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

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.

Well, thank you, Anne-Marie, and thank you, everyone, for joining us today. 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.

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.

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 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 flowed 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. 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 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 would like to know your current approach to pricing and promotions. Do you see any opportunities or challenges in increasing promotions or narrowing price gaps? Additionally, where do you feel confident about the steps you've already taken compared to your competitors, including private labels? I also have a follow-up question.

Thank you, David. Let me start, and then I'll hand it off to Andre, if he wants 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 continue to build for the long term. What you see from us is that we continue to invest across the board. Some of that investment is actually pricing. We're including about 100 basis points in pricing year-over-year. And we are also, on top of that, investing another 30 basis points in marketing so that we can reach about 4.8% of marketing as a percent of net sales by the end of 2025, which will be the highest level in nearly a decade. In terms of pricing, one clarification that I will make is that if you look at pricing in North America when you exclude 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 are some investments that we have saved for this moment as we have a lot of product renovations hit 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?

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 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 are parts of the business that might garner a higher multiple than 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 are your prospects, I guess, to make your growth parts grow, particularly if you want to shine a good light on those parts of the business as you think about strategic actions?

Let me go back to the strategy that we have been consistently following for the last 18 months or so, which is we are making investments to ensure that we're growing across emerging markets, North America retail, and Away From Home. In fact, we are continuing to make investments to drive that growth and return capital to our shareholders. 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 operating income 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. 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 we 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. Finally, in Away From Home, we're also expanding our footprint, 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 continue to invest in marketing, like I said earlier. We continue to ramp up our investment in e-commerce, which is helping us also drive our improvements in North America. We also have a solid balance sheet and strong cash flow that allows us to continue to make these investments. We feel very good that when you look deeply into our growth pillars, all those actions and investments we're making are taking shape to drive the company towards long-term success.

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

Great question. Thank you, Leah. I mentioned that we were very pleased to see that the top line now grew about 8%. Behind those numbers, though, is the fact that the growth is coming from both volume and price. The fact that we are doing that while increasing our margins gives us quite a bit of confidence that as we look at the end of this year, we should be able to hit a long-term algorithm of double-digit growth. For us, we continue to see investment in our business, and it's not going to stop. It already represents about $2.5 billion of our overall business. What gives me confidence is the fact that when you look at emerging markets, it's really a more simple portfolio. If you focus on Taste Elevation, particularly in our Heinz brand, we have a strong go-to-market model. When you step back and look at Heinz in emerging markets, we grew about 18% year-over-year. So we are building on the strength of our key brand in a business that we know how to operate with a model that we have been able to replicate across markets. We are expanding to ensure we are growing in Latin America, the Middle East, and Asia. For us, we continue to believe that this is a place where we have tremendous opportunity for now and for the long term.

Any color on the magnitude of the impact of inflation and promotions that were pushed into the third quarter? What drove the timing shift and how do you view cost pressures around inflation today?

Look, the magnitude is in the range of 30 to 40 basis points. It's nothing special. It's mostly the recognition 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 and Q3. 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. Clearly, it seems like based on your comment around exit rate on emerging markets and food service, the gating factor here continues to be North America retail. Maybe you can just update us on how you're thinking about timing of getting back to stabilization first and foremost in North America retail.

Thank you. For me, what I would say is, if you go back to the strategy, what's fueling our growth and improvements in North America performance is that we have now invested through our Brand Growth System back into our products. We're investing in our growth superiority, better marketing, and better tools with e-commerce investments that we have made over the last 6 months. That is giving us the confidence that we continue to see that now play into the marketplace. We ended last year with our 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 on North America ACCELERATE platforms. You can see how when we apply that methodology, it drives our improvement in performance. For example, Capri Sun is a business that we renovated. We invested back into the business, improved marketing, improved the products, highlighting benefits that resonate with parents and kids, emphasizing qualities that kids love and better promotions. We are applying this methodology to drive continual improvements in our North America retail business.

And maybe just a quick follow-up for Andre on the gross margin outlook. Inflation looks unchanged for the year, that 5% to 7%, a wide range. But could you just update us on what base input cost inflation is versus tariffs? How should we think about what carries into 2026, given a kind of lower exit rate on gross margin in the back half relative to the first half?

Yes. 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. We should expect some relief to start in Q4, reaching the inflection point. We still have pockets of high commodity inflation, particularly on meat and coffee. Regarding the tariffs, the current expectation is an impact of approximately 100 basis points this year linked to the tariffs. If the tariffs remain as they are right now, it will create a full year annualized impact of approximately 180 basis points. This effect will carry over into 2026. As I said earlier, there are a lot of actions in place with our procurement and commercial teams to mitigate as much as we can, while being mindful of the current consumer situation. 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 peers. 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 are always very disciplined in our investments and we like to test investments before scaling them up. We feel good about the actions that we are undertaking for this year. I think the magnitude is appropriate as well. 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 we're actively expanding the Brand Growth System to more brands as we speak. This is part of the reason we have decided to step up investments a little more than what we initially said last quarter. We are really trying to grow the business healthily by prioritizing stronger products, attributes, and marketing without relying solely on pricing, which takes more time but is the right approach. We will step up investments if we deem appropriate, that's for sure.

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 of how quickly that might be ramping up.

Thank you, Alexia, for your question. Let me give you a little context. It's important that when we define innovation, we're also thinking through the places where we can renovate many of our key products. Our Brand Growth System allows us to focus on meeting consumer needs in our core business, which is crucial for maintaining innovation. If we go back to 2022, the innovation percentage was around 1.6% of our sales. By the end of last year, it was about 3% of our sales. We are driving innovation to contribute a larger part of our business as we go forward. Importantly, it's already paying off. For instance, we're growing the business double digit by bringing the Taco Bell restaurant experience home and expanding it to Canada. We're also improving our Capri Sun product and expanding into new channels. Our focus continues to be on ensuring we have the right core products with the necessary renovations and creating opportunities for new innovation in the marketplace. We are not done yet; I believe there's more for us to do.

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