Hello. This is Anne-Marie Megela , Head of Global Investor Relations at The Kraft Heinz Company. I would like to welcome you to our third quarter 2026 business update. During the following remarks, we will make forward-looking statements regarding our expectations for the future, including related to our business plans and expectations, strategy, efforts and investments, and related timing and expected impacts. These statements are based on how we see things today, and actual results may differ materially due to risk and uncertainties. Please see the cautionary statements and risk factors contained in today's earnings release, which accompany these remarks, as well as our most recent 10-K, 10-Q, and 8-K filings for more information regarding these risks and uncertainties. Additionally, we will refer to non-GAAP financial measures, which exclude certain items from our financial results reported in accordance with GAAP.
Please refer to today's earnings release and the non-GAAP information that accompany these remarks, which are available on our website at ir.kraftheinzcompany.com under News and Events, for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures. Today, our Chief Executive Officer, Steve Cahillane, will provide an update on our business performance and overall strategy. Andre Maciel, our Chief Global Financial Officer, will then provide a financial review of the third quarter results, and we will conclude by discussing our 2026 outlook. We have also scheduled a separate live question-and-answer session with analysts. You can access our question-and-answer session at ir.kraftheinzcompany.com. A replay will also be available following the event through the same website. With that, I will now turn it over to Steve.
Thank you, Anne- Marie, and thank you all for joining us. We have been building momentum throughout the year, and that continued into the third quarter as we delivered top-line results in line with our expectations. These results reflect strong growth in emerging markets and Away From Home. While we have more work to do in U.S. retail, we are maintaining the traction we built in the first half of the year. Our 2026 operating plan to turn around the U.S. business and accelerate momentum in international markets is on track. Sales and share are recovering, volumes are improving in every region, and the rest of our $700 million investment will be put to work in the fourth quarter. The momentum we are seeing comes from meeting consumers where they are and keeping our brands relevant at a time when value and affordability remain top of mind.
Whether through product superiority or price, we are giving consumers more reasons to choose our brands, and our investments will continue to compound. Those longer-term investments, including marketing, innovation, and talent, will keep building. While the path may not always be linear, we are confident it leads to stronger performance. As we look at the remainder of the year, we are raising the low end of our organic net sales guidance. We now expect to land between down 1.25% to down 0.5%. This compares to our previous expectation of down 2% to down 0.5%. We are maintaining our constant currency adjusted operating income expectations while increasing adjusted EPS primarily due to a lower effective tax rate. Looking at the third quarter, organic net sales were down 1.1%, driven by a decline in U.S. retail, partially offset by strong growth in emerging markets and global Away From Home.
When we compare our underlying performance to the first half of the year, we continue to see improvement, including recovering volume trends. Adjusted gross margin declined 40 basis points versus the prior year, a result of higher inflation in procurement and logistics, partially offset by our productivity initiatives. Constant currency adjusted operating income declined 14.6%, which reflects lapping lower variable compensation in 2025 and our planned increase in marketing, R&D, and people. Taken together, these factors generated adjusted EPS of $0.53 in the quarter. Free cash flow is down 5.2% versus the prior year, in line with our expectations as we step up investments. Our free cash flow conversion remains strong at 120%, up 11 percentage points versus prior year. This, combined with a healthy balance sheet, allow us to confidently support our dividend.
Our goal remains to drive volume-led sustainable and profitable top-line growth while continuing to generate attractive free cash flow. As we approach the end of the year, we are well into executing our plans to turn around our U.S. business and accelerate momentum across our international markets, both in retail and Away From Home channels. Let's first take a look at the U.S. business. This year, we are investing an incremental $700 million across product superiority, select pricing, marketing, sales, and R&D, of which the majority is focused on turning around our U.S. business. We have also made several changes to simplify our North America operating model, driving stronger accountability and faster decision-making across the organization. We brought in new leadership.
We introduced a refined incentive structure that keeps teams focused on market share gains while giving them more flexibility, and we sharpened our business unit model so that we are fully leaning into a business unit-led, functionally enabled approach with clear ownership. The investments, combined with our new operating model, are working. Comparing our performance to last year, we see that total company volume trends have improved by 3 percentage points. This improvement is broad-based, with better volume trends across each region. We are also seeing improved market share performance. The percentage of our revenue that is gaining or holding share has improved from 21% in 2025 to 31% year to date. When we look specifically at WIN BIG, 44% of our revenue is gaining or holding share year to date. This is led globally by our Heinz brand, which is gaining share and growing sales across each region.
We have also made progress in U.S. retail. We ended 2025 with 12% of our revenue gaining or holding share. Year to date, we are now at 25%, led by condiments and desserts. Over the past several months, our market share has held steady, and we view that stability as a solid foundation. We expect the next meaningful step-up to come as we recover distribution in next spring's resets with retailers. The investments we've made in our brands, the stronger velocities we're now delivering, and the innovation we're bringing to market give our retail partners more reasons to expand our shelf space and our consumers more reasons to choose us. When we look at where we have prioritized our investments, we see better performance. WIN BIG, which represents approximately 60% of our business globally, has returned to consumption growth.
As a reminder, we are prioritizing investments by market share goal. Where we aim to hold share in brands like Oscar Mayer and Bagel Bites, we are spending to defend. Where we aim to win, brands like Lunchables and Jell-O, we are investing selectively. Where we have the right to WIN BIG, like our Taste Elevation brands, Heinz and Philadelphia, we are distorting investments accordingly. We have talked about our performance. Now let me walk you through how we have deployed our investments this year. A portion of the investment went to price to make sure we remain competitive. We invested in opening price points across certain categories, made selective base price adjustments, and protected distribution. Assessing our performance to date, most of our investments have worked.
For example, we made investments in mac and cheese liquids to close the gap to private label and bring shoppers into our liquid format.
Early results are encouraging. Both dollars and volumes are up versus the incoming trend, with no cannibalization of our dry or microwave formats. In a few areas, most notably cream cheese, it did not work. Consumers responded less to lower prices than we planned, so we are pivoting. We are pulling back on part of the investment in the fourth quarter while staying focused on strong holiday execution. A portion of our investment is also geared towards people. We have increased headcount throughout the organization, with a focus on our marketing and sales teams. We are on track, having hired approximately 80% of our North America commercial needs. This includes investments across e-commerce, where we grew approximately 14% year to date through August. We have also significantly stepped up our marketing investment, increasing it to at least 6% of net sales.
You can see it in the work with new campaigns like Heinz, "It Has to Be Heinz." You can see it with more media in market as we invest behind brands with the strongest returns and support new launches. You can see it in our strategic partnerships, which put our brands front and center at key cultural moments. Earlier this year, we announced a five-year global strategic partnership with the National Football League, and with the regular season now underway, we are bringing it to life. With over 190 million NFL fans, football is the number one sport in America, and nine of our top 10 brands index highest with NFL fans over any other sport. The partnership puts eight of our categories in front of those fans.
From NFL kickoff to Thanksgiving to the Super Bowl, we expect it to drive incremental retail opportunities and expand Away From Home in stadiums, including additional SKUs beyond ketchup and branded equipment. Alongside our incremental media investment, we are improving effectiveness and delivering a higher return on advertising spend, driven by better creative and a stronger tactical mix. Marketing is a medium-term investment, and we are already seeing benefits. As this investment continues to ramp up in market, we expect returns to compound, setting us up for a stronger 2027. Beyond marketing, we have also stepped up our investment in R&D to deliver product superiority and value. Our approach to innovation is fewer and bigger, allowing us to launch new products with more support and scale faster. We are putting our resources behind a focused set of consumer-driven platforms across convenience, new occasions, and nutrition.
We're making progress this year. Innovation is contributing 100 basis points more to our consumption performance than it did in 2025, but we still have a lot of opportunity to close the gap to branded competitors. This year's launches are a strong start. Kraft Mac & Cheese PowerMac is over 55% incremental to the category and ranked in the top quartile for velocity. Capri Sun Hydrate continues to be the fastest-turning kids' beverage innovation. Our Ore-Ida Shapes are the number one frozen innovation at a key retailer, and Lunchables Snackables is over 60% incremental. We also recently launched KD Ramen in Canada, moving into a fast-growing adjacent category. All three SKUs launched are ranked in the top quartile for velocity, and early data shows strong cross-purchases within the franchise. We will do the same in the United States.
In early 2027, we're launching Kraft Mac & Cheese Cheesy Ramen. It's the brand's first entry into new category in nearly 20 years, reflecting our focus on bringing our iconic brands to the categories and occasions where consumer interest is growing. We're encouraged by the early green shoots from the innovation we delivered this year, particularly given that we entered 2026 following a period of underinvestment. The step-up we've made in R&D and commercial support is only beginning to flow through our results. We expect its impact to become increasingly evident in 2027, especially following the spring resets and into the second half of the year. Now, turning to our international markets. Our focus is on growing the core through our Heinz brand and distribution expansion in our emerging markets.
While the majority of our investment was allocated to the U.S., a portion also went to our international markets, with a focus on marketing behind Heinz and on our sales force. Our investments here are designed to accelerate momentum, with growth led by our Heinz brand and distribution expansion in emerging markets. We expect to close the year with double-digit growth in our emerging markets. Heinz grew approximately 16% in emerging markets in the third quarter, with growth across every category, including condiments, mayonnaise, and pasta sauce. Around the world, we are expanding Heinz across new occasions and geographies while catering to local preferences and trends. That combination of global brand strength and local relevance is driving growth and positions us well for the quarters ahead. Heinz Zero ketchup in Brazil continues to be a standout.
We backed the launch with the biggest campaign we've ever run in the country, generating more than 2 billion impressions. Since its launch earlier this year, Heinz Zero has gained nearly three points of share, and about 80% of its sales are incremental to the category, which means we're bringing new consumers and new growth to ketchup. Looking at distribution, we declined 1% versus the prior year. We're replacing ineffective distribution with much more effective distribution. We also continue to expand into new markets, and Away From Home grew approximately 8% in the quarter. The net of it all is that we're maintaining double-digit growth while improving the quality of our points of sale. Taking a closer look at our global Away From Home performance, we grew organic net sales 2.6%. This was driven by growth across each region, North America, Europe, and Pacific developed markets, and emerging markets.
Growth in the U.S., our largest market, was driven by ongoing net new business wins. Away From Home remains a strategic channel for us where we see significant opportunities, including growing beyond Heinz ketchup, expansion into non-commercial channels, and increased penetration in QSRs. As we look towards the end of the year, we anticipate continued growth in our global Away From Home business. With that, Andre will now walk you through our third quarter financial performance in more detail and our outlook for the remainder of the year.
Thank you, Steve. Starting with our third quarter results. Organic net sales for Kraft Heinz declined 1.1%, at the upper end of our guidance range. Price was flat, with positive pricing in emerging markets offset by negative pricing in North America due to planned investments. Volume mix declined 1.1 percentage points, driven by North America, and largely reflects softness across meats, in addition to the anticipated 80 basis point headwind from inventory pull-forward into the second quarter. Relative to our expectations, the quarter was helped by approximately 40 basis points from trade coming in lower than planned. We now expect trade to be higher in the fourth quarter. When we normalize for these inventory and trade impacts, our third quarter demonstrates sequential improvement compared to the first half of the year. Now breaking down performance by region. North America organic net sales declined 3.2%, driven by U.S. retail.
This reflects the inventory headwind we expected, along with some additional inventory reductions by retailers. Offsetting this impact was continued growth in Canada and Away From Home. In our Europe and Pacific developed markets, organic net sales declined 1.3%. This reflects an approximate 100 basis point impact from negative cash flow businesses that we exited in Australia and New Zealand. With this impact starting in the third quarter, we expect a headwind to continue into 2027. This was partially offset by volume-led growth in Europe, where we continue to gain market share. In emerging markets, organic net sales were up 15.6%, with a balanced contribution from both price and volume mix. The disruption we had with a distributor in Indonesia last year is now behind us, and Indonesia contributed about 3 percentage points to emerging markets growth in the quarter.
Taking a closer look at our performance in U.S. retail, our consumption performance in the third quarter was relatively in line with our performance in the first half of the year, and our volumes are improving. As we unpack our performance, there are areas where we see our investments driving significant improvements and areas where we still have work to do. Starting with where we see our investments working well. In condiments, we returned to growth, and throughout the year, that has been accelerating, from 2.5% growth in the first half of the year to over 4% in the third quarter. We are seeing the same momentum across desserts, from 1.7% growth in the first half to 2.5% growth in Q3. Mac & Cheese is a category where we have been declining for the last couple of years, and in the third quarter, we grew consumption 1.4%.
In hydration, while the pace is moderating as expected, as we lap earlier pricing, we are still driving consumption growth. At the same time, there are other parts of the business where we have work to do or need to redeploy our investment. Looking at our declining U.S. retail, these pressures are concentrated. Our meat business is still driving the majority of our U.S. retail decline, but is improving. We are now past last year's packaging issue in cold cuts, and a renovated product is on shelf. We are supporting it in market, and the signs are encouraging, with positive volumes per distribution point. Our consumption performance in cream cheese has weakened throughout the year. As Steve mentioned before, we made investments in price early in the quarter, and Philadelphia is nearly 2/3 of the category, so our price effectively became the category's price.
Competitors followed, the category deflated, and we did not see the elasticities we expected. We learned from that, and we are starting to redeploy the investments in the fourth quarter. Sandwich cheese is a challenging category, and we expect the turnaround to take time. We are taking a measured approach with several levers working together, and we are realistic that the recovery will be gradual and limited in the near term. We are making investments in Kraft Singles with a new creative platform launching early next year, and culturally relevant partnerships like our NFL activation. We are scaling our price pack architecture work, including an 8-ounce entry pack that showed strong category incrementality in early tests. We are developing innovation and updating claims on existing products to target a more health-conscious consumer. Together, these actions position us to stabilize the business, but we are not underwriting a sharp rebound.
Lastly, salad dressing has become a larger drag in our results due to a recent disruption that affected the entire category. While we are seeing the category start to improve, we are taking actions to rebuild momentum by realigning our promotional strategy and emphasizing usage occasions through marketing. Turning to the next slide. Kraft Heinz adjusted operating income declined 15.2%, and our adjusted operating income margin decreased 230 basis points. Relative to our expectations, the quarter was helped by approximately 450 basis points from trade and marketing coming in lower than planned. We now expect both trade and marketing to be higher in the fourth quarter. In North America, adjusted operating income declined 10.5% versus the prior year. This was primarily driven by inflation, top-line performance, including investments in price, and lapping lower variable compensation expense in the prior year. These impacts were partially offset by productivity.
In Europe and Pacific developed markets, adjusted operating income declined 32.8%. This was primarily driven by a non-cash write-off of obsolete spare parts, increased investment in marketing, and higher variable compensation expense. In emerging markets, adjusted operating income increased 22.5%. This was driven by strong top-line performance and productivity more than offsetting inflation and investments in marketing. Now, going deeper into how we are tracking against some of our investments. We have generated improvements in our return on promotions. Year to date, we have increased ROI by 4 percentage points versus prior year, and have increased the percentage of promotional spend with net positive ROI by approximately 6 percentage points. As we unpack our investment, about half went to marketing. Based on our latest data, return on ad spend grew 2 percentage points globally. For the full year, we expect marketing to be at least 6% of net sales.
Year to date, marketing was up approximately 25% versus the prior year and sits at 6.1% of net sales. Across both promotions and marketing, we are encouraged by the improvement in our returns, and we know there are more opportunities across our brands. We are also increasing investments in R&D. Year to date, R&D was up 20% versus prior year, which is in line with our expectation for the full year. Moving to adjusted gross profit margin. In the third quarter, our margin declined 40 basis points versus the prior year. This was driven by higher inflation in procurement and logistics, partially offset by our productivity initiatives. Relative to our expectations for the quarter, logistic costs came in higher than anticipated, driven by increased transportation costs. While logistics costs are trending up, given our portfolio composition, favorability in commodities like dairy and bellies helped to offset the headwind.
Our inflation outlook for the full year remains slightly above 4%. As we move into the fourth quarter, we expect this to be the peak of inflation for the year at approximately 6%. Helping to mitigate these inflationary pressures, we continue to drive strong gross efficiencies. We delivered over $520 million year to date, representing at least 4% of COGS, a pace that we expect to continue into the fourth quarter. In terms of adjusted EPS, we declined approximately 13.1% or $0.08 versus the third quarter of 2025. The decline was driven, as expected, by increased variable compensation expense and our investments. Looking at free cash flow, year to date, we generated approximately $2.4 billion, a 5.2% decrease versus prior year. As anticipated, this was driven by our increased investments and partially offset by improvements in working capital.
Free cash flow conversion of 120% represented an 11 percentage point increase compared to last year. Now turning to capital allocation. Our priorities are unchanged and remain very clear: sustaining the dividend and protecting our investment-grade credit profile. With a strong balance sheet and solid free cash flow generation, we have the flexibility to navigate volatility while investing in the business and continuing to fund the dividend, reduce debt, and manage leverage in a disciplined way. We expect our 2026 net leverage to be between 3.2x-3.3x , with a path to deleverage as we continue to pay down debt and generate a solid level of excess cash after dividends. Now looking at our full year 2026 outlook. We are raising the low end of our organic net sales outlook.
We now expect to be down 1.25% to down 0.5% versus our previous expectation of down 2% to down 0.5%. This guidance contemplates an impact of reduced SNAP benefits of approximately 100 basis points. Our outlook now contemplates adjusted gross profit margin at the lower end of our range of down 50 to down 10 basis points year-over-year. Our guidance assumes inflation that peaks as we head into the fourth quarter. For constant currency adjusted operating income, we are reiterating our guidance range of down 18% to down 16%. This continues to include an approximate 5 percentage point impact from lapping lower variable compensation in 2025. We are raising our outlook for adjusted EPS to be in the range of $2.07-$2.13 versus our previous expectation of $2.03-$2.09.
This is driven by an effective tax rate of approximately 23.5% relative to our prior expectation of 24.5%, driven by discrete benefits that we don't expect to repeat in 2027. From a cash standpoint, we continue to expect to generate free cash flow conversion of approximately 110%. With that, let me pass it back to Steve for some closing comments.
Thank you, Andre. The investments we're making are working. Volume is recovering, share is improving, and emerging markets and Away From Home are delivering strong growth. We're making progress in U.S. retail, but we're not yet where we want to be. We will continue to double down where things are working and will adjust where they're not. Importantly, the actions we are taking are from a position of strength, with strong free cash flow conversion, a healthy balance sheet, and a commitment to our dividend. The path won't always be linear, but we are confident it leads to a stronger 2027. Next week, we look forward to sharing more about how we will build on our progress at our Investor Day, including our strategy, our priorities, and how we plan to create long-term value. Thank you for your time, and thank you for your interest in Kraft Heinz.