The company posted April 22 organic growth of 7.7% with 6.4% real internal growth during the first three months of the year – its largest increase in quarterly sales in almost a decade and almost double analyst expectations of 3.3%.
The jump was driven primarily by increased demand by consumers still stuck at home during the pandemic for coffee, including Nespresso pods, Nescafe instant coffee and Starbucks-branded products, as well as a double-digit increase in dairy based on elevated demand for home-baking products and fortified milk, according to the company, which also called out increased demand for pet food.
While “pleased” with the “exceptionally strong quarter,” CEO Mark Schneider cautioned industry analysts against “excessive margin growth expectations” for the full year due to pandemic-related inflation driving up input costs.
“We now see broad based inflation across our various commodities, packaging materials and transportation costs,” he said, explaining: “Not all of these items can be hedged and our hedging cover for a number of commodities will run out over time.”
To offset rising costs, “we are raising prices where appropriate, but usually there’s a time lag associated with pricing,” and, therefore, it likely won’t go into effect until late 2021 or in 2022, he said.
“We are on top of the situation and my raising this issue should not give you alarm. I just wanted to caution against excessive expectations on the margin. So, please stay close to our guidance level during this turbulent time,” he added.
With that in mind, Schneider confirmed Nestle’s 2021 guidance of organic sales growth in the mid-single-digit range and “moderate improvement” in profit margins over time.
“In light of our exceptional growth in Q1, our guidance may appear to be conservative to you. Our confidence level of getting to an organic sales growth rate of more than 4% has certainly increased on the back of our Q1 performance and we are not aware of any material items that might stand in the way,” he said.
However, he added, the company’s “cautious revenue growth guidance” is based on two main reasons: “significantly” higher comparisons in the back half of the year, and a desire for more visibility into the pandemic recovery and consumer mobility as vaccinations increase.
Price increases likely won’t ‘stand in the way of a positive market share development’
If Nestlé raises prices, it will not be alone. The Coca-Cola Co. announced earlier this month that it would raise prices in line with inflation, and PepsiCo and other CPG players made similar statements previously.
Given players across the board are raising prices where appropriate, Schneider said he is hopeful that consumers and retail partners will not punish Nestle for higher prices.
Indeed, he noted, “it was reassuring” to see previous price increases “did not stand in the way of a positive market share development in line with our expectations” during this quarter.
CFO Francois-Xavier Roger reinforced Schneider’s optimism, noting that price increases to offset higher inputs has helped the company manage and grow margins in the past despite unfavorable inflation.
‘This will not be your normal year-over-year, steady comparison situation’
However, he added, the time delay between increased costs and prices could mean margin fluctuation quarter to quarter, and he asked that analysts consider the company’s performance on a longer horizon than they might during more predictable times.
“That’s very important to me,” echoed Schneider. “We’re in a period now, which started last year with the onset of the pandemic, and which will probably last another year or so, where you will have pretty strong gyrations from one quarter to another on top line, gross margin and bottom line. So, this will not be your normal year-over-year, steady comparison situation.”
Therefore, he said, “its important not to over interpret the latest information, but see it more in perspective and on a full year basis.”
