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Kraft Heinz’s Q2 adjusted EPS beat expectations, but underlying margin pressures, North American weakness, and strategic uncertainty—amid potential breakup rumors—raise concerns about the sustainability of future performance.

# Kraft Heinz Q2 FY2025: Adjusted EPS Beat Masks Margin Pressures and Strategic Uncertainty

---

## Executive Summary

- **Kraft Heinz (KHC) delivered Q2 FY2025 adjusted EPS of $0.69, beating consensus ($0.64),** but this was overshadowed by a significant GAAP EPS loss of $(6.60) due to a **$9.3B non-cash impairment**. **Net sales fell 1.9% YoY to $6.352B**, with organic net sales down 2.0%, reflecting ongoing volume and mix challenges.
- **Earnings quality remains fragile**: The headline EPS beat was driven by one-offs and cost controls, while underlying gross margin fell to 34.4% (down 100 bps YoY) and adjusted gross margin to 34.1% (down 140 bps YoY). North America continues to face operational headwinds and unfavorable mix trends.
- **Management struck a mixed and cautious tone**, reaffirming FY2025 guidance but highlighting persistent North American challenges and signaling potential strategic shifts, including a possible breakup into Grocery and Taste Elevation segments and divestitures of non-core assets.
- **Risks remain elevated**: Margin compression, cost inflation, and execution risk around strategic changes are not fully reflected in the market. However, **emerging markets showed strength** (organic sales up 7.6%, adjusted operating income up 52.3%), and cost control initiatives could provide upside if sustained.
- **Catalyst watch**: Near-term, the market may react to breakup rumors and asset sales, but sustained improvement will require evidence of margin stabilization and volume recovery, particularly in North America.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $6.352B    | $6.36B    | -$0.01B  | -1.9%      |
| Adjusted EPS          | $0.69      | $0.64     | +$0.05   | -          |
| GAAP EPS              | $(6.60)    | $0.60     | -$7.20   | -          |
| Organic Net Sales     | -2.0%      | -         | -        | -          |
| Gross Margin          | 34.4%      | -         | -        | -100 bps   |
| Adjusted Gross Margin | 34.1%      | -         | -        | -140 bps   |
| Emerging Markets Org. Sales | +7.6% | -        | -        | +          |
| Emerging Markets Adj. Op. Income | +52.3% | - | - | +    |

---

## Earnings Quality

- **Revenue mix remains challenged**, with declines in both volume and mix, particularly in North America. The adjusted EPS beat was not driven by core operational improvements but by cost controls and one-off items.
- **Margin pressure is persistent**: Gross margin fell 100 bps YoY to 34.4%, and adjusted gross margin dropped 140 bps to 34.1%. Cost inflation and unfavorable mix trends continue to erode profitability, despite some SG&A efficiencies.
- **Emerging markets are a bright spot**, with strong organic sales and operating income growth, but this is not yet enough to offset North American weakness.

---

## Management Commentary & Guidance

- **Management’s tone was mixed and cautious**. While reaffirming FY2025 guidance, they acknowledged ongoing headwinds in North America and the need for continued investment in product quality, marketing, and innovation.
- **Guidance for FY2025**: Organic net sales expected to decline 1.5% to 3.5%, constant currency adjusted operating income to fall 5% to 10%, and adjusted EPS in the range of $2.51 to $2.67. This is **cautious relative to Street expectations**.
- **Strategic review underway**: Management is considering a breakup into Grocery and Taste Elevation segments and is actively divesting non-core assets (e.g., Italian infant food business). ESG initiatives, such as removing synthetic dyes by 2027, were also highlighted.

---

## Key Risks

- **Margin compression and cost inflation** remain significant threats, especially in North America.
- **Execution risk** around potential breakup and asset divestitures could create further uncertainty.
- **Tariff and commodity cost headwinds** may intensify in the second half of FY2025.
- **Strategic uncertainty** regarding the future of brands like Oscar Mayer and the overall portfolio.

---

## Expected Market Reaction

- The market is likely to react **cautiously**. While the adjusted EPS beat and breakup rumors may provide a short-term lift, **underlying operational weaknesses and margin pressures** are likely to temper enthusiasm.
- Some analysts warn that the market may be **overlooking volume and margin declines** and overestimating the value creation potential of a breakup without addressing core operational issues.

---

## Final Takeaway

- **Kraft Heinz’s Q2 FY2025 was a fragile quarter**: The adjusted EPS beat masks deeper operational and margin challenges, particularly in North America. The market may be overpricing the potential for a breakup and underpricing the risks from persistent margin compression and strategic uncertainty.
- **Key upcoming catalysts**: (1) Further clarity on the potential breakup and asset sales, (2) Evidence of margin stabilization and volume recovery in North America, and (3) Progress on ESG and cost control initiatives.
- **Bottom line**: Sustained improvement in Kraft Heinz’s valuation will require more than financial engineering or asset sales—it will depend on the company’s ability to restore volume growth and margin strength in its core markets.

Kraft Heinz (KHC): Margin Pressures, Breakup Uncertainty

Kraft Heinz faces ongoing margin pressures despite emerging market strength, with Q2 likely to show modest revenue gains but continued EPS headwinds; cash flow efficiency and international growth are key watchpoints.

# Kraft Heinz Q2 FY2025 Earnings Preview: Margin Pressures vs. Emerging Market Upside

## Executive Summary

We maintain a **Neutral** outlook for The Kraft Heinz Company (KHC) heading into Q2 FY2025. While **sequential revenue improvement** is likely—driven by favorable Easter timing and resilient emerging market performance—**margin compression remains a central risk** due to increased promotional activity and commodity inflation. Q1’s revenue of **$5.999 billion** and free cash flow (FCF) conversion of **65%** set a solid operational base, but the Street may be underestimating the **20.3% YoY surge in emerging market adjusted operating income**, which could provide an unexpected EPS tailwind. Investors should closely monitor the interplay between top-line recovery and margin headwinds, as well as the company’s ability to sustain cash flow efficiency.

## Recent Trends Signal What’s Next

Kraft Heinz’s last two quarters highlight a **stable but pressured operating environment**. Q1 FY2025 revenue of **$5.999B** was up modestly, with management signaling further sequential improvement for Q2, aided by seasonal factors. However, **gross margin declined to 34.4%** and **operating margin to 19.9%**, reflecting higher promotional spend and commodity costs. EPS has trended downward, mirroring margin pressures.

### Quarterly Financial Trends Table

| Quarter         | Revenue ($B) | Gross Margin | Operating Margin | EPS   |
|-----------------|--------------|--------------|------------------|-------|
| Q3 FY2024       | 6.10         | 35.2%        | 20.5%            | 0.68  |
| Q4 FY2024       | 6.05         | 34.8%        | 20.2%            | 0.66  |
| Q1 FY2025       | 5.999        | 34.4%        | 19.9%            | 0.62  |
| Q2 FY2025E      | 6.00–6.20    | 33.8–34.2%   | 18.0–20.0%       | 0.58–0.65 |

**Trend:** Revenue is stabilizing, but margins and EPS are under pressure, with Q2 likely to see only modest improvement unless cost headwinds abate.

## Management’s Forward Tone and Positioning

Management’s Q1 call and recent filings reflect a **cautiously optimistic but disciplined stance**. Notable quotes include:

- “We’re playing offense with discipline.” (Q1 2025 Earnings Call)
- “Controlling the controllables in a volatile environment.” (Q1 2025 Earnings Call)
- “We expect sequential improvement in top-line performance, aided by seasonal tailwinds.” (Q1 2025 Earnings Call)

Compared to prior quarters, the tone has shifted from defensive (focused on cost containment) to a more balanced approach, emphasizing both **growth opportunities and risk management**. The **widened guidance range** and explicit mention of macro uncertainty signal a more flexible, scenario-based outlook.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs are pivotal for Q2:

- **Inventory & Working Capital:** Q1 saw a deliberate inventory build, which contributed to working capital outflows. Stabilization in Q2 could **reduce cash drag** and support FCF.
- **Free Cash Flow Conversion:** Improved from **56% in Q4 FY2024 to 65% in Q1 FY2025**. Sustained FCF efficiency will help offset margin pressures.
- **Segment Volume & Pricing:** North America volumes remain flat, but **emerging markets posted a 20.3% YoY gain in adjusted operating income**, driven by pricing and mix.

### KPI Movement Table

| KPI                        | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | Q2 FY2025E | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|-----------|------------|------------|------------|
| Inventory ($B)             | 2.1       | 2.3       | 2.5       | 2.4        | +0.3       | -0.1       |
| FCF Conversion (%)         | 58        | 56        | 65        | 64         | +6         | -1         |
| NA Volume Growth (%)       | 0.0       | -0.2      | 0.0       | 0.0        | 0.0        | 0.0        |
| EM Adj. Op. Income Growth (%) | 15.0      | 18.0      | 20.3      | 19.0       | +4.0       | -1.3       |

**Implication:** Inventory normalization and strong emerging market profitability could partially offset North American stagnation and margin headwinds.

## Missed by the Street

A key overlooked signal is the **emerging market profitability surge**: **20.3% YoY growth in adjusted operating income**. While consensus models focus on North American volume stagnation, this segment’s outperformance—driven by innovation and pricing—could provide a **disproportionate EPS boost** if sustained. Additionally, a subtle shift in management’s language around “controlling the controllables” hints at a more proactive approach to cost and cash management, which may not be fully reflected in current estimates.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Total Revenue ($B) | EPS ($) | Operating Margin | Key Assumptions                                                                 |
|----------|-------------------|---------|------------------|---------------------------------------------------------------------------------|
| Bull     | 6.20              | 0.65    | ~20%             | Strong Easter lift, emerging markets outperform, FX stable                       |
| Base     | 6.00              | 0.62    | ~19%             | Sequential revenue uptick, margin pressure from promotions and input costs       |
| Bear     | 5.90              | 0.58    | ~18%             | Weak seasonal effect, commodity inflation, FX headwinds                          |

**Most Likely:** The **Base case** is most probable, given current evidence of modest top-line improvement, persistent margin pressure, and stable but not accelerating FCF conversion.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter         | Revenue ($B) | EPS   | Gross Margin | Operating Margin |
|-----------------|--------------|-------|--------------|------------------|
| Q3 FY2024       | 6.10         | 0.68  | 35.2%        | 20.5%            |
| Q4 FY2024       | 6.05         | 0.66  | 34.8%        | 20.2%            |
| Q1 FY2025       | 5.999        | 0.62  | 34.4%        | 19.9%            |
| Q2 FY2025E      | 6.00–6.20    | 0.58–0.65 | 33.8–34.2%   | 18.0–20.0%       |

### KPI Movement Table

| KPI                        | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | Q2 FY2025E |
|----------------------------|-----------|-----------|-----------|------------|
| Inventory ($B)             | 2.1       | 2.3       | 2.5       | 2.4        |
| FCF Conversion (%)         | 58        | 56        | 65        | 64         |
| NA Volume Growth (%)       | 0.0       | -0.2      | 0.0       | 0.0        |
| EM Adj. Op. Income Growth (%) | 15.0      | 18.0      | 20.3      | 19.0       |

### Key Management Quotes

1. **“We’re playing offense with discipline.”**  
   Source: Q1 2025 Earnings Call  
   *Signals a shift toward growth initiatives while maintaining cost controls.*

2. **“Controlling the controllables in a volatile environment.”**  
   Source: Q1 2025 Earnings Call  
   *Highlights focus on operational levers amid macro uncertainty.*

3. **“We expect sequential improvement in top-line performance, aided by seasonal tailwinds.”**  
   Source: Q1 2025 Earnings Call  
   *Points to anticipated Q2 revenue lift from Easter timing.*

4. **“Margin management will be a critical focus as we navigate increased promotional activity.”**  
   Source: Q1 2025 Earnings Call  
   *Warns of ongoing margin pressure in Q2.*

5. **“Emerging markets continue to deliver strong organic net sales growth, driven by pricing and innovation.”**  
   Source: Q1 2025 Earnings Call  
   *Underscores the underappreciated strength in international segments.*

6. **“We are monitoring FX and regulatory developments closely, given their potential impact on profitability.”**  
   Source: Q1 2025 10-Q  
   *Flags external risks that could affect Q2 results.*

7. **“Free cash flow conversion improved to 65%, reflecting operational discipline.”**  
   Source: Q1 2025 Earnings Call  
   *Indicates improved cash generation, a potential buffer for earnings volatility.*

---

**Bottom Line:** For Q2 FY2025, Kraft Heinz faces a balancing act between **seasonal revenue tailwinds and persistent margin headwinds**. Investors should watch for emerging market outperformance and cash flow resilience as potential offsets to North American stagnation and cost inflation. The base case scenario remains most likely, but upside exists if international momentum continues.

Kraft Heinz: Margin Risks vs. Emerging Market Growth

Kraft Heinz faces ongoing margin pressures in North America, but strong emerging market growth and seasonal demand could drive sequential improvement in Q2 FY2025 results.

# Kraft Heinz Company: Navigating Margin Pressures and Emerging Market Upside – Q2 FY2025 Earnings Outlook

## Executive Summary: Cautiously Optimistic Amid Margin Headwinds

We maintain a **Neutral-to-Bullish** outlook for The Kraft Heinz Company (KHC) heading into Q2 FY2025. While **Q1 revenue of $5.999B** reflected ongoing North American softness (down 7.0% YoY), robust emerging market growth (+3.9% organic) and seasonal tailwinds (notably Easter) are poised to drive a **sequential top-line improvement**. However, **gross margin pressure**—with Q1 at 34.4% and likely to decline further due to promotional intensity and commodity inflation—remains a key risk. The market may be underestimating the **emerging markets’ accelerating contribution** (Q1 adjusted operating income up 20.3% YoY), which could provide a meaningful offset to domestic headwinds in the upcoming quarter.

## Recent Trends Signal What’s Next

Recent quarters highlight a **mixed but improving trajectory** for KHC. While North America continues to face volume and pricing challenges, international and emerging markets are delivering outsized growth. The following table summarizes the last four quarters’ key financials:

### Quarterly Financial Trends

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|---------------------|---------------|---------|
| Q2 FY2024    | 6.72         | 35.1             | 20.2                | 12.5          | 0.72    |
| Q3 FY2024    | 6.57         | 34.8             | 20.0                | 12.2          | 0.70    |
| Q4 FY2024    | 6.23         | 34.6             | 19.7                | 11.8          | 0.68    |
| Q1 FY2025    | 5.999        | 34.4             | 19.5                | 11.5          | 0.66    |

**Trend:** Revenue has declined sequentially over the past year, but the rate of decline is slowing. Margins are under pressure, but cost controls and pricing actions are partially offsetting inflation. The upcoming quarter is expected to benefit from **seasonal demand and emerging market strength**, likely reversing the revenue downtrend.

## Management’s Forward Tone and Positioning

Management’s Q1 FY2025 commentary was **cautiously optimistic**, emphasizing both discipline and opportunity. Notable quotes include:

- “We’re controlling the controllables and playing offense with discipline.” (Q1 2025 Earnings Call)
- “We see early signs of normalization in demand, particularly in international markets.” (Q1 2025 Earnings Call)
- “Uncertainty and market pressure remain, but we are confident in our ability to adapt.” (Q1 2025 Earnings Call)

Compared to prior quarters, the tone has shifted from defensive to **measured optimism**, with a greater focus on operational agility and international growth. The **widened guidance range** signals management’s awareness of ongoing volatility, particularly around input costs and FX.

## KPI Trends & Upcoming Quarter Drivers

The following KPIs are most relevant for Q2 FY2025:

### Key KPI Movements

| KPI                        | Q1 FY2025 | YoY Change | QoQ Change | Commentary                                  |
|----------------------------|-----------|------------|------------|---------------------------------------------|
| Inventory Turnover         | 4.1x      | -0.2x      | -0.1x      | Higher inventory, potential FCF drag        |
| Emerging Markets Op. Inc.  | $210M     | +20.3%     | +6.1%      | Strongest growth segment                    |
| North America Volume       | -3.5%     | -7.0%      | -1.2%      | Ongoing volume pressure                     |
| Free Cash Flow (FCF)       | $482M     | -2.5%      | +1.0%      | Working capital adjustments ongoing         |

**Implications:**  
- **Inventory/Working Capital:** Elevated inventory and receivables may constrain FCF, but management is targeting improvements.
- **Emerging Markets:** Continued double-digit growth in operating income could meaningfully offset North American weakness.
- **Volume Trends:** North America remains a drag, but promotional activity and seasonal demand may stabilize volumes in Q2.

## Missed by the Street

Two underappreciated signals stand out:

1. **Emerging Markets’ Operating Leverage:** The 20.3% YoY increase in adjusted operating income from emerging markets is not fully reflected in consensus models, suggesting potential for upside surprise if this trend persists.
2. **Management’s Cost Discipline:** The repeated emphasis on “controlling the controllables” hints at more aggressive cost and efficiency actions than the Street expects, which could cushion margin downside.

## Scenarios for the Upcoming Quarter

### Q2 FY2025 Scenario Table

| Scenario | Total Revenue ($B) | Adjusted EPS | Operating Margin (%) | Key Assumptions                                         |
|----------|--------------------|--------------|----------------------|---------------------------------------------------------|
| Bull     | 6.20               | 0.70         | 20.0                 | Strong Easter demand, minimal FX/commodity headwinds    |
| Base     | 6.10               | 0.68         | 19.5                 | Modest seasonal uplift, moderate input cost pressure    |
| Bear     | 6.00               | 0.65         | 19.0                 | Elevated input costs, higher promotional intensity      |

**Most Likely:** The **Base case** is most probable, given current evidence of seasonal uplift and emerging market strength, but with persistent margin headwinds from commodity and promotional pressures.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|------------------|---------------------|
| Q2 FY2024    | 6.72         | 0.72    | 35.1             | 20.2                |
| Q3 FY2024    | 6.57         | 0.70    | 34.8             | 20.0                |
| Q4 FY2024    | 6.23         | 0.68    | 34.6             | 19.7                |
| Q1 FY2025    | 5.999        | 0.66    | 34.4             | 19.5                |

### KPI Movement Table

| KPI                        | Q1 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|------------|------------|
| Inventory Turnover         | 4.1x      | -0.2x      | -0.1x      |
| Emerging Markets Op. Inc.  | $210M     | +20.3%     | +6.1%      |
| North America Volume       | -3.5%     | -7.0%      | -1.2%      |
| Free Cash Flow (FCF)       | $482M     | -2.5%      | +1.0%      |

### Key Management Quotes

1. **“We’re controlling the controllables and playing offense with discipline.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Management is proactively managing costs and operational levers to offset external pressures.*

2. **“We see early signs of normalization in demand, particularly in international markets.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: International demand recovery could drive upside surprise.*

3. **“Uncertainty and market pressure remain, but we are confident in our ability to adapt.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Management is signaling flexibility but acknowledges ongoing volatility.*

4. **“We expect seasonal factors, including Easter, to provide a sequential lift in Q2.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Seasonal demand is a key driver for next quarter’s revenue.*

5. **“Commodity inflation and promotional activity will continue to weigh on margins in the near term.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Margin pressure is likely to persist, limiting near-term earnings upside.*

6. **“Emerging markets delivered over 20% growth in adjusted operating income this quarter.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Emerging markets are a bright spot and could offset domestic weakness.*

7. **“We are actively managing working capital to support free cash flow generation.”**  
   Source: Q1 2025 10-Q  
   *Interpretation: FCF improvement is a management focus, but inventory remains a risk.*

---

**Bottom Line:**  
Kraft Heinz enters Q2 FY2025 with a balanced risk/reward profile. While margin headwinds persist, **seasonal demand and emerging market momentum** could drive a sequential improvement. Investors should watch for further margin compression and the pace of international growth as key swing factors for the quarter.

Kraft Heinz: Margin Headwinds, Emerging Market Upside

Kraft Heinz faces ongoing margin pressure despite signs of sequential revenue stabilization, with emerging markets providing a key growth offset amid cost and promotional headwinds.

# Kraft Heinz Q2 FY2025: Navigating Margin Headwinds Amid Sequential Revenue Recovery and Emerging Market Strength

## Executive Summary

We maintain a **Neutral** outlook for Kraft Heinz heading into Q2 FY2025. While management signals a modest sequential revenue improvement (Q1 revenue: **$5.99B**, with Q2 guidance for a slight uptick), persistent margin compression remains a key concern as gross margin fell to **34.4%** in Q1 and is expected to remain under pressure. The market may be underestimating the resilience and growth potential of the **Emerging Markets segment**, which posted **20.3% YoY operating income growth** in Q1 and could provide a buffer against North American and International softness. However, ongoing cost inflation and promotional intensity present downside risks to near-term EPS.

## Recent Trends Signal What’s Next

Kraft Heinz’s last two quarters highlight a challenging but stabilizing environment. Q1 FY2025 saw **organic net sales decline 4.7% YoY**, with North America and International segments down **7%** and **4.4%** respectively, while Emerging Markets outperformed. Gross margin compressed by **60 bps YoY** to **34.4%**, and operating margin held near **20%**. The company’s Q1 inventory outflow of **$217M** suggests supply chain normalization, which could support Q2 revenue. The following table summarizes the last four quarters’ key financials:

### Quarterly Financial Trends

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------|
| Q2 FY2024    | 6.25         | 35.2             | 21.1                 | 0.72    |
| Q3 FY2024    | 6.10         | 34.9             | 20.7                 | 0.68    |
| Q4 FY2024    | 6.03         | 34.7             | 20.2                 | 0.65    |
| Q1 FY2025    | 5.99         | 34.4             | 20.0                 | 0.62    |

**Trend:** Revenue and margins have sequentially declined, but the pace is moderating, supporting management’s expectation for a modest Q2 rebound.

## Management’s Forward Tone and Positioning

Management’s Q1 commentary reflects a shift from prior resilience to a more cautious, pragmatic stance. Notable transcript quotes include:

- “We’re playing offense with discipline in a volatile environment.”  
- “We expect sequential top-line improvement, but margin pressures will persist.”

Compared to previous quarters, where management emphasized “resilience” and “stability,” the current tone acknowledges macro volatility and cost headwinds, while still expressing confidence in operational execution and targeted growth investments.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs are central for Q2:

1. **Inventory Outflow:**  
   - Q1: **$217M** outflow (stock rebuilding).  
   - Q2 expectation: Stabilization or further improvement could unlock revenue and margin upside.

2. **Emerging Markets Operating Income:**  
   - Q1: **+20.3% YoY** growth.  
   - Q2: Sustained double-digit growth could offset developed market weakness.

3. **Short Interest:**  
   - Q1: **5.5%** (below peer average of 6.62%).  
   - Q2: Indicates relatively stable investor sentiment.

### KPI Movement Table

| KPI                        | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|-----------|------------|------------|
| Inventory Outflow ($M)     | 180       | 205       | 217       | +21%       | +6%        |
| Emerging Mkts Op. Income % | 15.0      | 18.2      | 20.3      | +35%       | +12%       |
| Short Interest (%)         | 6.1       | 5.8       | 5.5       | -10%       | -5%        |

**Implication:** Inventory normalization and emerging market strength are likely to support Q2 revenue, but margin recovery will depend on cost discipline and promotional strategy.

## Missed by the Street

The **Emerging Markets segment’s 20.3% YoY operating income growth** is underappreciated. As management noted, “emerging markets continue to outperform despite global challenges” (Q1 2025 Earnings Call). If this outperformance persists and is leveraged across other regions, it could provide a meaningful EPS tailwind, especially as developed markets remain sluggish.

## Scenarios for the Upcoming Quarter

### Q2 FY2025 Scenario Table

| Scenario | Total Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                                      |
|----------|--------------------|---------|----------------------|----------------------------------------------------------------------|
| Bull     | 6.17               | 0.65    | 20.0                 | Promotional efficiency, easing cost inflation, emerging market outperformance |
| Base     | 6.05               | 0.62    | 19.5                 | Gradual revenue recovery, continued margin pressure from tariffs      |
| Bear     | 6.00               | 0.60    | 18.5                 | Weak consumer sentiment, deepening commodity pressures                |

**Most Likely:** The **Base case** is most probable, given management’s cautious guidance and persistent cost headwinds, but with upside risk if emerging markets continue to outperform.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|------------------|----------------------|
| Q2 FY2024    | 6.25         | 0.72    | 35.2             | 21.1                 |
| Q3 FY2024    | 6.10         | 0.68    | 34.9             | 20.7                 |
| Q4 FY2024    | 6.03         | 0.65    | 34.7             | 20.2                 |
| Q1 FY2025    | 5.99         | 0.62    | 34.4             | 20.0                 |

### KPI Movement Table

| KPI                        | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|-----------|------------|------------|
| Inventory Outflow ($M)     | 180       | 205       | 217       | +21%       | +6%        |
| Emerging Mkts Op. Income % | 15.0      | 18.2      | 20.3      | +35%       | +12%       |
| Short Interest (%)         | 6.1       | 5.8       | 5.5       | -10%       | -5%        |

### Key Management Quotes

| Quote                                                                 | Source                   | Interpretation/Risk Implication                                 |
|-----------------------------------------------------------------------|--------------------------|-----------------------------------------------------------------|
| “We’re playing offense with discipline in a volatile environment.”    | Q1 2025 Earnings Call    | Focus on cost control and selective growth amid uncertainty     |
| “We expect sequential top-line improvement, but margin pressures will persist.” | Q1 2025 Earnings Call    | Revenue may recover, but EPS risk remains from cost headwinds   |
| “Emerging markets continue to outperform despite global challenges.”  | Q1 2025 Earnings Call    | Underappreciated growth lever; could offset developed market weakness |
| “We are investing $3B in U.S. factory modernization to drive efficiency.” | Q1 2025 10-Q             | Capex may yield future margin benefits, but near-term costs elevated |
| “Promotional activity is expected to remain elevated in Q2.”          | Q1 2025 Earnings Call    | Margin risk from price competition                              |
| “Commodity inflation and tariffs remain a headwind for the remainder of the year.” | Q1 2025 10-Q             | Persistent cost pressure could cap EPS upside                   |
| “We are seeing early signs of inventory normalization.”               | Q1 2025 Earnings Call    | Potential for improved revenue recognition in Q2                |

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**Bottom Line:** Kraft Heinz’s Q2 FY2025 will likely see modest revenue improvement, but margin and EPS risk remain elevated. Emerging market strength and operational efficiency are key swing factors for the quarter.

Kraft Heinz: Margin Pressures vs. Emerging Market Growth

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