Kraft Heinz (KHC) Q4 2024 Earnings Call Transcript

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Kraft Heinz (NASDAQ: KHC)
Q4 2024 Earnings Call
Feb 12, 2025, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to The Kraft Heinz Company Quarter 4 2024 earnings. [Operator instructions] It is now my pleasure to introduce Anne-Marie Megela. Thank you. Anne, you may begin.

Anne-Marie Megela -- Head of Global Investor Relations

Thank you, and hello, everyone. During today's call, we may make forward-looking statements regarding our expectations for the future, including items 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 this call as well as our most recent 10-K, 10-Q, and 8-K filings for more information regarding these risks and uncertainties.

Additionally, we may 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 available on our website at ir.kraftheinzcompany.com under News and Events, for a discussion of our non-GAAP financial measures reconciliations to the comparable GAAP financial measures. I will now hand it over to our chief executive officer, Carlos Abrams-Rivera, for opening comments. Carlos, over to you.

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Carlos Abrams-Rivera -- Chief Executive Officer

Well, thank you, Anne-Marie, and thanks, everyone, for joining us today. I want to thank the Kraft Heinz team for their hard work and dedication this past year. Even though it was a tough year, we stayed focused on building for the future and improving profit margins while boosting the free cash flow. We do know that economic landscape is rough, but we are proud that we returned $2.7 billion to our stockholders through share buybacks and dividends, which provide the highest yield in the food industry.

Looking ahead to 2025, we are seeing key successes that aren't yet showing up in our financials and we are expecting to see improving top line throughout the year while preserving profitability. Frankly, I'm proud of the progress the teams are driving and confident that our strategy will yield long-term returns to our shareholders. Now with that, today, I have Andre joining me. So let's open for the call for the Q&A.

Questions & Answers:

Operator

Great. Thank you. [Operator instructions] And our first question comes from Andrew Lazar with Barclays. Please proceed with your question.

Andrew Lazar -- Analyst

Great. Thank you so much. Carlos, you mentioned a number of times in the prepared remarks, the plan to be disciplined in how you approach reinvestment this year, specifically calling out your expectation for some gross margin expansion and flat price in 2025, despite the stated plan to invest in price in some key areas. I guess, what I'm hearing most from investors this morning is that they're really wondering if this outlook provides enough room to do what's needed this year to get the key brands back into volume growth? So I guess, my question is sort of what gives you the confidence that this plan is accounting for an adequate level of investment given current market share trends? Thanks so much.

Carlos Abrams-Rivera -- Chief Executive Officer

Thanks, Andrew. I think, first of all, I guess, let me put into context of the margin expansion. If you think about 2024, we increased our margin by 100 bps. When you look at the way we're seeing 2025, it's somewhere between flat to 20 bps.

So while, yes, an expansion certainly is most reduced than we have had in the past. And if I think about now, our plan and what gives me comfort, let me just highlight a couple of things. First, if you think about our growth pillars, we actually have a head start going into this year and let me break it down in each of the growth pillars. In Away From Home, 75% of new customer wins are already locked in.

That's about 40% of a year-over-year incremental growth in our Away From Home business. Now in Emerging Markets, we are building on the 17% distribution increase with new 40,000 additional points planned in 2025 that we have already mapped out and making sure that our teams are clear where they're going to be able to secure those. And then frankly, in North America Retail and the rest of the business, what you see is that 75% of the 2025 innovation pipeline is already locked in. And on top of that, we also are leveraging our Brand Growth System that we that we have proven through the pilots did in 2024.

So in each of our pillars, we have things going on really into 2025 that is about us continuing versus completely something new. And at the same time, and you mentioned this in your question, we are investing in certain places, we are we are investing in price, investing in product and we are investing in marketing. We're making sure we're prioritizing those brands that we know that we can benefit from having the Brand Growth System insights. We are investing in technology-led solutions that are actually helping us drive the efficiencies that lead to improved margins.

And then lastly, we continue ship more marketing dollars toward consumer facing marketing as we go into 2025. So again, that's the way I kind of see it is it gives an opportunity for us to expand in a modest way of margins, but at the same time, coming into the year with things that we have built in 2024 that now we can still see reaping benefits in 2025 as long with investments specifically in price, products and marketing.

Andre Maciel -- Executive Vice President, Chief Financial Officer

I'll just add to that. Good morning, Andrew. So I will add to that when we think about our top-line improvement, as Carlos said, it does not only come from price. It comes also from lapping some of the challenges we faced last year and also comes from other product enhancements that we have been deploying since the second half of last year.

When I think about the gross margin, we do expect another year of efficiencies higher than inflation. And we are going to price the inflation linked to commodity categories, coffee being an example, like we have done historically. So there is some price embedded into the plan in commodities and Emerging Markets. So the combination of efficiencies ahead of inflation, price in Emerging Markets and commodities give us some room to be investing more in price or trades in the places where it makes the most sense.

Andrew Lazar -- Analyst

Great. Thanks so much. I appreciate the color.

Operator

Thank you. Our next question comes from Peter Galbo with Bank of America. Please proceed with your question.

Peter Galbo -- Analyst

Hey. Good morning, Carlos and Andre. Thank you, guys, for the question. I wanted to ask about the top line and the pillars maybe in a slightly different way.

Just within the organic sales guidance for 2025, Andre, how are you thinking about the growth rates for each, Accelerate, protect and balance within that organic sales guidance? And then the part B to that question, Carlos, I think a year ago, you kind of gave us market growth rates for each of those Accelerate, protect and balance, how you see the market growth for 2025 comparing to those targets you gave us a year ago. So thanks for the call on both of those.

Andre Maciel -- Executive Vice President, Chief Financial Officer

I can start. Good morning. So I think about the pillars of growth First, Emerging Markets, we will see gradual improvements building from Q4 in all the quarters and we do expect to exit at double-digit growth. And Away From Home, we do expect some slight improvement in Q1 to flat to Q4, but then building from the base gradually throughout the rest of the year and probably exiting around the mid-single-digit that we target, so still below algo, but a good improvement versus 2024.

And inside the Accelerate platforms in the U.S., we do expect elongated recoveries, as we have said before. And most of the U.S. improvement in trends in Retail comes from Accelerate. So that's where we are investing most of the price.

That's where we are investing a lot of our product enhancements. So that's where we're going to see -- you should see a sharper improvement again throughout the year. Not as much in Q1 for the reasons I already mentioned before. I think investments get more concentrated from Easter and also there is the Easter effect between Q1 and Q2.

But at the end of the year, you should see Accelerate being the one driving most of the improvement in U.S.

Carlos Abrams-Rivera -- Chief Executive Officer

Yes, what I would add is, I think we all can agree that testing wins battle, but strategies win the wars. And our strategy hasn't changed. We have not only continued to drive resources and prioritizing our Accelerate platforms, but also making sure that a year later we continue to live onto the roles of each of those particular categories. So I feel great about the fact that we see kind of how our balanced portfolio continues to live into the role of making sure they're contributing with the right margins, at the same time, making sure that they are bringing renovation and innovation into the categories to make sure they're relevant with consumers.

But again, our strategies haven't changed and any one year it's not going to make us change that. I think that we -- as we stand here, I'll tell you, I feel even more confident that we have this right strategy for us to deliver our long-term algorithm over the long term.

Peter Galbo -- Analyst

Thank you.

Carlos Abrams-Rivera -- Chief Executive Officer

Thank you.

Operator

And our next question comes from John Baumgartner with Mizuho Securities. Please proceed with your question.

John Baumgartner -- Analyst

Good morning. Thanks for the question. I wanted to ask about the marketplace activities in the U.S. and the market share softness.

As you've reduced the unprofitable trade, which is net positive for margins, are you getting a sense that maybe your consumers have become a bit more customed or trained to buy on deals a bit more for your -- were you reinvesting elsewhere, whether it's in marketing or display? The lifts on that are just sort of insufficient to counter the volume drag. I'm just curious on maybe making these changes to promo is a bit more painful upfront than you had anticipated with the elasticity to the consumer?

Andre Maciel -- Executive Vice President, Chief Financial Officer

As we said throughout the last year, I think not all our promotions are working the same as they used to. We do believe that base volume has also a significant implication on the size of lift that we observe. So volume is an area that you're paying too much attention to, especially, again, a lot of the product enhancements should help that base, which should give us a stronger starting point for lift to come up. There are places where we are contemplating as well base price changes instead of simply a promotion.

So there is a discussion in some category, it might make more sense to one versus the other. And on promotions, again, we have seen typically higher frequencies working better, not necessarily deeper discounts. You're going to see some of that reflected as we head into next year.

Carlos Abrams-Rivera -- Chief Executive Officer

The only thing I would add -- this is Carlos. I what we or the things that we continue to see is consumers increasing the number of locations in which they buy the food. So we are seeing smaller size of baskets per trip, but an increase in the number of trips. So for us, it's also important not just to make sure that we that we have the right price, but also have right distribution in different channels in the U.S., which is why our expansion in dollar channels, club channels where we actually are seeing growth as well, too.

So for us, it's making sure that, again, we have that combination on where the consumers are shopping at right price point for us to make sure that we are attracting the purchases for consumers in the moment they need it.

Operator

Thank you. And our next question comes from Ken Goldman with J.P. Morgan. Please proceed.

Ken Goldman -- Analyst

Hi. I wanted to dig in a little bit on the increase in your tax rate, if I could, into 2025. We've heard from a number of multinational food companies and beverage companies in the last couple of weeks. I don't think any of them have really talked about quite the increase in tax that you're about to experience.

I didn't know if there's anything unique in how you had previously considered tax in some of these other countries that we should consider or if there's anything you know about that's slightly different in how you approach the way you think about tax rate and so forth with the understanding that, of course, your tax -- your cash tax rate isn't going up quite as much. So just wanted to get a little bit of color there. Just -- it just seems a little bit more unique to Kraft than what we might have expected given the size of the announcement? Thank you.

Andre Maciel -- Executive Vice President, Chief Financial Officer

Hi. Good morning. Look, I think companies have different strategies when it comes to taxes. So it's not easy for me comment on what others have.

We did have a more competitive tax rate in the P&L compared to other peers, you can see that very clearly. We had to record December -- in Q4 a $2.4 billion tax benefit in the P&L -- in net income this quarter, and that's linked to a transfer we did in a certain business operation. And that was part of the efforts to reduce the cash impact of several countries enacting the global minimum tax regulation. So we did have this relevant benefit in the P&L this year.

But as a consequence, the tax rate in the P&L will have a 500 bps increase starting 2025. On the flip side, a $2.4 billion P&L gain will translate into approximately $120 million cash gains per year for the next 20 years, which makes the impact in our cash tax rate, which ultimately is the one that I'm most interested at being about 200 to 300 bps, OK? So you will see this is one of the reasons, not the only, why also our cash conversion is expected to be around 95% into 2025.

Operator

Thank you. And our next question comes from Leah Jordan with Goldman Sachs. Please proceed with your question.

Leah Jordan -- Analyst

Thank you. Good morning. I wanted to ask about Lunchables. Just seeing if you could provide an update on how you see the recovery in that business.

I know you had a supplier issue in the fourth quarter. It seemed like it was going to be resolved in 1Q, but the January data does still look a bit soft. So how should we think about the improvement from here? Is it more just leading price adjustments? Or is it more of a step up in innovation as you're planning? And then just any color on the competition you're seeing in the category from private label and smaller brands?

Carlos Abrams-Rivera -- Chief Executive Officer

Thank you for the question. First, I would say is that the supplier ingredient issue that we faced in Q4 still lingers through Q1. We will have that -- we will exit Q1 in a much better location in terms of service. So I think that, that you still see as we see the data in January.

But again, as we go through the quarter, that will improve significantly. Now in terms of the overall category, what I'll say is our focus has been how do we continue to invest in the business that we believe can be a great source of growth for us as a company. And I'm proud of the fact that team have been looking at using our Brand Growth System, looking at the places that actually can solve different pain points for consumers. So you'll see as we go in through the rest of the first half, a product that is much improved with better quality, better ingredients and us continue to bring different innovation and marketing to our Lunchables business.

So I think what you see right now, don't think of that as a sign of how the year is going to be, but you'll see that still there's a lingering effect of that Q4.

Andre Maciel -- Executive Vice President, Chief Financial Officer

If you look at the sellout December and January, for example, for Lunchables, there are four SKUs in particular that that are linked to the upstream supplier issue that we mentioned that are declining more than twice the average rate of Lunchables as a whole. And those are dragging the sellout down quite a lot in these last few months. We do expect that to continue to happen into February. We think the service issue will be fully resolved during the month of February and then we're going to see a gradual recovery on the sellout from that point onwards.

Carlos Abrams-Rivera -- Chief Executive Officer

Thanks for the question.

Operator

Thank you. And our next question comes from Tom Palmer with Citi. Please proceed with your question.

Tom Palmer -- Analyst

Good morning. Thanks for the question. I wanted to just ask on -- this is a little bit of a follow-up, but on the organic sales growth and inflection as the year progresses. I think the comment in the prepared remarks was sequential improvement throughout the year.

It sounds like the second quarter has maybe some unusual timing benefits with the Easter shift and then also lapping the plant downtime from a year ago. So just trying to understand, are we looking for kind of an underlying sales trends, this bigger inflection starting in the third quarter to overcome that? And if so, kind of what are the key drivers of that inflection? Thank you.

Andre Maciel -- Executive Vice President, Chief Financial Officer

Good morning. Thanks for the question. So yes, in the second quarter, you should see a relevant improvement on the trends. But only because of Easter being about 100 bps shift from Q1.

But also we start to lap the factory closure -- temporary closure we had in the quarter. We start to lap that Lunchables report that was issued early in April. So those two things alone will -- these three things alone will have a relevant improvement in the trends, plus the fact that, as we mentioned before, price investments start more pronounced as we head into Easter and beyond and as we continue to launch some product enhancements, Lunchables being one of them.

Operator

Thank you. And our next question comes from Michael Lavery with Piper Sandler. Please proceed with your question.

Michael Lavery -- Analyst

Thank you. Good morning. I wanted to ask a similar question to Andrew's but with the advertising as opposed to promotional spending. You pointed out the 4.5% level, but that does include market research, and even for peers, excluding that, the advertising level is -- averages closer to 5% or more.

Is your marketing spending enough? And I know it's come up, but with just competitive and consumer dynamics is not at the right level, does there need to be some upside to that figure as well?

Carlos Abrams-Rivera -- Chief Executive Officer

Look, I guess I will start by saying -- and thank you for the question, not all brands, not all countries are created equal. So I think one of the things you see is that we're also making sure that that some of the analyses that we have done in the past years is we have kind of the right levels of marketing in different categories and in different countries based on our needs and what it means to be successful. The second thing that you should also know is that we talked about earlier, we have especially designated categories to Accelerate, protect, and balance. Our marketing dollars are going to continue to follow that.

That is part of the strategy of us making sure we invest in those businesses that we believe have a bigger tailwind as we go forward. So again, a different level of spending by different type of strategy. And the last thing I would say is one of our focus has been over the last two years doing two things; first, making sure that we grow the return of every dollar that we invest in marketing. So we have the analytical tools to allow us to do that.

And second, that we continue to shift more dollar from non-working into working. So I think as we go into 2025, you'll see us that even though we may stay at the same levels of overall spending, there's actually a dramatic shift in terms of how much consumers will see in terms of marketing as we are shifting away from, again, places of nonworking dollars, being more efficient with those dollars so that actually can be beneficial to the brands.

Andre Maciel -- Executive Vice President, Chief Financial Officer

And just to complement, as we have said before quite a few times, we do believe our efficiency levels are around 5% and we're going to gradually get there. But to Carlos' point, one of the benefits, among others, of the Brand Growth System that we are deploying now is shedding light on opportunity for us to be a lot better in the returns of the market investments. So you see in 2025, we are going to release $60 million to $80 million more marketing like brand media marketing, which is quite a lot, more than 10% increase, in our overall media investment. That's coming from nonworking dollars.

And within the media, there is also a lot of efforts to redeploy media places that provide higher return, be it about media levers or across certain brands. So even though the P&L will be flat as a percentage of revenue on a year-over-year basis, you'll see a lot more marketing pressure, which is important.

Michael Lavery -- Analyst

Thank you very much.

Carlos Abrams-Rivera -- Chief Executive Officer

Thank you.

Operator

And our next question comes from Chris Carey with Wells Fargo Securities. Please proceed with your question.

Christopher Carey -- Analyst

Hi, everyone. I wanted to ask, I guess, a bigger-picture question. I think one of the things I personally struggle with is that the categories in which you compete are actually running more or less in line with historical growth rates. Not amazing, but more or less in line.

And your business is just underperforming those categories in which you compete. And certainly, there are specific categories that have had some issues and you'll be lapping those and really that will helpful. But it does feel like there's a bit broader of a dynamic underway. And I think that's where some of these questions are coming from around pricing investments and what's potentially needed in the acceleration of organic sales growth.

I guess, if you could diagnose what you think is driving some of this underperformance relative to categories on a broader level, whether that's execution, whether that's affordability. And really what I'm getting at, I suppose, is say we're sitting here in a few months and we're not seeing the pickup, what is the correct action to take? Is it incremental pricing, incremental advertising, a rethink of execution. So I realize that's a big question, but I'd love your observations or thoughts on this topic. Thank you very much.

Carlos Abrams-Rivera -- Chief Executive Officer

Thank you. Appreciate the question. I guess, let me just start by putting things in perspective a little bit in terms of the way I see it. Our portfolio is about over 200 brands in over 40 countries.

If you think about today where we see our challenges, they are concentrating in four brands and only in the U.S. Retail business. And so it actually helps quite a bit for us to make sure that we are being focused on our investments in products and pricing in order to drive top-line improvements, in particular, those areas that, again, there are a subset of the large brands that we have in a number of countries we participate. At the same time, we're doing that, we're also being conscious of making sure we manage through our margins so that we don't go backwards in our gross margins.

And in terms of the investment we're making, I think that it's easy for us to just point to the things that we actually have proven already. Let me give you an example of Capri Sun. We've actually improved 5 points in dollar sales in the fourth quarter. And that came about us renovating the product to make sure we win on taste, innovating, we're bringing new multi-serve packaging, single-cell bottles, bringing vito consumer, expanding into convenient channel.

And at the same time, we've already seen how multi-serve product in club is actually becoming a top quartile item. So for us, it is that we already have kind of a blueprint in which we have applied our Brand Growth System to the critical brands in order to see results that we are continuing to see experience as we go forward. So I know that sometimes it can seem like a lot. But again, for us, it's a specific, it's a few brands, it's in the U.S.

Retail and it's places in which we are attacking leveraging kind of the proven methodology that we have now developed through our Brand Growth System in order to drive top-line growth.

Andre Maciel -- Executive Vice President, Chief Financial Officer

The other thing I will add is, look, there is not one answer like there's not a super bullet. I think given the different categories that you play in different dynamics, the approach differs a lot. So there are places where, yes, it's affordability. And that's where we are going to invest the price the most, to ensure that price gaps are established.

There places, which is about continuing to invest in the products maintain or increase product superiority. And that's where we see investments in places like Capri Sun, Lunchables and there are a few others. So you will see next week in CAGNY, I think that there are good answers for what you're seeking for, because there is a lot of time in that presentation that we're going to be talking about our path to growth, given specific themes across the different platforms. So I think you're going to see what you're asking in more detail over there.

Christopher Carey -- Analyst

OK. Thanks, guys.

Anne-Marie Megela -- Head of Global Investor Relations

Thanks. Operator, we have time for one more question.

Operator

OK. Great. And our last question comes from Alexia Howard with Bernstein. Please proceed with your question.

Alexia Howard -- Analyst

Good morning, everyone.

Carlos Abrams-Rivera -- Chief Executive Officer

Good morning.

Andre Maciel -- Executive Vice President, Chief Financial Officer

Good morning.

Alexia Howard -- Analyst

OK. Can I hit on the GLP-1 topic? We've seen other protein-focused companies in North America already announcing plans to lean into the rising uptake of these GLP-1 injectable weight-loss drugs. But first of all, do you believe Kraft Heinz is seeing any impact from them? And what opportunities are there to meet the unmet needs of these patients over time? Thank you.

Carlos Abrams-Rivera -- Chief Executive Officer

Thank you, Alexia. I guess, let me start with the last part of your question. And no, we have not seen any meaningful impact from GLP-1 in the business. Now, we do know that consumers who do use GLP-1s, typically what they're looking for more protein and more hydration alternative.

So here at Kraft, we're making sure we continue to provide those choices for every consumer. And we're seeing that that whether is making sure in our portfolio that we highlight in products like Oscar Mayyer, Lunchables, P3, even our quesadillas and Delimex and Heinz beans, the amount of protein that actually can deliver for consumer in taste and accessible and affordable way. And then at the same time, we're also making sure that we are continuing to drive the importance of us elevating the portfolio any product that has protein. So the fact that we have this taste elevation product platform within our company allows us to make sure that no matter what protein people are using at home, that we can actually elevate it and make sure that it delivers a great taste they're looking for.

So I think you'll see us continue to emphasize this in a process as we go forward because, for us, it's important that we provide choices for every consumer and every lifestyle. Thank you, Alexia.

Alexia Howard -- Analyst

Thank you.

Anne-Marie Megela -- Head of Global Investor Relations

And thank you, everyone, for your questions. Thanks, everyone, for your questions today. We look forward to seeing you all at CAGNY next week.

Carlos Abrams-Rivera -- Chief Executive Officer

See you next week. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Anne-Marie Megela -- Head of Global Investor Relations

Carlos Abrams-Rivera -- Chief Executive Officer

Andrew Lazar -- Analyst

Andre Maciel -- Executive Vice President, Chief Financial Officer

Peter Galbo -- Analyst

John Baumgartner -- Analyst

Ken Goldman -- Analyst

Leah Jordan -- Analyst

Tom Palmer -- Analyst

Michael Lavery -- Analyst

Christopher Carey -- Analyst

Chris Carey -- Analyst

Alexia Howard -- Analyst

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