Nestle’s ‘exceptionally strong organic sales growth’ may not be enough to buoy margins amid rising inflation

The Swiss company raised its expected full-year organic sales growth to between 6% and 7%, after “exceptionally strong organic sales growth”​ in Q3 that reached 6.5%, which CEO Mark Schnieder described was “no small feat” ​considering the strong comparable 4.9% growth in the same quarter last year.

While Schnieder said he expects “continued good prospects for the remainder of the year,”​ he stopped short of increasing the company’s expected profit margins for the year – leaving it at 17.5%.

“It will be tempting for some to translate the higher sales growth expectations into higher expectations for our underlying trading operating profit margin,”​ he acknowledged. However, he said, “I would like to caution against that in the current cost inflation environment where input costs are rising faster than we can roll forward through pricing.”

His comment aligns with those he made in April, but were delivered with a bit more gravity this time as he noted the inflationary situation has not improved since the spring and summer.

“If anything,”​ he said, “we’re seeing further downsides compared to what we told you in the summer.”

Nestle estimates that the impact of inflation on the cost of goods for 2021 will come in around 4% over the prior year, with a significant portion during the first half of the year coming from commodities and packaging, which have since stabilized, thanks in part to forward buying, explained CFO Francois-Xavier Roger.

Since July, the company has tracked higher costs mainly with energy and transportation and, to a lesser extent, salaries and social costs, all of which play directly into Nestles profits and losses, he said.

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