The Kraft Heinz Company - Earnings Call - Q2 2025 [Q&A]

Executive Summary

• Q2 2025 was operationally solid with broad-based beats on revenue, adjusted EPS, and EBITDA versus Wall Street consensus, but headline GAAP results were dominated by a $9.3B non-cash impairment, yielding a GAAP operating loss of $8.0B and GAAP diluted EPS of $(6.60).
• Net sales of $6.35B fell 1.9% YoY while Organic Net Sales declined 2.0%; price was +0.7pp, volume/mix −2.7pp; Emerging Markets grew with price and volume while North America and International Developed declined.
• Management reaffirmed FY25 guidance (Organic Net Sales down 1.5% to 3.5%; Constant Currency Adjusted OI down 5% to 10%; Adjusted EPS $2.51–$2.67; FCF flat, ≥95% conversion), but lowered margin expectations to the low end of the prior range; CFO highlighted tariff headwinds (~100bp in 2025; ~180bp annualized if unchanged).
• Cash generation and capital returns remain strong: YTD Free Cash Flow of $1.50B (+28.5% YoY), dividends paid $951M, and $435M in share repurchases; Board declared a $0.40 quarterly dividend payable Sept 26, 2025.
• Potential strategic transactions remain under evaluation; CEO emphasized discipline and long-term value creation—an ongoing narrative that could be a stock catalyst as options crystallize.

What Went Well and What Went Wrong

What Went Well

• Strong beat vs consensus: Adjusted EPS $0.69 vs ~$0.64*, revenue $6.35B vs ~$6.27B*, and EBITDA ~$1.56B vs ~$1.47B*, reflecting cost discipline and Emerging Markets strength. Values retrieved from S&P Global*.
• Emerging Markets delivered growth and margin expansion; management said it achieved its “highest OI margin ever” in EM and highlighted Heinz growth +18% YoY in EM.
• Robust cash generation: YTD operating cash flow $1.93B (+12.6%), FCF $1.50B (+28.5%) with FCF conversion at 96%.

What Went Wrong

• GAAP optics were very weak due to the $9.3B non-cash impairment driven by sustained share price and market cap declines, resulting in GAAP diluted EPS of $(6.60).
• Adjusted Operating Income fell 7.5% YoY to $1.28B, pressured by commodity cost inflation and unfavorable volume/mix despite pricing and lower SG&A.
• North America continued to drag: segment net sales −3.3% YoY; management cited declines in cold cuts, coffee, Lunchables, frozen snacks, and powdered beverages, and noted pricing below inflation in NA.

Transcript

Operator (participant)

Greetings and welcome to The Kraft Heinz Company second quarter 2025 earnings 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 star zero on your telephone keypad. 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 (Head of Investor Relations)

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 risk 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 Abrams-Rivera (CEO)

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, driving momentum and giving us confidence to reiterate our 2025 full-year outlook. While we do not 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 the Q&A.

Operator (participant)

We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Andrew Lazar with Barclays.

Andrew Lazar (Managing Director)

Great. Thanks so much. Good morning. 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 was 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 dyssynergies 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 Abrams-Rivera (CEO)

Thank you, Andrew. Always great to hear from you. As I said, our board is working with urgency on our evaluation of those strategic options to unlock, as you said, long-term strategic value creation. 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. Any actions, if any, will be consistent with that goal of unlocking that long-term shareholder value. That's essentially all I can say at this time. Thank you for your question.

Andrew Lazar (Managing Director)

Yep. Gave it a shot. Thank you.

Operator (participant)

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

Peter Galbo (Director and Head of U.S. Consumer Staples Equity Research)

Hey, guys. Good morning. Thanks for taking the question.

Carlos Abrams-Rivera (CEO)

Morning.

Peter Galbo (Director and Head of U.S. Consumer Staples Equity Research)

Maybe a bit more of a. Morning. Maybe a bit more of a technical one. There was a pretty sizable impairment that was taken in the quarter, and was just hoping to get a little bit more detail. It seemed like it was maybe more at the enterprise level, but I did not know if that flowed down to any of the brands in particular or if it is 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. Again, it is relatively sizable, so just hoping to get some more detail there. Thanks very much.

Carlos Abrams-Rivera (CEO)

Sure. Thanks for the question. Look, we recorded a $9.3 billion non-cash 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. It is not really anything new and nothing beyond that. This does not change the view that we have of the company, including the confidence and direction we have in the strategy.

Peter Galbo (Director and Head of U.S. Consumer Staples Equity Research)

Okay. Thanks very much.

Operator (participant)

Our next question is from David Palmer with Evercore ISI.

David Palmer (Senior Managing Director)

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

Carlos Abrams-Rivera (CEO)

Thank you, David. Let me start, and then hand it off to Andre who may give additional commentary. I guess I would just say as context, we're certainly a consumer-centric brand, first of all, which means that we are making sure that our brands are brands that are going to continue to build for the long term. What you see from us is that we continue to make investments across the board. Some of that investment is actually in pricing. We're including about 100 basis points in price year-over-year. We also are, 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 2025. By the end of 2025, which will be the highest level in nearly a decade.

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 of production inflation, it's actually negative. That gives you a sense that we're also being thoughtful about how to think about pricing. Andre, anything else you would add?

Andre Maciel (EVP and Global CFO)

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 the summer. There are some investments that you have saved for this moment as we have a lot of product renovations hitting the market and some core innovations hitting right now. We concentrated the efforts on that so you can have the new product, the extra marketing, and those investments all hitting at the same time to improve the chance of success. I mean, beyond that, there is nothing to say. Carlos, I do not want to see.

Carlos Abrams-Rivera (CEO)

Yeah. The only thing I would add, David, here is that it's important to know that we are pricing well below inflation. In fact, we're expecting inflation to be about 5%-7% this year, and we're only passing about around 1% of the pricing. So we are, in fact, keeping the consumer in mind as we're taking these actions on pricing. Sounds like you had another question, David?

David Palmer (Senior Managing Director)

Yeah. No, thank you for that. Just one thing I'm thinking about with regard to Kraft Heinz, particularly as you think about strategic actions. Presumably there are parts of the business that might garner a higher multiple than others. Is this problem that 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? 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? Thanks.

Carlos Abrams-Rivera (CEO)

Thank you. I guess let me go back to 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 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 our highest OI margin ever. If you look at North America retail and accelerate platforms, we are actually investing also to power by the brand growth system, and we are executing through agile ways of working.

Let me just say that if you look at some data, IRI data over the last four 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 four weeks, ex. cold cuts and bacon, we are down 2.7% year to date, with down 4%. 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 are also expanding into footprints and distribution and driving new innovation into the marketplace. The last thing I will say is that we're not done. We're going to continue to invest in the business because we are confident in the strategy.

We're making sure we 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. Frankly, we also have a solid balance sheet that allows us and a 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, in fact, taking shape in order for us to be able to continue to drive the company towards long-term success.

Andre Maciel (EVP and Global CFO)

I think beyond that, we have, as we said before, we have a lot of product renovation 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 to the second half. The vast majority of all the media increases are all happening now in the second semester. We have, as we said, the step-ups, 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.

Carlos Abrams-Rivera (CEO)

Thank you, David.

David Palmer (Senior Managing Director)

Thank you.

Operator (participant)

Our next question is from Leah Jordan with Goldman Sachs.

Leah Jordan (Analyst)

Thank you. Good morning. Just seeing if you could provide more detail on your sales trends across emerging markets. I know there is a big opportunity for distribution gains and away from home in the region. 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? Really, what is giving you the confidence in that double-digit exit rate for this year?

Carlos Abrams-Rivera (CEO)

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's 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 actually increasing our margins at the same time gives 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. 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.

I think one other thing that gives me confidence is the fact that when you look at step-backs and you look at emerging markets, it's really a more simple portfolio. It is focused on taste elevation, in particular in our Heinz brand, and we have a strong go-to-market model. When you look at the double-click of Heinz in emerging markets, it actually grew about 18% year-over-year. It is building on the strengths 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. It is 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.

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. Thank you, Leah.

Leah Jordan (Analyst)

Thank you. I [audio disruption] 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?

Carlos Abrams-Rivera (CEO)

Sorry, Leah. You got cut off at the beginning of the question. If you can repeat it.

Leah Jordan (Analyst)

Oh, 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. What was the driver of that timing shift for those two items, and how are you thinking about inflationary cost pressures today?

Andre Maciel (EVP and Global CFO)

Look, magnitude is in the range of 30-40 basis points. Yeah, 30-40 basis points. 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. That's why it shifted Q2, Q3. Nothing really beyond that.

Leah Jordan (Analyst)

Great. Thank you.

Andre Maciel (EVP and Global CFO)

Thank you, Leah.

Operator (participant)

Our next question is from Megan Clapp with Morgan Stanley.

Megan Clapp (Executive Director)

Hi, good morning. Thanks so much. 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 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. 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. Thank you.

Carlos Abrams-Rivera (CEO)

Thank you. For me, what I would say is, if you go back to kind of the strategy that was 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. We are investing in our products of priority. We are investing in better marketing. We are investing in better tools with e-commerce investments that we have made over the last six months. 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. By the end of this year, it will be about 40% of our business, disproportionately focused in North America accelerated platforms.

You can see how when we are applying that methodology, that actually is driving our improvement in performance. In fact, let me give you 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 benefits that it has with parents and kids, that it 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 the marketplace like Capri-Sun with new promotional limited edition products, whether that is we bring in new channels, whether it is club, whether it is convenient.

You see how when we apply the brand growth system at a brand like Capri-Sun that is comprehensive, the investments we make, the improvement that it yields in our business. That, along with the fact that we continue to step up our marketing, as I mentioned earlier, about 30 basis points to get us about 4.8% by the end of the year, that combination of the way we are investing, the fact that we are investing more, and that we are using agile ways of 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 continued improvements in our North America retail business.

Megan Clapp (Executive Director)

Okay. Thanks for that.

Carlos Abrams-Rivera (CEO)

Thank you for your question.

Megan Clapp (Executive Director)

Thank you. And then maybe just a quick follow-up for Andre on the gross margin outlook. Inflation, I think overall looks to be unchanged for the year at that 5%-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? Thank you.

Andre Maciel (EVP and Global CFO)

Yeah. 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 start to expect some part of relief starting in Q4. We should start to reach the inflection points. We still have pockets of high commodity inflation, particularly on beef and coffee. Regarding the tariffs, the current expectation based on the latest 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 analyzed impact of approximately 180 basis points. There will be some carryover into that, affecting 2026.

As I said before, there are a lot of actions in place for procurement teams and also for commercial teams to mitigate as much as we can, being mindful about the current consumer situation. Some pricing is required, and that's what we are doing.

Megan Clapp (Executive Director)

Okay. Great. Thank you.

Andre Maciel (EVP and Global CFO)

Thank you.

Operator (participant)

Our next question is from Max Gumport with BNP Paribas.

Max Gumport (Director of Equity Research)

Hey, thanks for the question. Center Store peers that have recently established their off-calendar FY2026 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. It still feels a bit less sizable than what we are seeing from some of these peers. Particularly in light of the continued volume declines, I just want to get a better sense for what's giving you the confidence that your investment plans for this year are appropriate. Thanks.

Andre Maciel (EVP and Global CFO)

Thanks for the question. Look, as everything we do, we are always very disciplined on investments, and we like to test investments before scaling them up. We feel good about the actions that we are doing for this year. I think those are the right ones, and 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 as well that we are actively expanding the brand growth system to more brands as we speak. This is part of the reason as well why we decided to step up investments a little more beyond what we initially said last quarter. 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 healthy, not through price, but through really stronger products and stronger attributes, stronger marketing, which takes more time, but it's the right thing to do. We are going to step up investments if we deem appropriate. That's for sure.

Max Gumport (Director of Equity Research)

Thank you. Okay. I'll leave it there. Thanks very much.

Anne-Marie Megela (Head of Investor Relations)

Operator, we have time for one more question.

Operator (participant)

Our last question is from Alexia Howard with Bernstein Research.

Alexia Howard (Research Analyst)

Good morning, everyone.

Andre Maciel (EVP and Global CFO)

Morning.

Alexia Howard (Research Analyst)

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. It sounds 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? Thank you, and I'll pass it on.

Carlos Abrams-Rivera (CEO)

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. 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. I have to say, as you pointed out, I think that if we go back to 2022, I think the number on our innovation, whether on 1.6% of our sales, by the end of the last year, it was about 3% of our sales.

We're going to continue to drive on that investment on innovation to contribute a larger part of our business as we go forward. I would say it also is already paying off. 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're bringing into single serve, and now it's achieving high levels of velocity to wherever we have taken that product outside of the pouch. 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. It's also making sure that we continue to expand on the importance of our Heinz manual business across our international portfolio and continue to expand into new countries as we go into 2026. 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. At the same time, being thoughtful about how do we are actually bringing innovation to market that has the long-term opportunity to be here for many, many years. I'm pleased with what I'm seeing. I also think that there's more for us to do.

The last thing I would say is it's important to recognize when we talk about the brand growth system, it also creates and highlights opportunities for us to go after new innovation. 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. Thank you, Alexia.

Alexia Howard (Research Analyst)

Thank you.

Operator (participant)

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