Nestle SA: Q2 Preview: 2% RIG is the bar

Research evidence excerpt

Nestle SA: Q2 Preview: 2% RIG is the bar

Barclays | Nestle SA

quarter. That said, the underlying Food and Beverage market in China is not dynamic and is

only growing in low single digits. Nestle are prioritising improving its performance in the

Chinese infant milk formula market despite the fact that we expect category growth to soften

given the fading impact on birth rates from the year of the dragon in 2024. One of the strategies

that Nestle is employing to improve its performance in China is the launch of HMO's (Human

Milk Oligosaccharides), which have been finally approved in China, and we expect a number of

launches this year. That said, Nestle continues to face intense local competition, and execution

challenges have dogged the company in the recent past so it is imperative that management

are laser focused on delivery.

Margins: H2-weighted recovery remains the base case: Nestlé continues to guide to FY

margin expansion, while we expect margins to improve sequentially from H2 2025, but the bulk

of gains will come in H2 as lower coffee and cocoa prices flow through. We expect H1 margins to

be around 16% (from 16.4%) due to little raw material benefit (because hedging means that it is

not yet seeing spot benefits from lower green coffee prices and cocoa) and some ongoing

impact from US tariffs. Despite our lower H1 UTOP margin forecast, we are maintaining our FY26

margin forecast of 16.4% but we now see a more H2 margin cadence. FX remains a headwind

(-5% for FY26) albeit the recent strength of the US dollar may mean a slightly lower drag albeit it

is unhelpful for its balance sheet debt deleveraging efforts.

Coffee and pet care remain the key category focus areas: Coffee delivered strong Q1 growth