November 1, 2018 / 8:21 PM / 13 days ago

Kraft Heinz earnings disappoint as costs surge, shares slide

CHICAGO (Reuters) - Tater tots maker Kraft Heinz Co (KHC.O) missed quarterly earnings estimates, sending its shares down more than 7 percent, as steep commodity costs, other expenses and pricing promotions overshadowed higher-than-expected sales.

FILE PHOTO: Heinz tomato Ketchup is show on display during a preview of a new Walmart Super Center prior to its opening in Compton, California, U.S., January 10, 2017. REUTERS/Mike Blake/File Photo

Consumer goods companies have struggled in recent months to cope with skyrocketing costs for raw materials and transportation, exacerbated by a shortage of truck drivers in the United States.

“Cost is one area we are falling short this year,” Kraft Heinz Chief Executive Bernardo Hees said on a call to discuss third-quarter results.

Hees said U.S. cost inflation in the third quarter had been greater than expected, and that Kraft Heinz had delayed some supply chain projects that would have cut expenses. The company also decided to invest in customer service to boost sales volumes, he said.

Chief Financial Officer David Knopf said the company expects profitability to improve “significantly” beginning with the current quarter, with growth continuing into the first half of next year.

Kraft Heinz’s stock, which has declined 27 percent in the past year, was down 7.5 percent at $52 in extended trading.

“The big surprise was the EBITDA miss,” Edward Jones analyst Brittany Weissman said. “While sales were decent, we were disappointed by the decline in profitability.”

Excluding items, the Chicago-based company, which owns the Velveeta cheese and Heinz ketchup brands, earned 78 cents a share, falling 3 cents short of analysts’ average expectations, according to data from Refinitiv IBES.

Net sales rose 1.6 percent to $6.38 billion, topping Wall Street estimates of about $6.31 billion.

Kraft Heinz said pricing fell 0.9 of a percentage point during the third quarter, a disappointing reversal from the higher prices the company reported in the first half of the year.

Pricing in the third quarter was weighed down by the U.S. business, as the company passed along lower prices for some commodities, including bacon. Pork belly prices were down during the period as China, the world’s biggest pork consumer, was importing less from the United States over trade tensions.

The company also increased promotions on some of its products, including natural cheese and ready-to-drink beverages.

Big food makers have been spending more on promotions and discounts this year, hoping to win back consumers who are increasingly turning to fresh, trendier brands.

Kellogg Co (K.N) cut its full-year profit outlook on Wednesday due to higher spending on advertising, sending shares of the Corn Flakes maker tumbling 9 percent.

Pricing across the industry has also been squeezed for years as traditional grocery stores compete fiercely against Amazon.com Inc (AMZN.O) and discount retailers.

Reporting by Richa Naidu; Editing by Bill Berkrot

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