VEVEY, SWITZERLAND — Input costs overall are lessening for Nestle SA but not in certain categories, which was evident in the first half of the fiscal year.
“Pricing, cost efficiencies and portfolio optimization only partly offset the impact of cost inflation, which is still significant, despite being lower than in the prior year,” said Francois-Xavier Roger, chief financial officer, in a July 27 earnings call to discuss financial results. “While costs have decreased versus the peak for some items, many price levels for commodities and labor are still trending materially above their 2022 average, and some items have seen increases.”
Robusta coffee spot prices are nearly 30% above their 2022 average, and sugar and cocoa prices are 25% above their 2022 peak and over 35% their 2022 average, he said. Input costs companywide increased almost 10%.
“We are starting to restore gross margin, and when compared to the second half of 2022, we can see a material improvement of 110 basis points,” Mr. Roger said. “We expect our gross margin to be up materially in the second half versus the corresponding period in 2022.”
In the first half, underlying trading profit for Vevey-based Nestle increased 2.9% to 7.90 billion Swiss francs ($9.05 billion) from 7.68 billion Swiss francs. Sales increased 1.6% to 46.29 billion Swiss francs ($52.98 billion) from 45.58 billion Swiss francs with organic sales up 9%. Foreign exchange decreased sales 6.7% while net acquisitions had a negative impact of 0.4%.
Organic sales growth for coffee was in the high single-digit percentages. Growth in Starbucks was almost double-digit percentages with momentum in out-of-home channels, Mr. Roger said. Nespresso returned to growth.
“And Nespresso, we are very pleased to see what we knew would happen eventually to see the RIG back into positive territories that happened in Q2, and it will continue for the remaining part of the year,” Mr. Roger said. “We knew that the pressure that we had over the last couple of quarters was largely linked to the post pandemic landing, and so what we saw happening in Q2 is exactly in line with what we expected.”
Coffee input costs could ease in the second half of the year.
“There is still a lot of volatility, but we expect to see the price of coffee bean prices stabilizing, and then this will be certainly an opportunity to see our margin increasing again in coffee,” Mr. Roger said.
Purina PetCare was the largest contributor to Nestle’s organic growth in the first half. Double-digit organic growth also came in infant nutrition and confectionery, which was fueled by strong sales of KitKat. High single-digit growth came in dairy, and Maggi led mid-single-digit growth in prepared dishes and cooking aids.
In Zone North America, sales increased 10% to 12.55 billion Swiss francs ($14.37 billion) from 12.14 billion Swiss francs. The North American beverages category, which includes Starbucks products, Coffee mate and Nescafe, had high single-digit growth.
The frozen food category was flat in North America as the winding down of the frozen meals and pizza business in Canada had a negative impact. Water sales decreased due to temporary capacity constraints for Perrier that outweighed growth for S.Pellegrino and Acqua Panna.
In Nestle Health Science, sales increased 4.8% to 3.32 billion Swiss francs from 3.17 billion Swiss francs. Net acquisitions, largely related to the Orgain acquisition, increased sales 6%.
Nestle increased its organic sales outlook for the fiscal year to a growth range of 7% to 8%, up from a previous range of 6% and 8%.
“Now when it comes to pricing, I think it's too early here to speculate on '24,” said Mark Schneider, chief executive officer. “Of course, everything is now all eyes on second half of '23, making good on our plans with a high degree of precision.“Twenty-four, obviously it's safe to say that pricing will not reach the same levels as we've seen in the first half of '23 so far, but it's also clear that when it comes to the overall macro environment, that pricing on a selective basis where appropriate, will still apply and will still be needed.”