past few months maybe specifically where you're saying, okay? That you know, that specific strategy is working to kind of right the ship here because it's been a bit harder to see in the data. So thanks for those two items.

Sure. Thanks for the question. I will start with the Q2 margins. So basically, we do expect pressure on the gross margin in the second quarter, and there are a few different items affecting the margin. The first one is, as I just said in the prior question, we do expect a step up in the promotion activity as we start the shipments for the summer season. So we will see a lower price in the P&L. The second, we are facing impact of some hedge losses in the second quarter. And they are quite large, and the good thing is that once they roll off, heading to Q3, we'll start to see some of those commodities starting to come down, like dairy starting to flow through the P&L. And third, to your point, there are some increases in certain commodities in Q2. And the way we see right now is some of them are going to reach the peak in Q2, and that they should start to go backwards or decelerate at the least as you head into the third quarter. So those three elements are the key contributors for the gross margin pressure that we are seeing. And there is a little bit as well of the product renovations that we're starting to step up. So as a result of that, plus we're starting to step up investment in marketing, we do expect the operating income to decline double digits in the second quarter. When it comes to the bright spots, that's over to you. Listen. I think if you look at our year-to-date, our latest five weeks versus the year-to-date, you see us making progress in all of our accelerated businesses. So whether it's cancellation, whether it's ready-to-eat meals, or whether it's snacking. So all those things are progressing. I think in Q1, obviously, we had the impact of Easter. I think as we are seeing now the data with several weeks of the Easter now read, we are going to continue to see that improvement. And I think, for example, in a business like our Philadelphia cream cheese, which as we now kind of pass the Q1 lapping of the private label that has been off the business in the category last year, you see that continue to drive growth, whether you see that in our desserts business that continue to drive growth after reformulations and focusing on better-for-you products in that category. So you will see that many of the investments we’ll make will continue to play out as we go through the year. And I mentioned that in the opening statement, is a lot of the great things that we are seeing in terms of the building blocks and not yet all reflecting the data, but those are things that you'll see us as we continue to progress throughout the year. I'm also frankly very encouraged about the fact that, you know, some of the big innovations we have done have continued to now drive growth. So a business like our Mexican strategy that we didn't have two years ago grew double digits last year, and we are growing double digits again this year. So that also gives me confidence in the fact that as we are building innovation, we're doing it with the right insights with consumers to drive growth that is sustainable and profitable for the long term. Thanks for your question.

Operator, we have time for one more question.

Our next question comes from Megan Clap with Morgan Stanley. Please proceed.

This is Alexia on for Megan. In the prepared remarks, you guys mentioned the wider operating income guide partly reflects the changing policy landscape. Should we be thinking about that from a top line perspective, or is that related to cost? Just any incremental color you could give there would be great. Thanks.

Thanks for the question. Look, there are, as you know, a lot of things being discussed and under consideration that may have implications on the business, positive or negative. So part of the reason why we have this wider range is to contemplate a whole different set of scenarios that can come into play. So we're trying to just provide, you know, the flexibility knowing that there are a number of things that are still boiling out. But in that guidance, and you'll see us that we are acknowledging some of those things. We're preparing for those things. And also at the same time, sure that we have the right flexibility to invest back in the business in order to drive the trade that we have. And then fuel the opportunities that we are seeing with our brand growth system to expand back in our brands. So that's all reflected in the way we're kind of shaping the year ahead. Thank you, Alexia.

And thank you everyone for joining us. Operator, that concludes our Q&A session.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.