Nestle cautions on margins despite sales boost
Nestle (NESN.S) said input cost inflation would slightly squeeze margins this year even as strong demand for coffee boosted organic sales in the first half, allowing the world’s biggest food group to raise its full-year growth guidance.
Food groups are grappling with surging commodity costs that are hitting margins, and Nestle, with well-known brands like Nescafe coffee and Purina pet food, said price increases could only be implemented with a time lag.
Its underlying trading operating profit margin is expected to slip to around 17.5% this year from 17.7% in 2020, and then improve again from 2022, Nestle said in a statement on Thursday.
“(On the margin), we’re taking a bit more of a cautious view to the full year because we see continued inflation in the system,” Chief Executive Mark Schneider told reporters on a call. He said the company could hedge against some increases — such as coffee prices that spiked this week — but not against higher transportation costs.
“Inflation has been virtually absent for a number of years and then pointed up very sharply. It hit us directly,” Schneider said, adding the problem was transitory.
Schneider said input cost inflation was expected to reach around 4% this year and the company would accelerate price increases in the second half. He said Nestle needed to raise prices by about 2% to offset 4% cost inflation. It raised prices by 1.3% in the first half, and said a better product mix and efficiencies would also help.
Peer Unilever (ULVR.L) said last week it expected cost inflation to be in the high-teens in the second half of the year, while Danone (DANO.PA) also on Thursday reported a lower operating margin for the first half. read more
Shares in Nestle, up almost 10% so far this year, were 0.9% lower at 0721 GMT, outperforming a 1.1% weaker sector (.SX3P).
Kepler Cheuvreux analyst Jon Cox said “the market probably did not want to hear about a delay in passing through prices”, while the strong top line and increased growth guidance had been expected.
Nestle raised its organic growth guidance for the year to 5-6%, versus “above 3.6%” previously, after strong demand for coffee and a rebound in the out-of-home business and in China lifted sales by 8.1% in the first half and 8.6% in the second quarter.
Vontobel analyst Jean-Philippe Bertschy noted “strong sales growth in developed markets at 6.7%, compares with a flat outcome at Mondelez (MDLZ.O) and Unilever, demonstrating Nestle’s innovation strength”.
Nestle confirmed it would deliver “consistent mid-single-digit organic growth for years to come”.
Net profit rose slightly to 5.9 billion Swiss francs ($6.49 billion).