Kraft Heinz Co

NASDAQ:KHC

Q1-2025 Earnings Call

[Anne-Marie Megela, executive]

Hello. This is Anne-Marie Megela. Head of Global Investor Relations at the Kraft Heinz Company. I'd like to welcome you to our first quarter 2025 business update.

During the following remarks, we will make forward-looking statements regarding our expectations for the future, including 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 risks and uncertainties. Please see the cautionary statements and risk factors contained in today's earnings release, which accompanies these remarks as well as our most recent 10-K, 10-Q and 8-K filings for more information regarding these risks and uncertainties.

Additionally, we will 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 that accompany these remarks, which are available on our website at ir.kraftheinzcompany.com under News and Events for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures.

Today, our Chief Executive Officer, Carlos Abrams-Rivera, will provide an update on our overall business performance. And Andre Maciel, our Global Chief Financial Officer, will provide a financial review of the first quarter results and will discuss our 2025 outlook. We have also scheduled a separate live question-and-answer session with analysts. You can access our question-and-answer session at ir.kraftheinzcompany.com. A replay will also be available following the event through the same website.

With that, I will turn it over to Carlos.

[Carlos Abrams-Rivera, executive]

Thank you, Anne-Marie and thank you all for joining us. At Kraft Heinz, we know we play a vital role in families' lives and are proud to be a trusted partner in kitchens everywhere. We do know that in moments of uncertainty, our products provide comfort and connection from the kitchen table to the soccer fields to the family-owned Main Street restaurants. We source high-quality ingredients from local communities like California tomatoes, Ohio cucumbers and Idaho Potatoes. And our commitment to quality and community is reflected in the craftsmanship and the care that goes into every Kraft Heinz product.

In these unpredictable times, Kraft Heinz remains committed to controlling the controllables and making the necessary investments to deliver quality, taste and value to our consumers through our beloved brands. We are leveraging our unique insights gained from our Brand Growth System and are executing quickly through our agile ways of working. We believe everyone deserves access to delicious and nutritious food, which is why we are dedicated to making our products superior, affordable and accessible to all. This is especially important now as consumer sentiment has reached its second lowest point in the last 70 years.

Despite growing market pressures in the first quarter, we delivered results in line with our expectations. We also delivered strong cash flow performance with an increase in free cash flow conversion of 9 percentage points year-over-year. At the same time, we maintained our targeted leverage ratio of approximately 3x, ensuring a healthy balance sheet as we returned nearly $900 million to our stockholders. We are encouraged by these results and will build on the progress we have made to drive consistent long-term growth and profitability. At the same time, we're also closely monitoring implication from market tensions such as tariff inflation and the consequence to consumer behavior and we have reflected these factors in our updated guidance.

While we do still expect to see progress on recovery throughout the year, we have lowered our expected organic net sales range and widened our constant currency adjusted operating income guidance range. Our revised outlook contemplates incremental cost from inflation, including the impact of tariffs and new regulations as well as the impact on elasticities. Andre will provide more color in his remarks. Looking at the quarter more closely. Organic net sales declined 4.7% versus the prior year and were in line with our expectation of down mid-single digits. This performance was driven by continued growth in emerging markets and international Away From Home, more than offset by a decline in the U.S. retail and to a lesser extent, softness in the U.S. Away from Home industry.

We generated nearly $150 million in gross efficiencies in the quarter, offsetting some of the pressure primarily from commodity inflation. This resulted in a 10 basis point margin contraction in year-over-year adjusted gross profit margin. Constant currency adjusted operating income decreased by 4.4% as a result of the top line and margin dynamics. EPS came in at $0.62, including a $0.05 impact from a higher tax rate. As we continue to control the controllables in this environment, our ability to deliver strong cash flow is a consistent bright spot. We generated $482 million in free cash flow for the quarter, slightly above last year's performance. Our 2025 priorities are aligned with our long-term strategy to drive growth and value creation. We will do this by continuing to unlock efficiencies and reinvest in the business. This will power brand and product superiority and ultimately accelerate profitable growth.

And while we have further to go on our journey, we have made meaningful progress. For example, we are making considerable strides in productivity. In 2023, we set a goal to unlock $2.5 billion in gross efficiency by 2027 and we have already unlocked $1.5 billion. As a reminder, we are not just looking to cut cost but rather a commitment to continuous improvement, building this mindset into our culture, so it becomes a natural part of our DNA. And this commitment has paid off with a meaningful improvement in overall equipment effectiveness, reaching an all-time high of 70% this quarter and up 5 percentage points from 2023. We recognize that consumers are increasingly seeking value and we are committed to delivering products that meet their needs at prices they can afford. In addition to marketing and innovation, we are stepping up our investments in value-driving initiatives, which is reflected in part in our declining price gap relative to private label in the first quarter.

At the same time, we are creating a strong foundation to grow our brands. To drive brand superiority, we are harnessing the power of our Brand Growth System. And this framework is helping us pinpoint areas for growth acceleration as well as inform smart investments and prioritize future initiatives. We have expanded the system's reach, aiming to cover 40% of our sales by year-end, up from our pilots in 2024, which covered approximately 10%. And finally, we are seeing progress in driving omnichannel execution across U.S. retail. In this quarter, we increased share of shelf approximately 25% of our portfolio.

Now moving into our results by strategic pillar. In our North America Retail ACCELERATE platforms, organic net sales declined 8.1%. This was primarily driven by a decline in Lunchables, lapping competitors out of stocks in Philadelphia and Ore-Ida in the previous year and the Easter shift, which drove 110 basis points of the decline. This is partially offset by a strong performance in Canada, where ACCELERATE platforms grew 5% versus the prior year. We expect a material improvement in the second quarter due in part to the timing of Easter. We're also stepping up price investments, optimizing media spend and launching innovation for the remainder of the year, which is expected to improve performance. I will provide more details on that later.

Global Away From Home organic net sales declined 0.8% but we continue to see growth in international Away from Home and have for 16 quarters in a row now. At the same time, the U.S. Away from Home industry faced pressures due to slowing traffic, which led to a decline in our total U.S. Away from Home business. Turning to emerging markets, we grew 3.9% versus the prior year, primarily driven by recovery in Brazil as we expected. We anticipate continued improvement throughout 2025 in each quarter and we plan to exit the year at an [ on ] algorithm pace.

Now let's go deeper into our North America retail business. Following the success of our Philadelphia and the Heinz U.K. pilots, we are scaling up our Brand Growth System to reach 40% sales coverage by year-end, up from only 10% in 2024. At CAGNY, you may recall that we were expecting 30% coverage by year-end. Our revised expectations are grounded in our experience to date and the success we're seeing combining the brand growth system with our agile ways of working. Our Brand Growth System is a critical component of our creative ecosystem, providing a systematic and repeatable framework that complements our disruptive marketing and innovation efforts to drive brand superiority.

We have prioritized resources to drive improvement across 4 brands that are experiencing more significant top line pressures, Lunchables, Capri Sun, Kraft Mac & Cheese and Kraft Mayonnaise. So let me walk you through each brand, sharing the specific actions we're taking and the encouraging traction we are already seeing as we invest to drive superiority. You will then see how we are confident in the expected improvements contemplated in our 2025 guidance. Starting with Lunchables. We remain committed to our #1 market share. We are bringing bold innovation, delicious renovation and executed an integrated omnichannel approach as part of our largest Lunchables fall season campaign ever. We recently launched our Spicy Nachos, which has already delivered over 30% incremental growth to the category and be sure to stay tuned for a game-changing new launch still here in Q2.

We are geared up for a successful fall season like never before, starting with an elevated Lunchables experience. Our iconic brand now features a superior tasting cookie embossed with the Lunchables logo, sure to excite everyone. Better cracker options are also on the menu, offering a delightful upgrade in our products. Plus Lunchables is highlighting the fact that it is a great source of protein, giving parents confidence that they are providing nutritious and filling meals and snacks. And to amplify this message, we have built a targeted marketing campaign to drive trial and sampling. This effort ensures that the value and quality of Lunchables resonates with people who matter most, consumers who love our brand. Our strategic focus on omnichannel execution across Lunchables is already paying dividends with key customer partnerships yielding a meaningful increase in distribution.

And to support a winning fall season for our consumers, we are doubling down on our marketing commitment and investing twice the national media spend, ensuring that this iconic brand is top of mind. Let's now look at Capri Sun. It is truly amazing the progress we are seeing in this turnaround story. First, we are driving product superiority with a newly renovated Capri Sun, generating an 8 percentage point improvement in year-over-year sales in Q1 from what we ended in 2024. We are also expanding accessibility in new channels and driving new occasions with our single-serve bottles. The early success is very encouraging, with initial sales coming in 5x greater than we expected. Plus, we have entered the front of the store for the first time at checkout with our on-the-go Capri Sun bottles generating velocities at 4x the rate of a key competitor.

And let's not forget all the new brand love we are bringing by showing up in culturally relevant moments. We launched Capri Sun Moon Punch, featuring our first ever glow-in-the-dark pouch with 8 collectible designs inspired by the different moon phases. This limited time offer was a huge success with sales exceeding 2x the rate of our core products, leading to increased distribution with several top customers. Not only is it clear that kids and parents alike were over the moon for Capri Sun Moon Punch but that we are successfully executing on these relevant moments. And importantly, we have several more limited time offers underway and are heavily investing in brand media over the summer hydration season.

At Kraft Heinz, we are committed to revamping our iconic Mac & Cheese brand to meet the evolving needs and taste of our consumers. Our approach to driving top line growth is threefold. First, we are focused on driving incrementality to the category. Our Mario shapes are driving total [ shape ] sales to the highest level we have seen in the last 5 years. We're also expanding our flavor portfolio, targeting younger consumers who are craving bold, adventurous flavors within the comfort of familiar, trusted brands. Flavor Mac & Cheese has seen remarkable growth, outpacing the total category by 7x over the last 5 years.

Second, we are optimizing our packaging graphics to ensure consumers know that our Kraft Mac & Cheese has been proudly made with no artificial flavors, no preservative and no dyes since 2016. We're also showcasing our cheesiness and taste because let's be honest, who does not love more cheese. We know these attributes are important to our consumers. And to further showcase our superiority, we have a new product-focused creative rolling out into the market in the coming months with a large media investment behind it. And third, building on our commitment to deliver value, we are excited to introduce new value offerings that cater to evolving consumer needs and preferences. We recently launched an 11-ounce box, which provides 50% more at a price point that is 20% less per ounce. This larger size is unbeatable value, feeding a family of 5 for less than $2.

To serve across multiple meal occasions, we are rolling out larger Mac & Cheese cups to capture the accelerating trend of mini meals. Our big cups are twice the size of the original and are perfectly suited to satisfy the larger than a snack hunger. Now let's look at Kraft Mayonnaise. To build on this great taste, our initial focus is on investing in packaging and price. We're also executing a regional media strategy at key moments and leveraging the success we have had in Mayonnaise in other parts of the world. We are refreshing our packaging with new graphics, highlighting key attributes that are important to our consumers. We are also encouraging trial and driving confidence in a superior quality through a money back guarantee. Through our Brand Growth System, we learned that for Mayonnaise, regionality matters. So to optimize our media spend, we are now using a targeted media approach focusing on 3 regions where 75% of our business is concentrated.

We are connecting with our target audience during key seasons like Easter and summer grilling. And inspired by our global success, which includes reaching a 50% market share in Chile from 30% in 2020, we have what it takes to win. In fact, we are taking the Heinz Mayo line that has been extremely successful globally and launching it now in Canada. I am very excited about the plans we have in store for these important brands. They are rooted in robust insight from our Brand Growth System and are being brought to life by our proven agile ways of working. This powerful combination of what we are doing and how we are doing it, is what gives me confidence in our ability to successfully execute our expected top line recovery in the U.S. retail this year.

At the same time, we are making great strides across our other ACCELERATE categories, including pasta sauce with a 5% increase in Q1 organic net sales and our delicious CRAVE frozen meals in Canada increased 7% through innovation launches and more effective promotions and a focus on driving awareness and conversion contributed to 10% growth in Primal Kitchen. And finally, building on the growing Mexican cuisine trend, we grew Mexican food and sauces by 15%, the second year of double-digit growth in this category. Our next strategic pillar is global Away From Home. In the U.S., the Away From Home market is experiencing a downturn as consumers tighten their belts and navigate economic uncertainty. However, despite the challenging environment, we are seeing progress across each aspect of our strategy. We are expanding our footprint in higher-margin channels, growing beyond ketchup and excelling in our go-to-market approach.

In the U.S., we achieved 4% of sales growth in higher-margin noncommercial channels, including notable wins in the entertainment and travel sectors. Our recent partnership with the Chicago Cubs, which made Heinz the official condiment of Wrigley Field, has yielded incremental distribution of our ketchup, mustard, relish and other products. We also signed a new global contract earlier this year with Hilton Hotels. It designates Kraft Heinz as their preferred sauce and condiment vendor. Furthermore, we are making strides in diversifying our portfolio beyond ketchup. Our Philadelphia Cream Cheese brand, for instance, has seen substantial growth in the U.S. Away from Home channel, up double digits in the quarter, driven in part by partnership with Crumble and Dunkin' Donuts.

Finally, we are leveraging our proven go-to-market model to expand our distribution network in the emerging markets Away From Home segment. In the first quarter, we successfully added 16,000 new distribution points. And while we're pleased with initial improvement in the first quarter relative to the fourth quarter of last year, the U.S. Away From Home industry continues to face challenging times with traffic declining across the sector. As a result, our go-forward expectation of industry growth is appropriately adjusted. Andre will discuss the implication and outlook in this guidance discussion.

Looking at emerging markets. As we expected, we grew organic net sales at an accelerated pace year-over-year in the first quarter of 2025 as compared to the fourth quarter of 2024. Our growth drivers in emerging markets are twofold, leveraging the strong brand equity of our Heinz brand and expanding distribution through our go-to-market model. We grew Heinz organic net sales in emerging markets approximately 11%. Heinz is our largest brand globally. And today, it represents over $1 billion in sales in emerging markets but account for only 40% of total sales in the zone, reflecting meaningful room for growth. We also continue to expand distribution through our go-to-market model, adding approximately 21,000 distribution points compared to the first quarter of 2024.

Shifting now to 2 key enablers of growth, innovation and marketing. Let's begin with innovation. We are creating products that truly delight consumers, whether it's through our bold new flavors and cuisines, making our brands more accessible and relevant to a wider audience or delivering benefits that make a real difference in people's life. We have spent the last few years building a solid pipeline with over 75% of innovation sales in 2025 expected to come from proven innovation already launched. For example, as part of our Mexican food strategy, we have expanded our Taco Bell partnership, providing our consumers with restaurant quality experiences at home. Building on the momentum from 2024, we grew dollar sales 12% in the first quarter of 2025 and we are now launching this great tasting experience in Canada. We are also expanding into new channels, occasion and host foods.

After 150 years, leveraging our extensive agricultural heritage and tomato expertise, we launched the first Heinz pasta sauce in the U.K. a couple of years ago. Now we continue to introduce new formats, disrupting and driving excitement in the pasta sauce category and are expanding into new countries and it's working. generating dollar sales growth of 26% in the first quarter. And in Indonesia, we introduced our ABC multipurpose peanut sauce, making our entrance into a $200 million peanut sauce market. This ready-to-use sauce takes meals to the next level. With the rich nutty flavor of peanuts, it elevates dishes in an instant and a super convenient, just open, pour and enjoy.

Introducing Mio Unwind, our latest innovation in the health and wellness space. This on-the-go hydration solution helps consumers discover their zen and is made with 0 sugar, 0 artificial dyes and 0 calories. Plus it is a good source of magnesium and B vitamins. This is a great example of how we are tapping into the increasing demand for wellness-focused [ cafe ] products. The $6 billion global magnesium market projected to grow at 5% annually presents a significant opportunity for us to capitalize on this exciting trend.

Turning to our marketing engine. This year, we're all about leveling up our game and driving return on investment, obsessed with making every marketing dollar count as we power our brands. Fueled by insights from the Brand Growth system, we are ensuring that creative excellence is a likely outcome, not a lucky one. We are marketing at the speed of culture and igniting relevance of great ideas by aligning them to key moments in culture. Helping to bring this to life is our internal agency, The Kitchen. Here, the best internal talent is collaborating with external partners to create marketing that matters. In Q1, we secured over 11 billion earned impression for our North America brand, which is the highest in Kraft Heinz history.

And we're not just reacting to trends. We're activating with agility to capitalize on real-time consumer insights. For example, when egg prices soared, our team swooped in with a genius solution, a Jet-Puffed Dip & Decorate Marshmallow kit for only $1.99. It was a total hit and retailers are already asking for a repeat performance in 2026. Who knows? Maybe we just started a new Easter tradition. Just a week before March Madness, a news story dropped that BYU star player, Richie Saunders, was the great-grandson of the tater tot inventor and Ore-Ida founder. We knew we had to act fast, but as a non-NCAA partner, breaking through the noise was a challenge. Undeterred, we signed Richie to an NIL deal, captured a photo shoot and launched the tot clock national giveaway in under a week. The campaign went viral, driving 3 billion earned media impressions and a 9% regional sales lift. We had more engagements than all March Madness sponsors combined, with less than 5 basis points of the spend.

As you can see, we are elevating our marketing and making a lasting impact. By combining data-driven insights with creative excellence, we are building brand relevance and sparking new consumer connections, all at the speed of culture.

With that, let me hand it over to Andre to provide more details on our first quarter financial results and to discuss our 2025 outlook.

[Andre Maciel, executive]

Thank you, Carlos. In the first quarter, organic net sales declined 4.7% for total Kraft Heinz with price up 0.9 percentage points and volume mix down 5.6 percentage points. In North America, organic net sales declined 6.5% with growth in our Canada business offset by lower sales in both U.S. retail and Away From Home. This includes an impact of 120 basis points driven by the timing of Easter.

In our international developed markets, organic net sales declined 1.7%. This was primarily driven by industry slowdown in the U.K. from weakening consumer sentiment. Keep in mind that this is an improvement from the fourth quarter year-over-year decline of 4%. In emerging markets, organic net sales were up 3.9%, an improvement from 2.2% year-over-year growth in the fourth quarter of 2024. Results were driven by pricing in line with inflation with volumes impacted by the timing of Ramadan. We are pleased with the progress in emerging markets and we expect to see this continue, reaching double-digit growth by the fourth quarter of 2025.

Turning to the next slide. Total Kraft Heinz adjusted operating income declined 5.2%, while our adjusted operating income margin increased 30 basis points, a result of strong performance in emerging markets. In North America, adjusted operating income declined 9.4% versus the prior year. Productivity gains and lower incentive compensation were more than offset by declines in sales and commodity inflation, particularly in coffee, eggs and meat. In international developed markets, adjusted operating income decreased 7%, mainly due to the lag between pricing and inflation, as well as softer sales. In emerging markets, adjusted operating income increased 20.3% and adjusted operating income margin expanded by 300 basis points. This growth and margin expansion was driven by revenue management initiatives in Brazil and operational efficiencies across the zone. As a result of these initiatives, we expect to be able to maintain these profitability levels throughout the year.

As we navigate the current consumer landscape and macroeconomic conditions, our focus remains on delivering value to our consumers. By unlocking efficiencies and optimizing our marketing spend, we are able to invest in price and support our brands. Building on our previous commitment, we are increasing our investments in price in 2025, starting with reestablishing optimal price gaps in key categories. Additionally, we are leveraging trade spend to support our product renovations and boost trial and drive awareness of superior product attributes. We are also leveraging our Heinz Verified loyalty program to accelerate distribution gains in Away From Home. And finally, we are investing in the strategic areas, including our brands across Canada and Philadelphia and Ore-Ida to keep the momentum and drive further growth.

In addition to increasing our investments in price, we are working diligently to improve marketing efficiency and drive better returns. We expect marketing as a percentage of sales to be up versus the prior year, with the media spend increase by at least 15%. We are also targeting a double-digit increase in returns on that spend by optimizing our media mix and brand allocation. Ultimately, our goal is to drive improvement in top line trends and we believe these efforts will help us to achieve that. I'm extremely proud of the team's ability to unlock end-to-end efficiencies, which enables us to make the investments I just discussed. In Q1, we generated 3.7% of gross efficiencies as a percentage of cost of goods sold. This exceeds the 3.5% goal we had for the year and we are well on our way to achieving our goal of $2.5 billion in efficiencies by 2027. With $1.5 billion unlocked to date, we have significant runway ahead.

These efficiencies helped mitigate commodity pressure and limited the decrease in year-over-year adjusted gross profit margin to 10 basis points in the first quarter. Turning to cash flow. We generated free cash flow conversion of 65%, a 9 percentage point increase versus the prior year. This was primarily driven by lower cash outflows from variable compensation, partially offset by inventory phasing. In terms of adjusted EPS, we declined 10.1% or $0.07 versus the first quarter of 2024. This was driven by favorable impacts from share repurchases and other expense income, more than offset by negative impact from a higher effective tax rate and results of operations.

Last quarter, we spoke about the expected 500 basis point step-up in our P&L tax rate starting in the first quarter. As a reminder, this step-up is related to the transfer of certain business operations that was completed in the fourth quarter of 2024. The transfer was part of our planning for the changes in the international tax environment. It also allowed us to achieve greater operational synergies. A healthy balance sheet and strong cash flow generation provide a foundation for financial stability and flexibility. We have been able to provide consistent cash generation as well as significantly reduce our net leverage ratio, positioning ourselves to better navigate this uncertain environment. As part of our ongoing effort to optimize our capital structure, we issued bonds to rebalance our debt towers. The net effect on our P&L is minimal and we are able to reinvest the funds raised.

We continue to be excellent stewards of capital. By taking a disciplined approach to financial management, we have created optionality for capital allocation. Our priorities remain the same, to continue to invest in organic growth, actively manage our portfolio and return incremental capital to our shareholders. We have maintained a strong balance sheet, returned nearly $900 million in capital to stockholders year-to-date and maintained our net leverage target of approximately 3x. Of the $900 million returned to stockholders, $500 million was through our competitive dividend, with a yield that exceeds 5% and $400 million through our share repurchase program. This demonstrates our confidence in the improved trajectory of the company. Currently, we have about $1.5 billion remaining against our $3 billion authorization. As a reminder, our share repurchase program is nonprogrammatic, a function of excess cash and takes into consideration the macroeconomic environment.

Now turning to our full year 2025 outlook. We are lowering our organic net sales expectations and are widening our guidance range for constant currency adjusted operating income as a result of the growing macroeconomic challenges, including potential tariffs and the regulatory environment. We are now expecting organic net sales in the range of down 1.5% to down 3.5% compared to our previous outlook of flat to down 2.5%. This guidance contemplates growth in emerging markets, which is expected to reach a double-digit pace by year-end and it also reflects a relatively flat top line performance in Global Away From Home relative to last year and an elongated recovery in U.S. retail-challenged categories. Relative to our previous expectations, the change in organic net sales is primarily driven by worsening consumer sentiment and changes in volume elasticity, particularly in the United States.

For full year constant currency adjusted operating income, we are now anticipating a decline of 5% to 10% compared to our previous expectation to decline 1% to 4%. Our lower expectations contemplate increased cost of doing business, including elevated inflation and tariffs. The wider range reflects a larger degree of uncertainty given the underlying volatility and unpredictability of macroeconomic dynamics as well as a changing policy landscape. It also provides us with the necessary flexibility to dial in on investments as deemed appropriate. Our constant currency adjusted operating income expectations include the impact of lapping lower variable compensation in 2024, which is an approximate 150 basis point headwind. It also contemplates an adjusted gross profit margin that is down 25 to 75 basis points year-over-year, driven by our gross efficiencies, tariff mitigation efforts and additional pricing that are expected to be more than offset by inflation and incremental investments in price and product.

We expect adjusted EPS to be in the range of $2.51 to $2.67 as compared to our previous expectation of $2.63 to $2.74. The change in guidance reflects the revised organic net sales and constant currency adjusted operating income estimates, partially offset by the impact of year-to-date share repurchases. Our adjusted EPS expectation also contemplates an effective tax rate of approximately 26%, which is a $0.23 headwind on adjusted EPS year-over-year. From a free cash flow perspective, we expect 2025 to be flat versus prior year with free cash flow conversion of approximately 95%. This is driven by working capital efficiencies and lower cash outflows for variable compensation, partially offset by the net cash impact of a higher tax rate. Our outlook does not reflect any impact from future potential share repurchases. And as a reminder, we have $1.5 billion remaining on our $3 billion share repurchase plan.

Looking at the second quarter, we expect year-over-year organic net sales to come in better relative to the first quarter of 2025. This is driven primarily by an approximate 100 basis points benefit due to Easter shift but also from improvements in cream cheese and Ore-Ida, as we lap headwinds in the first quarter that were driven by competitor out of stocks in the prior year and also continued sequential improvement in emerging markets. We expect adjusted gross profit margin to be down approximately 200 basis points in the second quarter. The pressure is primarily driven by continued inflation in coffee and the timing of commodity hedges. As a result of the pressure on adjusted gross profit margin, we expect adjusted operating income to be down double digits versus the prior year.

With that, I will pass it back to Carlos for some closing comments.

[Carlos Abrams-Rivera, executive]

Well, thank you, Andre. Let me wrap up by saying we're acutely aware of the building pressures across food from incremental inflation to tariff implications and the concern our consumers have regarding a potential recession.

We're actively working on solutions. I sincerely believe that our proven ability to unlock efficiencies and generate cash, along with our value-adding innovation and renovation, plus the strategic investments we're making across marketing and our brands provide us with a robust toolkit to navigate and adapt to the ever-changing environment. And by doing so, we will continue to serve our consumers delicious food from trusted brands at a price they can afford, all while returning value to our stockholders.

Thank you for joining us and for your interest in Kraft Heinz.