Nestle Posts a Strong 2007

21/02/08 In what it is calling a milestone year for the company, in 2007, consolidated sales of the Nestlé Group amounted to CHF 107.6 billion, an increase of 9.2% over the same period last year, the company has said. This was driven by organic growth of 7.4%, consisting of real internal growth of 4.4% and price increases of 3.0%. Acquisitions net of divestitures, primarily driven by the acquisition of Novartis Medical Nutrition and Gerber, contributed another 1.4% of growth while exchange rate fluctuations added another 0.4%. The Group's Food and Beverages business, with sales of CHF 100.3 billion, was the main contributor to growth, achieving organic growth of 7.1%, consisting of real internal growth of 4.0% and price increases of 3.1%.

The Group's EBIT grew by 12.9% to CHF 15 billion, resulting in an EBIT margin of 14%, a 50 basis point improvement over 2006. Food and Beverages' EBIT grew by 12.7% to CHF 12.6 billion, resulting in a margin improvement of 40 basis points. These performances were achieved in spite of a negative 10 basis point currency impact. Timely pricing actions, scale efficiencies, cost reduction initiatives, as well as the ongoing strategic transformation process allowed the Food and Beverages business to more than offset higher raw material and energy costs in 2007.

Net profit grew by 15.8% to CHF 10.6 billion, resulting in a net margin of 9.9%, up 60 basis points. Earnings per share once again grew at a double-digit rate, by 16.4% to CHF 27.81.

The Group’s operating cash flow increased by 15.1%, from CHF 11.7 billion to CHF 13.4 billion, while free cash flow increased from CHF 7 billion to CHF 8.2 billion. Tight capital management was demonstrated by continued efficiencies in working capital and the launch of a third share buyback programme. The return on invested capital (ROIC), excluding goodwill, improved by 100 basis points, to 22.2%; including goodwill, it was up 50 basis points, to 12.2%. The Group’s net debt rose to CHF 21.2 billion, mainly due to the acquisition of Novartis Medical Nutrition and Gerber, as well as the buyback of shares amounting to CHF 4.4 billion in 2007.

Peter Brabeck-Letmathe, Chairman and CEO of Nestlé: "This milestone performance was achieved in a difficult external environment and, for the twelfth year in a row, has demonstrated the power of the Nestlé model: organic growth of at least 5-6% coupled with a sustainable EBIT margin improvement, irrespective of prevailing economic conditions. Nestlé is now uniquely positioned as the world's foremost nutrition, health and wellness company with leading brands, global geographic spread and an exceptional management team. Indeed, Nestlé has ventured far beyond the traditional food industry: our success is now driven more by our capacity to innovate and use our R&D pipeline to launch new, added-value products and services, than by raw material prices or the economic climate. Combined with our strong emphasis on excellence in execution and discipline in capital management, we have, over time, created powerful momentum which will deliver profitable growth for years to come."

In 2007, the organic growth of Nestlé's total Food and Beverages business (including globally-managed businesses such as Nestlé Waters, Nestlé Nutrition, Nespresso, the Food and Beverages joint ventures, as well as the Zones) amounted to 4.2% in Europe, 8.6% in the Americas and 9.6% in Asia, Oceania and Africa.

In Zone Europe sales of CHF 28.5 billion, 2% real internal growth and 3% organic growth were reported. The Zone experienced double-digit growth in eastern Europe, mainly in Russia and Poland, and positive growth trends in key western European markets, such as Germany, France and Great Britain. The Zone's 30 basis points improvement in EBIT margin was mainly driven by higher operational performance and was achieved in spite of investments in premium segment initiatives. Mövenpick of Switzerland did particularly well as a pan-European super-premium ice cream brand. Nescafé Dolce Gusto had strong first year sales, driven both by continued success in the initial launch markets and successful introductions in a further six markets. Chocolate did well due to a renewed focus on strategic brands, particularly in Great Britain, as did soluble coffee and the pet care business.

In Zone Americas Nestle reported sales of CHF 32.9 billion, 3.3% real internal growth and 8.1% organic growth. Real internal growth remained strong across the Zone, with good contributions from fast-growing Popularly Positioned Products and direct sales distribution initiatives in Latin America. EBIT margins increased by 50 basis points led by timely pricing, operational improvements and successful innovative product launches such as Nescafé Protect, Panini Lean Cuisine or Cat Chow Natural. Key product categories such as ice cream and beverages improved their EBIT margin supported by a stronger focus on more value-added products.

In Zone Asia, Oceania and Africa sales of CHF 16.6 billion, 4.4% real internal growth and 8.8% organic growth were reported. The Zone's EBIT margin slipped 30 basis points to 16.3% as a result of two one-off factors in 2007: Nestlé Japan was the Group's last market to move to a demand-driven, just-in-time business model and, in Australia, Nestlé was affected by the specific situation of a key customer. The Zone's emerging markets continued to deliver double-digit growth with all categories contributing. While these markets were particularly exposed to exceptionally high milk prices, timely pricing, together with efficiency initiatives and successful new launches such as Nido growing up milks enriched with probiotics in several Asian markets were sufficient to protect EBIT margins in emerging markets.

Nestlé Waters had sales of CHF 10.4 billion, 5% real internal growth and 6.6% organic growth. Following a very promising first half, the second half of the year was somewhat softer, mostly due to unfavourable weather conditions in Europe. This slow growth, together with continued weakness in the European home and office delivery (HOD) business as well as higher packaging and distribution costs, caused the EBIT margin to fall by 50 basis points. In North America and emerging markets, double-digit sales growth was achieved. With over 30% organic growth, Nestlé Pure Life maintained its momentum and the brand is now a key growth driver in over 20 countries. Overall market shares continued to improve in most countries.

Nestlé Nutrition reported sales of CHF 8.4 billion, real internal growth of 6.5% and 9.7% organic growth. As a result of the acquisition and successful integration of Jenny Craig in 2006 as well as Novartis Medical Nutrition and Gerber in 2007, Nestlé Nutrition reinforced its undisputed world leadership in specialised nutrition, with annualised sales of around CHF 11 billion. In parallel with the integration of these acquisitions, thanks to a highly productive R&D pipeline, Nestlé Nutrition continued to experience strong sales and profit growth in its established businesses, mainly driven by new launches of premium NAN starter formulas and infant cereals. Even though recent acquisitions had an anticipated initial dilutive impact, Nestlé Nutrition's EBIT margin increased by 30 basis points.

The strong performance in 2007 and the positive outlook for 2008 will enable the Board to propose to shareholders a dividend increase of 17.3% from CHF 10.40 per share to CHF 12.20 per share.