Nestlé is aiming to achieve positive growth in its key underlying metric of real internal growth (RIG) as the impact of pricing moderation on volumes decreases.
CEO Mark Schneider is confident that RIG will turn positive in the second half of the year, and Nestlé’s gross margin, which has been affected by rising input costs, will also show a significant improvement.
However, these efforts may face challenges due to Nestlé’s ongoing portfolio optimization and the lingering inflation in commodities such as sugar, cocoa, and coffee.
In the first half of the year, Nestlé’s RIG was down 0.8%, compared to a nearly flat growth of 0.1% in fiscal 2022. Pricing contributed 9.5% to organic growth of 8.7%. The company’s rationalization strategy, focused on reducing stock-keeping units (SKUs) in favor of higher-margin products, had a negative impact of 60 basis points on RIG.
CFO François-Xavier Roger highlighted the factors that will drive RIG improvements: increased marketing investment, portfolio optimization, and moderation of new pricing. CEO Mark Schneider expressed the goal of achieving positive RIG for the full year.
The exit from the frozen meals and pizza business in Canada, as part of the portfolio optimization program, will have an impact on RIG growth in the second half of the year and for the full year ’23.
Gross Margin Recovery
In the first half of 2023, Nestlé’s gross margin decreased by 40 basis points to 45.6%, primarily due to significant inflation in commodity and packaging costs, as well as higher salaries and wages. However, compared to the second half of last year, the margin showed an improvement of 110 points.
Pricing, cost efficiencies, and portfolio optimization partially offset the impact of cost inflation. Although some costs have decreased, many commodities and labor prices are still significantly higher than the 2022 average. Nestlé implemented price increases in quarter one, resulting in input-cost inflation of nearly 10% in the first six months of 2023.
The target for Nestlé’s gross margin is around 50%, but achieving this will take time and depend on external factors. The company expects a significant improvement in the gross margin in the second half of 2023 compared to the corresponding period in 2022.
Feedback from Nestlé’s CEO Mark Schneider indicates that pricing will not reach the same levels as in the first half of 2023. However, pricing on a selective basis will still be necessary in response to the macro environment and commodities-related categories.
In other financial results, Nestlé’s sales increased by 1.6% on a reported basis to SFr46.3bn ($53.3bn) and the underlying trading operating margin (UTOP) improved by 20 basis points to 17.1%. Net income grew by 7.7% to SFr5.6bn.
Nestlé has revised the bottom end of its organic growth guidance upwards to 7-8%, with the expectation of achieving the upper half, if not the upper end, of the range. The outlook for UTOP and underlying earnings per share remains unchanged.
Shares in Nestlé closed up 2.62% at SFr108 as of 17:30 CEST.
