Nestlé Targets 2-4 Percent Growth as Company Reports Profit Loss

16 Feb 2017 --- Nestlé, which makes KitKats, Nescafe and Purina pet food, have reported its figures for full year 2016. The company has said it will steepen its cost-cutting plan after unveiling disappointing results. Net profit for 2016 fell to 8.5bn Swiss francs ($8.4bn) from 9.1bn Swiss francs ($9bn) a year earlier. Analysts had expected 9.59bn Swiss francs'($8.4bn) worth of profit. 

Sluggish food inflation in most of its markets and easing demand in emerging markets saw sales growth slow to 3.2% from 4.2% in 2015.

The company has cut its sales growth target to between 2% and 4% for 2017, scrapping its prior "Nestle model" of 5-6% so-called organic growth, which excludes sales from companies it buys.

Nestle SA’s new Chief Executive Officer Mark Schneider said it will take years to return to the growth rates targeted by his predecessors and will consider exiting underperforming businesses if he can’t fix them.

The world’s largest food company forecast revenue will increase 2 percent to 4 percent on an organic basis this year, below a long-held goal of 5 percent to 6 percent. The stock fell as much as 2.1 percent as Schneider also said Thursday restructuring costs will rise to about 500 million francs ($498 million) in 2017, putting pressure on profitability.

Schneider says: "Our 2016 organic growth was at the high end of the industry but at the lower end of our expectations. We saw a solid trading operating profit margin improvement and our cash flow grew significantly. Based on these results, our Board of Directors is pleased to propose the 22nd consecutive dividend increase, underlining our commitment to continuity."
 
"In 2017, we expect organic growth between 2% and 4%. In order to drive future profitability, we plan to increase restructuring costs considerably in 2017. As a result, the trading operating profit margin in constant currency is expected to be stable. Underlying earnings per share in constant currency and capital efficiency are expected to increase."
 
"Nestlé continues to invest in future growth and operating efficiency, targeting mid-single digit organic growth and significant structural cost savings by 2020."

For the group, total sales increased by 0.8% to CHF 89.5 billion, with a foreign exchange impact of -1.6%. Acquisitions net of divestitures reduced sales by 0.8%. Organic growth was 3.2%, with real internal growth reaching a three-year high of 2.4%. Pricing was limited at 0.8%, with some improvement in the second half of the year. Pricing is expected to improve further for the full year 2017. Organic and real internal growth were broad-based, highlighting the strength and resilience of our diversified portfolio. Innovation supported volume growth, with 30% of sales coming from products introduced or renovated in the last 3 years.E-commerce accounted for 5% of sales, up 18% year-on-year. 
 
Trading operating profit was CHF 13.7 billion with a margin of 15.3%, up 20 basis points on a reported basis and up 30 basis points in constant currency. The company achieved this margin improvement while investment increased in brand support, digital marketing, research and development, and in the new nutrition and health platforms. Consumer-facing marketing spend increased by 6.3% in constant currency. Restructuring costs doubled to CHF 300 million in 2016 to support structural cost-saving initiatives. 
 
Net profit of CHF 8.5 billion was impacted by several items, the largest one being a one-off non-cash adjustment to deferred taxes. Reported earnings per share decreased by 4.8% to CHF 2.76, for the same reasons. Underlying earnings per share in constant currency increased by 3.4%.

For Zone Americas, Zone sales of CHF 26.4 billion were reported with 4.2% organic growth, 1.3% real internal growth; 19.3% trading operating profit margin, -10 basis points. The Zone reported good and consistent organic growth. 
 
For Zone EMENA, sales of CHF 16.2 billion were reported with 2.0% organic growth, 2.7% real internal growth; 16.7% trading operating profit margin, +100 basis points. The Zone delivered strong real internal growth, accelerating for a fourth consecutive year and gaining market share, showing the ability to innovate. In Western Europe positive organic growth was due to solid real internal growth. Pricing was negative, affected by sustained low commodity prices, trade pressure and intense competition: 

For Zone AOA, sales of CHF 14.5 billion were reported with 3.2% organic growth, 2.9% real internal growth; 19.0% trading operating profit margin, +60 basis points. The Zone saw real internal growth and organic growth gain increasing momentum throughout the year, with market shares recovering and almost all markets contributing. The Zone's emerging markets had a good year overall with growth accelerating in most businesses. Yinlu was the main exception, decreasing the Zone's organic growth by 260 basis points.

Nestlé Waters had sales of CHF 7.9 billion, 4.5% organic growth, 4.5% real internal growth; 11.9% trading operating profit margin, +110 basis points. Nestlé Waters maintained its good organic growth momentum based on real internal growth. 

For Nestlé Nutrition, sales of CHF 10.3 billion were reported with 1.5% organic growth, 0.9% real internal growth; 22.7% trading operating profit margin, +10 basis points. Nestlé Nutrition grew in the context of changed category dynamics, particularly in China, and deflationary pressure owing to sustained low milk prices. 

Nestlé Professional continued to grow, led by mid-single-digit growth in emerging markets with strong growth in Russia and Mexico and solid growth in China. The US also had good organic growth while business in Canada and Western Europe declined. As from 2017, Nestlé Professional is integrated into the Zones due to increasing demand for more customised products and services on a local and regional basis. 
 
Nespresso continued to grow in its 30th year. The US and Canada saw strong momentum from the continued success of the VertuoLine system. Sales in France also benefitted from the launch of VertuoLine at the end of the year. The UK saw strong acceleration following brand investment and the launch of a subscription model. In Asia, both China and Korea performed well.
 
Nestlé Health Science maintained a good pace of growth. Consumer care was once again the key source of growth including the Boost range of products, Carnation Breakfast Essentials and, in Europe, Meritene. Medical nutrition benefitted from strong contributions from the allergy portfolio (especially in China), Vitaflo and oral nutritional supplements in key markets.
 
Nestlé Skin Health performed well in consumer care. However, we adjusted inventory levels in the trade at the end of the year. Increased competition and pressure from generics affected the US prescription business.
 
The trading operating profit margin of this segment was impacted by Nestlé Skin Health. Adjustment of trade inventories and higher restructuring and litigation costs affected profitability. Nestlé Health Science also absorbed higher restructuring costs. Nestlé Professional and Nespresso both improved their profitability, helped by favorable input costs.