Nestlé Upbeat on First Half Performance

Foreign exchange had a -8.3% impact on sales, while acquisitions net of divestitures, primarily driven by the acquisition of Novartis Medical Nutrition and Gerber, added 3.2% to sales.

11/08/08 In the first six months of 2008, consolidated sales of the Nestlé Group amounted to CHF 53.1 billion, an increase of 3.8% over the same period last year, driven by organic growth of 8.9%, including real internal growth of 3.5%. Foreign exchange had a -8.3% impact on sales, while acquisitions net of divestitures, primarily driven by the acquisition of Novartis Medical Nutrition and Gerber, added 3.2% to sales.

Paul Bulcke, CEO of Nestlé: "These figures build on the strong momentum gathered from last year's milestone results. Nestlé's drive to become the world's recognised leader in nutrition, health and wellness, its strong billionaire brands and its focus on speed and discipline in execution have allowed the company to further accelerate its performance under difficult economic conditions. I am therefore confident that 2008 will be another year of delivering the Nestlé model, with organic growth at least at the 2007 level and a further improvement in EBIT margins. Our Food and Beverages business will be the key driver of this profitable growth."

The Group's EBIT grew by 6.1% to CHF 7.3 billion, resulting in an EBIT margin of 13.8%. This represents a 60 basis point improvement in constant currencies over the first half of 2007. Foreign exchange reduced the Group's EBIT margin by 30 basis points, to 30 basis points reported.

With sales of CHF 49.3 billion, Food and Beverages achieved organic growth of 8.9%, including real internal growth of 3.2%, and was the Group's main contributor to growth and EBIT margins. With an EBIT growth of 6.7%, Food and Beverages' EBIT margin was up 50 basis points in constant currencies over last year. Foreign exchange reduced Food and Beverages' EBIT margin by 20 basis points, to 30 basis points reported.

The Group's cost of goods sold increased by 190 basis points to 42.8% of sales. This reflects the impact of higher raw material costs, partially reduced by operating efficiencies. Marketing and administration costs declined by 190 basis points to 33.3% of sales, reflecting the effect of different growth rates of the company's product portfolio, efficiencies and the leverage effect from growth. In constant currencies, consumer marketing spend increased by 7%.

Net profit grew by 6.1% to CHF 5.2 billion, resulting in a net margin of 9.8%, up 20 basis points. Earnings per share grew by 8.6% to CHF 1.39.

On 30 June 2008, the Group’s operating cash flow stood at CHF 3.5 billion. This is lower than last year reflecting a higher level of inventories as a result of the increased cost of certain raw materials and the decision to selectively increase inventories of some products. The Group’s net debt, seasonally high at the half year, rose to CHF 25.8 billion. This will decline to below the level prevailing at the end of 2007, thanks partly to the proceeds received from the sale of 24.8% of Alcon to Novartis.

This performance, above-target organic growth combined with a good improvement in EBIT margins, demonstrates Nestlé's ability to grow profitably even in a difficult business environment.

Nestlé, the world's leading nutrition, health and wellness company, is particularly focused on four core growth platforms. The first is nutrition, covering not only Nestlé Nutrition, the world's largest specialised nutrition company, but also Nestlé's entire product portfolio with the aim of ensuring that its brands offer the best nutritional profile of their respective categories. The second is out-of-home, where the focus is both on branded beverage solutions and customised food solutions for restaurants and institutions. The third is Popularly Positioned Products (PPPs), affordable nutritional products for emerging consumers. The fourth is the increasing focus of many product groups on premium and luxury segments. These four core platforms often overlap.

Nutrition, Health and Wellness. Nestlé Nutrition continues to do well based on its four growth platforms: infant nutrition, healthcare nutrition, performance nutrition and personalised weight management. The Group will continue to leverage Nestlé Nutrition's specific R&D know-how in its overall food and beverage business. Indeed, the transformation of Nestlé's product portfolio continues unabated. In the innovation and renovation process, any new product launched must obtain a consumer preference of at least 60% in blind tasting and a higher nutritional profile compared to its nearest competitor. Products enriched with Branded Active Benefits (BABs) again achieved double-digit organic growth in the first half of 2008. The objective is that around 20% of Nestlé's product portfolio is renovated each year.

Out-of-home. Nestlé Professional continued to refocus its activities on branded beverage solutions and customised food solutions, as well as pursuing a significant SKU rationalisation programme. The priority areas within Nestlé Professional performed well, and its business in Asia, Oceania and Africa grew strongly, with double-digit organic growth in markets such as China, India and South East Asia.

Popularly Positioned Products (PPPs), an integrated business model to reach out to emerging consumers in the developing world, continued to grow strongly in the first half. Nestlé's PPPs, such as dairy and cereal products, beverages and culinary products, enjoyed organic growth of over 20% overall. They grew by 40% in Zone Asia, Oceania and Africa, and also enjoyed good performances in Zone Americas and Europe. This positive trend is set to continue, as consumers migrate to Nestlé's PPPs offering quality, taste and nutritional content at affordable prices.

Premiumisation. The premium and luxury end of the market offers strong growth opportunities for Nestlé and is proving particularly resilient. The premium segment of most categories performed well, including the most visible examples such as Nespresso, which enjoyed organic growth of almost 40%, and different brands in confectionery (Perugina, Nestlé Noir), ice cream (Häagen Dazs, Mövenpick of Switzerland), water (S.Pellegrino), and PetCare (Beneful, Gourmet).

In the first half of 2008, Nestlé's organic growth was stronger than last year in each of the three geographic regions. These performances, mirrored by strong results in the product groups, together with a positive overall development of EBIT margins, demonstrate that Nestlé is resilient and able to create opportunities for profitable growth even in challenging economic times. Indeed, the excellent first half of 2008 supports the statement made in February that Nestlé's success is increasingly driven by its capacity to innovate and use its R&D pipeline to launch new, added-value products and services in line with its nutrition, health and wellness strategy.

Nestlé's strong emphasis on speed and excellence in execution, as well as continuing momentum, will deliver profitable growth in the second half of 2008 and beyond. In view of its first half performance, Nestlé foresees organic growth at least at the 2007 level for the full year, clearly above the company's long-term target, together with an improvement in EBIT margin. 2008 will therefore be another year of delivering the Nestlé model.