Nestle misses expectations on China, deflation and foreign exchange but expects strong full year

James Nickerson
Follow James
Nestle Recalls Toll House Cookie Dough Products Due To Sickness Cases
Bulcke said the first half was in line with expectations (Source: Getty)

Nestle marginally missed expectations on a cocktail of deflation in developed markets, foreign exchange and competition in China.

The figures

Nestle reported sales of SFr43.2bn (£34.43bn) in the six months to June 30, a 3.5 per cent increase.

Net profit was SFr4.1bn for the first half, down SFr400m a year earlier.

Reported earnings per share came in at SFr1.33, down by 7.2 per cent.

Nestle Nestle | mobile image

Share price in Swiss Francs

Why it's interesting

Nestle is looking forward to sales growth in the rest of the year as net profit fell by SFr400m year-on-year in the first half due to a one-off, non-cash adjustment to deferred taxes.

Net sales came in slightly below analysts expectations. The company said pricing reached a historically low level due to deflationary environments across a number of developed markets, as well as low commodity prices.

Sales weren't helped by a negative foreign exchange impact, either. But the company expects better sales growth in the rest of the year

Read more: Nestle whips up ice cream deal with R&R

Chief exec Paul Bulcke said that the company continued to address challenges in China, where growth slowed "significantly" and "competitive intensity remained high".

But the company "enjoyed good performances across the US, Europe, South East Asia and Latin America and expect this to continue in the second half".

‚ÄčRead more: Nestle warns of "even softer pricing" ahead

Fortunately, the company also expects pricing to recover somewhat in the coming months.

So the full-year out look was confirmed, with improvements in margins and capital efficiency.

Investment has also been made in nutrition and health platforms, important as consumers are demanding more healthy products. It is attempting to produce "premium" - and higher-margin - products.

What Nestle said

Chief executive Paul Bulcke said:

The first half of 2016 was in line with our expectation with growth almost entirely driven by volume and product mix, yielding further market share gains. We grew our gross margin and trading operating profit through further premiumisation, continuous cost discipline and input cost tailwinds.

This allowed us to significantly enhance our free cash flow. In these times of rapid change, we keep our focus on profitable growth by further investing in innovation, R&D, brand support and digital to engage with our consumers, meeting their changing needs. Overall our first half performance allows us to reconfirm our outlook for the full year.