Nestlé first half profits jump: Momentum in US and China, coffee and infant nutrition boost

26 Jul 2018 --- Swiss food giant Nestlé has reported a 19 percent jump in net profit to CHF5.8 billion (US$5.8 billion) in the first half of the year as markets in the US and China improve. Earnings per share have also increased by 21.4 percent to CHF 1.92 (US$1.94). Nestlé sales have been gathering momentum since the group switched its focus toward high growth areas including the US coffee sector following a deceleration in sales growth last year which was the slowest in more than two decades and the result of changing consumer trends.

But the latest results show continued progress and that the group is on track to meet its full-year guidance, supported by increased momentum in the US and China, as well as in infant nutrition.

The company has reported organic growth of 2.8 percent, with 2.5 percent real internal growth (RIG) and pricing of 0.3 percent. Total sales increased by 2.3 percent to CHF 43.9 billion (6M-2017: CHF 42.9 billion). Acquisitions and divestments netted to zero. Foreign exchange reduced sales by 0.5 percent.

Underlying trading operating profit margin was 16.1 percent, an increase of 20 basis points in constant currency and on a reported basis. Trading operating profit margin was 14.6 percent, a decrease of 50 basis points on a reported basis due to higher restructuring costs and net other trading items. Free cash flow increased by 52 percent, from CHF 1.9 billion (US$1.9 billion) to CHF 2.9 billion (US$2.9 billion).

In January, Nestlé offloaded its US confectionery business to the Ferrero Group in an estimated US$2.8 billion deal. The move bolstered the Italian company’s footprint in the American market and allowed Nestlé to concentrate on a range of growth categories including bottled water, coffee, frozen meals and infant nutrition.

Nestlé CEO Mark Schneider, who took over the position at the end of last year, has introduced profit margin targets and carried out a series of acquisitions, targeting high growth areas including the US coffee sector. 

Nestlé has snapped up organic cold brew coffee company, Chameleon Cold-Brew. Founded in 2010, Austin-based Chameleon has become the number one organic cold brew brand in the US and one of the top three refrigerated cold brew brands in the country.

Last September, Nestlé entered the fast-growing, super-premium coffee shop segment by acquiring a majority stake in Blue Bottle Coffee, a Californian-based high-end specialty coffee roaster and retailer that has built a strong reputation among discerning coffee drinkers.

And just a couple of months ago Nestlé and Starbucks formed a “global coffee alliance” in a US$7.15 billion distribution deal that sees two of the most iconic coffee brands join forces.

Mark Schneider, Nestlé CEO says that the first half results confirmed the group’s strategic initiatives and rigorous execution are paying off. 

“Nestlé has maintained the encouraging organic revenue growth momentum we saw at the beginning of the year. In particular, the US and China markets showed a meaningful improvement. We were also pleased by the enhanced organic growth in our core infant nutrition category,” he notes.

“Our margin development is fully consistent with our 2020 target. We are creating value by pursuing growth and profitability in a balanced manner. In line with this approach, we have accelerated our product innovation efforts to drive future growth and initiated significant cost reduction efforts, in particular in Zone EMENA and at our Corporate Center.”

Schneider also adds how towards the second half of 2018, the company expects further improvement in organic revenue growth. “Margin improvement is likely to accelerate with further benefits from our efficiency programs and more favorable commodity pricing,” he claims. 

Group sales
Organic growth of 2.8 percent in the first half was in line with expectations and within the group’s guidance for 2018. RIG was 2.5 percent and remained at the high end of the food and beverage industry. Pricing contributed 0.3 percent, reflecting the challenging environment in Europe and lower inflation in some emerging markets. 

Organic growth in the first half improved materially in North America and China. All categories reported positive growth, led by coffee, pet care and Nestlé Health Science. Infant nutrition sales growth accelerated, with a broad-based improvement across all geographies, helped by recent product launches, including HMOs (Human Milk Oligosaccharides) infant formula.

Acquisitions and divestments had a net neutral impact on reported sales with the acquisition of Atrium Innovations and other deals being offset by divestments, mainly US confectionery. Foreign exchange had a negative impact of 0.5 percent. Total sales increased by 2.3 percent on a reported basis to CHF 43.9 billion (US$44.2 million).

Outlook
Full-year guidance for 2018 has been confirmed with organic sales growth expectation narrowed to around 3 percent; underlying trading operating profit margin improvement in line with the group’s 2020 target. Restructuring costs are expected at around CHF 700 million (US$705 million). Underlying earnings per share in constant currency and capital efficiency are expected to increase, according to Nestlé.