Executive Summary / Key Takeaways

• Kraft Heinz is strategically investing in its brands, technology, and supply chain to drive an elongated recovery, particularly in the challenged U.S. Retail segment, while building momentum in Global Away From Home and Emerging Markets.
• First Quarter 2025 results showed a Net Sales decrease of 6.4% and Organic Net Sales decrease of 4.7%, primarily due to unfavorable volume/mix across segments, partially offset by pricing and growth in Emerging Markets. Adjusted Operating Income declined 5.2% due to volume/mix, cost inflation, and currency impacts, despite lower SGA.
• The company is prioritizing investments in marketing (targeting ~4.8% of sales, up 30 bps), R&D (aiming for 1% of net sales), and a $3 billion U.S. manufacturing upgrade to enhance operational efficiency, reduce costs, and accelerate innovation.
• Key challenges include persistent consumer trade-down, competitive pressures (private label, branded price gaps), and specific brand turnarounds (Lunchables, Spoonables), contributing to management's expectation of not reaching the long-term algorithm pace in 2025, although sequential improvement is anticipated.
• Despite near-term top-line pressure and risks like tariffs and tax disputes, strong cash flow generation, disciplined capital allocation (dividends, share repurchases), and a focus on profitable growth initiatives underpin the investment thesis, positioning KHC as a stable income provider with potential for gradual recovery.

A Packaged Food Giant's Strategic Pivot

The Kraft Heinz Company, a global powerhouse in packaged foods and beverages, stands at a pivotal juncture. Formed in 2015 through the merger of two iconic American food companies, H.J. Heinz and Kraft Foods, KHC inherited a vast portfolio of beloved brands spanning categories from condiments and sauces to cheese, meals, and coffee. Its operational structure is organized into three reportable segments: North America, International Developed Markets, and the combined Emerging Markets. This geographic segmentation is overlaid with a consumer-driven platform approach, categorizing products into roles like "Accelerate," "Protect," and "Balance" to guide resource allocation.

The company operates within a highly competitive global industry characterized by evolving consumer preferences, intense price competition, the growing influence of private label brands, and significant exposure to volatile commodity costs and foreign exchange fluctuations. Key direct competitors include global players like Mondelez International (MDLZ), General Mills (GIS), PepsiCo (PEP), and Conagra Brands (CAG), each vying for market share through brand strength, innovation, pricing, and distribution efficiency. Indirect competition comes from emerging trends like plant-based alternatives and the disruptive force of e-commerce platforms.

In response to this dynamic environment and building on lessons from its post-merger history, which included significant impairment charges and a period of strategic recalibration, KHC has articulated a strategy focused on driving profitable growth through three core pillars: Global Away From Home, Emerging Markets, and accelerating specific platforms within U.S. Retail. This strategy is underpinned by a commitment to operational excellence, disciplined investment, and leveraging technology not just in products, but crucially, in its processes and supply chain.

While KHC may not possess a single, unique product technology moat akin to specialized manufacturing processes in other industries, its competitive differentiation increasingly lies in the strategic application of technology and data analytics to drive operational efficiency, enhance R&D effectiveness, and optimize market execution. The company is prioritizing investments in technology, including automation and enhanced digital tools, specifically to drive efficiencies throughout its supply chain. This focus on operational technology is expected to yield tangible benefits, contributing to consistent, best-in-class productivity levels, which management reported reached their highest-ever in 2024, consistently delivering around 4% of cost of goods sold (COGS) in savings. This efficiency gain is a critical operational moat, helping to offset inflationary pressures and fund strategic investments.

Furthermore, technology supports the Brand Growth System (BGS), KHC's repeatable global model for understanding consumer needs and driving brand superiority. The BGS leverages insights to inform product renovation, packaging innovation, value equation optimization, and execution strategies. Piloted on 10% of brands in 2024, the BGS is being scaled to 40% of the portfolio by the end of 2025, aiming to improve brand resonance and drive sustainable base volume growth. This systematic approach to brand building, supported by data and technology, represents a strategic differentiator in a crowded market.

A significant tangible investment in this operational and strategic technological edge is the planned $3 billion upgrade to U.S. manufacturing facilities over the next decade. This is the largest plant investment in a decade and is explicitly aimed at lowering costs, improving efficiency, accelerating new product development, and potentially mitigating the impact of tariffs. This investment underscores the company's commitment to modernizing its operational backbone to support its long-term growth ambitions and maintain a competitive cost structure against rivals like GIS and CAG, who also emphasize supply chain efficiency.

Performance Reflecting Strategic Adjustments and Market Headwinds

The first quarter of 2025 provided a snapshot of KHC navigating the challenging market landscape while implementing its strategic initiatives. Net Sales decreased by 6.4% to $6.0 billion compared to $6.4 billion in the prior year period. This decline included unfavorable impacts from foreign currency (-1.6 percentage points) and minor effects from acquisitions and divestitures (-0.1 percentage points). Organic Net Sales, a key metric for management, decreased by 4.7% to $6.1 billion. This was primarily driven by an unfavorable volume/mix decline of 5.6 percentage points across all segments, which more than offset a positive pricing contribution of 0.9 percentage points.

Operating income decreased by 8.1% to $1.2 billion. This was mainly attributable to the unfavorable volume/mix trends, negative changes in unrealized gains/losses on commodity hedges, and increased procurement cost inflation. These headwinds were partially mitigated by decreased selling, general and administrative expenses (SGA), driven by lower variable compensation and advertising costs, and the benefit of higher pricing. Adjusted Operating Income, which excludes certain volatile or non-core items, saw a decrease of 5.2% to $1.2 billion, reflecting similar pressures from volume/mix, cost inflation, and foreign currency impacts, partially offset by lower SGA and higher pricing.

Segment performance in Q1 2025 highlighted the divergent trends within KHC's portfolio. North America, the largest segment, saw Net Sales decrease by 7.0% and Organic Net Sales decrease by 6.5%. This was largely due to a significant 7.1 percentage point decline in volume/mix, partially influenced by the shift in Easter timing and specific challenges in categories like cream cheese, Meats, Desserts, Lunchables, and Coffee. Pricing in North America was positive at 0.6 percentage points, aimed at offsetting higher input costs, particularly in coffee. Segment Adjusted Operating Income for North America decreased by 9.4%.

International Developed Markets experienced a 4.4% decrease in Net Sales and a 1.7% decrease in Organic Net Sales. The Organic Net Sales decline was due to unfavorable volume/mix (-1.5 percentage points) and lower pricing (-0.2 percentage points). Volume/mix was impacted by industry slowdowns in UK meals and sauces, although partially offset by favorable trends in Australia and New Zealand. Segment Adjusted Operating Income decreased by 7.0%, primarily due to higher procurement costs (including cocoa inflation in the Netherlands) and lower pricing, partially offset by reduced advertising spend.

Emerging Markets stood out with a 3.9% increase in Organic Net Sales, despite a 4.7% decrease in Net Sales due to significant unfavorable foreign currency impacts (-7.5 percentage points) and divestitures (-1.1 percentage points). The Organic Net Sales growth was driven by strong pricing (+4.3 percentage points), implemented to counter inflationary pressures in certain regions, which more than offset a slight unfavorable volume/mix (-0.4 percentage points), partly impacted by the shift in Ramadan timing. Segment Adjusted Operating Income for Emerging Markets increased significantly by 20.3%, benefiting from higher pricing and lower SGA, despite increased supply chain costs and unfavorable foreign currency.

Financially, KHC maintains a focus on cash flow generation. Net cash provided by operating activities was $720 million in Q1 2025, down from $771 million in Q1 2024, primarily due to higher inventory outflows (partly for stock rebuilding related to Easter timing) and lower Adjusted Operating Income, partially offset by lower variable compensation payments. Net cash used for investing activities increased substantially to $878 million from $287 million, driven by the purchase of marketable securities, although capital expenditures were lower year-over-year. Net cash provided by financing activities was $900 million, a significant shift from cash used in the prior year, primarily due to proceeds from the issuance of $1.6 billion in new senior notes in Q1 2025, partially offset by common stock repurchases ($225 million in Q1 2025 vs. $329 million in Q1 2024).

Total long-term debt increased to $21.6 billion at March 29, 2025, from $19.9 billion at December 28, 2024, reflecting the new debt issuance and foreign currency movements. The company remains in compliance with all financial covenants. A share repurchase program authorized up to $3 billion through December 2026 saw $225 million utilized in Q1 2025, with $1.7 billion remaining. Quarterly dividends of $0.40 per share continue to be paid, reflecting the company's commitment to shareholder returns, supported by its cash flow generation.

Outlook and the Path Forward

Management has adjusted its full-year guidance for 2025, acknowledging the persistent market tension and macroeconomic uncertainty. While specific quantitative full-year targets were not detailed in the Q1 2025 report beyond qualitative expectations and investment levels, previous commentary indicated that management does not expect to reach its long-term algorithm pace at any point during 2025. However, they anticipate sequential improvement in revenue and volume trends throughout the year.

The outlook is underpinned by several key assumptions and strategic priorities. Management expects the difficult consumer environment and propensity to trade down to continue, particularly impacting U.S. Retail share. They are focusing on driving growth through their strategic pillars: Emerging Markets are expected to see gradual improvement and exit 2025 with double-digit growth, while Global Away From Home is projected to exit the year around the mid-single-digit growth territory, still below its long-term algorithm but a notable improvement from 2024.

In U.S. Retail, the focus is on an "elongated recovery," with sharper improvement expected in the latter half of the year, driven by the "Accelerate" platforms. This recovery is tied to the success of strategic investments and initiatives, including the scaling of the Brand Growth System to 40% of the portfolio, product renovations (like Capri Sun and Lunchables), innovation launches (new Mac & Cheese flavors/shapes, Mexican strategy expansion), increased marketing investment (targeting ~4.8% of sales, a 30 bps step-up), and expanded distribution in channels like dollar and club stores. Management emphasizes that the midpoint of their guidance does not require total company volume to turn positive, indicating a reliance on pricing and mix management alongside targeted volume recovery.

Operational efficiency remains a core focus, with expectations for continued strong productivity gains to offset anticipated cost inflation, including potential impacts from tariffs (estimated at 50 to 200 bps on COGS, mostly in the second half of 2025). The $3 billion U.S. manufacturing investment is a long-term play supporting this efficiency drive. Management also highlighted the cash flow benefits from recent corporate entity structure changes related to global minimum tax, expecting approximately $120 million in annual cash gains for the next 20 years, which will favorably impact the cash tax rate by 200-300 bps.

Despite the strategic focus and planned investments, several risks could impact the outlook. The elongated recovery in U.S. Retail is susceptible to execution risk, particularly in turning around challenged brands like Lunchables (facing lingering negative publicity and competitive entry) and Spoonables (impacted by price gaps). Competitive intensity, especially from private label and agile branded competitors, could continue to pressure market share and require further price/trade investment, potentially impacting margins. Commodity and input cost volatility, exacerbated by potential tariffs and trade policy changes, remains a significant risk to profitability, despite hedging efforts. Furthermore, the company faces legal and regulatory risks, including the ongoing IRS examination related to transfer pricing, which could result in material tax liabilities and penalties if not successfully contested. Impairment risk for goodwill and intangible assets remains heightened for several reporting units and brands with low excess fair value, sensitive to changes in market conditions and internal forecasts.

Conclusion

Kraft Heinz is actively engaged in a multi-year transformation, shifting from a period of portfolio optimization and cost-cutting to one focused on driving profitable growth through strategic investment and operational excellence. While the first quarter of 2025 reflected ongoing market headwinds and challenges in key segments, particularly U.S. Retail volume, the results were largely in line with management's expectations and highlighted areas of momentum in Emerging Markets.

The core investment thesis rests on KHC's ability to leverage its iconic brand portfolio, enhance operational efficiency through technology and supply chain investments (including the significant $3 billion U.S. manufacturing upgrade), and execute its Brand Growth System to drive sustainable improvements in product superiority and market performance. The commitment to disciplined investment in marketing and R&D, coupled with a focus on cash flow generation and shareholder returns, provides a degree of stability in a volatile environment. However, the path to meaningful organic sales growth, particularly in the crucial North America segment, is expected to be an elongated one, facing persistent consumer trade-down and intense competition. Investors should closely monitor the execution of brand turnaround strategies, the impact of investments on volume trends, the ability to manage inflationary and tariff pressures, and the outcomes of ongoing legal and regulatory matters. While the near-term outlook suggests continued top-line pressure, the strategic foundation being laid, supported by operational efficiencies and a focus on profitable growth, positions KHC for potential gradual recovery and continued value creation over the long term.