Nestle cautions on margins despite sales boost
* H1 organic growth 8.1%, Q2 growth 8.6%
* H1 sales 41.8 bln Sfr, net profit 5.9 bln Sfr
* Expects slightly lower margin in full year
* Shares down 0.9%, but outperform food sector index
* Raises FY guidance to 5-6% organic growth
By Silke Koltrowitz
ZURICH, July 29 (Reuters) - 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.
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).
Danone Q2 sales beat forecasts as company launches buyback,
Inflation worries overshadow Unilever's strong first half, hit shares
Reporting by Silke Koltrowitz Editing by Michael Shields, Sonali Paul and Emelia Sithole-Matarise
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.