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Aug 3, 2017

Kraft Heinz profit beats as cost cuts offset weak North American demand

A Heinz Ketchup bottle sits between a box of Kraft macaroni & cheese and a bottle of Kraft Original

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Kraft Heinz Co (KHC.O), the maker of Velveeta cheese, Heinz ketchup and Oscar Mayer meats, reported a bigger-than-expected quarterly profit on Thursday as the company continued to cut costs amid weak demand in North America.

Shares of North America's third-largest food and beverages company were marginally up at US$87.50 in after-market trading.

Kraft, which is targeting to cut US$1.7 billion in costs by the end of 2017, said on Thursday that its selling, general and administrative expenses fell about 15 per cent to US$760 million in the second quarter ended July 1.

This is the fourth straight quarter of double-digit declines in selling, general and administrative expenses.

However, the company, which is backed by billionaire-investor Warren Buffett and private equity firm 3G, said revenue fell 1.7 per cent to US$6.68 billion, the third straight quarter of drop. Analysts on average had expected US$6.73 billion.

U.S. sales dipped 1.2 per cent in the quarter. The region accounts for more than two-thirds of the company's total revenue.

But analysts did not read much into the decline.

"The revenue line was not as bad as some observers may have feared, especially in light of recent U.S. food trends," J.P. Morgan analyst Ken Goldman wrote, adding that Kraft's 0.9-per-cent drop in organic sales is better than numbers posted by peers.



Mondelez reported a 2.7-per-cent drop in organic sales for its latest quarter, while ConAgra said in June total sales fell 9.3 per cent in its fourth quarter.

Processed packaged food makers, including Kraft Heinz, are being pressured by increasing preference for healthier alternatives among U.S. consumers.

Kraft Heinz has responded by launching products such as no salt-, no sugar-added Heinz Beanz and a new line of premium pasta sauces under the Classico Riserva brand with no artificial ingredients or added sugar.

The company has also relaunched Kool-Aid Jammers with fewer calories and no preservatives.

Kraft's net income surged 50.5 per cent to US$1.16 billion, or 94 cents US per share, in the latest quarter.

Excluding certain items, the company earned 98 cents US per share, three cents US ahead of analysts' average estimate, according to Thomson Reuters I/B/E/S.

The company also benefited from refinancing its Series A preferred stock a year earlier.

Kraft also raised its quarterly dividend to 63 cents US per share from 60 cents US.