NESTLE recently published H1-20 results, with EPS decline of 16.8% and 20.7% y/y in H1 and Q2, respectively. EPS was weighed by weaker gross margin and higher net finance costs. 

Revenue declined by 0.3% y/y in Q2-20 (H1: -0.6% y/y), a smaller decline than expected, following a significant decline in the Beverages (-7.1% y/y) segment amidst weak consumption during the lockdown. We highlight that the decline in Beverage sales is the largest since at least 2016 when NESTLE began reporting segment revenues. Meanwhile, demand for NESTLE’s food products remained resilient, as Food revenue grew by 4.1% y/y, picking up the slack from the 8.7% y/y decline in Q1. Sequentially, revenue grew 0.5% q/q, underpinned by improved volume outturn from the Food segment (+7.3% q/q).

Gross profit margin shrank by 751 bps y/y to 41.3% in Q2-20, the lowest since Q1-18. This was driven by the surge in CoGs (+14.3% y/y). We highlight increased inflationary pressure on domestic food prices during the lockdown as the key driver, as NESTLE currently sources c.80% of its raw materials locally.

EBIT (-21.3% y/y) and EBIT margin (-634bps y/y) both declined as the revenue slump offset the 12.3% y/y decline in OPEX in Q2.

NESTLE’s net finance cost grew 1,087.2% following a 23.9% increase in finance costs (the company drew down NGN5.81 billion from its intercompany loan facility) and a 64.7% decline in finance income amidst the lower yield environment compared to the previous year. 

Compared to Q1-20, EPS was down 5.1%, as COGS (+7.4%) outran revenue (+0.5%), and as net finance costs grew 362.8%. The effective tax rate in the quarter was 35.2%, compared to 35.9% and 39.3% in Q1 and Q4 respectively.

Comment: NESTLE’s Q2 revenue surprised positively amidst the COVID-19 induced challenges. We, however, highlight the significant margin pressure from higher input costs which is likely to persist in H2.  Our estimates are under review.