Nestle Warns Profitability May Decline As Inflation Bites

(Bloomberg) -- Nestle SA warned profitability may decline for a second year in 2022, showing that even the world’s largest food and beverage company isn’t immune to the cost inflation wracking the industry.

Raw material and shipping costs will probably increase more this year than in 2021, Chief Executive Officer Mark Schneider told reporters Thursday, forecasting an underlying trading operating profit margin of 17% to 17.5% this year, compared with last year’s 17.4%.  

“There’s almost no place in the company that’s exempt from inflation now,” Schneider said. The forecast leaves some room for the possibility of some improvement. Schneider said the range is conservative. 

Nestle has been increasing pricing at the fastest rate in six years as consumer-goods companies struggle with accelerating cost growth. Unilever Plc said last week it will take two years for its margin to return to 2021 levels. Heineken NV said Wednesday that consumers’ budgets are being pinched by the worst inflation in a decade.

The stock was little changed at 10:30 a.m. in Zurich, recovering from a previous 1.6% decline. 

The Nespresso maker is in a better position than its peers as it has strong brands and sells products with a long shelf life like instant coffee, which makes it easier to pass on higher costs, according to Baader Helvea analyst Andreas von Arx.

“Margin guidance for 2022 is arguably fractionally light,” RBC Europe analyst James Edwardes Jones wrote. “We think Nestle can be forgiven this slightly downbeat guidance given the prevailing uncertainty.”

The KitKat maker’s sales rose 7.5% on an organic basis in 2021, the fastest pace in 13 years and ahead of analysts’ expectations. The company forecast revenue growth to decelerate to about 5% in 2022, and Schneider said the company is able to achieve its previous “Nestle Model” guidance in coming years. That called for annual revenue increases of 5% to 6%. Schneider said he’s optimistic on the prospect of moderate margin growth in the mid-term, speaking on Bloomberg TV.

U.S. Vibrancy

More than a third of Nestle’s sales come from premium products, which outperformed with 12% growth last year. Schneider said those should continue to hold up as it’s easier to raise prices in that segment, while mid-range priced products face more pressure. Consumers in developing markets started downtrading to cheaper brands last year, he added. Still, recent data on consumer spending in the U.S. is “vibrant.”

Schneider also said Nestle is open to considering further acquisitions after announcing 85 purchases and divestments since became CEO in 2017. The company started a 20 billion-franc ($21.7 billion) share buyback program this year after selling part of its stake in French cosmetics maker L’Oreal SA in December for about $10 billion. Nestle said at the time it would adjust the buyback if it makes any sizeable acquisitions.

In response to questions, Schneider said Nestle is open to forming partnerships with private-equity firms to make deals, as it did with its Froneri ice cream joint venture, though the company has enough finances to acquire companies on its own. 

“One of the hallmarks of Nestle has been to be very creative when it comes to dealmaking,” Schneider said. 

Separately, the company is proposing to add Apple Inc. Chief Financial Officer Luca Maestri and Schneider Electric SE Chief Marketing Officer Chris Leong to its board of directors.

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