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Nestlé has upgraded its full year expectations as first half sales rose on pricing and volume growth, but margin expectations have been downgraded due to the impact of mounting costs.

The Swiss food giant’s organic growth in the first six months of the year 8.1% as pricing increased to 6.5% and volumes rose 1.7%.

Nestlé said pricing growth reflecting “significant and unprecedented cost inflation”, while volumes remains “resilient… given the high base of comparison in 2021 and supply chain constraints”.

Organic growth was 6.9% in developed markets, with strong pricing and positive volumes, while organic growth in emerging markets was 10%, with increased pricing and solid volume growth.

Total reported sales increased by 9.2% to CHF 45.6, with net acquisitions having a positive impact of 1%.

By product category, Purina PetCare was the largest contributor to organic growth, with continued momentum for its science-based and premium brands Purina Pro Plan, Purina ONE and Fancy Feast as well as veterinary products.

Sales in coffee grew at a high single-digit rate, with growth across brands and geographies, supported by a strong recovery of out-of-home channels.

Confectionery reported double-digit growth, reflecting particular strength for KitKat and seasonal products.

Sales in vegetarian and plant-based food continued to grow at a double-digit rate, led by Garden Gourmet.

Growth in Infant Nutrition reached a high single-digit rate, with a return to positive growth in China and improving market share trends.

Water also posted double-digit growth, led by premium brands and a further recovery of out-of-home channels, Nestlé Health Science recorded high single-digit growth and dairy reported mid single-digit growth, with strong sales developments for coffee creamers and affordable nutrition offerings.

Prepared dishes and cooking aids posted low single-digit growth, following a high base of comparison in 2021.

By channel, organic growth in retail sales remained robust at 6.7%. Within retail, e-commerce sales grew by 8.3%, building on growth of 19.2% in the first half of 2021. Organic growth in out-of-home channels reached 29.6%, with sales exceeding 2019 levels.

Underlying trading operating profit increased by 6% to CHF 7.7bn. However, underlying trading operating profit margin decreased by 50 basis points to 16.9% in constant currency and on a reported basis, reflecting time delays between cost inflation and pricing actions.

Gross margin decreased by 280 basis points to 46%, following “significant broad-based inflation” for commodity, packaging, freight and energy costs.

Marketing and administration expenses as a percentage of sales decreased by 210 basis points, which Nestlé said was supported by sales growth leverage and disciplined cost control.

After the first half, Nestlé has upped its full-year 2022 outlook to expect organic sales growth between 7% and 8%.

However, underlying trading operating profit margin has been trimmed to around 17%, though underlying earnings per share in constant currency and capital efficiency are expected to increase.

CEO Mark Schneider commented: “In the first half of the year, we delivered strong organic growth and a significant increase in underlying earnings per share. Our local teams implemented price increases in a responsible manner. Volume and product mix were resilient, based on our strong brands, differentiated offerings and leading market positions.

“We limited the impact of unprecedented inflationary pressures and supply chain constraints on our margin development through disciplined cost control and operational efficiencies. At the same time, investments behind capital expenditure, digitalization and sustainability increased significantly.

“We are focused on creating shared value over both the short and long term. Growing food insecurity around the world and heightened climate concerns, following an increase in unusual weather patterns, underlines the importance of this strategic direction. Good for you and good for the planet are the two key strategic pillars that our company pursues in an unwavering manner, even in the face of significant short-term challenges.”

Nestlé shares are down 1.8% to CHF115.40 so far this morning.

Morning update

On the busy morning, global spirits player Diageo has reported a 21.4% annual sales jump as rising prices and the return of out of home consumption boosted its top line.

The group said net sales grew 21.4%, driven by strong organic growth, made up of organic volume growth of 10.3% and 11.1 percentage points of positive pricing.

All regions delivered double-digit growth, reflecting the continued recovery of the on-trade channel, resilient consumer demand in the off-trade channel and market share gains.

Growth was also underpinned by favourable industry trends of spirits taking share of total beverage alcohol and premiumisation.

Pricing growth of 11.1% was driven by strong growth of its super-premium-plus brands, particularly scotch, tequila and Chinese white spirits. It also reflects continued recovery of the on-trade channel in North America and Europe and the partial recovery of travel retail, partially offset by negative market mix due to the increased contribution to net sales from India.

Reported operating profit increased 18.2%, primarily driven by growth in organic operating profit, which was up 26.3% and grew ahead of sales. This growth was partially offset by the negative impact of exceptional costs, which were mainly due to non-cash impairments related to India and Russia.

Organic operating margin increased 121bps, reflecting a strong recovery in gross margin and leverage on operating costs, while increasing marketing investment. Strong operating margin expansion in Latin America and Caribbean, Europe and Africa was partially offset by a decline in North America.

CEO Ivan Menezes commented: “I am very pleased with our fiscal 22 results. We delivered double-digit organic net sales growth across all regions and we gained or held off-trade market share in over 85% of our total net sales value in measured markets.

“We expanded operating margin while increasing marketing investment ahead of net sales growth and we used our strong cash generation to invest in long-term growth. I am very proud of what my 28,000 colleagues have achieved through their energy and creativity.

“In a year of significant global supply chain disruption, our double-digit volume growth demonstrates the tremendous agility and resourcefulness of our teams. Our net sales growth was across categories. We benefitted from the on-trade recovery, continued global premiumisation trends, with our super-premium-plus brands up 31%, and from price increases across our regions.

“Looking ahead to fiscal 23, we expect the operating environment to be challenging, with ongoing volatility related to Covid-19, significant cost inflation, a potential weakening of consumer spending power and global geopolitical and macroeconomic uncertainty. Notwithstanding these factors, I am confident in the resilience of our business and our ability to navigate these headwinds.

“We believe we have an advantaged portfolio with extraordinary brands across geographies, categories and price points. And we continue to actively shape our portfolio to fast-growing categories through innovation and acquisitions.”

Elsewhere in the alcohol sector, brewing giant AB In Bev also delivered double-digit top line growth in the second quarter as the global leisure market bounced back.

Revenue increased by 11.3% in with revenue per hl growth of 7.5% and by 11.5% in first half with revenue per hl growth of 7.9%.

Growth was driven by revenue management initiatives, ongoing premiumization and expansion of the beer category across most key markets supported by increased investment in its brands.

It saw a 9.7% increase in combined revenues of its global brands, Budweiser, Stella Artois and Corona, outside of their respective home markets in the second quarter and 7.9% in first half.

Total volumes were up 3.4% in the quarter, with own beer volumes up by 2.7% and non-beer volumes up by 8.2%. In the first half volumes grew by 3.1% with own beer volumes up by 2.4% and non-beer volumes up by 7.1%.

AB InBev posted normalized EBITDA of $5.1bn, which represents an increase of 7.2% with normalized EBITDA margin contraction of 127 bps to 34.5% due to anticipated commodity and supply chain cost headwinds.

For the full year it expects EBITDA to grow in-line with its medium-term outlook of between 4-8% and our revenue to grow ahead of EBITDA from a combination of volume and price.

CEO Michel Doukeris said: “Our business delivered sustained profitable growth. The relentless execution of our strategy, the strength of our brands and accelerated digital transformation enabled us to meet the moment in an ongoing dynamic operating environment.”

Hotel Chocolat, fresh from announcing a scaling back of international investment last week, has said that its Japanese joint venture in undergoing court-approved restructuring proceedings.

Hotel Chocolat KK, in which the group holds a 20% shareholding, has obtained Court approval for Civil Rehabilitation restructuring proceedings

The move enables to JV to pursue options for a restructuring, pursuant to seeking new sources of capital.

The group had loaned £23m to Hotel Chocolat KK over the period 2018 to 2022 for working capital purposes. In addition, Hot Chocolat has entered into guarantee arrangements of up to £5.8m for loans made to HC KK by Japanese leasing companies.

Hotel Chocolat previously acknowledged the potential for a full impairment charge in its 2022 accounts, in relation to the likelihood of recovery on £23m of loans made to Japan joint venture.

Ocado COO Mark Richardson is taking a new role at the group to head up a new business “extending Ocado’s product offering into new market sectors alongside grocery”.

CEO Tim Steiner said: “In 2020 Ocado Group expanded outside of our core grocery focus with the acquisitions of Kindred Systems and Haddington Dynamics.

“With the upcoming launch of our Re:Imagined Ocado Smart Platform products, Ocado Group will have a product range that will set an unrivalled level of performance both in price and throughput, not only in grocery, but can also be adapted for automated storage and retrieval systems (ASRS) used in a wide range of market sectors.

“Ocado Group will soon start a new business segment that combines these activities and over the next few years will revolutionise the whole ASRS and robotic handling sectors.

“I am delighted to confirm that Mark Richardson will lead this new venture. Mark is a 20-year Ocado veteran and during this time has been responsible for teams spanning technology, platform implementation, and logistics.”

The group said this new venture will be self-financing and will not require any additional capital beyond that we have previously guided.

Finally, Virgin Wines has posted a sales slowdown in its financial year to 30 June, but expects to bounce back to growth in the forthcoming year.

Overall revenues were down to £69m from £73.6m as it lapped strong trading during the Covid pandemic.

It pointed out that revenue remained up 63% on a 3-year, pre-Covid basis, showing that the business has retained much of the substantial growth achieved during the Covid-19 lockdowns, despite the lifting of restrictions and opening up of hospitality.

It said its customer base remains loyal, with subscription membership and demand for the WineBank scheme and Wine Advisor service demonstrably resilient.

This has resulted in market share growth from 6.1% in 2021 to 8.4% in 2022, according to IBISWorld

It said strict discipline has been maintained in relation to the company’s customer acquisition strategy with cost per recruit below budget and 2021 levels.

It said it has strong momentum in customer acquisition heading into 2023, with fourth quarter acquisitions up 37% year-on-year, and a comprehensive pipeline of new partnership opportunities, giving optimism for the year ahead.

EBITDA was down to £6.3m from £7m, with “industry leading” margins of 9.1%, while EBITDA is up 136% on its pre-Covid levels.

Looking forwards, it guided to a year of growth driven by strong H222 customer acquisition levels, increased levels of Commercial revenue following new partnerships, and its loyal and growing WineBank customer base.

CEO Jay Wright commented: “The popularity of our unique consumer propositions, our low customer acquisition costs, our high levels of customer retention and the outstanding quality and value of our wines continue to give us great confidence for the future. Our growth, driven by a substantial pipeline of new partnerships to drive increased customer acquisition, will continue in a post Covid world, and we continue to drive levels of profitability unseen elsewhere in our market sector whilst maintaining our gross margins despite the widely documented global cost pressures.

“Our disciplined approach to customer acquisition continues to generate strong returns on investment and our wider strategy and business model continue to position us well to mitigate rising costs and to help us deliver against our growth plans.”

On the markets this morning, the FTSE 100 is down 0.1% to 7,341.3pts.

Risers include Parsley Box, up 4.4% to 12p, DS Smith, up 3.1% to 285.4p and Devro, up 2.3% to 204.5p.

Fallers include Virgin Wines, down 7.6% to 67p, British American Tobacco, down 2.7% to 3,355p and Imperial Brands, down 1.5% to 1,837.7p.

Yesterday in the City

The FTSE 100 ended yesterday up 0.6% to 7,348.2pts.

Seniors meal kit player Parsley Box dropped 36.2% back to just 11.2p after sales from new customers declined from £3m a year ago to just £900k, while repeat sales also fell from £11m to £8.7m.

Reckitt Benckiser fell back 0.4% to 6,534p despite posting strong sales driven by price hikes.

Fallers included Naked Wines, down 6.6% to 140.2p, Nichols, down 3.8% to 1,270p, McBride, down 3.4% to 15.9p, Greencore, down 2.2% to 102p and Hilton Food Group, down 1.8% to 1,072p.

Risers yesterday including Ocado, up 4.5% to 768.8p, DS Smith, up 4% to 276.9p, Just Eat Takeaway.com, up 4% to 1,424.6p, SSP Group, up 2.9% to 259.7p, THG, up 2.5% to 67.6p, Marks & Spencer, up 2.3% to 138.6p, Kerry Group, up 2% to €100.65 and Greggs, up 1.9% to 1,945p.

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