Nestle sales outlook brightens after strong first half

By Richa Naidu

LONDON (Reuters) -Nestle improved its full-year organic sales outlook and reported better-than-expected first-half organic sales, as the world's biggest packaged food company again raised prices to cope with higher input costs.

Nestle said it is narrowing its full-year organic sales growth guidance - which does not include the impact of currency movements and acquisitions - to a range of 7%-8% from a range of 6-8%.

"You always leave yourself some downside protection and, personally, I expect the organic growth more in the range of 7.5%-8%," CEO Mark Schneider said on a call with journalists.

Shares in Nestle were up 1.5% on Thursday morning.

The Swiss company, which makes Kit Kat chocolate wafer bars, Nescafe coffee and Purina petfood, said organic sales during the period rose 8.7%, beating the average estimate for 8.1% growth, according to a company-provided analyst consensus.

Nestle's 9.5% price increases were ahead of the average analyst estimate of 8.7%. Real internal growth - or sales volumes - fell 0.8% versus expectations of a 0.6% decline.

"For the remainder of the year, we are confident that we will deliver a positive combination of volume and mix, an improvement in gross margin and a significant increase in marketing investments," Schneider said.

"We're still repairing our gross margin," he added. "Pricing action will moderate. It will also be a lot more targeted to products that are still subject to input cost inflation."

Nestle's underlying trading operating profit margin was 17.1%, an increase of 30 basis points on a constant currency basis. Underlying earnings per share increased by 11.1% in constant currency.

"Pretty solid results," Richard Saldanha, a portfolio manager at Nestle investor Aviva (LON:AV), said. "That petcare division is the jewel in the crown and premium coffee is doing well, too."

"The key for Nestle is going to be the next couple of quarters because of better marketing and a moderation in pricing - hopefully that'll lead to better volumes."

The consumer goods company is one of many - from Unilever (NYSE:UL) to P&G - that have in the past two years struggled to manage high costs of everything from sunflower oil to packaging. Their problems began with the Covid-19 pandemic and unusual weather patterns hurting agricultural commodities, and have worsened since Russia's invasion of Ukraine.

"The trajectory from the first quarter to the second quarter looks promising both in terms of growth and gross margin improvement, and it seems that peak inflation is behind," Vontobel analyst Jean-Philippe Bertschy said.

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By comparison, earlier this week consumer industry rivals reported mixed volume results. Reckitt reported sales volumes for the second quarter were down 4.3%, Unilever's quarterly volumes were down 0.3% and Danone's second-quarter volume/mix declined 2.3%.

Analysts and investors have repeatedly expressed concerns that hefty increases in selling prices over the past two years will alienate consumers and push them towards cheaper private label brands.