Analyzing Kraft Heinz’s 2Q17 Margins
EBITDA fell across segments, except the United States
Kraft Heinz’s (KHC) adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose 0.70% to $2.1 billion in 2Q17. Improvement in the United States (SPY) (SPX-INDEX) more than offset the declines in other business segments.
US EBITDA rose 3.2% YoY (year-over-year) to 1.6 billion, mainly due to higher cost savings. Meanwhile, lower sales and increased input costs (coffee and cheese) remained a drag.
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In Canada, adjusted EBITDA fell 1.2% to $0.20 billion, reflecting an adverse currency impact of 3.5% and lower pricing, which more than offset the benefits from cost-cutting. In Europe, adjusted EBITDA fell 8.6% to $0.20 billion. Lower pricing, increased input costs, and currency headwinds offset the benefits of higher cost savings. As for the Rest of World segment, adjusted EBITDA fell 11.6% to $0.20 billion as leverage from improvement in sales was offset by currency headwinds, increased input costs, lower volumes, and higher business investments.
Margins boosted by cost savings
Despite lower sales, Kraft Heinz’s gross and operating margin expanded significantly in 2Q17, thanks to higher productivity and cost savings. The company’s reported gross margin expanded 290 basis points to 40.2% in 2Q17 as higher cost savings more than offset the impact of lower sales and the increase in input costs.
Kellogg (K), General Mills (GIS), and Conagra Brands (CAG) also reported a YoY expansion in gross margins as cost savings more than offset the adverse impact of the decline in sales and rising material costs.
Kraft Heinz’s reported operating margin expanded 470 basis points, reflecting higher gross margins and lower SG&A (selling, general, and administrative) expenses as a percentage of sales.