The Kraft Heinz Company

Greetings and welcome to the Crafts & Hinds Company first quarter 2025 earnings conference 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 Maggiela, head of global investor relations.

Thank you. And hello, everyone. Welcome to the Q&A session for our first 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 statement 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 excludes 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 .cracksciencecompany.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-Bervera, for opening comments. Carlos, over to you.

Thank you, Amarie. And thank you, everyone, for joining us today. At Crack Hines, we are proud to be a trusted partner in Kitchens Everywhere, providing confident connections, particularly in these moments of uncertainty. Despite growing market pressure in the first quarter, we deliver top-line results in line with our expectations, with strong cash flow performance and a healthy balance sheet. We are also encouraged by the progress we are making in improving brand superiority. While these advancements are not yet reflected in the financial results, they do give me confidence that we are putting in place the right building blocks. Our commitment to making the necessary investments to deliver quality and value offerings to our consumers is unwavering. At the same time, we are closely monitoring market tension and have adjusted our guidance accordingly. With that, I have Andrew joining me, so let's open the call for Q&A.

Thank you. We will now conduct a -and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for our first question. The first question comes from Andrew Lazar with Barclays. Please proceed.

Great. Thanks so much. Carlos, you mentioned in the prepared remarks that the revised outlook provides the necessary flexibility to dial in on investments as deemed appropriate. And that said, this is not the first time, right? Kraft Times has sort of used this language around proposed investments, and so far it's not proved enough, although admittedly in a very dynamic consumer environment. You know, 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 -and-learn approach. 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 as more comprehensive in some way. Thanks so much.

Good morning, Andrew. Thanks for the question. First, let me just say we are continuing to invest in the business, despite what we are seeing in terms of the macroeconomic uncertainty because, you know, frankly, because we're confident in the strategy that we have. And I think in moments like this, companies can be sometimes overly cautious and defensive or play offense. And we are choosing to play offense with discipline. So we are, in fact, prioritizing investments in marketing, R&D, and technology. And the way we're doing that, Andrew, is we focus on increasing returns of our marketing dollars by shifting more towards a consumer-facing marketing. We're also making sure we're optimizing the location across the brands and media types so that, in fact, we make sure we have the best ROI and improve the quality of the messaging at the same time. I mentioned investing 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, that is 1% of net sales. And I mentioned technology. We are going to continue investing in technology as well because that actually has helped us in terms of driving the efficiency in the business by investing in things like automation and enhanced retail tools. I think you also go up to why it is different, what's different now versus in the past. And I'll tell you, one of the important parts of what is different is the fact that we're also investing through the brand growth system. And if you recall, the brand growth system is our repeatable global model for understanding how we see opportunities within our brands and how do we make sure we drive superiority on those brands through both products and packaging and making sure that every communication has the right brand resonance, value equation, and on the execution. So it's not just what we are spending, but how we are spending too. And we mentioned in the past that we have done this with about 10% of our brands in 2024 as a way to pilot. That is in fact now being scaled up to 40% of our business by the end of this year. So that idea of us having more confidence in us investing because now we have proven that the brand growth system helps us identify the right opportunities and allows us to make sure we take the right steps in order to fuel the investments, I think is part of why we're going to be playing offense with discipline. So you'll see those actually steps on 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 communication. 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 communication to support it and drive that forward. It's something that helped us work with our Philadelphia brand in 2024. It helped us in our high-end UK business in the last year. And now we are going to be seeing that across all of our brands as we go towards 2025 here in the US. I think,

good morning, Andrew, just to add to Carlos. So remember that in our prior guidance, we already had contemplated a step up in price investments. And just roughly speaking, to the extent of 100 bips on the top line,

it

was a relevant investment and concentrated on those categories we have previously described. And we also had in the prior guidance already contemplated a double-digit increase in media. So we were still retaining our marketing percentage of revenue at 4.5 in the prior guidance. And with that, by reallocating expenses within the marketing bucket, we could free up double-digit increase in media. Now, in this new guidance, we have opened the room to further accelerate our market investment. Remember that in our long-term algorithm, we want to be approximately at 5%. We have at the midpoint of the guidance around .8% of markets, so 30 bips step up. This number might still fluctuate a little bit up or down, depending on how the dynamics happen throughout the year, including final impact on tariffs. But we want to accelerate the step up to 5%. And we also have in the guidance some impacting costs linked to product renovation. As Carlos said, as we continue to deploy the Brando system, we have seen opportunities not only to improve quality of messaging and have more media pressure, but also to renovate the products and ensure a stronger superiority. Great. Thank you both. Thank you, Andrew.

The next question comes from Yasmin Besswande with Bank of America. Please proceed.

Hi. Good morning, everyone, and thank you for the question. So I kind of wanted to dig in a little bit on North America and the organic sales guidance update for this year. So just for Tukey specifically, there's a few items here to consider. You know, you talk about the Easter timing shift and then there's a plant closure lab. But there were also impacts last year on lunchables from the Consumer Report. And then you had the Capri Sun reformulation impacting consumption. So could you help size those impacts, if any, to the second quarter? And if there's anything else that we should consider that will drive a gap between North America shipments versus consumption?

Sure. Good morning. Thanks for the question. Look, we expect second quarter top line to be better than the first quarter top line. The effect of Easter, as I said before, is approximately 90 bips, 100 bips. So that will be a tailwind in the second quarter. In addition to that, we have emerging markets not part of the US, but we have emerging markets further accelerating from where we were in Q1. And inside the US, aside from Easter, we're going to see improvement in the accelerated platforms. So cream cheese and a orida, for example, they decline into one. And this was totally expected because we're lapping competitors with out of stock issues last year. But now we restore growth and you're going to see growth in those two categories in the quarter. And to your point, we will see some improvement in lunchables. It's still not be the levels that we believe we can achieve as part of the main renovation hits the market in the second quarter. But you should see lunchables improving, particularly after mid-May and June. That's when we really start to fully lab the consumer reports from last year. So on the muscatine, on the factory, we are lapping that as we head into the second quarter, but take into mind that the industry has slowed down quite a lot this year. So we are not going to see necessarily a growth in our way from home in the second quarter. But beyond that, you will see the accelerated platforms, sausage, cream cheese, meals and snacking with a better performance in comparison to Q1.

OK, 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. You know, your organic sales cut was basically all volume since the price and contribution was left unchanged. Do you see a need for North America volumes to inflict 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 to hit your guidance for the year?

No, we don't need. In fact, in our midpoint of our guidance, total company does not get you positive in any quarter.

OK, great. I don't

need to bother you.

OK, all right. Thank you guys.

The next question comes from Tom Palmer with Citi. Please proceed.

Thanks for the question. I wanted to ask on the COGS inflation, the revised outlook, just any breakdown of how much of that is related to tariffs versus maybe other drivers of that increase and then just the timing of when we really start to see that step up. Thank you.

Sure. So in our prior outlook, we had inflation at 3 percent. So before any tariffs, our our guidance is step up to 5 percent of COGS, particularly in some commodities like coffee and meat. We saw a big increase in comparison to the rest of the last time we met. So the base inflation was already up to 5 percent. And now with the tariff impact, I mean, obviously a lot of uncertainty still around that. But we do estimate with what we know so far, an impact in 2025 of 150 to 200 bits on the COGS. I mean, why? Look, we we don't know for sure. We are assuming that this would be concentrated in the second half. Maybe there will be some impact in the second quarter. We built some inventory where possible in certain items as we anticipated that to happen. So that gives a little relief of a month, maybe two in some of the items. But the impact should be mostly concentrated in the second half.

Thank you for that. And I noted or I noticed that there wasn't a change in kind of that pricing outlook as Yesmin just noted. But it sounds like is it there's price investment in some areas and then there is incremental pricing in other areas. Maybe just any detail you can provide there.

In the midpoint of the new guidance, we don't have further investments in price. In addition to the hundred, approximately hundred, we already had contemplated in the initial outlook. So the incremental investments, as I said, is mostly on marketing, particularly media, product renovation. And there is some sampling investments because we remember that as we renovate the products, including the ones that you have renovated last year, like Capri Sun, we really need to step up the trial curve. So we are stepping up sampling investments head into the summer. Thank

you for the details.

Thank you. The next question comes from David Palmer with Evercore ISI. Please proceed.

Thanks. A couple of questions. You updated that your inflation guidance and thanks for your comments there on the tariffs being incorporated in that. I wonder how you're thinking about pricing offsets to that. And when it gets to a certain level of input inflation and in your willingness to price that away, are there levels where you have to be cognizant of rising price elasticity, perhaps over a few percent, for example, where you're more aware of any sort of list pricing. And you have to start moving towards other types of adjustments or offsets. And then I separately, and Andre, I know you've been very active in thinking about promotional activity and returns on that promotion activity. When we look at our data, it looks like Kraft Heinz has been a little bit different than some of the other larger food companies in that it's well below 2019 levels in terms of its volume on promotion, whereas some many, many, or if not most other companies look like they're at those levels already and continuing to rise. I'm wondering if you kind of recognize that that juxtaposition and how you think about the promotion strategy going forward. Is that something that that you're noticing as well? Thank you.

Let me start with the second part, Carlos, and then have Andre comment a little bit on the first part of your questions. First of all, what you're seeing is the fact that it follows our strategy. I mentioned earlier that we are going to continue to make investments and play offense with discipline. And I think for us, it's the opportunity to make sure that when we are invested, we are doing this in a way that is thoughtful about the return of that investment. And that we are building something that supports our strategy and allows us to grow not only in the short term, but really in the medium and long term. So what we're investing in pricing for a promotional event 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 that consumer needs us, whether that is now Memorial Day, whether it's July 4th, whether it's back to school. We're just going to do it in a disciplined way to make sure that again is supporting the stride that we have and not just change a short term volume that actually does essentially all you do is kind of rent, rent volume for a short period of time. The other piece that is important to note is that when we're making those investments, we're also doing it in concert with our brand growth systems investments. So that when we are going for a back to school time period and we have now a renovated, you know, new launchables, whether we have a renovated new Capri Sun, that's a moment for us to not only stimulate the demand, but also making sure that the consumers get to try the best product that we have ever made on those categories. So I think it's that combination that is kind of guiding our principles versus kind of how competitors are playing at this particular time. They're choosing different strategy. You know, we believe we we want to make sure that we're doing things smartly because our focus is continue to drive profitable growth for the future. And then you want to comment on the first part.

Yeah, so. They look on the on the promo side, kind of said we will continue to be disciplined and really seeking those promotions with good returns. We will see a step up in promotion activity during the key windows, particularly now in summer. So you see that number stepping up is part of our initial guidance. Again, we have approximately 100 pips of incremental price investment in the US. And on regards to pricing the tariffs, we are trying to do everything we possibly can to minimize the amount of price necessary. So even things like to delay, we have anticipated some purchases. We are looking at alternative sourcing. There is opportunity for in some cases reformulation, which takes a little bit longer. There are opportunities on the mix side. There are certain SKUs within a category that are less less impacted than others when it comes to tariffs. So all of that is at play. We are stepping up productivity in the year. We started expecting 3.5 percent of COGS. Now we're expecting a little more than that. So we are taking all the possible levers, but pricing might be necessary. So but again, I think this is that it is working progress. Thank you.

Thank you.

The next question comes from Chris Carey with Wells Fargo. Please proceed.

Hi, everyone. I wanted to ask a question about gross margins and just a follow up elsewhere. From a gross margin perspective, specifically the Q2 weakness that you're expecting and in the context of just how this typically works, is the primary driver of Q2 gross margin weakness coffee inflation? And I guess I asked that question in the context of historically, this is really a pass through category where 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 just given the overall coffee inflation backdrop? And then just secondly, are there any areas within your portfolio or broader portfolio where you're seeing more bright spots from a market share perspective? Because I think it's similar to last quarter where we continue to struggle is the categories have clearly softened, 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 saying, OK, that specific strategy is working to kind of right the ship here because it's been a bit harder to see in the data. So thanks for those two items.

Sure. Thanks for the question. I will start with the Q2 margins. So basically, we do expect pressure on the gross margin in the second quarter. And there are a few different items affecting the margin. The first one is, as I just said in the prior question, we do expect a step up in the promotion activity as we start the shipments for the summer season. So we will see a lower price in the P&L. The second, we are facing impacts of some hedge losses in the second quarter. And they are quite large. And the good thing is that once they roll off heading to Q3, we start to see some of those commodities that starting to come down like dairy start to flow through the P&L. And third, to your point, there are some increases in certain commodities in Q2. And the way we see right now is some of them are going to reach the peak in Q2 and that issue start to go backwards or decelerate at least as you head into the third quarter. So those three elements are the key contributors for the gross margin pressure that we are seeing. And there is a little bit as well of the product renovations that we're starting to step up. So as a result of that, plus we started to step up investment in marketing, we do expect to break the economic decline double digits in the second quarter. When it regards to the bright spots, that's over to

you. Yeah, listen, I think if you look at our year to date, our latest five weeks versus the year to date, you see us making progress in all of our accelerated businesses. So whether it's tent elevation, whether it's ready to eat meals, whether it is snacking. So all those things are progressing. I think in Q1, obviously, we had the impact of Eastern. So I think as we are seeing now the data with several weeks of the Eastern now read, you're going to continue to see that improvement. And I think, for example, in a business like our Philadelphia cream cheese, which as we now kind of pass the Q1 lapping of the private label not have been on the business in the category last year, you see that continue to drive growth. Whether you see that in our in our desserts business that continues to drive growth after reformulations and focusing on better for your products on and that category. So you'll see that many of the investors will make it will continue to play off as we go through the year. And I mentioned 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 all reflecting the data. But those are things that you'll see us as we continue to progress throughout the year. I'm also frankly very encouraged about the fact that some of the big innovations we have done to have continued to now drive growth. So a business like our Mexican strategy that we didn't have two years ago. We grew double digits last year and we're growing double digits again this year. So that also gives me confidence the fact that as we are building innovation, we're doing it with the right insight with consumers to drive growth that is sustainable and profitable for the long term. Thanks for your question.

Operator. We have time for one more question.

Our next question comes from Megan clap with Morgan Stanley. Please proceed.

Hi, good morning. This is Alexia on for Megan and the prepared remarks. You guys mentioned the wider operating income guide partly reflects changing policy landscape. Should we be thinking about that from a top line perspective or is that related to cost? Just any incremental color you could give there would be great. Thanks.

Thanks for the question. Look, there are, as you know, a lot of things being discussed under consideration that might have implication on the business, positive or negative. So part of the reason why we have this wider rendition contemplate a whole different set of scenarios that can come into play.

So we're trying to just provide the flexibility, knowing that there is a number of things that are still bought out. But I mean, I got it. I think you see us that we are acknowledging some of those things. We're preparing for those things and also at the same time, making sure that we have the right flexibility to invest back in the business in order to drive the trade that we have and then fuel the opportunities that we are seeing with our brand growth system to expand back in our brands. So that that's all reflected in the way we're kind of shaping the year ahead.

Thank you, Alexia.

And thank you everyone for joining us. Operator, that concludes our Q&A session.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.