The Kraft Heinz Company ($KHC)

Greetings, and welcome to The Kraft Heinz Company First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Anne-Marie Megela. Thank you. You may begin.

Thank you, and thank you all for joining us today. Welcome to the Q&A session for our first quarter 2026 business update. During today's call, we may make forward-looking statements regarding our expectations for the future. 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 and our most recent SEC filings, for more information regarding these risks and uncertainties. Additionally, we may refer to non-GAAP financial measures. Please refer to today's earnings release and the non-GAAP information available on our website for a discussion of our non-GAAP financial urethane reconciliations to the comparable GAAP financial measures. Joining me today to answer your questions is our Chief Executive Officer; Steve Cahillane and our Chief Financial Officer, Andre Maciel. Operator, please open the call for the first question.

[Operator Instructions] My first question comes from Peter Galbo with Bank of America.

Thanks for the question. Steve, I was actually hoping to start with hold win and win big. Just comparing kind of what you said at CAGNY a few months ago to what you're presenting today, at least in the slides. I think there's been a few shifts of some of the platforms or subplatforms between kind of the different categories. So I was hoping you could kind of touch on the decision to make some of those changes and then kind of as a part B to that question, just whether that signals anything in terms of how you're viewing potential asset sales of different platforms.

Yes. Thanks for the question, Peter. As I said in the outset, we reserve the right to continue to get smarter. And that's what we've done, as we've made some of these changes. And a couple of examples we did downgrade our frozen from win big to hold, and we think that's based on what the category is showing us what our real opportunities are and really confronting the facts as they stand and being realistic about them. Equally, if we look at hydration, we moved that from win to win big, we see strong category growth. We really like our brands in this space. We really like Capri-Sun its ability to go from following the cohort that's young and aging with them with our new hydration platform that's coming out now. So we see a real opportunity to win big there based on our brands and our place in the category. Equally, we've moved cheese from hole to win. We like the margins there. We like our brands. We like our opportunities. So those are some of the changes that we've made. I think they're all positive, and they point to the fact that we're continuing to look at our portfolio, challenge our portfolio, invest in our portfolio and look for those areas where we can grow.

Great. And Andre, maybe just as a follow-up, I know the guidance is largely unchanged after what was probably a better-than-expected Q1. You called out some timing factors. But maybe just you can expand a little bit on your prepared remarks from the commentary around Q2 and how you kind of view the evolving inflation outlook? I know you bumped that up a little bit today.

Look, we expect second quarter to have top line between minus 3%, minus 5%. This is a consequence of the Easter shift that we have -- a few times. Combined, we still anticipate and expect this NAP to be 100 bps headwind in the year, starting in the second quarter. There's nothing that we have seen so far that indicates otherwise. We do expect -- continue to see the market share improving like we observed in Q1. But given softness in the category, we still expect this to be a headwind in the second quarter. This will be all partially offset by continuous improvement in away-from-home business online and in emerging markets. When it comes to inflation, we initially guided the year to be approximately 4%. In fact, our number implied in the outlook was a little lower than that. We are now seeing -- mainly because of the conflict inflation around energy and resins spiking up, we are well hedged in energy for the year. Resins, we are hedged through mid-Q3. So we do expect the situation remains the same. There's still a lot of volatility out there, which can get better or even worse, but we do anticipate in the third quarter to start to suffer the impact from that inflation.

Our next question comes from Steve Powers with Deutsche Bank.

Great. Steve, if we just look at the improvement you've started to show through in exiting the first quarter. I guess as you dig into it, are you able to parse out where there is more meaningful true underlying progress that you think can really -- this momentum that you can build on versus maybe some transitory impacts just areas where Easter timing or weather or what have you, flattered the quarter. Just is there a way to parse out what's most promising versus maybe where we should just kind of temper our thinking a bit.

Yes, Steve. Definitely, we benefited from Easter shift. There's no question about that. And the winter storms caused some pantry loading, no doubt about that. But underlying that, we've seen real improvement in our share trajectory and performance. As we said in the prepared remarks, the total business last year held or gained share in only 21% in the first quarter, that moved to 35%. And in March, that moved all the way up to 58%. And then if you look at our Taste Elevation, where we were investing earlier last year that moved from 24% holding or gaining share last year, all the way to 81% in the first quarter of 26% and exited March at 87%. And that's really a function of the investments that we've made, the product improvements that we've made the distribution that we've been able to hold or gain based on the activities that were put in place. And the totality of the business and the good start to the quarter, I think can also be attributed to the fact that for the last at least 60 days, this organization has been maniacally focused on growth and execution, pausing the split freed up lots of resources as we said it would, and we turned our attention and the attention of this entire organization to get off to a strong start, and that's exactly what we did. So we're being very realistic about what flattered the quarter, as you said, but we also see the underlying strength that's building. And that's important because that's where we're going to continue to invest. And the vast majority of our $600 million is still dry powder that is being deployed, as we speak from now through the rest of the year. So we're holding guidance, but we're very encouraged by the start to the year, and we plan on continuing our maniacal focus against our consumer and our customer and execution.

And to complement a little very quick with the numbers, so last year, we started the year losing 90 bps of market share mix adjusted, which was with the bottom in the last 10 years. We -- as we started to step up investment in the second half, we were able to exit last year, losing 50 to 60 bps of market share. And now year-to-date, we are at 30 bps. So that is definitely a good improvement happening right now, led by deceleration, but also by hydration, as Steve mentioned, and desserts. These places where we have step-up investments in marketing, in renovating the product, starting to show some signs.

Great. And Andre, while I have you, just on free cash flow, obviously, a strong quarter, but some more capital and marketing accrual timing benefits. Just obviously, you called you've maintained the free cash flow outlook for the year. But as you think about the balance of year to Q3, Q4, anything to call out in terms of timing of year-to-go free cash flow?

Look, our cash flow remains very strong. I think all the changes we have done to incentives a couple of years ago. We have another organization focused on really being disciplined in deploying CapEx and managing working capital better. So we are seeing that translated again in the first quarter because of the step-up in investments happening in the second half, we should expect cash flow potentially to go down in the second half of the year, but I mean, that's anticipated. Now we exited the year, exited the quarter with a very strong cash on hand. So you will see us now in the second quarter paying down debt. The debt is maturing now in Q2, and we are strongly considering anticipating paying back part of the debt that is maturing next year, have $1.9 billion next year again. So we are considering anticipating a portion of that as well. And there are a couple of other things we are doing in terms of managing better our debt tower, which will allow us to reduce interest expense. But I think is a good position to put ourselves in and not allow us even to invest $600 million in business and to generate strong cash flow.

Our next question comes from Michael Lavery with Piper Sandler.

Thank you. Just curious how to think about the pricing environment. You've obviously started the year with plans that include price adjustments and it looks like there's early signs in this quarter that were they look like they're in place are that's working. But then there's, of course, shifts in the input cost environment. Does that do anything to change how you think about your plans or how kind of fluid and dynamic what your pricing expectations be?

Yes. Thanks, Michael. I'd say the pricing environment can be best characterized as very rational. We've come through this inflationary cycle, which was obviously unprecedented. The consumer is under a lot of pressure. And so our focus is very much on value, creating value and affordability and we have looked at opportunities to adjust pricing where we think it's gone a little too far and you're seeing some results on that. But we'll always look at the input cost environment and say our first line of defense is productivity. And we're really looking to ramp up our productivity and have a top-notch productivity year this year because it's really needed because the consumer can only absorb so much price. And so we'll be looking at productivity. Ideally, a business like ours would take about half of input cost inflation in price and then the rest in productivity. And if we can do better than that, this is the year to do it because the consumer is under a tremendous amount of pressure. And we look at it as very much our goal to be affordable and be there for our consumers in an environment like this.

And I think the comment -- as Steve said, in the guidance for the year, we have contemplated initially that would price only 20% of the inflation. Okay. So this was already anticipated. And I think to Steve's point, we are relying on another strong year of productivity. We started Q1 strong, again, above 4% of COGS, and we do expect to be able to maintain that pace.

That's really helpful. And related to that, I just wanted to follow up on -- I think it's Slide 8, you flagged a simplified operating model as part of the turnaround for the U.S. And I guess, I want to make sure we understand kind of some of what that means. And it has the right of logo there. It could be referring to the Simplot, but how much opportunity is there to simplify the operating model? And I guess part of the question is through the lens of district knowing the cost cutting can obviously go too far. So how should we just think about what opportunities there are and maybe the risks and how you think about that approach?

Yes. We made a terrific hire in bringing Nicolas Amaya to run our North American business, and he has been hard at work looking at the operating model as have we all, and we see real opportunities to have stronger accountabilities, stronger empowerment at the people who are running the business. We also see big opportunities to supplement our commercial activities, our commercial people, and we've been doing a lot of that hiring people in sales and marketing, but really with a focus on the consumer and the customer and very strong objectives that are aligned around our business objectives. The Chief 1 is growing organic sales and improving market share performance. And so simplifying everything that we do in service of the consumer and the customer and our goal to drive profitable volume-led value market share.

Our next question comes from Chris Carey with Wells Fargo.

Thank you, everybody, for the question. If you just think about the back half acceleration in top line that you're embedding for the year. Can you just unpack that a little bit across the most meaningful drivers as it pertains to the lapping of Indonesia, the step-up that you're expecting from investments, the improvement and the subsequent improvement in market share that you're expecting perhaps some of this acceleration in Western Europe post pricing. Can you just give us a sense of how to think about the complexion of the major contributors to the back half improvement that you would expect in the top line?

Chris, I'll start and Andre can help with more details on the numbers. We're not really calling for an acceleration. We got off to a very good start, and we're being prudent about the way we think about the rest of the year. Of course, we'd always like to over-deliver on our top line goals, definitely would like to overdeliver on our market share objectives. But we're being prudent in the way we think about the rest of the year and not embedding the first quarter over delivery into our guidance for the top line.

In terms of the building blocks, you mentioned Indonesia, that's certainly a contributor. Like in the first quarter, for example, Indonesia alone was a 70 bps headwind to top line growth and do expect that all to go away in the second half, as we lap all the adjustments we have made in the business. Market share in the U.S. as we step up the investment, we should see an improvement versus where we are today. Similarly, we feel good about our European brands, everything that we're doing behind Heinz, there is a lot of step-up investments as well as part of the $600 million that is going against Heinz in Europe, we're going to see that also helping improvement performance over that. And away from home, even though there is still overall softness in the category, we are now seeing a sign of market share improvement in the U.S., which is quite encouraging, especially in the sauces portfolio. So I think all of those factors should allow us to see the step up. So there will be a balanced contribution across those levels.

Okay. And it's been touched on a bit. But just as you think about the inflation exposure in Q4, obviously, this is going to imply bigger exit rates going between '27. Just -- and Michael kind of labor, you touched on this a bit, but what does the toolkit look like for you to work through a sustained higher inflation environment. Obviously, there's a pricing discussion, productivity sustaining relatively high levels. Would you look at maybe harvesting some of the investments that you've made in G&A to protect the bottom line going to '27. Obviously, this is a fluid environment and inflation can certainly change. But can you just give us a bit more insight on how you'd be planning from a cost offset perspective if we kind of look out 18 months.

Yes, Chris, so we wouldn't look at our investments, the $600 million and otherwise as a way to protect profit. In fact, we're looking at opportunities to even invest more as we see good returns against those investments and good outcomes in terms of the top line. So we'll protect that and in fact, even lean into it. As we said earlier, the first line of defense is always going to be productivity, but it's unknown what the fourth quarter and 2027 will bring. It could be that the whole environment moves towards needing to take more price. I mean we can't predict what the outcome will be in the Middle East and how that will affect. But it's going to be something that affects the entire environment and we would be looking to go with that. But again, first line of defense is productivity, investing in our brands and driving a good top line outcome is what we'd be looking at.

Our next question comes from Thomas Palmer with JPMorgan.

Maybe I could just start on the marketing side, you noted the 37% increase in the first quarter on a year-over-year basis, also the plans for 5.5% spend. But maybe any framing on where that level of increase in the first quarter kind of takes you relative to that annualized percent of sales? And then when we think about the magnitude of the increase, are there any timing considerations such as kind of having that earlier Easter impacting how that marketing spend flowed through? And last detail on kind of where that spend has really been focused. And if you're seeing when we look at the share improvements disproportionate spend in kind of the areas that have inflected the most?

Yes. So as we said in our prepared remarks, we do expect marketing for the year to be at least 5.5% of revenue. And Steve mentioned, we have been looking very closely on how our performance is shaping up and if things end up better than we anticipated, we will be -- will truly need more on the investments, marketing being 1 of the key drivers. The reason why we see 37% in the first quarter. You might remember last year, we stepped up market investment in the second half of last year. So then you have this effect of now we have, in a certain way, easy comp on the marketing front. So year-over-year, we're going to see that gradually reducing that impact because of the step up in the second half. But overall, in the year, we do expect at least 20% of increase. In terms of where this money is going, we have been prioritizing our win big category. So there is a proportionate amount started last year that went against sauces, cheese, Mac & Cheese hydration. But the reality is we do have the opportunity to step up marketing across the whole portfolio. So we have been gradually stepping up the investments across different parts of the business to different extents, but we do believe that will be healthy to the whole portfolio.

Okay. On the Snap side, you've noticed expected headwinds, especially ramping this quarter. I know it's still early in the quarter. Are you already seeing signs of this incremental impact as we think about the second quarter. And just to confirm, there was not really impact in the first quarter. I know it wasn't a call out.

Yes. So we definitely see an impact from SNAP already happening in February and March. So if we look SNAP transactions, they are already down in line, if not even a little more than expected. On the other hand, we saw strength in the non-SNAP households, which helped to offset that in the first quarter. but it's hard to predict at this point, if that strength that you saw in the non-SNAP households will hold into the remainder of the year. So what we are anticipating is that we're going to start to see that more -- that SNAP household impact more producing to sell out a year to go. And that's why we have been calling for 100 bps headwind. Obviously, they're not sitting on the problem, right? So we do expect that have been space for a while. So that's why part of the price investments that we have deployed in the $600 million were put against opening price points because this part of the consumer base is definitely under a lot of pressure.

Our next question comes from Megan Clapp with Morgan Stanley.

Maybe to pick up on Tom's first question on the marketing investments. And Steve, some of the comments you've made, clearly, you're seeing some benefits from things that were done kind of prior to making this new plan? And Steve, I think you mentioned $600 million is still dry powder. So as you see the improvements you've made in the first quarter and then some of the areas you highlighted meets in particular where there's still opportunity. Can you just talk about whether anything you've seen so far has changed how you're thinking about concentrating some of those investments particularly as we've talked about a lot, the macro continues to shift and perhaps the cost inflation outlook gets more challenging as we go into the back half.

Yes, Megan, what we've seen is good returns on the investments that we've made, and that's where we're leaning in. I mean if you look at some of the exciting things that we have going on right now, you can you can follow our investment against those. So for example, Power Mac and Cheese, which just came out in April, too early to see any sell-out data, but the sell-in was outstanding, 35,000 accounts right now as we speak. And I think that's a function of the commitment that we made to increase our investments substantially led to better distribution, and we're going to be investing against it. And so we anticipate a good launch there. We've got in -- business nice shapes innovation that we're investing in. The Capri Sun hydrate that we mentioned earlier, I think a big opportunity to continue the momentum that was built last year on Capri Sun and new distribution and new doors there. So investing against that. We've got a Lunchables renovation, which is coming next month. We'll be investing against that. We've seen a good turnaround in Lunchables, which started at the end of last year. And we've got things in the back half of the year, like Philadelphia lactose free, which is, as we mentioned in the prepared remarks, we think a big opportunity given the number of people who suffer from lactose intolerance in the U.S. and a great innovation there that we'll be investing against. So the brands where we think we have a real right to win, we'll be investing in. And you mentioned meats, where we have things that we need to turn around. Clearly, we need to make some investments there. We don't like leaky buckets and we're going to look to plug those at the same time as we lean against our biggest and best opportunities.

Great. And Andre, maybe just a quick follow-up on the gross margin performance. It was down in the quarter, but significantly better than I think what you were expecting, certainly what -- the Street was modeling, I understand there was probably some fixed cost leverage benefits there just on the top line. But anything else in the quarter just in terms of the upside maybe versus your expectations to call out?

Sure. That is about 40 to 50 bps of gains in the quarter that are nonrecurring. A portion of that is selling excess by products so we don't expect that to be repeated a year to go. There is a small contribution from -- were expected to do a maintenance in a certain factory and then have to production to a copacker temporarily. We decided to move that to later in the summer. So that's like a phasing thing. Cheese commodity came a little better than what anticipated. So we did see the peak in inflation that we expected across most of the commodities, including coffee and meats, but we had those other upsides that help in the quarter. But that's why we are maintaining also our expectation for the year of a headwind of 25 to 75 bps.

Operator, we have time for 1 more question.

Okay. Our last question comes from Scott Marks with Jefferies.

In the interest of time, I'll just ask one. Wondering if you can give us a lay of the land in terms of the away-from-home environment. I know you called out some pressures in the U.S. business have certainly some clear paths to growth there. Just wondering if you can kind of help us understand what's happening both in the U.S. and abroad and how you think about the improvements within that part of the business.

Yes, Scott. So I'd say from a macro perspective, away from home is under a fair amount of pressure based on the macroeconomic environment, both in this country and around the world. Having said that, we see tremendous opportunities for us in away from home based on the strength of our brands and the opportunities in front of us. And this is 1 of the areas we're investing in. So we see away from home as a strategic outlets. We see it as a strategic opportunity for us. We like the momentum that we're building early this year, and we see a lot of opportunities, both in this country and especially around the world to continue to gain share in away from home. And we've got 1 of the greatest away-from-home brands in Heinz and we can do a lot more in leaning in to Heinz. And not just in catch-up. Heinz has been successful in mayonnaise and other spreads as well. So big opportunities for us to continue to leverage our brands, especially Heinz as we think about the away-from-home opportunity.

We've reached the end of the question-and-answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.