UPDATE 3-Kraft Heinz profit margins squeezed by soaring costs

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(Adds analyst and CEO commentary, context)

By Mehr Bedi

July 27 (Reuters) – Kraft Heinz Co reported a bigger-than-expected decline in quarterly gross profit margins on Wednesday, under pressure from soaring transportation and raw material costs despite multiple price hikes.

Shares of the U.S. food giant fell about 8% in morning trading as the company reported a slight slowdown in demand in response to several rounds of price increases.

The pandemic, the war between Ukraine and Russia and other supply issues have pushed up prices for tomatoes and pork and harder-to-hedge categories including dairy and poultry, squeezing margins for packaged food manufacturers.

Kraft’s second-quarter gross margin fell to 30.3% from 34.6% a year earlier. Analysts on average had expected margins of 32.6%, according to IBES data from Refinitiv.

“What was discouraging…is that cost inflation continues to accelerate, which will require more pricing and savings to compensate,” said Arun Sundaram of CFRA Research, adding that further increases prices will be difficult for retailers to bear in the current economic environment. .

Last month, Kraft stopped supplying certain products, such as tomato ketchup and baked beans, to Britain’s biggest supermarket group Tesco, as the retailer refused to charge customers higher prices. The two companies have since reached an agreement to bring Kraft’s products back to store shelves.

Kraft said a key measure of its sales volumes fell 2.3 percentage points in the quarter under review, hurt by slowing demand due to higher prices and supply constraints. Still, that’s against a 12.4 percentage point increase in average selling prices.

CEO Miguel Patricio said around 99% of the price increases planned for the year have been announced, with the majority implemented, adding that any new pricing the company takes will be “surgical”.

The Philadelphia-based cream cheese maker forecasts 2022 organic revenue to grow by a high single-digit percentage, higher than its previous forecast of a mid-single-digit percentage increase. (Reporting by Mehr Bedi in Bengaluru; Editing by Saumyadeb Chakrabarty and Shailesh Kuber)

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