Nestle Earnings: Pricing and Margin Ahead in 1H With Top-Line Guidance Upgrade as Expected

Nestle reported first-half results that included strong organic growth of 8.7% (real internal growth, or RIG, of negative 0.8% and pricing up 9.5%), ahead of company-compiled consensus estimates of 8.1%, driven predominantly by better-than-expected pricing (0.7% ahead of consensus). From a regional perspective, RIG (volume and mix effect) stood flat in emerging markets and it was negative in developed markets with pricing continuing to be strong across geographies. At the product category/business level, water, prepared dishes, and cooking aids as well as milk products and ice cream continued to exhibit the weakest RIG, down 6.3%, 4.2%, and 3.8%, respectively. We reiterate our view that despite some weak RIG numbers in noncore categories and close to 10% pricing contribution, flat to slightly negative RIG at the group level is a best-in-class performance in fast-moving consumer goods, driven by continued resilient performance from core categories (petcare, nutrition, coffee) and confectionery (driven by KitKat). Underlying trading operating margin of 17.1% was ahead of company-compiled consensus of 16.7%, but this was mainly driven by lower-than-expected distribution costs due to lower freight and energy prices (8.6% of sales versus 8.9% for consensus). We maintain our CHF 116/$131 fair value estimates and wide moat rating.