Kraft Heinz Co

NASDAQ:KHC

Earnings Call Transcript

[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 fourth quarter and full year 2024 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 filing 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 fourth quarter 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 today.

I would like to start with a big thank you to the Kraft Heinz team for working tirelessly in what proved to be a challenging year for us and for the industry.

Together, we maintain our focus on building and investing for the future. We have demonstrated our ability to be efficient cash generators, delivering both industry-leading gross margins and strong free cash flow. We have delivered efficiencies to fuel investments that are driving meaningful product renovation and innovation and enhancing our marketing capabilities, all of which are helping us build brand superiority.

And despite a weaker macroeconomic backdrop, we returned meaningful capital to our stockholders in 2024 with $2.7 billion returned through our dividend, which offers the highest yield in food and share buybacks.

As we look ahead to 2025, we remain confident in our strategy. By building upon the advancements made in 2024 and executing with excellence, we anticipate improvements each quarter in our top line performance. This will be driven by growth in Emerging Markets and Global Away From Home with U.S. retail benefiting from actions we are taking to further implement our Brand Growth System. And we will do this while preserving profitability, something we have proven we know how to do well.

With that, let us turn to our 2024 full year results. Organic net sales declined 2.1% versus the prior year. Through the lens of our strategic pillars, this was driven by the growth in Emerging Markets, which was more than offset by declines in North America Retail and Away From Home in the U.S.

Despite the top line pressure, we generated 100 basis points of adjusted gross profit margin expansion versus 2023. This was due in large part to the capabilities we have built over the years, including investments in technology that are driving efficiencies across areas like revenue management, manufacturing and logistics. These efforts enabled us to deliver nearly $750 million in growth efficiencies, a portion of which was reinvested in our brands. We remain committed to a disciplined approach to investing, ensuring that our resources are driving sustainable long-term volume growth.

Our gross margin expansion in addition to a benefit from lower variable incentive compensation for the year contributed to adjusted operating income growth of 1.2%. The reduction in variable incentive compensation reflects our culture of meritocracy, where performance is closely tied to rewards. This demonstrates the effectiveness of our compensation model in aligning pay with results.

Our adjusted operating income growth, along with share repurchases, led to adjusted EPS growth of 2.7% Finally, free cash flow came in at approximately $3.2 billion, an increase of 6.6% versus the prior year.

Moving to the details of our performance across the 3 strategic pillars. In our ACCELERATE platforms in North America Retail, organic net sales declined 2.9%. This was primarily driven by weakening trends in 3 specific brands and the planned exit of our unprofitable bulk vinegar business. This overshadowed strong performances across our Ore-Ida, Taco Bell, Philadelphia and Heinz brand, which together make up about 40% of sales in U.S. Retail ACCELERATE.

In Global Away From Home, organic net sales declined 0.6%. Growth in International Away From Home was more than offset by a decline in the U.S. This decline was driven primarily by 2 planned business exits from margin-dilutive businesses, a temporary plant closure in the second quarter and softer traffic trends relative to 2023.

In the fourth quarter, Global Away From Home came in below our expectations. To improve our performance in 2025, we are committed to providing additional value to our customers. We will be increasing our investment in trade, alongside our marketing initiatives. And through our premium loyalty program, Heinz verified, we will provide customers with access to bundles, traffic driving promotions and our state-of-the-art culinary portfolio and equipment.

Turning to Emerging Markets. We grew 4% versus full year 2023, driven by both price and volume mix. Excluding pressures experienced in Brazil and China, the rest of Emerging Markets grew double digits, in line with our long-term algorithm.

In the fourth quarter, Emerging Markets organic net sales came in below our expectations, driven primarily by performance in China, where consumer confidence continues to remain soft. As a result, we saw more than anticipated inventory deloading as retail customers and distributors are reducing working capital and costs.

Now, going a bit deeper into our North America retail business. Last quarter, we discussed a couple of core categories that are driving year-over-year top line pressure, including Lunchables, Kraft Mayonnaise, Kraft Mac & Cheese and Capri Sun.

Across each of these brands, we have kicked up the Brand Growth System, running deep forensic-like assessment that will uncover the most meaningful opportunities to drive brand superiority. We are confident that the Brand Growth System will make a meaningful difference because we have already seen its success in action. In 2024, we run pilots on Philadelphia Cream Cheese and Heinz in the U.K. On Philadelphia, we captured wide space in growing channels with 13% growth in club. And on Heinz ketchup in the U.K., we grew volume share by 2.3 percentage points, a category we haven't grown share in 5 years.

We are now scaling this approach across these 4 brands with dedicated agile pods already in play for each. And importantly, we are committed to making necessary investments in the products and marketing to close those gaps. In parallel to starting the Brand Growth System, the initial actions we have taken are showing early signs of traction as we're investing in the products to drive superiority.

On Lunchables, we are strengthening the core and expanding the occasions. Take, for example, our recent launch of Spicy Nachos, which is 17% incremental to the meal combos category, driven by increases in both buy rate and consumption. We also continue to renovate as part of our ongoing commitment to deliver exceptional quality, including upgrades to our cookies and crackers to meet evolving taste.

In our Mayonnaise business, we are strengthening our value proposition to reengage with lapsed users and to attract new ones. We are bringing new flavors, including Pickle Mayo, which has successfully rolled out in the U.S. And we're taking this flavor expansion strategy globally, launching new flavors in countries, including Canada, Australia, the U.K. and the Middle East. In addition to our flavor strategy, we are delighting consumers with better-for-you options through our Primal Kitchen brand.

For Kraft Mac & Cheese, we are connecting and engaging with families and younger consumers. We are doing this through the new bold flavors like ranch and jalapeño, better-for-you options, new pack sizes and long pack partnerships, and we are seeing momentum here with a 1 percentage point improvement in the year-over-year sales trends.

And finally, on Capri Sun, I am very excited that we have generated a 5 percentage point improvement in year-over-year sales. We invested in the product innovation to win on taste, and now we're bringing value to consumers through innovation, including a new 64-ounce multi-serve and our single-serve bottles.

Our ACCELERATE platforms represent the most attractive spaces within our portfolio, where we have the highest right to win and in turn, where we have been prioritizing our investments. This prioritization has contributed to growth across several of our iconic brands, including Philadelphia, Heinz Ketchup, Ore-Ida and Taco Bell.

As I mentioned earlier, Philadelphia is one of the brands we piloted in our Brand Growth System in 2024. We uncovered opportunities to attract under-indexed audiences to expand distribution in white space channel and to highlight the versatility of cream cheese across new user occasions. Our initial learnings and actions are yielding results with 2% dollar gross sales despite lapping private label out of stock in 2023.

And Heinz Ketchup grew dollar sales 2% versus 2023. This was driven by impactful marketing campaigns and by increasing distribution from innovation. We have innovated across formats and flavors to deliver on consumer desires, including the successful launch of our Pickle Ketchup, which has been 50% incremental to the flavor ketchup category, and we are now expanding it to 4 continents.

On Ore-Ida, we have been able to meet the strong consumer demand for our products, which in turn enabled us to increase investments in marketing and promotions. This contributed to dollar sales growth of 8% in 2024.

Lastly, Taco Bell had a great year, growing 24% versus 2023. This was driven by expanded distribution and share gains on both existing products and innovation as we doubled down on the fast-growing Mexican cuisine category growing at a pace of 4.5%.

Turning to our next strategic pillar, Global Away From Home. Despite the decline in our top line growth, we are seeing wins across each key area of our strategy, growing in higher-margin channels, increasing penetration beyond ketchup and go-to-market excellence.

In the U.S., we gained 70 basis points of share and grew sales mid-single digits for the full year across higher-margin noncommercial channels. This includes wins in entertainment and travel. Earlier this year, we announced a new multiyear partnership with the Chicago Cubs, where Heinz has been named the official condiment of Wrigley Field. This included incremental distribution on Heinz ketchup, mustard, relish and more.

I am also excited to share that we have signed a new contract with Hilton Hotels, making Kraft Heinz the preferred vendor for sauces and condiments globally. This presents a large opportunity for us, and we are excited for the doors it unlocks, partnering with Hilton to leverage the worldwide presence in over 130 countries to drive growth.

We also continue to expand beyond ketchup. I just mentioned our partnership with the Chicago Cubs. This is one example where fans can also enjoy Kraft Mac & Cheese, Philadelphia and Primal Kitchen throughout the ballpark. And more recently, we further increased our penetration of Philadelphia Cream Cheese in Away From Home with Dunkin'. In U.S. Away From Home, we grew Philadelphia Cream Cheese high single digits in 2024.

And we are focused on go-to-market excellence, leveraging our proven model to not only gain distribution in retail within Emerging Markets where we have solid coverage, but also expanding the model into Away From Home channel. In 2024, we grew total distribution points in Emerging Markets Away From Home by 21%.

As you can see, our Away From Home team has been busy this year, and I'm happy to report that for 2025, we have already locked in 75% of the expected sales from new client wins.

Looking at Emerging Markets, we grew organic net sales both in the fourth quarter and the full year. While this growth was lower than we originally anticipated due to pressures in Brazil and China, the rest of Emerging Markets grew double digits, a testament that our strategy is working.

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 8% in 2024. Heinz is our largest brand globally, and it represents over $1 billion in sales in Emerging Markets, accounting for roughly 40% of total sales in the zone.

We also continue to expand distribution through our go-to-market model. We increased total distribution points by 17% in 2024 and plan to further increase by an additional 40,000 points of distribution in 2025. This sets us up well for accelerated growth.

As we look to 2025, marketing and innovation will be key enablers of our growth. Let's dive into both. First, on the marketing front, we continue to make meaningful advancements in talent, tools and capabilities by building an ecosystem that fuels brand relevance and creative excellence. A key driver of this success is our in-house agency, The Kitchen, which we launched 4 years ago to unlock creativity and deliver breakthrough ideas at the speed of culture. Since its launch, The Kitchen has garnered external recognition, earning numerous awards for the in-house agency of the year.

I am thrilled to share that our marketing team has been pushing the boundaries of innovation and creativity in the partnership space. We're not just talking about any partnership. We are talking about game-changing culture shifting collaborations that are redefining the marketing landscape. For example, we finally got Mustard on the Beat with the electrifying collaboration with the award-winning producer Mustard, which dropped during the biggest night in music to Grammys.

And if that wasn't enough, we also brought our beloved brands to life in Instacart's first-ever Super Bowl campaign, featuring the iconic Heinz Wiener Dogs, the Kool-Aid man and the Oscar Mayer Wienermobile. It was a moment that will go down in marketing history. These partnerships aren't just about generating buzz. They're about creating unforgettable experiences that leave a lasting impact on our consumers. And I couldn't be prouder of our team for their dedication to truly creating marketing that excites.

Our Brand Growth System is another critical component of our creative ecosystem, providing a systematic and repeatable framework that complements our disruptive marketing and innovation efforts to drive brand superiority. You have heard that about the early success we've had with Heinz Ketchup in the U.K. and Philadelphia Cream Cheese in the U.S. Now with this pilot complete, we are ready to scale. More on that as we get into CAGNY next week.

Turning to innovation. Our strategy is working. We have significantly increased innovation as a percentage of our organic net sales from 1.6% in 2022 to 2.9% in 2024. We are focused on creating and providing consumers with products that are worth paying for, whether that be through our cuisine and flavor exploration, high-quality convenient solutions or expanding options and functionality through unique benefits.

As part of our Mexican food strategy, we have expanded our Taco Bell partnership, providing our consumers with restaurant quality experiences at home. In 2024, this led to dollar sales growth of 24%, and we increased market share by nearly 1 point.

As consumers are looking for bolder, more exciting flavors, we are leveraging a flavor-focused expansion strategy in Mac & Cheese. Based on market and social media trends, we are creating buzzworthy moments by launching limited time offerings to drive excitement and deliver unexpected new flavors to market in record time. This includes our most recent Everything Bagel Kraft Mac & Cheese launch, which sold out in just 1 day online at one of our largest retailers.

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 recipes, disrupting and driving excitement in the pasta sauce category, making superior quality ingredients and the latest food trends accessible to all pasta lovers, and it's working with dollar sales growth of 45% in 2024. And by leveraging the Global Heinz team that was established last year, we are quickly scaling what works, expanding Heinz pasta sauce into other countries, including Brazil, Chile and across Europe.

And we are delivering deliciousness and convenience through our 360Crisp platform, pushing the boundaries of what frozen food can deliver. This patent technology provides convenience and quality, creating crispy products like those on the stove in a matter of minutes in the microwave. Delimex quesadillas marked our first launch on the brand in over 5 years, and they are now available in over 20,000 stores as we continue to expand distribution.

We entered 2025 with strong momentum on the innovation front, and we will continue to double down on innovation that worked well in 2024. In fact, over 75% of innovation sales in 2025 are expected to come from proven innovation already launched, plus we have an exciting array of launches ready for 2025, focused on our core brand.

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

[Andre Maciel, executive]

Thank you, Carlos.

In the fourth quarter, organic net sales declined 3.1% for total Kraft Heinz with price up 1 percentage point and volume mix down 4.1 percentage points. In North America, organic net sales declined 3.6%, with growth in our Canada business offset by lower sales in both U.S. retail and Away From Home.

In our international developed markets, organic net sales declined 4%. This was driven by volume pressures due to customer negotiations in Europe and declines in noncore categories.

In Emerging Markets, organic net sales was up 2.2%. Results were impacted by Brazil, driven primarily by volume elasticity linked to price taken in commodity categories and China, where we continue to experience industry softness. The rest of Emerging Markets grew the top line double digits in the fourth quarter with particularly strong growth in the Middle East and Turkey.

Turning to the next slide. Total Kraft Heinz adjusted operating income declined 0.3%, driven by declines in each of our zones, primarily due to lower sales. Our adjusted operating income margin increased 80 basis points, a result of lower variable compensation and unlocked efficiencies. Lower variable compensation was a benefit to adjusted operating income across each of our zones.

In North America, adjusted operating income declined 2.3% versus the prior year, with decline in sales more than offsetting productivity gains. In international developed markets, adjusted operating income decreased 3.8%, primarily driven by the decline in sales and incremental inflation, partially offset by operational efficiencies.

In Emerging Markets, while adjusted operating income declined 0.8% on a constant currency basis, we grew 3.5% and adjusted operating income margin expanded by 70 basis points. This growth and margin expansion was driven by lapping elevated investments in go-to-market, primarily in LATAM.

As we think about improving overall competitiveness in the market, we are leveraging a combination of strategies. We are focused on growing our base volumes in a sustainable way. This includes through consumer-driven innovation, portfolio renovation, marketing that matters as well as selectively investing in price.

In the fourth quarter, our percent of volumes sold on promotion was down 2% versus the prior year. This was primarily driven by lapping dynamics. In the fourth quarter of 2023, we were investing more in promotions on Ore-Ida as we were coming back from service issues. And in Philadelphia, we are lapping private label out of stocks.

As we continue to balance long-term profitability, our volume sold on promotion was 5% below levels that of 2019. Looking to 2025, we are planning an increased level of investment in price. remaining mindful of the consumer situation, we plan to make investments to adjust price gaps in selected categories, primarily across the 4 key brands Carlos discussed, and in our U.S. Away From Home.

While we will be investing more, we are also taking actions to ensure we generate positive returns. We have additional opportunities identified for 2025 to remove non-effective events that were not driving top or bottom line in 2024. And we know that promotions without product improvement and marketing will not get us to where we need to be.

Moving down the P&L, we continue to generate margin expansion through end-to-end efficiencies. This help us to not only offset inflation, but it also enables us to invest in the business to support long-term growth.

In 2024, we generated nearly 4.5% of gross efficiencies as a percentage of cost of goods sold. This exceeds the target 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 $1.3 billion unlocked to date, we have significant runway ahead to capture at least $1.2 billion more.

Through Agile@Scale, we have plans for further advancements, including but not limited to automation and network optimization in our supply chain, sourcing excellence within procurement and maintaining a disciplined execution and continuous improvement mindset.

These efficiencies helped generate 100 basis points of adjusted gross profit margin expansion in 2024 and provided us with the flexibility to increase investments.

We exited 2024 with marketing as a percent of net sales at 4.5% and R&D as a percent of net sales at 0.6%. On the marketing front, we are approaching optimal levels and are shifting more focus in 2025 on unlocking additional value from our marketing spend through data-driven improvements to ROIs. We have plans in place that will optimize marketing mix across brands and media types to ensure our dollars are working hard for our brands. On R&D, we expect to further increase our investments to support future innovation and are targeting levels closer to 1% of net sales.

Turning to cash flow. We generated full year free cash flow conversion of 85%, a 4 percentage point increase versus the prior year. This was primarily driven by the conversion of certain surplus plan assets related to the U.S. postretirement medical plan to cash as well as improved working capital.

At the same time, we continue to increase investments for growth with full year CapEx increasing to 4% of net sales, up 20 basis points from the prior year. In terms of adjusted EPS, we grew 7.7% or $0.06 versus the fourth quarter of 2023. This was driven by positive impacts from a lower effective tax rate and share repurchases.

Keep in mind, our adjusted EPS does exclude an impairment charge of $1.4 billion that was recognized in the quarter, which was more than offset by a $2.4 billion tax benefit. This tax benefit 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, and also allowed us to achieve greater operational synergies.

In accordance with GAAP, the P&L benefit from the transfer of certain business operations had to be recorded in the fourth quarter of 2024 when the transfer was completed. On a cash tax basis, however, the benefit is recognized annually starting 2025 and going forward for the next 20 years.

As a result, we expect a 500 bps step-up in our P&L tax rate starting 2025. However, we only expect a 200 to 300 bps step-up in our cash tax rate. And we continue to maintain a strong balance sheet while returning capital to stockholders.

In 2024, we maintained our net leverage target of 3x, ending the year at 2.9x. We believe this is a good level that provides us with optionality. We also returned approximately $2.7 billion to stockholders, $1.9 billion through our competitive dividend with a yield that exceeds 5% and $800 million through our share repurchase program. This leaves about $1.9 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 expecting organic net sales in the range of down 2.5% to flat. This includes full year growth in our emerging markets and Global Away From Home pillars with an elongated recovery expected in U.S. retail challenged categories.

We expect organic net sales in the first quarter to come in lower relative to the fourth quarter of 2024. This is driven primarily by an approximate 100 basis point headwind for total Kraft Heinz due to an Easter shift. As a result, we expect to see lighter sales in the first quarter with an offset in the second quarter. The second quarter should also benefit from lapping pressures on Lunchables' performance and the temporary plant closure in the second quarter of 2024 as well as increased investments in price and product. We then expect the second half to gradually improve from the second quarter.

Constant currency adjusted operating income is expected to be down 4% to down 1%. This includes the impact of lapping lower variable compensation in 2024, which is an approximate 210 basis point headwind at the midpoint of our guidance. This also contemplates an adjusted gross profit margin that is flat to slightly positive year-over-year, driven by our gross efficiencies that are mostly offset by incremental investments in price and product.

We expect adjusted EPS to be in the range of $2.63 to $2.74. This reflects a $0.07 headwind versus the prior year from lower variable incentive compensation in 2024. 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. The step-up in our effective P&L tax rate is primarily related to the dynamics I noted earlier.

As a reminder, this outlook does not reflect any impact from future potential share repurchases. 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.

We also want to acknowledge that the macroeconomic landscape remains uncertain, particularly as it relates to potential tariffs, food regulations, changes to SNAP and foreign exchange headwinds. Our current outlook does not contemplate significant worsening of these macroeconomic pressures.

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

[Carlos Abrams-Rivera, executive]

Thank you, Andre.

At Kraft Heinz, we're acting with urgency, building upon our proven ability to unlock efficiencies, benefiting from 2024 foundational accomplishments in our strategic pillars and investing for the now and the near to support the next.

We have established our ability to be an efficient operator. Through the capabilities we have developed, due in large part to our agile ways of working, we are generating best-in-class efficiencies with $1.3 billion captured to date with line of sight to an additional $1.2 billion.

These efficiencies, along with working capital improvements have led to an increase in free cash flow conversion from 81% in 2023 to 85% in 2024, with expectations to increase to approximately 95% in 2025.

Last year, our teams were busy laying a solid foundation for 2025. Our top line improvements in the year will be driven by building upon the momentum of strategic growth drivers, leveraging initiatives already set in motion.

Earlier, I talked about a couple of our successful innovation launches across Heinz, Mac & Cheese and our Mexican strategy. As we think about 2025, over 75% of the forecasted sales from innovation will come from launches already prove out.

In Away From Home, I am excited to enter the year with 75% of expected sales from new customer wins already locked in and a strong line of sight to additional customer wins as we progress throughout the year.

In Emerging Markets, we will continue to execute against our go-to-market model in both retail and Away From Home, building upon continued distribution gains with significant white space and a proven plan in Emerging Markets, we have meaningful opportunities to continue to grow.

And what really excites me is we completed 2 successful pilots of our Brand Growth System. Although it's still early, we are seeing promising initial results across Philadelphia and Heinz in the U.K.

And in 2025, we will be investing for the now and near to support the next. We are scaling our Brand Growth System, utilizing Agile@Scale ways of working to grow our core must-win brands. This deep forensic-like assessment of our brands uncovered meaningful opportunities to invest in the product, ensuring that we are driving superiority on all fronts, delivering on consumer desires and creating marketing that resonates with consumers. And importantly, we are dedicated to making these investments while protecting profits.

We're also honing in on our sales capabilities, ensuring our products are available and visible wherever, whenever and however our consumer wants. This includes strengthening our capabilities across our go-to-market model and joint business planning to drive further distribution and reach.

All of this combined, along with the highest employee engagement yet, being named a Great Place to Work in 22 countries, including in the U.S. for the first time, gives me excitement headed into 2025.

I know we've got some work ahead of us to really drive growth. But I got to tell you, I am feeling pretty optimistic about the momentum we have built. We're making strides, and that's something to be excited about. As we look to the year ahead, I'm confident that we got the right strategy in place. We will keep innovating, we'll stay focused and we'll keep driving towards our goals. Together, I'm excited to see what we can achieve.

Thank you for your time and interest in Kraft Heinz.