Nestle 2013 Net Profit Edges Down; Sees Challenging Year

13 Feb 2014 --- In 2013, Nestlé's sales increased by 2.7% to CHF 92.2 billion, impacted by negative foreign exchange of 3.7%. Organic growth was 4.6%, composed of 3.1% real internal growth and 1.5% pricing. Acquisitions, net of divestitures, added 1.8% to sales. The Group's trading operating profit was CHF 14.0 billion, representing a margin of 15.2%, up 20 basis points versus last year, and up 40 basis points in constant currencies.

“Last year was challenging and 2014 will likely be the same. We will continue to be disciplined in driving our performance in line with the Nestlé Model of profitable growth and resource efficiency. We therefore expect our 2014 performance to be similar to last year and again weighted to the second half, outperforming the market, with growth around 5% and improvements in margins, underlying earnings per share in constant currencies and capital efficiency,” the company reported.

Nestlé Continuous Excellence again delivered more than CHF 1.5 billion in efficiencies in all areas of the business. This, together with reduced structural costs, enabled us to increase our brand support and absorb higher restructuring costs. The cost of goods sold fell by 70 basis points as a percentage of sales, also supported by a favourable input cost environment. Distribution costs were down by 10 basis points. Administrative costs decreased by 40 basis points, reflecting structural efficiencies including in our pension plans.

Total marketing costs increased by 60 basis points with consumer facing spend up 16.3% in constant currencies. Net profit was CHF 10.0 billion down slightly due to the costs of portfolio restructuring and the currency impact. As a consequence, reported earnings per share were CHF 3.14, down 2.2%. Underlying earnings per share in constant currencies were up 11.0%.

The Nestlé Group's organic growth was broad-based, 5.1% in the Americas, 0.8% in Europe and 7.4% in Asia, Oceania and Africa. Our business in developed markets grew 1.0%, achieving sales of CHF 51.4 billion. Our emerging markets business grew 9.3%, delivering sales of CHF 40.8 billion.

Real internal growth was 2.1% in the Americas, 1.9% in Europe and 5.9% in Asia, Oceania and Africa. This growth reflected a focus on the priorities that enabled us to outperform the market: stay competitive by ensuring we offered consumers best value, invest behind our brands and build the capabilities to win in today's challenging environment.
 
Zone Americas reported sales of CHF 28.4 billion, 5.3% organic growth, 1.7% real internal growth; 18.2% trading operating profit margin, -50 basis points. The Zone delivered positive growth in both North America and Latin America. In North America the frozen food category contracted, particularly impacting Lean Cuisine, but Stouffers achieved positive growth, and in frozen pizza DiGiorno gained market share. In ice cream the super premium business grew, thanks in part to the success of Gelato, but snacks and premium had a more challenging year. Chocolate delivered a good performance. Early results from the launch of our Butterfinger Cups were promising and Skinny Cow maintained its strong growth momentum. Coffee-mate performed well in both powder and liquid. Nescafé Clásico stood out in a good year for soluble coffee.

Growth in Latin America was double-digit for the year. In Brazil, key growth drivers were KitKat, Nescau, Ninho and cereals. In Mexico, we took steps to improve the performance of soluble coffee, including the roll-out of Nescafé 3 in 1. Nescafé Dolce Gusto produced double-digit growth across the region. Culinary solutions in dairy, particularly Carnation, also did well.
 
The petcare business had a strong year, growing across the Zone, despite the one-off impact of Waggin' Train in North America. In the fast-evolving market in Latin America our strong momentum drove double-digit growth and market share gains. This year's launches of Dog Chow Light & Healthy, Beneful Smile, and Purina ONE True Instinct went well. Dog Chow and Proplan were among the main drivers of double-digit growth in Mexico and Brazil. The Zone's trading operating profit margin was 18.2%, down 50 basis points, reflecting restructuring and increased investment in brands.

Zone Europe sales were CHF 15.6 billion, 0.8% organic growth, 2.2% real internal growth; 15.0% trading operating profit margin, -40 basis points. The Zone outperformed the market with positive growth in a no-growth environment. Material negative pricing reflected our commitment to pass the savings from lower raw material prices to the consumer and maintain our competitiveness in the face of prevailing deflationary pressures. The innovation and premiumisation strategic platforms underpinned our growth with Nescafé Dolce Gusto and confectionery being key contributors. Growth for ice cream in Russia and France, as well as the Mövenpick brand, compensated for softer growth in that category elsewhere. In frozen pizza, Wagner and Buitoni accelerated through the year. Nescafé Gold delivered double-digit growth in Russia and other Eastern European markets. KitKat was another highlight, again in Russia and in the Great Britain region. Nesquik had a strong year across most markets. Petcare had an extremely good year with momentum across the Zone producing high single-digit growth. Felix, Proplan, Purina ONE and Gourmet were among the key drivers.

In Western Europe, highlights were the Great Britain region, Switzerland, the Netherlands, Belgium and Austria. Southern Europe continued to experience weak consumer confidence. Among Central and Eastern European markets Russia was a highlight. The region produced robust real internal growth despite difficult economic conditions and intense price competition. The Zone's trading operating profit margin was down by 40 basis points to 15.0%. This reflects the costs of restructuring and increased investments behind the strategic growth platforms.
 
Zone Asia, Oceania and Africa sales of CHF 18.9 billion were reported, 5.6% organic growth, 4.8% real internal growth; 18.9% trading operating profit margin, -10 basis points. The Zone's real internal growth outpaced the market with strong performances particularly in Africa, the Middle East, Indonesia and Malaysia. Also noteworthy was Japan where a focus on innovative products and business models delivered good growth in the long-standing subdued trading environment. Pricing in the Zone reflected our commitment to remain competitive in the face of relatively low inflation.

Most categories in the Zone contributed, notably ambient dairy and cocoa and malt beverages which grew double-digit with Milo a highlight. Ambient culinary and chocolate enjoyed high single-digit growth. Again there was a high level of innovation across the Zone. We successfully launched new Hungroo Maggi noodles and Alpino in India, and in the Middle East Nescafé Traditional Arabic Coffee. In Central and West Africa we continued the roll-out of the new Nido Nutripack and fortified Maggi products and in Egypt Dolceca ice cream. In China, Yinlu had a particularly strong year, helped by its new premium congees. Another strong performer in China was the adult and senior nutrition milk powder range Yiyang. A slowdown in its category had an impact on Hsu Fu Chi.  
 
The Zone's trading operating profit margin was 18.9%, down 10 basis points. External events in different parts of the Zone were challenging. Nonetheless our effective portfolio management and increased efficiencies helped mitigate the effects and allowed us to increase brand support driving strong real internal growth and market share gains.

The trading update follows recent news that Nestlé plans to sell an 8% stake in L’Oreal back to the French cosmetics group. The relationship between the two companies dates back 40 years and the stake has already proved financially lucrative for Nestlé, yielding a return of more than 15% a year, on average.

Nestlé will continue to own 23% of L’Oreal. In exchange for the portion of shares not paid for in cash, L’Oreal agreed to give Nestlé full control of their 50-50 dermatological joint venture, Galderma, the makers of Cetaphil skin cleanser, acne treatment prescription drug Epiduo and other skin treatments. Analysts believe this transaction was an essential part of the deal for Nestlé, which is working on ramping up its health-care business. It is likely that as part of Nestlé’s portfolio Galderma will move away from prescription products towards medical skincare items that can be stocked on retail shelves.

With challenges in the food markets many FMCG giants have been expanding the personal care arms of their portfolios, including Unilever and Procter & Gamble. Nestlé already has a foot in this market with products such as baby formula and baby shampoos.