Vevey / CH. (nsa) Swiss Nestle S.A. reported half-year results for 2018. Highlights:
- Continued progress with the Nestle value creation model and on track to meet our full-year guidance, supported by increased momentum in the United States and China, as well as in infant nutrition.
- 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.
- Earnings per share increased by 21.4 percent to CHF 1.92 on a reported basis. Underlying earnings per share increased by 9.2 percent in constant currency and by 10.4 percent to CHF 1.86 on a reported basis.
- Free cash flow increased by 52 percent, from CHF 1.9 billion to CHF 2.9 billion.
- Full-year guidance for 2018 confirmed, with organic sales growth expectation narrowed to around 3 percent; underlying trading operating profit margin improvement in line with our 2020 target. Restructuring costs1 are expected at around CHF 700 million. Underlying earnings per share in constant currency and capital efficiency are expected to increase.
Mark Schneider, Nestle CEO said: «Our first half results confirmed that our strategic initiatives and rigorous execution are clearly paying off. Nestle has maintained the encouraging organic revenue growth momentum we saw at the beginning of the year. In particular, the United States and China markets showed a meaningful improvement. We were also pleased by the enhanced organic growth in our core infant nutrition category.
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.
As we look towards the second half of 2018, we expect further improvement in our organic revenue growth. Margin improvement is expected to accelerate with further benefits from our efficiency programs and more favorable commodity pricing».
Group Results
| Total Group | Zone AMS | Zone EMENA | Zone AOA | Nestle Waters | Other Businesses | |
| Sales 6M-2018 (CHF m) | 43’920 | 14’153 | 9’303 | 10’634 | 3’967 | 5’863 |
| Sales 6M-2017 (CHF m)* | 42’926 | 14’689 | 8’741 | 10’273 | 3’988 | 5’235 |
| Real internal growth (RIG) | 2.5% | 1.0% | 3.1% | 3.7% | -0.7% | 5.4% |
| Pricing | 0.3% | 0.0% | -0.6% | 0.7% | 1.7% | 0.3% |
| Organic growth | 2.8% | 1.0% | 2.5% | 4.4% | 1.0% | 5.7% |
| Net M+A | 0.0% | -1.0% | -0.2% | -0.1% | -0.8% | 4.9% |
| Foreign exchange | -0.5% | -3.6% | 4.1% | -0.8% | -0.7% | 1.4% |
| Reported sales growth | 2.3% | -3.6% | 6.4% | 3.5% | -0.5% | 12.0% |
| 6M-2018 Underlying TOP Margin | 16.1% | 18.9% | 18.9% | 22.9% | 10.0% | 16.4% |
| 6M-2017 Underlying TOP Margin | 15.9% | 18.6% | 18.2% | 23.1% | 12.7% | 14.8% |
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*2017 figures have been restated to reflect:
- the implementation of IFRS 15 – Revenue from contract with customers, IFRS 16 – Leases and IFRIC 23 – Uncertainty over income tax treatments as well as other accounting policies and presentation changes; and
- the change in organization of infant nutrition business. Effective January 1, 2018 Nestle Nutrition is reported in the Zones as a regionally managed business, with Gerber Life Insurance business reported in Other Businesses.
Group Sales
Organic growth of 2.8 percent in the first half was in line with our expectations and within our 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, petcare, and Nestle 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 U.S. 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.
Underlying Trading Operating Profit
Underlying trading operating profit increased by 3.5 percent to CHF 7.1 billion. The underlying trading operating profit margin increased by 20 basis points in constant currency, and by 20 basis points on a reported basis to 16.1 percent.
Margin expansion was supported by operational efficiencies and successful execution of ongoing restructuring initiatives. These cost savings were partially offset by higher commodity and packaging costs of CHF 90 million, amounting to a 20 basis point headwind. Distribution costs also increased.
The underlying trading operating profit margin is expected to improve further in the second half of the year, driven by further benefits from efficiency programs and more favorable commodity prices.
Restructuring expenditure and net other trading items increased by CHF 323 million to CHF 672 million. As a consequence, trading operating profit decreased by 1.3 percent to CHF 6.4 billion and the trading operating profit margin decreased by 50 basis points on a reported basis to 14.6 percent.
Net Profit and Earnings Per Share
Net profit increased by 19.0 percent to CHF 5.8 billion and earnings per share increased by 21.4 percent to CHF 1.92. The increase was mainly the result of income from the disposal of businesses, lower taxes and improved operating performance.
Underlying earnings per share increased by 9.2 percent in constant currency and by 10.4 percent on a reported basis to CHF 1.86. Nestle’s share buyback program contributed 1.5 percent to the underlying earnings per share increase, net of finance costs.
Cash Flow
Free cash flow increased by 52 percent, from CHF 1.9 billion to CHF 2.9 billion. This was mainly driven by an improvement in working capital, lower taxes and increased operating profit.
Portfolio Management
Nestle has made further progress to actively evolve the portfolio towards high-growth, high-margin categories and brands.
On May 7, 2018, an agreement was announced granting Nestle the perpetual rights to market Starbucks consumer and foodservice products globally, outside of Starbucks coffee shops. As part of this transaction, Starbucks will receive an up-front cash payment of USD 7.15 billion for a business which generated annual sales of USD 2 billion. The agreement is now expected to close at the end of August 2018.
The process of exploring strategic options for the Gerber Life Insurance business is on track with completion expected in 2018.
Outlook
Full-year guidance for 2018 confirmed, with organic sales growth expectation narrowed to around 3 percent; underlying trading operating profit margin improvement in line with our 2020 target. Restructuring costs1 are expected at around CHF 700 million. Underlying earnings per share in constant currency and capital efficiency are expected to increase.
1Not including impairment of fixed assets, litigation and onerous contracts
Annex
*2017 figures have been restated to reflect:
- the implementation of IFRS 15 – Revenue from contract with customers, IFRS 16 – Leases and IFRIC 23 – Uncertainty over income tax treatments as well as other accounting policies and presentation changes; and
- the change in organization of infant nutrition business. Effective January 1, 2018 Nestle Nutrition is reported in the Zones as a regionally managed business, with Gerber Life Insurance business reported in Other Businesses.
Half-year sales and underlying trading operating profit (UTOP) overview by operating segment
| Total Group | Zone AMS | Zone EMENA | Zone AOA | Nestle Waters | Other Businesses | |
| Sales 6M-2018 (CHF m) | 43’920 | 14’153 | 9’303 | 10’634 | 3’967 | 5’863 |
| Sales 6M-2017 (CHF m)* | 42’926 | 14’689 | 8’741 | 10’273 | 3’988 | 5’235 |
| RIG | 2.5% | 1.0% | 3.1% | 3.7% | -0.7% | 5.4% |
| Pricing | 0.3% | 0.0% | -0.6% | 0.7% | 1.7% | 0.3% |
| Organic growth | 2.8% | 1.0% | 2.5% | 4.4% | 1.0% | 5.7% |
| Net M+A | 0.0% | -1.0% | -0.2% | -0.1% | -0.8% | 4.9% |
| Foreign exchange | -0.5% | -3.6% | 4.1% | -0.8% | -0.7% | 1.4% |
| Reported sales growth | 2.3% | -3.6% | 6.4% | 3.5% | -0.5% | 12.0% |
| 6M-2018 Underlying TOP (CHF m) | 7’063 | 2’680 | 1’758 | 2’435 | 398 | 960 |
| 6M-2017 Underlying TOP (CHF m)* | 6’821 | 2’734 | 1’593 | 2’377 | 505 | 777 |
| 6M-2018 Underlying TOP Margin | 16.1% | 18.9% | 18.9% | 22.9% | 10.0% | 16.4% |
| 6M-2017 Underlying TOP Margin* | 15.9% | 18.6% | 18.2% | 23.1% | 12.7% | 14.8% |
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Half-year sales and underlying trading operating profit (UTOP) overview by product
| Total Group | Powdered + liquid beverages | Water | Milk products + ice cream | Nutrition + Health Science | Prepared dishes + cooking aids | Confectionery | Petcare | |
| Sales 6M-2018 (CHF m) | 43’920 | 10’265 | 3’729 | 6’385 | 7’912 | 5’819 | 3’634 | 6’176 |
| Sales 6M-2017 (CHF m)* | 42’926 | 9’805 | 3’734 | 6’492 | 7’471 | 5’724 | 3’700 | 6’000 |
| RIG | 2.5% | 2.8% | -0.4% | 0.8% | 4.5% | 1.4% | 4.1% | 3.2% |
| Pricing | 0.3% | 0.6% | 1.7% | 0.2% | -0.4% | 0.1% | -1.3% | 0.6% |
| Organic growth | 2.8% | 3.4% | 1.3% | 1.0% | 4.1% | 1.5% | 2.8% | 3.8% |
| 6M-2018 Underlying TOP (CHF m) | 7’063 | 2’394 | 352 | 1’128 | 1’603 | 1’010 | 449 | 1’295 |
| 6M-2017 Underlying TOP (CHF m)* | 6’821 | 2’256 | 486 | 1’172 | 1’477 | 959 | 388 | 1’248 |
| 6M-2018 Underlying TOP Margin | 16.1% | 23.3% | 9.4% | 17.7% | 20.3% | 17.4% | 12.4% | 21.0% |
| 6M-2017 Underlying TOP Margin* | 15.9% | 23.0% | 13.0% | 18.1% | 19.8% | 16.8% | 10.5% | 20.8% |
