Nestle sales growth lags in first half, maintains 2017 guidance

27 Jul 2017 --- Nestlé has posted weaker-than-expected first half earnings and confirmed its full-year guidance as the world's biggest food company even as sales slipped in the face of currency headwinds. Nestlé reported that half-year total reported sales were CHF 43.0 billion (-0.3 percent) (US$45 billion), reflecting the impact of net divestments (-2.3 percent, largely related to the creation of the Froneri joint venture) and foreign exchange (-0.3 percent). Organic growth was below expectations at 2.3 percent. RIG was resilient at 1.4 percent but pricing remained soft at 0.9 percent.

Zone AMS was broadly in line with expectations as petcare in the US recovered after a slow start to the year. Zone EMENA delivered softer growth than anticipated in the second quarter. Selective price increases in Western Europe and unfavorable weather in June resulted in a short-term negative impact on RIG. Zone AOA accelerated for a fifth consecutive quarter, re-establishing its position as a growth engine for the Group. Nestlé Waters demonstrated a consistent level of growth. Nestlé Nutrition saw weak growth as the Chinese market remained difficult and developed markets overall were slightly negative. Nestlé Skin Health diluted Group sales growth due to difficult comparables and pressure from generics in the prescription business. Nespresso continued to be a key growth driver for the Group.

Overall, developed markets delivered soft organic growth of 0.8 percent, with solid RIG of 1.1 percent offset by negative pricing of 0.3 percent. In emerging markets, organic growth decelerated by 100 basis points to 4.4 percent, with RIG of 1.9 percent and pricing of 2.5 percent.

Growth by category was broad-based, led by water, coffee and petcare. Confectionery was the only category with negative growth although it stabilised in the second quarter.

2017 full-year guidance was confirmed with organic growth likely to be in the lower half of the 2-4 percent range; stable trading operating profit margin in constant currency as a result of considerable increase in restructuring costs; underlying earnings per share in constant currency and capital efficiency expected to increase

Mark Schneider, Nestlé CEO says: "We are pleased with our value creation progress in the first half of 2017. This includes solid operational improvements as well as portfolio management choices and our decision to increase balance sheet efficiency.”

“Organic growth in the first half did not fully meet our expectations. While volume growth remains at the high end of our industry, pricing continues to be soft. Asia and Africa confirmed their positive growth momentum. Western Europe experienced a volume decline, which we consider largely transitory. North America and Latin America saw a slight improvement in organic growth, mainly driven by volume. Our coffee, water and petcare businesses confirmed their growth potential with solid first-half results.”

Full-year guidance was confirmed with organic growth likely to be in the lower half of the 2-4 percent range. In order to drive future profitability, the company stated plans to increase restructuring costs considerably. 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.

Reported sales in zone AMS increased by 2.9 percent to CHF 13.3 billion. Organic growth was modest at 1.3 percent, but this represented a solid improvement in the second quarter based on stronger RIG. Pricing of 1.4 percent mainly came from Latin America, with pricing in North America slightly positive. Net divestments reduced reported sales by 0.9 percent but foreign exchange added 2.5 percent

The trading environment was challenging in North America, characterized by weak consumer demand. In this context we had broadly flat growth in the US, driven by sustained positive momentum in coffee creamers and a return to solid growth in petcare. Confectionery remained weak and ice cream declined due to poor weather. Frozen food was slightly negative against difficult comparables. Brazil remained negative but improved markedly compared to the subdued trading in the first quarter as RIG turned positive. Mexico had good growth and petcare maintained its dynamic growth across Latin America.

The zone's underlying trading operating profit margin improved by 30 basis points, as efficiency savings and the initial benefits from restructuring projects exceeded the inflation in commodity costs. The trading operating profit margin decreased by 50 basis points to 17.2 percent as restructuring costs increased significantly, largely related to projects in the US, Brazil and Mexico.

Reported sales in zone EMENA declined by 10.3 percent to CHF 7.8 billion. Organic growth of 1.0 percent was lower than in the first quarter, as higher pricing was offset by lower RIG. Net divestments reduced reported sales by 9.3 percent, mainly reflecting the transfer of ice cream to the Froneri joint venture. Foreign exchange headwinds reduced reported sales by a further 2.0 percent.

We applied price increases across the zone, especially in Nescafé. This had a short-term impact on RIG in the second quarter. The hot weather in June was also unfavourable for key categories in Western Europe. Petcare continued to generate strong growth across the zone, especially in Russia. North Africa performed well, driven by price increases, but the Middle East continued to be affected by political instability and sustained deflation.

Despite higher commodity costs, the zone's underlying trading operating profit margin increased by 50 basis points, reflecting price increases, portfolio management and cost savings. The trading operating profit margin also increased by 10 basis points to 16.9 percent as efficiency improvements more than offset restructuring costs.

Reported sales in zone AOA increased by 1.4 percent to CHF 7.9 billion. Organic growth accelerated for a fifth consecutive quarter to 4.8 percent. RIG was steady at 3.0 percent and pricing improved to 1.8 percent. Net divestments lowered reported sales by 0.5 percent and foreign exchange also had a negative impact, reducing sales by 2.9 percent.

Growth in China turned positive in the second quarter as Yinlu, confectionery and culinary gained momentum. South-East Asia and sub-Saharan Africa were core drivers of growth for the zone. India delivered good growth despite some uncertainty around the introduction of a Goods and Services Tax (GST). Japan's good performance was maintained. Oceania was negative due to pricing pressure.

Zone AOA's underlying trading operating profit margin decreased by 20 basis points due to an increase in commodity costs and commercial investments made to stabilise Yinlu. The trading operating profit margin decreased by 50 basis points to 19.6 percent due to higher restructuring-related costs.

This week it emerged that Nestlé is to build a factory in the western city of Himeji, Japan, to make exotic flavors of KitKats. Japan is the second largest consumer of KitKats in the world, and prefers flavors ranging from ginger and green tea to wasabi and sake. It will be the firm’s second factory in the country and the first dedicated to the new flavors.