Nestlé posts weaker than expected results amid challenging environment

During a webcast press conference held earlier this morning CEO Mark Schneider broke down the results and spoke about the company’s outlook for 2018.

 

“This was a very demanding year and we kicked off a lot of initiatives this year. Fourth quarter sales came in somewhat weaker than expected, coming in at the lower end of our guidance but there are still positives,” he said.

 

“There was very uniform development across all of our categories which contributed to positive growth and a very even profile, especially in turbulent times, which is very important.”

 

He acknowledged that 2017 didn’t take Nestlé entirely where it wanted to be, however, total reported sales increased by 0.4 percent to CHF89.8 billion (US$97bn), while net divestments had a negative impact of 1.9 percent.

 

This is mainly due to the creation of the Froneri joint venture – Nestlé and R&R completed the transaction to create Froneri, a joint venture in ice cream, frozen food and chilled dairy that combines the companies ice cream activities in Europe, the Middle East (excluding Israel), Argentina, Australia, Brazil, the Philippines and South Africa.

 

“Organic growth is at the higher end of our industry, at the lower end of our guidance. Solid improvements of underlying trade operations margin put us on track for our 2020 margin target,” Schneider said.

 

Nestlé reported organic growth of 2.4 percent, with 1.6 percent of real internal growth (RIG) and pricing of 0.8 percent. Underlying trading operating profit margin is ahead of expectations, up 50 basis points in constant currency and up 40 basis points on a reported basis to 16.4 percent.

 

Trading operating profit margin decreased by 60 basis points on a reported basis to 14.7 percent, in line with October 2017 expectations. This included a CHF900 million (US$972bn) increase mainly in restructuring and related costs to CHF1.5 billion (US$1.6 bn).

 

Underlying earnings per share increased by 4.7 percent in constant currency and by 4.6 percent to CHF3.55 on a reported basis. The company also proposed a dividend increase of 5 centimes (2.2 percent) to CHF2.35 per share (US$2.54).

 

Schneider also talked about the recent divestment of the US confectionery business, which Nestlé offloaded to the Ferrero Group in an estimated US$2.8bn deal that bolsters the Italian company’s footprint in the American market and allows Nestlé to concentrate on a range of growth categories including bottled water, coffee, frozen meals and infant nutrition.

 

“During the past months, we have completed initial portfolio adjustments with very favorable results. We will continue this active portfolio management approach in a disciplined manner and fully in line with our strategy. Regarding our core portfolio, accelerating our growth through product innovation and renovation is high on the agenda.”

 

“The consumer is much more concerned in the health benefits than in the past and that consumer is also better positioned, through transparency, to compare prices. There is a need to innovate faster,” Schneider added.

“We need to work on efficiency so that in our overall offering, we are competitive.”

 

“When these transactions are closed, the benefit you will have is the sales profile in North America that is much more aligned with our nutritious and wellness goals. Portfolio management can really advance our goals and a product line up that has a more attractive profile.”

 

Schneider also spoke about how recent acquisitions have not yet contributed to the group’s organic growth but will begin to do so soon, citing Blue Bottle Coffee as an example.

 

Last September, the Swiss giant entered the fast-growing, super-premium coffee shop segment by acquiring a majority stake in Blue Bottle Coffee, a Californian-based high-end specialty coffee roaster and retailer that has built a strong reputation among discerning coffee drinkers.

 

“The important thing on the acquisition side is that all of these are high-growth business. None of them have contributed to organic growth yet, a lot of good things have been done to support organic growth,” Schneider added.

 

Nestlé Waters posted high single-digit growth in the international premium brands. The regional brands in North America faced weak demand and pricing pressure, while growth remained soft in Nestlé Nutrition as sales were subdued in North America and declined in Brazil.

 

There was a modest improvement in China, driven by new organic offerings and Nespresso reported consistent mid-single-digit growth, with positive momentum in all regions and sustained mid-teen growth in North America.

 

Nestlé Health Science maintained solid growth and Nestlé Skin Health improved slightly.

 

All categories reported positive growth, led by coffee, pet care and Nestlé Health Science.

 

Organic sales growth is expected to improve in 2018 and Nestlé says it’s firmly on track for its 2020 margin improvement target.

 

At the same time of posting the latest financial results, Nestlé also announced Board decisions regarding the Gerber Life Insurance business and the L’Oréal investment.

 

The Board has decided to explore strategic options, including a potential sale, for its Gerber Life Insurance business which was part of the Gerber acquisition from Novartis in 2007. Its 2017 sales were CHF840 million (US$908 million). Nestlé says it remains fully committed to retain and develop the Gerber baby food business, which is an integral part of its infant nutrition growth platform.

 

The company also says that while L’Oréal continues to be an important investment and it remains committed to the company that has given Nestlé very good returns over the years, the shareholders’ agreement between Nestlé and the Bettencourt family is due to expire on March 21, 2018.

 

In order to maintain all available options for the benefit of Nestlé’s shareholders, the Board of Directors has decided not to renew this agreement and Nestlé doesn’t intend to increase its stake in L’Oréal.