The Kraft Heinz Company

Good morning, and welcome to the Kraft Heinz Company Quarter 4, 2024 earnings. 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 or your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Anne Marie Magella. Thank you, Anne. You may begin.

Thank you, and hello, everyone. 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. We 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.baphinescompany.com under News and Events, for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures. I will now hand it over to our Chief Executive Officer, Carlos Abrams-Rivera, for opening comments. Carlos, over to you.

Well, thank you, Marie, and thanks, everyone, for joining us today. I want to thank the Krupp-Heinz team for their hard work and dedication this past year. You know, even though it was a tough year, We stay focused on building for the future and improving profit margins while boosting the free cash flow. We do know that the economic landscape was rough, but we are proud that we returned $2.7 billion to our stockholders through share buybacks and dividends, which provide the highest yield in the food industry. Looking ahead to 2025, we are seeing key successes that aren't yet showing up in our financials, and we are expected to see improving top line throughout the year while preserving profitability. Frankly, I'm proud of the progress the teams are driving and confident that our strategy will yield long-term returns for our shareholders. Now with that, today I have Andrew joining me. So let's open for the call for the Q&A.

Great.

Thank you. We'll be starting the Q&A session. If you'd like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

One moment while you poll for questions.

And our first question comes from Andrew Lazar with Barclays. Please proceed with your question.

Great, thank you so much. Carlos, you mentioned a number of times in the prepared remarks the plan to be disciplined in how you approach reinvestment this year, specifically calling out your expectation for some gross margin expansion and flat price in 25, despite the stated plan to invest in price in some key areas. I guess what I'm hearing most from investors this morning is that they're really wondering if this outlook provides enough room to do what's needed this year to get the key brands back into volume growth. So I guess my question is, sort of what gives you the confidence that this plan is accounting for, you know, an adequate level of investment given sort of current market share trends? Thanks so much.

Thanks, Andrew. I think, you know, first of all, I guess let me put it into context of the margin expansion. You know, if you think about 2024, we increased our margin by 100 bps. When you look at the way we're seeing 2025, it's somewhere between flat to 20B. So while yes, an expansion, it certainly is much reduced than we have had in the past. And if I think about now our plan and what gives me confidence, let me just highlight a couple of things. First, if you think about our growth pillars, we actually have a head start going into this year. And let me break it down in each of the growth pillars. In away from home, 75% of new customer wins are already locked in. That's about 40% of a year-over-year incremental growth away from home business. Now, in emerging markets, we are building on the 17% distribution increase with new 40,000 additional points planned in 2025 that we have already mapped out and making sure that our teams are clear on where they're going to be able to secure those. And then, frankly, in North America retail and the rest of the business, what you see is that 75% of the 2025 innovation pipeline is already locked in. And on top of that, we also are leveraging our brand growth system that we have proven through the pilot that we did in 2024. So in each of our pillars, we have things going on already into 2025 that is about us continuing versus completely something new. And at the same time, and you mentioned this in your question, We are investing in certain places. We are investing in price. We are investing in product, and we are investing in marketing. We're making sure we're prioritizing those brands that we know that we can benefit from having the brand growth system insights. We are investing in technology-less solutions that are actually helping us drive the efficiencies that leads to improved margins. And then lastly, we continue to shift more marketing dollars towards consumer-facing marketing. as we go into 2025. So again, that's the way kind of I see it, is it gives an opportunity for us to expand in a more modest way our margins, but at the same time coming into the year with things that we have built in 2024 that now we can still see reaping benefits in 2025, along with investments specifically in price, product, and marketing. I'll just add to that.

Good morning, Andrew. So I will add that when you think about our top line improvement. As Carlos said, it does not only come from price. It comes also from lapping some of the challenges we faced last year and also comes from all the product enhancements that we have been deploying since the second half of last year. When you think about the gross margin, we do expect another year of efficiencies higher than inflation and we are going to price the inflation linkage to commodity categories, coffee being one example, like we have done historically. So there is some price embedded into the plan in commodities and emerging markets. So the combination of efficiencies ahead of inflation, price in emerging markets and commodities give us some room to be investing more in price or trades in the places where it makes the most sense.

Great. Thanks so much. Appreciate the call. Thank you. Thank you.

Our next question comes from Peter Galbo with the Bank of America. Please proceed with your question.

Hey, good morning, Carlos and Andre. Thank you guys for the question. I wanted to ask about the top line and the pillars maybe in a slightly different way. Just, you know, within the organic sales guidance for 25, you know, Andre, how are you thinking about the growth rates for each accelerate, protect, and balance within that organic sales guidance? And then the part B to that question, you know, Carlos, I think a year ago you kind of gave us market growth rates for each of those, you know, accelerate, protect, and balance, how you see, you know, the market growth for 25 comparing to those targets you gave us a year ago. So thanks for the color on both of those.

Okay. I can start. Good morning. so i think about the pillars of growth first emerging markets we will see gradual improvements building from q4 in all the quarters and we do expect to exit 25 at double digit growth in a way from home we do expect some slight improvement in q1 to flat to q4 but then building from the base gradually throughout the rest of the year and probably exiting around the mid-single-digit territory, so still below algo, but a good improvement versus 2024. And inside the accelerated platforms in the U.S., we do expect an elongated recovery, as I have said before, and most of the U.S. improvement in trends in retail comes from accelerates. So that's where we are investing most of The price, that's where we are investing a lot of our product enhancements. So that's where we're going to see a sharper improvement again throughout the year. Not as much in Q1 for the reasons I already mentioned before. I think investments get more concentrated from Easter, and also there is the Easter effect between Q1 and Q2. But at the end of the year, you should see accelerated being the one driving most of the improvement in the U.S.,

What I would add is I think we all can agree that, you know, tactics wins battle, but strategies wins wars. And our strategy hasn't changed. We have not only continued to drive resources and prioritizing our accelerated platforms, but also making sure that a year later we continue to live under the roles of each of those particular categories. So I feel great about the fact that we see kind of how our balanced portfolio continues to live and to the role of making sure they're contributing with the right margins. At the same time, making sure that they are bringing renovation and innovation into their categories to make sure they're relevant with consumers. But again, our strategies haven't changed in any one year. It's not going to make us change that. I think that as we stand here, I'll tell you, I feel even more confident that we have this right strategy for us to deliver our long-term algorithms over a long time.

Thank you. Thank you. Thank you.

And our next question comes from John Baumgartner, Mizuho Securities. Please proceed with your question.

Good morning. Thanks for the question. Good morning. I wanted to ask about the marketplace activities in the U.S. and the market share softness. As you reduce the unprofitable trade, which is net positive for margins, are you getting the sense that maybe your consumers have become a bit more accustomed or trained to buy on deal a bit more for your – where you're reinvesting elsewhere, whether it's in marketing or display? The lifts on that are just sort of insufficient to counter the volume drag. I'm just curious if maybe making these changes to promo is a bit more painful up front than you had anticipated with the elasticity to the consumer.

As we said throughout last year, I think not all promotions are working the same as they used to. We do believe that base volume has also a significant impact implication on the size of lifts that you observe. So base volume is an area that you're paying too much attention to, especially, again, a lot of the product enhancements should help that base, which should give us a stronger starting point for the lifts to come up. There are places where we are contemplating as well base price changes instead of simply a promotion. So there is a discussion in some categories that might make more sense, one versus the other. And on promotions, Again, we have seen typically higher frequencies working better, not necessarily deeper discounts. You're going to see some of that reflected as we head into next year.

Don't think I would add to this, Carlos. What we only think that we continue to see is consumers increasing the number of locations in which they buy their food. So we are seeing... you know, smaller size of baskets per trip, but increasing the number of trips. So for us, it's also important not just to make sure that we have the right price, but that we also have right distribution in different channels in the U.S., which is why our expansion in dollar channels, you know, club channels where we actually are seeing growth as well, too. So for us, it's making sure that, again, we have that combination on where the consumers are shopping at the right price point for us to make sure that we are attracting the purchases for consumers in the moment they need it.

Thank you.

And our next question comes from Ken Goldman with JP Morgan. Please proceed.

Hi. I wanted to dig in a little bit on the increase in your tax rate, if I could, into 25%. You know, we've heard from a number of multinational food companies and beverage companies in the last couple of weeks. I don't think any of them have really talked about quite the increase in tax that you're about to experience. I didn't know if there's anything unique in how you had previously considered tax in some of these other countries that we should consider or if there's anything you know about that's, you know, slightly different in how you approach the way you think about tax rate and so forth, with the understanding that, of course, your cash tax rate isn't going up quite as much. So just wanted to get a little bit of color there. It just seems a little bit more unique to Kraft than what we might have expected, given the size of the announcement. Thank you.

Good morning. Look, I think companies have different strategies when it comes to taxes. So if you'll permit me to comment on what others have. We did have a more competitive tax rate in the P&L compared to other peers. You can see that very clearly. We had to record December in Q4 a $2.4 billion tax benefit in the P&L, in that income, this quarter. And that's linked to a transfer we did in a certain business operation. And that was part of the effort to reduce the cash impact of several countries enacting the global minimum tax regulation. So we did have this relevant benefit in the P&L this year, but as a consequence, the tax rate in the P&L will have a 500 pips increase starting in 2025. On the flip side, the $2.4 billion P&L gain will translate into approximately $120 million cash gains per year for the next 20 years, which makes the impact in our cash tax rate, which ultimately is the one that I'm most interested at, being about 200 to 300 bps. So you will see this is one of the reasons, not the only, why also our cash conversion is expected to be around 95% into 25%.

Thank you.

And our next question comes from Leah Jordan with Goldman Sachs. Please receive us your question.

Thank you. Good morning. I wanted to ask about Lunchables. Just seeing if you could provide an update on how you see the recovery in that business. I know you had a supplier issue in the fourth quarter. It seemed like it was going to be resolved. one cube but the January data does still look a bit soft so how should we think about the improvement from here you know is it more just needing price adjustments or is it more of a step up in innovation as you're planning and then just any color on the competition you're seeing in the category from private label and smaller brands thank you for the question you know first I will say is

that the supplier ingredient issue that we face in q4 still lingers through q1 we will have that we will exit q1 in a much better location uh in terms of service so i think that that you still see as we see the data in january but again as we go through the quarter that will improve um significantly now in terms of the overall category what i'll say is Our focus has been how do we continue to invest in the business that we believe in can be a great source of growth for us as a company. And I'm proud of the fact that the team have been looking at using our brand growth system, looking at the places that actually can solve different pain points for consumers. So you'll see as we go into the rest of the first half, a product that is much improved with better quality, better ingredients, and also continue to bring different innovation and marketing to our Launchables business. So I think what you see right now, don't think of that as a sign of how the year is going to be, but you'll see that still is a lingering effect of Q4.

If you look at the sellout December and January, for example, for Launchables, there are four SKUs in particular that are linked to the upstream supplier issue that we mentioned. that are declining more than twice the average rate of launchables as a whole. And those are dragging the sellout down quite a lot in these last two months. We do expect that to continue to happen into February. We think the service issue will be fully resolved during the month of February, and then we're going to see gradual recovery on the sellout from that point onwards.

Thanks for the question. Thank you.

And our next question comes from Tom Palmer with Citi. Please proceed with your question.

Good morning. Thanks for the question. I wanted to just ask on, and this is a little bit of a follow-up, but on the organic sales growth inflection as the year progresses, I think the comment in the prepared remarks was sequential improvement throughout the year. It sounds like the second quarter has maybe some unusual timing benefits with the Easter shift and then also lapping the plant downtime from a year ago. So just trying to understand, are we looking for kind of an underlying sales trend, this bigger inflection starting in the third quarter to overcome that? And if so, kind of what are the key drivers of that inflection?

Thank you. So, good morning. Thanks for the question. So, yes, in the second quarter, you should see a relevant improvement on the trends, not only because of Easter being about 100 pips shift from Q1, but also we start to lap the factory closure, temporary closure we had in the quarter. We start to lap that Lunchables report that was issued early in April. So those three things alone will have a relevant improvement in the trends, plus the fact that, as we mentioned before, price investments start more pronounced as we head into Easter and beyond, and as we continue to launch some product enhancements, Lunchables being one of them.

Thank you.

And our next question comes from Michael Levery with Piper Sandler. Please proceed with your question.

Thank you. Good morning. I wanted to ask a similar question to Andrew's, but with the advertising as opposed to promotional spending. You pointed out the 4.5% level, but that does include market research and even For peers, excluding that, the advertising level averages closer to five or more. Is your marketing spending enough? I know it's come up, but with just competitive and consumer dynamics, is that at the right level? Does there need to be some upside to that figure as well?

I guess I will start by saying, and thank you for the question, it's Not all brands, not all countries are created equal. So I think one of the things you see is that we're also making sure that some of the analysis that we have done in the past years is that we have kind of the right levels of marketing in different categories and in different countries based on our needs and what it means to be successful. The second thing that you should also know is that we talked about earlier, we have especially designated categories to accelerate, protect, and balance. Our marketing dollars are going to continue to follow that. That is part of the strategy of us making sure we invest in those businesses that we believe have a bigger tailwind as we go forward. So again, in a different level of spending by different type of strategy. And the last thing I will say is one of our focus has been over the last two years doing two things. First, making sure that we improve the return of every dollar that we invest in marketing. So we have the analytical tools to allow us to do that. And second, that we continue to shift more dollars from non-working into working. So I think as we go into 2025, you'll see us that even though we may stay at the same levels of overall spending, there's actually a dramatic shift in terms of how much consumers will see in terms of our marketing as we are shifting away from again, places of non-working dollars, be more efficient with those dollars so that actually can be beneficial to the brands.

And just to complement, as we have said before quite a few times, we do believe our sufficiency levels are around 5%, and we're going to gradually get there. But to Carlos' point, one of the benefits, among others, of the brand growth system that we are deploying now is shedding light on opportunity for us to a lot better in the returns of the marketing investment. So you see in 25, we're going to release $60 to $80 million more marketing, like brand media marketing, which is quite a lot. It's more than a 10% increase in our overall media investment. That's coming from non-working dollars. And within the media, there is also a lot of efforts to redeploy media to places that provide higher returns. be it about media levers or across certain brands. So even though the P&L will be flat on a percentage of revenue on a year-over-year basis, you'll see a lot more marketing pressure, which is important.

Okay, thanks so much.

Thank you.

And our next question comes from Chris Carey with Wells Fargo Securities. Please proceed with your question. Hi, everyone.

Um, I wanted to ask, uh, I guess a bigger picture question. Um, I think one of the things I personally struggle with is that, um, the categories in which you compete are actually running more or less in line with historical growth rates. Not amazing, but more or less in line and your business is just underperforming. those categories in which you compete. And certainly there are specific categories that have had some issues, and you'll be lapping those, and surely that will be helpful. But it does feel like there's a bit broader of a dynamic underway. And I think that's where some of these questions are coming from around pricing investments and what's potentially needed and the acceleration of organic sales growth. I guess if you could diagnose what you think is driving some of this underperformance relative to categories on a broader level, whether that's execution, whether that's affordability. And really what I'm getting at, I suppose, is say we're sitting here in a few months and we're not seeing the pickup. What is the correct action to take? Is it incremental pricing, incremental advertising? a rethink of execution. So I realize that's a big question, but I'd love your observations or thoughts on this topic. Thank you very much.

Thank you. Appreciate the question. I guess let me just start by putting things in perspective a little bit in terms of the way I see it. Our portfolio is about over 200 brands and over 40 countries. If you think about today where we see our challenges, they are concentrating in four brands and only in the U.S. retail business. And so it actually helps quite a bit for us to make sure that we are being focused on investments in products and pricing in order to drive top-line improvements in particularly those areas that, again, that are a subset of the large brands that we have and a number of countries that will participate. At the same time, we're doing that, we're also being conscious of making sure we manage through our margins so that we don't go backwards in our gross margins. And in terms of the invest we're making, you know, I think that it's easy for us to just point to the things that we actually have proven already. Let me give you the example of Capri Sun. We've actually improved five points in dollar sales in the fourth quarter. And that came about us renovating the product to make sure we win on taste, innovating the We bring in new multi-serve packaging, single-serve bottles, bringing value to consumer, expanding into convenience channel. And at the same time, we already seen how the multi-serve product in club is actually becoming a top quarter up item. So for us, it is that we already have kind of a blueprint in which we have applied our brand growth system to the critical brands in order to see results that we will continue to see experience as we go forward. So I know that sometimes it can seem like a lot, but again, for us, it's just specific. It's a few brands. It's in the U.S. retail, and it's places in which we are attacking, leveraging kind of the proven methodology that we have now developed through a brand growth system in order to drive top-line growth.

The only thing I'll add is, look, there is not one answer. Like, there is not a silver bullet. I think given the different categories that we play and different dynamics, the approach differs a lot. There are places where, yes, it's affordability, and that's where we are going to invest the price the most to ensure that the price gaps are established. There are places which is about continuing to invest in the products to maintain or increase product superiority, and that's where you see investments in places like Capri Sun Lunchables and there are a few others. So you will see next week in Cagney, I think that they are a good answer for what you're seeking for, because there is a lot of time in that presentation that we're going to be talking about our path to growth, given specific themes across the different platforms. So I think you're going to see what you're asking in more detail over there. Okay. Thanks, guys.

Operator? Thanks. Operator, we have time for one more question.

Okay, great. And our last question comes from Alexia Howard with Bernstein. Please proceed with your question.

Good morning, everyone.

Morning.

Okay. Can I hit on the GLP-1 topic? We've seen other protein-focused companies in North America already announcing plans to lean into the rising uptake of these GLP-1 injectable weight loss drugs. First of all, do you believe Kraft Heinz is seeing any impact from them? And what opportunities are there to meet the unmet needs of these patients over time? Thank you.

Thank you, Alexia. I guess let me start with the last part of your questions. And no, we have not seen any meaningful impact from GLP-1 in the business. Now, we do know that consumers who do use GLP-1s, typically what they're looking for is, you know, more protein and more hydration alternatives. So, you know, here at Craft Finds, we're making sure we continue to provide those choices for every consumer. And we've seen that, whether that is, you know, making sure in our portfolio that we highlight in products like Oscar Mayer, Lunchables, P3, even our quesadillas and Deli Max and Heinz beans, the amount of protein that actually can deliver for a consumer in a tasty and accessible and affordable way. And then at the same time, we're also making sure that we are continue to drive the importance of us elevating the portfolio of any product that has protein. So the fact that we have this taste elevation product platform within our company allows us to make sure that no matter what protein people are using at home, that we can actually elevate it and make sure that it delivers a great taste and looking for. So I think you'll see us continue to emphasize this in a process we go forward, because for us it's important that we provide choices for every consumer and every lifestyle. Thank you, Alexia.

Thank you, everyone, for your questions. Thanks, everyone, for your questions today. We look forward to seeing you all at Cagney next week.

See you next week. Thank you. Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.