The Kraft Heinz Company - Earnings Call - Q3 2025 [Q&A]

Executive Summary

• Q3 2025 delivered a mixed print: Adjusted EPS of $0.61 was a modest beat versus Wall Street consensus*, while net sales of $6.24B were slightly below consensus* as price (+1.0 pp) was more than offset by volume/mix (-3.5 pp) and commodity inflation in meats and coffee.
• Margins compressed: Adjusted Gross Profit Margin fell 200 bps YoY to 32.3% and Adjusted Operating Income declined 16.9% YoY to $1.11B, reflecting inflationary pressures, unfavorable mix, and higher A&C spend, partially offset by efficiencies.
• Guidance lowered: FY25 Organic Net Sales down 3.0–3.5% (from down 1.5–3.5%), Constant Currency Adjusted Operating Income down 10–12% (from down 5–10%), Adjusted EPS $2.50–$2.57 (from $2.51–$2.67); Free Cash Flow Conversion raised to ≥100% (from ≥95%).
• Strategic separation remains on track for H2 2026; management reiterated capital allocation priorities and net leverage target near ~3x as a setup for investment-grade profiles for both entities.

S&P Global disclaimer: Asterisked values below are consensus estimates retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• Strong cash generation: YTD Free Cash Flow grew to $2.49B (+23.3% YoY) with FCF conversion at 109%, driven by working capital efficiencies and lower Capex.
• Share momentum in Taste Elevation: “We gained share across 70% of our U.S. Taste Elevation portfolio in September,” supported by renovation and improved marketing execution (e.g., Capri Sun, Lunchables).
• Emerging Markets resilience ex-Indonesia: EM grew organically +4.7% in Q3; management cited EM (ex-Indonesia) +9.2% with Heinz brand strength across markets and expanding distribution.

What Went Wrong

• Margin and profit pressure: Adjusted Gross Profit Margin down ~200 bps to 32.3%; Adjusted Operating Income down 16.9%; Adjusted EPS down 18.7% YoY to $0.61, impacted by inflation (meats, coffee), unfavorable mix, higher A&C, and a higher effective tax rate.
• U.S. Retail softness and promotions: Extended cold cuts promotions and weaker consumption weighed on Q3; Q4 guide embeds inventory phasing headwinds >100 bps and continued weaker U.S. consumption.
• Indonesia disruption: Significant destocking and route-to-market challenges; management expects meaningful improvement only in H2 2026 with transitional actions underway.

Transcript

Speaker 0

Hello, everyone. Welcome to the Q and A session for our third quarter twenty twenty five 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 as well as statements regarding the proposed separation of Broughton into two independently traded companies. 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 ks, 10 Q and eight ks 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.krafhinescompany.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. Over to you.

Speaker 1

Well, thank you, Marie, and thank you, everyone, for joining us today. I am encouraged by our progress in the third quarter, recognizing there's more work to do to navigate today's complex environment. You know, we delivered a modest year over year recovery in the top line performance, progress versus the first half of the year. That said, the operating environment remains challenging with worsening consumer sentiment and ongoing inflation influencing buying behavior around the world. To reflect our third quarter results and the expected continuation of these macro trends, we have updated our 2025 outlook.

We remain on track to separate into two independent companies in the 2026. And while we manage that transition, our priority is to drive performance today and position both businesses for long term success. I want to thank your teams for their efforts and our customers, consumers and shareholders for their support. With that, I have Andrew joining me. So let's open the call for the Q and A.

Speaker 2

Thank you. We'll now be conducting the question and answer session. Thank you. And our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Speaker 3

Carlos, in light of the weaker consumer sentiment that you've talked about, we are seeing a number of food companies sort of lean in more aggressively on investment spend, both pricing related and broader A and C. I guess I'm curious how much of the 25% profit revision, if any, is due to more aggressive spending behind the brands than initially contemplated versus just the impact of sort of higher costs and volume deleverage? And if there's not significant additional spend, I guess I'm curious why wouldn't more make sense now to help jump start volume improvement in a still tough consumer environment as you think towards next year?

Speaker 1

Let me have Andre kind of give you a little bit of context how we think about the updated guidance, and I can fill in some additional information. Okay. Thank you. Thanks for the question, Andre. Good morning again.

The profit revision is not linked to incremental investments beyond what we had previously communicated. The profit revision is a function of lower expectation of on consumption in The U. S, which we can talk more about that. It's a function of elongated recovery on taste elevation, which has been improving in a meaningful way. 70% of the revenue now is gaining market share.

However, the recovery still is lower than what's anticipated, so there is a mixed component to that. And we face incremental inflation in meat and coffee, and we didn't price certain elements of it due to competitive dynamics. And we had a few other one offs affecting our supply chain results in Q3 that should not expect to repeat in Q4. However, they stick in the year. Remember though that for this year, we are increasing promotional investment around $300,000,000 in The U.

S. We have $80,000,000 ish of incremental marketing spending media. We have more R and D investments, and we have incremental headcount in selected areas, mainly commercial related functions. So we are adding relevant investments on the business. And we don't think that adding more price at this moment will yield results.

The investments we have made already allow us to have opening price points in critical categories to the retailers and to the consumers. We have investments in meat and cheese, in frozen potatoes, in mac and cheese and a few others. We don't believe adding more market at this point. Remember that the entire market investment increase is concentrated in the second half of the year. So we don't think going even further beyond that would deliver returns at this point.

However, we are open in the future to add more marketing as we continue to go deeper in our brand assessments. But at this point, we don't think it's a matter of putting more investments. I think the one thing I would add, Andrew, is, you know, I mean, listen, we think about this as our company as a very much a consumer centric brand driven company. So for us, what's important is that we're building brand for the long term. So when we think about stepping up investments, we are thinking in terms of the, what Andrew mentioned, in R and D, in marketing, continue to drive the renovation of our products.

Because I think that is going to be the way for us to be successful over the long term. I think the fact that we have concentrated our effort behind our brand growth system to make sure that we are continuing to bring distinct attributes that consumers value, that's going to be the way we continue to be able to be successful over the long term. And by the way, I think some of the pricing that we have done strategically in terms of promotions have worked. If you look at our back to school campaign, we were able to actually be successful in being able to drive, you know, great returns behind the key brands that we focused during the back to school campaign, Capri Sun, Lunchables, Jell O. So I think we are gonna continue to be tactical at our investments, but really building our brand for the long term.

Thanks for the question, Adam. Yep. Thank you.

Speaker 2

The next question is from the line of Peter Galbo with Bank of America.

Speaker 4

Carlos and Andre, I wanted to ask maybe a more conceptual question around the spin. And really, if I think about it, one of your CPG peers is going through a similar dynamic right now in terms of kind of a split and you're living kind of parallel lives, I guess, for lack of a better word. In the case of your peer, right, there was an announcement, the market responded the way that it did, and there's been a pivot on their behalf, not in terms of pursuing the split, but in terms of how they're going about it, right? There's been an alteration in terms of the path forward. I wonder, just as you solicited feedback from investors and as you've heard from investors since your announcement, has there been any thought as to a pivot for Kraft Heinz, whether that means the leadership isn't the way that you thought it would pan out, The brands that you announced at the spin now, maybe some of them move from one to the other.

Just any thoughts, again, as you've heard feedback that you may potentially pivot versus the initial announcement?

Speaker 1

Well, thank you for the questions. And listen, I think that let me give you a little bit of the context of how we ended up with the decision. We have spent a number of months working with our Board of Directors to make sure we felt that we were going to do something that was gonna be unlocking shareholder value. And we believe in the fact that we create two stronger companies that can be more focused for us to drive that that that unlock that shareholder value. And if you think about two companies, I think we have already shown that we have a playbook that we have focused on in a part of our business that will be part of the global taste elevation.

In fact, if you look at our taste elevation progress into Q3, you are seeing already that, that playbook is working, that in fact, we are improving our dollar sales, that we're improving our share position. And in fact, in September, we gained share in 70% of The U. S. Taste elevation business. So the playbook that we have has been working, and we wanna apply it now to both companies with the right amount of resources and and support.

Having said that, we also said have said that, you know, we are gonna we are gonna continue to look at opportunity for us to to think what is the right way to support this with the right amount of experience, capabilities, and technical resources. So I think that's something that we'll continue to do as we think about the announcements that we'll have in ahead of the second half of the year with the right with the management teams and the way we're gonna create the right operating model for us to grow. So our focus remains on us doing the right thing by us creating these two companies. And, really, in every situation, and you you picked a particular peer that you had in mind, the reality is that there's many other examples of people who have done this. You know, for us, what we're trying to do is, well, it's the right thing to do for both Graphite and our shareholders.

The other thing I'll add is, look, the comments on perimeter and balance sheet. On the perimeter front, we, as we said before, we decide this perimeter, one, to allow focus, two, based on growth history and growth potential of the different brands, the margin profile and the synergies. So as we go deeper now, we're doing all the bottom up work. There's a lot of working going on as you can imagine. If at any moment, we think it might create more value to shareholders to have some adjustments, we will.

But at this point, we think we did the right thing because we put a lot of thought before that. The second, the balance sheet. I know there was initially some maybe misunderstanding about what are the potential to be both companies, and we try to clarify that in the subsequent forums. So we said we are targeting both companies to be investment grade. We are committed to ensure that we keep the net debt at reasonable levels.

We put even the prepared remarks were very clear. Our capital allocation priorities have not changed. And the second one after organic investments is to maintain the net debt at or close to three times, and we're committed to do that, which should allow both companies to have good balance sheets with optionality. And our clarification, when you say we want to have company investment grade, for us, net debt is below four times. You know?

And, obviously, the specifics, we're gonna be still discussing the upcoming months and discussing rating agencies, but we are committed for that as well.

Speaker 2

Next questions are from the line of Tom Palmer with JPMorgan.

Speaker 3

I wanted to just ask on emerging markets. It seemed like excluding Indonesia, trends were more encouraging. I guess, one and you did provide some commentary here on Indonesia from a sales overhang, but how big is Indonesia within emerging markets? And then when we think about the fourth quarter, the mid single digit growth guidance for emerging markets, what does that assume kind of for the business ex Indonesia and Indonesia in terms of potentially seeing some improvement? Thank you.

Speaker 1

Thanks for the question. Let me start, I guess, with the point of the context of emerging markets. You're correct. There is great progress at Cloud of Indonesia, and we have continued to see the not only the success in terms of growth, but also the continued improvements in terms of that growth. So I think for me, what it also gives me confidence is the fact that we think about the $1,000,000,000 that we have in the emerging market, that actually is accelerating And it's accelerating because of our key brand like Heinz, where it continues to show a tremendous amount of growth.

In fact, in emerging markets, our Heinz brand year to date is growing 13%. So I think for us is we continue to see that the value piece of our portfolio and one of our key growth drivers as we think about the future. In the case of Indonesia, top line is about $05,000,000,000 business. And frankly, what we have seen is a meaningful decline in consumer sentiment that has led then to the softening of demand. In fact, I think that the consumer sentiment in Indonesia year over year is about down almost 10 points in terms of consumer sentiment.

So that has led to the sellout reducing the sellout growth expectations and some of the challenges that we have seen in terms of our distributor particular distributor in the country and also how that has disrupted the overall, you know, our own business. At the same time, this is something now we're taking actions to make sure that this is only, you know, something that we can correct into the future. So we are rightsizing the inventory to the right levels. We are transitioning to a new distributor, and we're also making sure that we're reducing the pricing stability that have been in the country while we continue to invest in Indonesia in terms of our marketing of our brand and ABC is the largest brand that we have, and we believe that us continue to drive superiority on the brand equity, making sure we continue to drive the wholesale penetration in a meaningful way is going to be the best way for us to getting Indonesia back to where we want it to be in terms of contributing the growth to the business. Just just to add to that, we emerging markets aside from Indonesia grew 9.2%, So it did accelerate in a relevant way compared to the first half of the year as we have said before.

Indonesia just maybe a little more specific is close to $300,000,000 revenue. So it's like 12% of the emerging markets business. So still relevant, but not massive. And we do expect that the recovery in the P and L only to happen in the second half of next year because we still have adjustments to do into Q4. In Q1, there is Hamadan, which is very important for Indonesia, big seasonality in that business, so which will affect Q1.

So we really head into Q3, end of Q2, Q3, we're going to see the recovery there. Yes. But I think what is good is we invested a lot in this business in the past two, three years. There was a lot of marketing investment to put the ABC brand, which is the leading brand in several categories in a very good spot. So market share standpoint, things are doing well, but we have to make adjustments on the distribution network.

Thanks for the question.

Speaker 3

Thank you.

Speaker 1

Our

Speaker 2

next question is from the line of Steve Powers with Deutsche Bank. Please proceed with your questions.

Speaker 5

Great. Thanks so much and good morning. Don't Carlos, I don't believe I saw it anywhere this morning and apologies if I missed the relevant disclosure. But are you able to frame maybe pro form a the performance of Global Taste Elevation Co versus North American Grocery Co in the third quarter? And then also update us on how you see those businesses progressing into the fourth quarter, just so we can better assess momentum into 2026 and eventual separation?

And maybe alongside that, Andre, I don't know if you where you're sort of where you are in this process. But as you think ahead towards separation, I'm just curious if you have a more formal estimate around any onetime restructuring costs or cash costs that Kraft Heinz is likely to incur in preparation for the split. Just trying to see how we should handicap those dynamics over the next three or four quarters.

Speaker 1

Sure. Thanks for the question. Good morning. Look, both companies both to be companies' pro form a declined low single digits in the quarter. We see the global digitalization trajectory improving and in the very low single digit territory at this point.

We and expectation is for Q4 that to continue. So our main priority is to put the company's regulation back to growth in 2026 as it has grown for several of the last fifteen years. And so that's the priority number one to us. The North American grocery company had a significant improvement in trends in the third quarter compared to the first half, but also declining low single digits, though more than the green the global consolidation company. But the priority number one for the North American grocery company now is to ensure that you have stable cash flows heading into 'twenty six.

And but in parallel, we're working hard to to make sure that this company also had the prospects of of growing low single digits into the future. In terms of runoff cuts, I think it's very I should talk about that. There is a lot of work in motion right now. We are committed to be very, very disciplined with the use of cash like we have been. So you can see our results despite the EBITDA decline.

Our cash flow is up year over year, and it's going to continue to be the case year to go. So count on us to be very disciplined and do the right type of investments that are needed to put us to companies set up for success. Yeah. Let me just add then, you know, particularly as we think about the North American grocery company. I think with, you know, if you look at our history, we have proven that we can be an efficient operator.

So as we think about our separation, you know, we're gonna have the same level of efficiency as we think about how do we actually drive both of those companies. And I think that beyond that, we also have been a great and a confident company in terms of delivering strong cash flow for our shareholders. Now I would also point out the fact that I mentioned earlier that we have a playbook that has worked. Some of that playbook, we actually already have deployed to some of the key brands that will be part of North America grocery. So if you think back to Q3 and our results on Lunchables, on Capri Sun, those are brands that now in the future will be part of a North America grocery, and we were able to return to growth.

What will happen as we go into these two separate companies and we can create two more focused companies, we can then put put the right level of attention and resources to allow both of those companies to fit and to fulfill their true potential. So I think, you know, as we go into the forward going forward, you know, the attention of management remains in us making sure that we continue to see the progress of the company because that will support both companies as we exit into the 2026. And thanks for the question.

Speaker 2

The next question is from the line of David Palmer with Evercore ISI. Please proceed with your questions.

Speaker 3

Great. Thanks and good morning Carlos and Andre. In your slide presentation you noted several of those key categories where you're clearly improving in terms of market share. Your guidance for the fourth quarter doesn't imply much improvement. And I just wanted to get your thoughts about maybe offsets or categories that you're in, are they slowing, maybe some offsetting brands where you're seeing a little bit of deterioration?

And then separately, there's that story of the promotion spending that you're those investments of $280,000,000 that you're making, that's maybe 2% of North America retail sales. When we track in scanner data, I know these are audited numbers, but it only shows like that your volume on promotion is only up is only down, I'm sorry, 1%, basically unchanged. I'm just wondering what is going on with your promotions? Maybe you could tell us better than what the data is showing us, which doesn't show us much in terms of what activity you are doing. Thanks.

Speaker 1

Thanks for the question. So first, regarding Q4, you are right. The outlook implies revenue in Q4 worse than revenue in Q3, about 100, 120 basis points. We have inventory phasing in especially in North America, but especially in The U. S.

So we do expect that this headwind of inventory to be north of 100 bps for the total company. It's a combination of inventory phasing Q4 next year to January, given some timing of promotion and some September, October. We also do expect lower consumption in Q4. And that's so the inventory has been in our outlook for a while. There's nothing new.

The different aspect that also was one of the reasons why we adjusted the expectation for sales down year to go is related to the softness in consumption. So we saw throughout Q3 the industry decelerating further in The U. S. In October, aside from hurricane noise, it also started soft. So we do expect the market share to continue to improve, especially pace elevation, but we should expect share to improve, but we expect the industry to get worse.

So that results in the consumption overall in The U. S. Should be relatively flat to Q3, but the inventory then headwind impacting us. The second part of your question Promotions. On the promotions.

So we concentrate the promotion most about the key holidays. So our highest market share in the year historically is in Thanksgiving and Christmas. So we do have a lot more promotion activity around this this upcoming holiday. Part of the investments we have made, were to secure incremental distribution. So that's part of joint business plans that we do every year with the retailers, and we were very intentional in some cases ensure that the super expanded distribution, which we have been generally getting.

And in some other cases, we did invest deeper than than what we would normally do during back to school to ensure that we can accelerate the consumers trying to renovate the products. So we focus a lot on trying to drive units to have those household penetrations coming in, in the expectation that these eventually generate repeat purchases, which will help with the sales in the future. Remember, we said that at the beginning the last quarter that we will try to do different tactics to accelerate this consumer trial of the new products. So we see that. The other ones of those are not good, to be honest.

The lists are low. And maybe that's why when you look at the syndicated data, you have this perception. But I think me add a couple of things. I think, first of all, you know, we talked quite a bit about The U. S.

Because if you think about a total company, the reality is that, while we're seeing some pressure in Europe in terms of the consumer, particularly in The U. K, we actually are holding our share in a moment in which The U. K. Consumer also is seeing some challenges. And I mentioned earlier, emerging markets where we've seen actually strong growth, whether it's in Brazil, the recovery in Mexico that we feel great about, the stability in China and releasing Indonesia aspects that have been kind of holding us back in terms of getting to the double digit growth that we can see in emerging markets into the future.

So I think from that perspective is why we spent quite a bit of time talking about The U. S. And if I do a double click on some of the things Andrew mentioned, you know, the reality is that we are seeing some inventory pullback from customers. And I think that's a respond to what they're seeing in terms of the consumer sentiment. So the fact that we have now, you know, one of the worst consumer sentiments we have seen in decades, As we go into even a holiday season, we're already seeing how customers are pulling back on inventory, and that's reflected in our guidance as well, too.

So it is unique moment right now in which this is getting the consumer negativity and the sentiment is expanding longer than we had originally expected. And we are seeing already on top of that, the customers are also adjusting their own level of inventory to accommodate for that. Thanks for the question. The

Speaker 2

next question is from the line of John Baumgartner with Mizuho Securities. Please proceed with your questions.

Speaker 1

Good morning. Thanks for the question.

Speaker 4

Sticking with the promotional environment in U. S. Retail, despite the joint programming with retailers that you mentioned, Andre, and the larger investment dollars and the improving analytics, weak promo lips seem to be a theme right now across the center of the store. And Carlos, you mentioned some success with your lips around back to school, but lips have also been weaker in other parts of your portfolio as well. So I'm curious what you're finding that's working differently in the areas where the lips are stronger.

Is there a distinction there? And then what changes are you making, if any, to your promo approach into '26, given the consumer environment?

Speaker 1

I think there were about three different questions in there. So let me take one. Think there's a part of it you were getting at is some of the success between in back to school. For us, I think one of the things that we were playing in back to school, and I think we did that effectively, is how do we make sure we are winning in those key moments in which consumers are going disproportionately to stores? So back to school was actually one of our first pilot in which we kind of created a whole more executional approach of how we levered entire brands together during that particular moment.

So what you saw is an improvement in store display, an increased investment both in marketing but also in their promotional aspects inside of the retail environment. And that actually helped us make sure that we have a cross selling where brands cross shopping per purchase improved by 60 bps. We also saw that in in improving in base velocity as a result of the investments that we make in best in school so that when consumers were going to the store, I mentioned the fact that we have brands like Lunchables and Capri Sun. So when they go to back to school time period, they were actually experiencing a product that we had now renovated in both Lunchables and Capri Sun. So that actually helps us for us to the long term to make sure we continue to build a stronger base volume as we go into the future.

And I think those are key learnings that we'll take as we go into the holidays, as we go into key also moments into the future. I think that was one of your questions. Andrea, I think you wanna address some of the other pieces. Yeah. Maybe just just to complement.

So what we have seen working better generally is is more on higher frequency than deeper discounts. So and we see overall lifts coming down year over year. The ROIs are are lower than they were last year, generally, in part because of higher overall increment activity, which dilutes the lift across different players. But also in our case, as I mentioned before, because we're going deeper in certain occasions to drive household penetration. As we head into next year, we we have about a lot of tests running in selected places to see different type of tactics that could work well, including some case, cross merchandising and bundling products, putting adding more events in ecommerce, trying to maybe go less deep and less focus on key holidays and maybe spread these resources around in a more harmonic way throughout the year.

So there are there are set of different things that the teams are currently assessing to make sure that they can improve those returns into next year again. Carlos? Yeah. The one thing just to complete the thought of your question is, I think right now, we're also seeing some challenges with the consumer. But I think what we are looking to do and the game that we're playing for the long term here here is to make sure we continue to invest behind our brands to drive superiority from a consumer experience perspective.

I do think that right now, the challenges we're facing are more cyclical in nature. So for us, it's important that as we get out of this particular era in which consumers are feeling with a down sentiment, that we come out of it with a much stronger portfolio with stronger brands. So I do think that we are preparing ourselves not to just be victims of the moment, but actually stronger building a stronger company for the long term.

Speaker 2

Our next question is from the line of Robert Moskow with TD Cowen. Please proceed with your questions.

Speaker 3

Hi. Thanks for the question. I wanted to drill in a little bit on the commoditized categories, Carlos, like coffee and meats. The and I guess cheese to some extent. These three categories are going to be like 40% of the sales of North America grocery.

And as you can see in your results here, sliced meats and coffee have become really problematic. I guess I wanted to know, have you started rolling out the brand growth system to these categories? Is it harder to implement it in these than it is in the others? Your CAGNY presentation, you yourself said that you have a much lower right to win in coffee and meats. And as a result, does that make it harder to get traction with Brand Growth System than the others?

Thanks.