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Despite Growth In Sale Revenues, Nestle Warns On Margins

Despite Growth In Sale Revenues, Nestle Warns On Margins
While reporting strong organic sales for the first half of the current year because of strong demand for coffee, Nestle also cautioned investors against slight squeezing of margins for the year due to input cost inflation. Its gull year growth forecast was however raised by the world's biggest food group.
A surge in commodity costs is hitting the margins of most food companies and price increases could only be implemented with a time lag, said Nestle which is the owner of well-known brands like Nescafe coffee and Purina pet food.
Nestle said in a statement on Thursday that it expects its underlying trading operating profit margin to drop to about 16.5 per cent for the current year compared to 17.7 per cent last year and then pick up next year.
"(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. It is possible for the company to hedge against some price rises such as a rise in coffee prices that increased this week, but addressing increased costs of transportation was not possible, he said.
"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.
The company expected input cost inflation to reach about 4 per cent for the current year, Schneider said, and added that the company would also hike prices of its products faster in the second half of this year. in order to offset the impact of a 4 per cent inflation, the company needs to raise prices by 2 per cent, he said. Nestle had raised prices by 1.3 per cent during the first half of this year and said that inflation could be tackled by a better product mix and efficiencies.
While a lower operating margin was reported by peer Danone on Thursday for the first half, another rival Unilever last week forecast its expectations of inflation remaining in the high-teens in the second half of the year.
So far this year, there has been a 10 per cent rise in the share price of Nestle.  
"The market probably did not want to hear about a delay in passing through prices", said Kepler Cheuvreux analyst Jon Coxm, and added that investors had expected the strong top line and increased growth guidance.
The expected organic growth guidance for the year was raised to 5-6 per cent by Nestle compared to its previous forecast of "above 3.6%" following strong demand for coffee and a rebound in the out-of-home business and in China which resulted in a growth of 1.8 per cent in sale revenues during the first half of the year and by 8.6 per cent in the second quarter.
Nestle confirmed it would deliver "consistent mid-single-digit organic growth for years to come".

Christopher J. Mitchell

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