* Organic growth increases to 3.9% in Q2, highest since Q1 2016
* CEO says company well on target to meet 2020 goals
* U.S. and Brazil lead sales increase, China growth slows
* CEO says H2 faces tougher comparisons and higher commodity prices (Adds CEO comment, analysts, background)
By John Revill
ZURICH, July 26 (Reuters) - Food giant Nestle posted its fastest organic sales growth in three years on Friday as the KitKat chocolate bar maker’s recovery under Chief Executive Mark Schneider gathered pace.
Makers of packaged foods have been struggling to adjust to consumers’ growing appetite for fresh foods deemed healthier and intense competition from small local startups offering goods ranging from breakfast cereals to coffee and chocolate.
Since taking over in 2017, Schneider, the first outsider to lead Nestle in a nearly a century, has pushed the company into new areas such as plant-based foods, revamped big brands like Nescafe instant coffee and axed under-performers like its U.S. confectionary operation.
Nestle’s organic sales, which strip out currency swings and acquisitions and disposals, accelerated to 3.9% in the three months to the end of June, the highest quarterly rate since the beginning of 2016.
For the half year, it matched analyst expectations for 3.6% growth, an improvement over 2.8% in the year-ago period, and is now on track to meet its target of mid single-digit organic growth by the end of 2020, Schneider told reporters.
“People see good momentum in the company both on growth and earnings and that is not something we would expect to stop in 2020, so the momentum should continue,” Schneider said.
“I think the results show very convincingly we are on a path to meeting those,” he said, referring to Nestle’s targets.
Net profit at the world’s largest food company fell 14.6% to 5.0 billion Swiss francs ($5.05 billion), as the year-ago period benefited from a $2.8 billion one-off gain linked to selling its U.S. confectionery business to Ferrero.
Nestle’s trading operating profit margin improved to a better-than-expected 17.1% as the company pressed ahead with its premiumisation strategy, selling more products with fatter margins and more resilient to economic downturns.
Nestle now gets around 23% of its sales from products such as its rose chocolate flavoured KitKats and flavoured San Pellegrino water, a figure Schneider expected to rise.
“Premium overall is doing very well for us, it tends to be very successful for the top line and the bottom line. That applies to all geographies ... and all categories,” he said.
Nestle’s first-half sales rose 3.5% to 45.46 billion francs, short of forecasts of 45.7 billion francs, with the United States and Brazil, Nestle’s number 1 and number 4 markets, doing well.
China, its second biggest market, saw softer growth as categories like mainstream baby foods struggled compared with pricier options.
“We are a little more concerned there by the environment at large,” Chief Financial Officer Francois-Xavier Roger said.
French rival Danone on Thursday reported accelerated sales growth in the second quarter as its baby food products sales in China rebounded.
Nestle confirmed its guidance, saying it expects full-year organic sales growth around 3.5% and an underlying trading operating profit margin at or above 17.5%.
Analysts described the outlook as cautious, although Schneider said Nestle faced tougher comparisons in the second half of the year and higher commodity prices.
They also highlighted the improvement in margins and organic growth.
“What a change at Nestle within a short period of time,” said Bank Vontobel analyst Jean-Philippe Bertschy. “Under the leadership of Mark Schneider, Nestle is being propelled to a higher level of growth and returns.
“This is coming at an even quicker pace that anticipated.” ($1 = 0.9908 Swiss francs) (Reporting by John Revill; editing by Brenna Hughes Neghaiwi and David Evans)