Nestlé H1 profit drops 10% as higher costs and strong franc hit sales

Nestlé reported a challenging first half of 2025, with net profit dropping 10.3% to CHF 5.07 billion and sales declining 1.8% to CHF 44.23 billion, primarily due to cost inflation, adverse currency effects from a stronger Swiss franc, and increased raw material costs. Free cash flow plummeted 42% to CHF 2.3 billion, and net debt rose to CHF 60 billion. While organic growth was 2.9% driven by pricing, real internal growth was minimal and turned negative in Q2, reflecting significant margin pressure from higher expenses. Despite these headwinds, the company reaffirmed its full-year guidance, anticipating improved organic sales growth and an underlying trading operating profit margin at or above 16%.

Analysis

Nestlé's financial performance in the first half of 2025 reveals significant fundamental pressures, masking a seemingly modest 2.9% organic growth figure. The growth is almost entirely attributable to a 2.7% increase in pricing, while Real Internal Growth (RIG), a proxy for volume, was a marginal 0.2% and turned negative at -0.4% in the second quarter, indicating eroding consumer demand. Reported sales declined 1.8% to CHF 44.23 billion, heavily impacted by a 4.7% negative currency effect from a strong Swiss franc. Profitability deteriorated substantially, with the underlying trading operating profit margin contracting 90 basis points to 16.5% due to higher raw material costs, particularly for coffee and cocoa, and increased marketing expenses. The company's financial health weakened, evidenced by a 42% collapse in free cash flow to CHF 2.3 billion and a rise in net debt to CHF 60 billion. Geographic performance highlights specific weaknesses, with sales declining in Greater China and RIG contracting by 1.1% even in otherwise growing emerging markets. Despite these severe headwinds, management reaffirmed its full-year guidance for an improved underlying margin at or above 16%, presenting a critical test of its ability to navigate the challenging cost and demand environment.

Key Decisions for Investors

• Investors should be cautious of the deteriorating quality of growth, as the negative real internal growth in Q2 and the 42% plunge in free cash flow signal significant volume pressure and weakening financial flexibility.
• The reaffirmed full-year guidance is a key catalyst; monitor upcoming results for evidence of margin stabilization and a recovery in volumes, particularly in the underperforming Greater China region, to validate management's outlook.
• Closely track the Swiss franc's exchange rate and commodity prices for coffee and cocoa, as these external factors were primary drivers of the margin compression and are likely to remain significant risks to profitability.
• Given the pricing-led growth and volume declines, consider that Nestlé's ability to pass on further cost increases to consumers may be limited, posing a risk to future revenue and margin expansion.