Kraft Heinz Co ($KHC) Q3 2025 Earnings Call

Thank you, Ann Marie, and thank you all for joining us. I am encouraged by our progress and recognize there is further work to be done to successfully navigate in today's complex environment. In the third quarter, we saw a modest year-over-year topline recovery versus the first half, driven by targeted investments and sharper execution. Our investments in marketing, R&D, and technology are fueling the recovery, whether through brand growth system insights that are improving performance in Capri Sun and Lunchables or through advancements in technology that continue to drive efficiencies across the value chain. We are continuing to generate attractive cash flow, remain committed to our net leverage target, and have returned $1.8 billion to shareholders year-to-date while continuing to invest for growth. Overall, the operating environment remains challenging with worsening consumer sentiment and inflation shaping consumers' behavior globally. As a result, we are updating our 2025 outlook to reflect our third quarter performance and anticipated continued macro trends. Andre will share more details shortly. Finally, we remain on track to separate into two stronger, more focused companies, each anchored by market-leading brands. Global Taste Elevation company home to legacy iconic brands like Heinz, Philadelphia, and Kraft Mac and Cheese and North America Grocery company consisting of North American staples including three billion dollar brands Oscar Mayer, Kraft Singles, and Lunchables. The separation, which is expected to close in the second half of 2026, would allow each business to more sharply focus resources, improve execution, reduce complexity, and drive further efficiencies. In the meantime, our priority is to drive improved performance and position both companies for long-term success.

Now, moving into the details of our third quarter results, we continue to make progress on the top line with year-over-year organic net sales down 2.5%, an improvement compared to the decline of 3.3% in the first half of the year. Our Q3 performance was slightly behind our expectations driven in large part by extended promotional activity in the cold cuts category and slowdown in Indonesia that I will expand on shortly. At the same time, our teams delivered meaningful cost and efficiency gains across the business which helped to partially offset pressures from tariffs and inflation along with targeted investments in trade, the net of which compressed gross margin versus last year. This results combined with an increasing investment and a more favorable tax rate led to constant currency adjusted operating income of $1.1 billion and adjusted EPS of 61 cents. Our cash generation remains a clear strength. Year-to-date, free cash flow was $2.5 billion, up over 20% from last year, reflecting disciplined working capital. Importantly, the sequential recovery that we are seeing in year-over-year topline growth is coming primarily from improved volume mix. In total, organic net sales improved 80 basis points in the third quarter compared to the first half of the year with volume mix improving 70 basis points over the same time period. We achieved this result despite growing challenges in Indonesia and continued promotional activity in the US cold cuts category. The pressure seen in Indonesia is attributable to inventory destocking as well as route-to-market challenges both fueled in part by a sharp economic slowdown that has led to a pullback in consumption. I can assure you we are addressing these issues directly and executing a comprehensive plan. This includes resetting inventory to optimal levels, stabilizing our distributor network, and continuing to build on investments we have made to improve the equity of our ABC brand. Given the scope of the challenges and complexity of these initiatives, we expect meaningful improvements in the second half of next year. In cold cuts, elevated promotional activity in the marketplace continued longer than we anticipated. We made the decision to invest in price in the back half of the third quarter and expect those investments to drive improved performance.

Now let's take a look at our results through the lens of our three strategic pillars. In North America Retail, Accelerate platforms declined 4.2% versus the prior year. This reflects a year-over-year improvement of 100 basis points from the first half of down 5.2%, largely driven by Lunchables, cream cheese, and Primal Kitchen. And while we experience improvements in these categories, the Q3 year-over-year decline in North America Retail Accelerate was primarily driven by mac and cheese, spoonables, and processed snacks. Global Away From Home organic net sales declined 2.4%. We delivered growth in international away from home for the 18th straight quarter. While the overall US away from home industry continues to face pressure as traffic remains suppressed. We continue to expect growth in our international business in Q4, but we are not contemplating an improvement in the US industry for the remainder of the year. Now turning to emerging markets, organic net sales grew 4.7%. Latam and Middle East and Africa regions delivered double-digit growth for the second quarter in a row. While the weakness I just mentioned in Indonesia created a sizable headwind.

Going deeper into North America Retail Accelerate. I am encouraged to see share improvement across key categories in cream cheese, salad dressings, ketchup and mustard. We gained on-hand share in the quarter and drove even larger share gains in September. In fact, we gained share across 70% of our US taste portfolio in the month of September. We are seeing success across these categories as we continue to invest to drive superiority through innovation and renovation, consumer-driven price pack strategies, improved marketing and strong sales execution. And we will continue to deploy the successful playbook across the portfolio to accelerate improvement. Shifting our focus to our next strategic pillar, Global Away From Home. While I'm encouraged by the growth we continue to see internationally, the industry remains pressured in the US, particularly in chains and restaurants. Outside of restaurants in areas such as hotels, stadiums and entertainment, the non-commercial channel is an attractive higher margin channel where we continue to see growth. Over the past few years, we have been focusing growth initiatives on these channels to diversify our sales mix and reducing our dependency on QSR and restaurants. As a result, their contribution to overall away from home sales in North America is up a percentage point from 2022. We also continue to expand beyond ketchup through both distribution and innovative offerings for a new high Chipotle Honey Mustard. We strategically launched in away from home prior to bringing it to retail. The partnership delivered twice the initial expected volume, unlocking a relationship that has opened the door for incremental cross-channel revenue. In emerging markets away from home, we increased organic net sales by 9% in the third quarter, surpassing the 8% growth rate achieved in the first half of the year. This achievement underscores the success of our go-to-market model and the ongoing strength of the Heinz brand globally. Our Heinz Verified program supports restaurants with exclusive access to a suite of benefits that unlocks growth and boosts traffic. Nearly 2,500 operators have joined recognizing the value of serving Heinz in driving traffic and credibility. So while we expect the US industry to remain under pressure for the remainder of the year, success across key elements of our strategy should drive an improvement versus Q3.

Our final strategic pillar, emerging markets, delivered yet another quarter of growth, increasing topline by nearly 5%. Driven by a combination of price and volume mix. This performance was attributed to our Heinz brand which grew an impressive 14% in the quarter as well as our repeatable go-to-market model. Heinz is our global anchor with over $1 billion in sales in emerging markets alone. In these markets, we have successfully been able to expand beyond ketchup into mayonnaise, pasta sauce and other fast growing categories. And our go-to-market model continues to drive steady growth in distribution with an increase of 60,000 distribution points in the third quarter versus last year. This brings our emerging market total to nearly 900,000 distribution points and we still see so much opportunity for further expansion. The strength of our Heinz brand and our go-to-market model execution give me confidence that we are well positioned for sustainable long-term growth in our emerging markets.

Now turning to our continued investments across marketing, R&D and technology which are at the heart of our initial recovery. One key area of investment is our brand growth system. This is a systematic and repeatable data-driven methodology that is powered by forensic-like analysis to drive category growth through brand superiority. It identifies opportunities across a broad competitive landscape to improve performance in four key areas. Brand resonance, product and package, value equation and omni-channel execution. Let's start with brand resonance. Here our goal is to drive category expansion and build an everlasting emotional connection with our consumers. Driven by insights gained through the brand growth system. Our creative is now more product focused. For example, in the UK, our Trigger the Taste campaign replaces the Heinz name with the food paired with to evoke taste memory and highlight the inseparable pairing. In product and package delivery, we have invested to delivering superior quality, taste, and consumer experience. I am proud of the teams for what they have been able to accomplish in such a short amount of time. Lunchables upgraded cookies and crackers now test superior in all metrics. We're also highlighting high protein content on packaging across several brands, including Lunchables, which has 10 grams of protein. In 2025, we invested in renovation and product superiority across nearly two-thirds of the US portfolio fueled by insights from our brand growth system. Delivering value remains a top priority and we are committed to meeting the needs of all consumers from families to single households. Let me give you an example in mac and cheese. This year we introduced a new family-sized box of Kraft Mac and Cheese offering 50% more than the standard blue box. Lastly, for omni-channel execution, we want to amplify brand and category reach through excellent execution across all channels. A key component of this is e-commerce where we have generated high single-digit growth for the last three years. We built portfolio marketing to develop multi-brand media to shelf programs so we can win bigger in our must-win moments where our brands are hyper-relevant. For example, this summer we won in display and feature across our multi-brand Let's Grill Out for Dinner campaign. We have made meaningful progress implementing our brand growth system. By year end, we expect to reach 40% sales coverage, representing a 30 percentage point increase over last year. And with a dedicated team, we will continue to scale faster and further expand coverage in 2026.

Our brand growth system works hand-in-hand with our disruptive marketing and innovation efforts. By delivering superior products to meet our consumers' evolving needs through innovation, we continue to drive momentum globally. Starting in Canada, where we turned up the flavor with the launch of new Heinz mayonnaise style sauces now available at major retailers. These flavors are driving nearly 3 percentage points of share gains for Heinz Mayo versus the prior year. In fact, Heinz has now claimed five of the top 10 SKUs, representing 22% of the flavored mayo category. In addition to flavor exploration, we are making our beloved brands more accessible and relevant. Our single-serve Capri Sun bottles are proving to be a huge success. We have achieved top quartile performance across major retailers with display execution driving significant lift. Our dual aisle placement on shelf and in front of the store is demonstrating incrementality. 60% to the brand and 50% to the category. The single-serve bottles are aging up our consumer base and over-indexing to lower income households giving an accessible entry price point and we continue to deliver unique benefits such as health and wellness. Our Heinz TKO with zero added sugar and salt is now available in over 10 countries with its new formula, graphics and campaign. Our renovated Heinz TKO has gained over 1 percentage point of share in Europe and driven incremental volume to the category. Our zero promise does not compromise on its iconic ketchup taste. So whether you choose zero, classic or sweetened with honey, you can trust that it will always taste like Heinz. And finally, marketing. We have transformed our approach. Started with investing behind product-focused creative. As we move forward on our journey, we are amplifying human creativity with Tastemaker, our new AI marketing and innovation platform that enables content creation at record speeds. What once took eight weeks now takes just eight hours. And we're only scratching the surface of what's possible. We're also leaning into relevant moments in culture where our brands make sense. This past quarter, we announced our new Heinz Look Familiar global campaign that reveals the striking similarity of French fry boxes and the iconic Heinz keystone. Live across eight global markets including the US. The campaign demonstrates the unmistakable link between the universally loved duo and we're unlocking value at must-win consumer moments. Most recently during back to school, we increased media investment in core brands by 75% versus the prior year. And with a full 360-degree campaign, we were able to reach 85% of parents at an average frequency of five times. As a result, we increased cross-shopping across participating brands by 60 basis points compared to the prior year. On the next slide, you can clearly see that our investments across marketing, R&D, and technology are yielding results across all four focus categories in North America. Lunchables and Capri Sun returned to positive consumption growth. And we are making progress in mayonnaise and mac and cheese. With renovated products in market and several initiatives either just hitting shelf or coming soon, I believe we can drive further improvements. This success gives me confidence in our ability to apply this framework across the rest of our brands to drive topline growth.

As a leader in the food industry, we are harnessing the power of technology to drive efficiencies across our value chain. Our AI-powered solutions are transforming the way we work, enabling us to streamline processes, enhance decision making, and better enable reformulation. Our AI-powered tool, the Cookbook, provides employees access to 150 years of company knowledge on the production of ketchup and is leading to more efficient operation from farm to table. The tool went from idea to prototype in less than three months thanks to our partnership with Microsoft. We are planning to scale this technology to other brands, products, and businesses and explore additional use cases to further leverage its potential. In operations, our AI-powered platform PlanChat is enhancing real-time decision making on the factory floor. By gathering real-time analytics and insights, our employees can make informed decisions, improving quality and throughput across our supply chain. PlanChat is one component of our broader connected AI ecosystem across operations that has led to a meaningful reduction in waste, increased forecast accuracy and improved yield. And in R&D, our product AI model Leonardo is enabling faster and more cost-effective reformulation for nutritional advancements. Leonardo makes recommendations that replicate the exact taste and experience profile, allowing us to create healthier products without compromising on taste. In our first pilot in Brazil, we used Leonardo to reduce added sugars and sodium by over 30% in Heinz Tomato Ketchup while preserving the iconic Heinz taste. As part of our overall innovation and renovation strategy across health and wellness, we are committed to offering a balanced portfolio with an array of options. Our AI-powered solutions will be key tools in helping us achieve this goal as well as drive continued progress on our commitment to eliminate artificial dyes by 2027.

Before I hand it off to Andre, I would like to quickly touch on the separation. Work is well underway and we will continue to keep you informed of our progress. We remain on track to close in the second half of 2026 and I can assure you that in the meantime we are laser focused on execution and improving the performance of the business. With that, Andre will provide more details on our financial results and discuss our 2025 outlook.

Thank you, Andre. I would like to share some thoughts based on where the consumer is today and what that means for the food industry as we look to 2026. The consumer continues to navigate a tough environment with sentiment worsening, costs continuing to rise, and SNAP-related headwinds expected to intensify. We see these pressures as persisting beyond the fourth quarter leading to a longer path to consumer recovery. That said, I am encouraged by the progress we at Kraft Heinz are making. We continue to deliver best-in-class productivity levels and strong cash flow reflecting discipline, efficiency, and execution. We intentionally chose the path forward that prioritizes long-term sustainable growth and are continuing to make targeted brand investments enabled by a brand growth system better positioning us for 2026. Next year will be a pivotal year for us as we prepare for the separation. We are committed to investing in the long term and are taking deliberate actions now to position both companies for success post separation. Thank you for your time and interest in Kraft Heinz.