Q1 2025 Kraft Heinz Co Earnings Call - Q&A
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 answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad.
A reminder, this conference being recorded.
Speaker Change: Now my pleasure to introduce and memory Megillah head of global Investor Relations. Thank you you may be.
Speaker Change: Thank you.
Speaker Change: Hello, everyone welcome to the Q&A session for first quarter 2025 business update.
Speaker Change: During today's call we may make forward looking statements regarding our expectations for the future, including items related to our business plan and expectation strategy.
Speaker Change: It's an investment and related timing and expected impact.
Speaker Change: These statements are based on how we see things today actual results may differ materially due to risks and uncertainties.
Speaker Change: Please see the cautionary statements and risk factors contained in today's earnings release, which accompanies this call.
Speaker Change: As well as our most recent 10-K.
Speaker Change: 10-Q, and 8-K filings for more information regarding these risks and uncertainties.
Speaker Change: Additionally, we may refer to non-GAAP financial measures, which exclude certain items from our financial results reported in accordance with GAAP.
Speaker Change: Please refer to today's earnings release, and the non-GAAP information available on our website.
Speaker Change: The Orange crop Science company Dot Com under news and events for a discussion of our non-GAAP financial measures and reconciliation to the comparable GAAP financial measures.
Speaker Change: 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.
Speaker Change: And thank you everyone for joining us today are coupons, we are proud to be a trusted partner kitchens everywhere.
Speaker Change: Providing comfort on connections, particularly in this moment of uncertainty.
Speaker Change: 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.
Speaker Change: We are also encouraged by the progress, we're making in improving brand superiority.
Speaker Change: These advancements are no yet reflecting the financial results. They do give me confidence that we are putting in place the right building blocks.
Speaker Change: Our commitment to making the necessary investments to deliver quality and value offerings to our consumers on wavering at the same time, we are closely monitoring market tension and have adjusted our guidance accordingly.
Speaker Change: Is that right.
Speaker Change: Andrew joining me so lets open the call for Q&A.
Speaker Change: Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment it may be necessary.
Speaker Change: Sorry to pick up your handset before pressing the star keys, one moment, while we poll for our first question.
Andrew Lazar: The first question comes from Andrew Lazar with Barclays. Please proceed.
Speaker Change: Great. Thanks, so much Carla.
Speaker Change: Carlos you mentioned in the prepared remarks that the revised outlook provides the necessary flexibility to dial in on investments as deemed appropriate.
Speaker Change: And that says this is not the first time right Kraft heinz's sort of use this language around proposed investments and so far its not proved enough although admittedly in a in a very dynamic consumer environment.
Speaker Change: Many industry players I think have taken the approach of kind of like increasing investments on what seems to be more of an incremental basis to see how the consumer reacts almost like a sort of a test and learn approach.
Speaker Change: The magnitude of today's guidance cut is larger than previous ones, but 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 is more comprehensive and subway. Thanks, so much.
Andrew Lazar: Good morning, Andrew.
Speaker Change: Thanks for the question.
Speaker Change: First let me just say we are continuing to invest in the business. Despite what.
Speaker Change: What we are seeing in terms of the macro economic uncertainty because.
Speaker Change: You know frankly, because we're confident in this trial that we have.
Speaker Change: And I think in moments like this company can be sometimes overly cautious in defensive or play offense.
Speaker Change: We're choosing to play offense with discipline. So we got that in fact prioritizing investments in marketing R&D and technology.
Speaker Change: And the way, we're doing that we focus on increasing returns of our marketing dollars by shifting more towards a consumer facing marketing, while also making sure we're optimizing the allocation across the brands and media types. So that getting fat we make sure we have the best ROI.
Speaker Change: Improved the quality of the messaging at the same time I.
Speaker Change: I mentioned investing in R&D, we are going to continue to invest behind innovation pipeline. We are making sure. We are closing the gap to our investment levels of 32, 1% of net sales.
Speaker Change: As I mentioned technology, we are going to continue investing in technology as well because that actually has helped us in terms of driving the efficiencies in the business by investing in things like automation and enhanced digital tools.
Speaker Change: But you I think you also called too you know why it's just defend what's different now versus in the past.
Speaker Change: You're one of the important part of what is different is the fact that we're also investing through the brand grow system and if you recall the brand growth system is a repeatable global model for understanding how we see opportunity for them within our brands and how do we make sure we drive superiority on those brands through both type products and packaging.
Speaker Change: <unk> and making sure that every communication has the right brands wrestling is by the way equation and your execution. So it's not just what we're spending or how we are spending too.
Speaker Change: And we mentioned in the past that we have done this at about 10% of our branch in 'twenty 'twenty four all the way to pilot that is in fact that will be scaled up to 40% of our business by the end of this year.
Speaker Change: So that idea of us having more comprehensive multi investing because now we have proven that the brand go systems help us find the right opportunities.
Speaker Change: Also 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 disciplined so you'll see us actually step Italian investments in marketing and also to make sure that as we renovate our products. We are supporting it with the right focus on the consumer.
Speaker Change: So we invested behind the Bgs, we make sure we have the great products packaging quality and then we make sure we have the right communications to support that and drive that forward something that helps us work with our Philadelphia bearing 'twenty 'twenty four you helped us in our highest U K business in the last year and now we're gonna be seen that across all.
Speaker Change: Of our brands.
Speaker Change: 'twenty 'twenty four 'twenty 25 here in the U S.
Speaker Change: Yeah, I think good morning out there just your attitude to Carlos.
Speaker Change: So remember that in our.
Speaker Change: Prior guidance, we already had contemplated I step up.
Speaker Change: And price investments and just roughly speaking to the extent of 100 bps on this on the top of the ninth so what's the what's the relevant investment and concentrated on those categories would have played as previously described.
Speaker Change: And we also had in the prior guidance already contemplated up double digits, increasing media. So we were still retaining or marketing presented a rabbit in the $4 five in the prior guidance that'd be week to week by reallocating expenses, we'd need the marketing bucket, we could free up double digits, increasing media no.
Speaker Change: This new guidance we have.
Speaker Change: Open to is there room to further accelerate our marketing investment remember that in our long term algorithm, we want to be approximate that's 5%.
Speaker Change: We havent the midpoint of the guidance around four 8% of market is about 30 bps of step up.
Speaker Change: The December may still fluctuate, a little bit up or down sandy.
Speaker Change: The dynamics happened throughout the year.
Speaker Change: Including finally back on tariffs, but we want to accelerate the step up to at least 5% and we also have the guy that semi back to Cogs didn't get your product renovation as Carlos said this.
Speaker Change: We continue to deploy the bronchial system.
Speaker Change: We are seeing opportunities not only to improve quality of messaging and have more media pressure, but also.
Speaker Change: Two renovated products and any sure I still got superiority.
Speaker Change: Great. Thank you both thank you Andrew.
Speaker Change: The next question comes from gasoline, that's why Andy with Bank of America. Please proceed.
Andy: Hi, Good morning, everyone and thank you for the question.
Speaker Change: So I kind of wanted to dig in a little bit on North America, and you know what the organic sales guidance update for this year. So just for <unk>, specifically, there's a few items here to consider.
Speaker Change: Talk about the Easter timing shift and then Theres a plant closure lap, but they were also impact saucier on multiples from the consumer report and then you got the Capri Sun reformulation impacted consumption. So could you help size those impacts if any to the <unk>.
Speaker Change: Second quarter, and if there's anything else that we should consider that will drive a gap between north American shipments versus consumption.
Speaker Change: Sure. Good morning. Thanks for the question look we expect second quarter top line should be better than the first quarter top line.
Speaker Change: The effect of Easter because it has said before it is approximately 90 bps 100 bps, so that to be.
Speaker Change: They will be in the second quarter.
Yeah in addition to that.
Speaker Change: We have an emerging market its not hard to do as well as the emerging markets further accelerating from where we were in Q1 and inside the U S. Aside from Easter. We do have we were gonna see improvement index platforms, So cream cheese and N a rider.
Speaker Change: For example, they declined in Q1 and that this was totally expected because we were lapping competitors with out of stock issues last year, but now we restore growth and we're going to do were going to see growth in those two categories in the quarter and.
Speaker Change: And to your point, we will see some improvement the lunchables.
Speaker Change: It's still not be the levels that we believe we can achieve.
Speaker Change: What's the name of innovation in the market that there was a second quarter, but you should see lunchables improving particularly after mid May and June that's when we really start to fully lap.
Speaker Change: The consumer reports from from last year.
Speaker Change: On the Muscatine.
Speaker Change: Yeah on the on the factory.
Speaker Change: We we we are lapping that as we head into the second quarter, but they came to mind that they're in.
Speaker Change: History has slowed down.
Speaker Change: Quite a lot.
Speaker Change: This year, so we're not gonna see necessarily a growth in away from home in the second quarter, but beyond that you will see the accelerated platforms.
Speaker Change: Sauces cream cheese meals and snacking with a better performance in comparison to Q1.
Speaker Change: 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 you'll see some nice improvement on volumes given the one time items that you just mentioned your organic sales Cod was basically all volume since the price of contribution it was left unchanged do you see.
Speaker Change: Need for North America volumes to inflect positively in the second half in order to hit your guide or do you expect growth in international, particularly in emerging markets to be enough.
Speaker Change: Your guidance for the year.
Speaker Change: No we don't do it in fact in our the midpoint of our guidance.
Speaker Change: Total corporate it does not get too positive.
Speaker Change: Quarter.
Speaker Change: Okay great.
Speaker Change: Okay.
Speaker Change: Alright, Thank you guys.
Tom Palmer: The next question comes from Tom Palmer with Citi. Please proceed.
Tom Palmer: Good morning, and thanks for the question.
Tom Palmer: Wanted to ask on the on the Cogs inflation the revised outlook just any breakdown of how much of that is related to tariffs.
Tom Palmer: Versus maybe other drivers of that increase and then just the timing of when we really start to see that step up.
Tom Palmer: Thank you.
Tom Palmer: Sure so in our.
Tom Palmer: Hi.
Tom Palmer: Look we had inflation at 3%.
Speaker Change: Before any tariffs or our guidance the step up two 5% of Cogs.
Speaker Change: Particularly in some commodities like coffee and meets we saw.
Speaker Change: A big increase in comparison to the last time, we met so the base population was already up to 5%.
Speaker Change: And now with the tariff impact I mean, obviously lots of uncertainty around that but we do estimate with what we know so far.
Speaker Change: Back in 2075, or 150 to 200 bps on the Cogs.
Speaker Change: I mean wise look we don't know for sure, but we are assuming that it would be.
Speaker Change: Concentrated in the second half maybe there'll be some impact in the second quarter.
Speaker Change: We built some inventory where possible and certain items is as we anticipate that to happen. So that gives a little relief of a mouse neither too in some of the items, but they're there they they back should be mostly concentrated in the second half.
Speaker Change: Okay. Thank you for that.
Speaker Change: And I noted alright, sorry, I noticed that there wasn't a change in kind of that pricing outlook. As you asked me if you said it but it sounds like.
Is it theres price investment in some areas and then there is incremental pricing in other areas, maybe just any any detail you can provide there.
Speaker Change: No it didn't get in the midpoint of the new guidance, we don't have further investments in price.
In addition to the 100 approximately 100 bps, we already had contemplated in the initial outlook. So the incremental investments as I said.
Speaker Change: Mostly myopathy, particularly media.
Speaker Change: Product renovation and there is some some sampling investments because we remember that as we renovate the projects, including the ones that do have renovated last year like Capri Sun, we really need to step up the dry the trial curve. So we are stepping up simply as estimates heading into the summer.
Speaker Change: Alright, Thank you for the details.
Speaker Change: Thank you. The next question comes from David Palmer with Evercore ISI. Please proceed.
Speaker Change: Thanks.
David Palmer: A couple of questions.
David Palmer: You updated that in your inflation guidance and thanks for your comments there on the tariffs.
David Palmer: Being incorporated in that I'm wondering how you're thinking about pricing offsets to that and you know when it gets to a certain level of input inflation and your willingness to price that away.
David Palmer: Are there levels were.
You have to be cognizant of rising price elasticity, perhaps over a few percent for example, where you're you're more aware.
Speaker Change: Of any sort of list pricing and you have to start moving towards other types of adjustments or offsets and then and then separately and Andre I know you've been very active in thinking about promotional activity and returns on that promotional activity. When we look at our data it looks like Kraft high.
Speaker Change: <unk> has been a little bit different than some of the other large food companies and that it's well below 2019 levels in terms of its volume on promotion, whereas some many many years if not most other companies look like they are at those levels already and continuing to rise I'm wondering if you you kind of recognized that juxtaposition and how you.
Speaker Change: Think about the promotion strategy going forward is that something that that you are noticing as well. Thank you.
Speaker Change: But let me start with recycled parts catalogs, and then how long they're going to come in a little bit on the first part of your questions first of all what Youre seeing is the fact that it's both a strategy I mentioned earlier that we are going to continue to make investments and play offense with dish.
Speaker Change: <unk> and I think for US is the opportunity to make sure that we are investing we are doing this in a way that is thoughtful about the return on that investment and that we are building something that supports our strategy and that allows us to grow not only in the short term, but really with the medium and long term, so where are we investing in pricing for a promotional lever.
Speaker Change: Vince 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 the consumer needs us whether that is now memorial day was July 4th when it's back to school.
Speaker Change: We're going to do it in a disciplined way to make sure that again is supporting the strategy that we have and not just chase a short term volume that actually doesn't essentially all you do is kind of rent.
Speaker Change: No Brent volume for a short period of time.
Speaker Change: The other pizza and important to note is that when we're making the investments will also do it in concert with our brand gross systems investments. So that when we are going for our back to school time period, and we have now a renovated.
Speaker Change: New Lunchables, whether we have a rid of it in your Capri Sun, that's a moment for us to know all of these stimulate the demand, but also making sure that consumers get to try the best product that we have ever made on those categories. So I think it's that combination that had kind of guiding a principal versus kind of how competitors are playing at this particular time.
Speaker Change: They're choosing different strategy, we believe we want to make sure that we're doing things smarter smartly, because our focus is continuing to drive profitable growth for the future.
Speaker Change: Although you want to comment on the first part.
Speaker Change: Yeah. So.
Dave: Hey, Dave.
Speaker Change: Look on the on the promo side.
Carlos: Carlos said, we will continue to be disciplined and really seeking those promotions with good returns.
Speaker Change: We'll see.
Speaker Change: The step up.
Speaker Change: Activates duty the key windows, particularly now.
Speaker Change: So you'll see that number stepping up as part of our initial guidance again, we have approximately 100 bps of incremental price investment in the U S.
Speaker Change: On regards to price C diff.
Speaker Change: Tariffs.
Speaker Change: We are trying to do everything we possibly can.
Speaker Change: To minimize the amount of price necessary so.
Speaker Change: Even things like to delay we have anticipated some purchases we are looking at alternative so I see.
Speaker Change: There is opportunity for in some cases, we're formulation, which takes a little bit longer.
Speaker Change: There are opportunities on the mix side, there are certain skus within categories that are less and less impacted than others. When it comes with that so all of that is at play we are.
Speaker Change: Is stepping up for the tip. It in the ear, we started that you're expecting three 5% of Cogs now we are expecting a little more than that so that they can all the possible levers, but but pricing might be necessary. So but again I think this is what your brothers.
Speaker Change: Thank goodness.
Speaker Change: Thank you.
Chris Carey: The next question comes from Chris Carey with Wells Fargo. Please proceed.
Chris Carey: Hi, everyone I wanted to ask a question about gross margins and then just a follow up elsewhere.
Chris Carey: From a gross margin perspective, specifically the Q2 weakness that you are expecting and in the context of just how this typically works.
Chris Carey: It is the primary driver of Q2 gross margin weakness coffee inflation.
Speaker Change: And I guess I asked that question in the context of you know historically this is really a pass through category, where our 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.
Speaker Change: And just given the overall coffee inflation backdrop.
Speaker Change: And then just secondly.
Speaker Change: Or are there are there any areas within your portfolio or broader portfolio.
Speaker Change: What were you seeing more bright spots from a market share perspective, because I think it's similar to last quarter, where we continue to struggle as the other categories have clearly soften but market share performance has come under more pressure and so what are those things that you've been doing over the past few months, maybe specifically, where you're where you're saying okay that you know that that specific strategy is working.
Speaker Change: Right the ship here, because it's been a bit harder to see in the data. So thanks for those two items.
Speaker Change: Sure. Thanks.
Speaker Change: Thanks for the question.
Speaker Change: I will start with the <unk> margins.
Speaker Change: So basically we do expect the press.
Speaker Change: Pressure on the gross margin in the second quarter and there are.
Speaker Change: A few different items affecting the margin to the first one.
Speaker Change: I just had no. Prior question, we do expect.
Speaker Change: The step up in the promotional activity as we start the shipments for the summer season, So we will see a lower price.
Speaker Change: In the P&L.
Speaker Change: Second we are facing in fact off some hedge losses in the second quarter.
Speaker Change: They are not.
Speaker Change: Quite large and the good thing is that once they roll off.
Speaker Change: Q3, it will start to see some of those commodities, that's starting to come down like a database that should flow through the P&L.
Speaker Change: And then third to your point that there are some increases in certain commodities in Q2, and the way we see right now.
Speaker Change: Yes.
Speaker Change: Some of them are going to reach the peak in Q2 and that issue start to go backwards.
Speaker Change: So the rate that at least as you head into the third quarter. So those three elements are the key contributors for the gross margin pressure that we're seeing.
Speaker Change: Yep.
Speaker Change: That is a little bit as well off the product innovations that we are starting to step up.
Speaker Change: So as a result of that plus we are starting to step up investment in marketing, we do expect it to break the eco which declined double digits in the second quarter.
Speaker Change:
Speaker Change: In regards to the bright spots and silver too.
Speaker Change: Yeah.
Speaker Change: If.
Speaker Change: If you look at our year to date, our latest five weeks versus the year to date, you will see us making progress in all of our accelerate businesses.
Speaker Change: But there's 10 celebration when it's ready to eat meals, where there is snacking. So all those things are progressing I think in Q1, obviously, we had the impact of Easter. So I think as we are seeing now the data with you know several weeks of the ETA now read we are going to youre going to continue to see that improvement.
Speaker Change: And I think for example in a business like ours, you know Philadelphia cream cheese, which as we know kind of past the Q1 lapping of the private label not have been on the business in that category last year, you'll see that continue to drive growth, whether you see that in our.
Speaker Change: Desserts business that continues to drive growth after re formulations and focusing on better for you products in that category. So you'll see that many of the investments, we're making will continue to play out as we go through the year.
Speaker Change: So that in the opening statement, which is a lot of the great things that we are seeing in terms of the building blocks and not yet reflecting the data, but those are things that youll see us continue to progress throughout the year I'm also frankly very encouraged about the fact that some of the big innovations. We have done have continued to drive growth so a business like ours.
Speaker Change: Our Mexican strategy, but we didn't have two years ago, we grew double digits last year and we are growing double digits again. This year. So that also gives me.
Speaker Change: Confident the fact that as we are building innovation, we're doing it with the right insight with consumers to drive growth in a sustainable and profitable for the long term.
Speaker Change: Thanks for your question.
Speaker Change: Operator, we have time for one more question.
Speaker Change: Our next question comes from Megan Clark with Morgan Stanley. Please proceed.
Speaker Change: Hi, Good morning. This is alexia on for Megan in the prepared remarks, you guys mentioned the wider operating income guide partly reflects changing policy landscape.
Speaker Change: We be thinking about that from a topline perspective or is that related to costs, just any incremental color you could give there would be great. Thanks.
Speaker Change: And thanks for the question look there.
Speaker Change: As you know a lot of things being discussed under consideration that my has implications on the business positive or negative so.
Speaker Change: Part of the reason why we have these wider ranges should contemplate.
Speaker Change: For a different set of scenarios that can come into play.
Speaker Change: So we're trying to just provide the flexibility knowing that there is a.
Speaker Change: A number of things that are still volatile.
Speaker Change: I mean that guidance and Youll see us that we are acknowledging some of those things we are preparing for those things and also at the same time, making sure that we'd have the right flexibility to invest back into the business in order to drive that.
Speaker Change: Trade that we have and then fuel.
Speaker Change: The opportunities that we are seeing with our brand grow system towards spend back into our brands. So that that's all reflected in the way we kind of shaping the year ahead.
Thank you Alexia.
Speaker Change: And thank you everyone for joining us operator that concludes our Q&A session.
Speaker Change: Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Speaker Change: Okay.
Speaker Change: [music].