Nestle S.A.: reports half-year results for 2019

Vevey / CH. (nsa) Swiss Nestle S.A. announced its financial results for the first half 2019. Highlights:

  • Organic growth of 3.6 percent, with continued strong real internal growth (RIG) of 2.6 percent and pricing of 1.0 percent. Increased growth was led by the United States and Brazil.
  • Total reported sales increased by 3.5 percent to CHF 45.5 billion (6M-2018: CHF 43.9 billion). Net acquisitions had a positive impact of 1.1 percent and foreign exchange reduced sales by 1.2 percent.
  • The underlying trading operating profit (UTop) margin reached 17.1 percent, up 100 basis points. The trading operating profit (Top) margin increased by 90 basis points to 15.5 percent.
  • Underlying earnings per share increased by 15.7 percent in constant currency and by 14.6 percent on a reported basis to CHF 2.13. Earnings per share decreased by 12.3 percent to CHF 1.68 on a reported basis, as the prior year benefited from the disposal of the U.S. confectionery business.
  • Free cash flow increased by 40.4 percent to CHF 4.1 billion.
  • Portfolio management fully on track. Sale of Nestle Skin Health expected to be completed in the second half of 2019 at an agreed price of CHF 10.2 billion. The strategic review of the Herta charcuterie business is ongoing and expected to be completed in late 2019.
  • Full-year guidance for 2019 confirmed. We expect organic sales growth around 3.5 percent and the full-year underlying trading operating profit margin at or above 17.5 percent. Underlying earnings per share in constant currency and capital efficiency are expected to increase.

Chief Executive Mark Schneider: «We are encouraged by our first half results and have made further progress toward our 2020 financial goals. Disciplined execution and fast innovation contributed to improved organic growth and profitability. Our growth was broad-based with our largest market, the United States, performing particularly well. Across our categories increased investment behind our brands and in innovation is clearly paying off, as reflected in our strong momentum in PetCare and the return to mid single-digit growth in coffee. Our Starbucks launch has been a great success so far and we plan on further geographic expansion and product innovation to make the most of this unique opportunity. Active portfolio management will continue to sharpen our strategic focus and position the company in attractive high-growth businesses. Our value creation model is clearly delivering the expected results and will support sustained profitable growth.»

Group Results

Total Group Zone AMS Zone EMENA Zone AOA Nestle Waters Other Businesses
Sales 6M-2019 (CHF million) 45’456 15’666 9’231 10’725 4’003 5’831
Sales 6M-2018 (CHF million) 43’920 14’153 9’303 10’634 3’967 5’863
Real internal growth (RIG) 2.6% 2.0% 3.7% 2.5% -3.3% 6.7%
Pricing 1.0% 1.9% -1.3% 0.8% 4.7% 0.7%
Organic growth 3.6% 3.9% 2.4% 3.3% 1.4% 7.4%
Net M+A 1.1% 6.4% -0.1% -0.1% -0.2% -6.5%
Foreign exchange -1.2% 0.5% -3.1% -2.3% -0.3% -1.4%
Reported sales growth 3.5% 10.8% -0.8% 0.9% 0.9% -0.5%
6M-2019 Underlying Top Margin 17.1% 19.2% 18.8% 23.1% 11.8% 19.6%
6M-2018 Underlying Top Margin* 16.1% 18.8% 18.7% 22.7% 10.0% 16.4%

* 2018 figures have been adjusted to reflect re-allocation of some marketing and administration expenses from Unallocated items into the Operating segments. This was done to better reflect the use of central overheads by each Zone and Globally Managed Business.

Group Sales

Organic growth reached 3.6 percent. RIG of 2.6 percent remained at the high end of the food and beverage industry. Pricing contributed 1.0 percent with some deceleration in the second quarter owing to the deflationary environment in Europe and lower pricing in Brazil. Organic growth was 3.4 percent excluding businesses under strategic review. The year-on-year growth acceleration was led by the United States and Brazil. AOA saw solid growth despite negative sales development in Pakistan and softness in some categories in China. Organic growth was 2.4 percent in developed markets, with a significant RIG acceleration in the second quarter. Growth in emerging markets was 5.3 percent.

All product categories posted positive growth. The largest contributions came from Purina PetCare, coffee and infant nutrition. Coffee returned to mid single-digit growth in the second quarter with improved Nespresso and Nescafe momentum across all Zones. The launch of Starbucks products in 14 markets saw strong demand and further markets will follow in the second half of the year.

Net acquisitions increased sales by 1.1 percent. Acquisitions of the Starbucks license and Atrium Innovations more than offset divestments, mainly Gerber Life Insurance. Foreign exchange had a negative impact of 1.2 percent. Total reported sales increased by 3.5 percent to CHF 45.5 billion.

Underlying Trading Operating Profit

Underlying trading operating profit increased by 10.1 percent to CHF 7.8 billion. The underlying trading operating profit margin reached 17.1 percent, an increase of 100 basis points in constant currency and on a reported basis. The classification of Nestle Skin Health as an asset held for sale contributed 20 basis points to the Group’s underlying trading operating profit margin.

Margin expansion was supported by pricing, structural cost reductions, operational efficiencies and improved mix. Pricing more than offset input cost inflation in the first half. Consumer-facing marketing expenses increased by 5.1 percent in constant currency.

Restructuring expenses and net other trading items were CHF 0.7 billion. Trading operating profit increased by 10.4 percent to CHF 7.1 billion. The trading operating profit margin increased by 90 basis points on a reported basis to 15.5 percent.

Net Financial Expenses and Income Tax

Net financial expenses grew by 45.7 percent to CHF 504 million, largely reflecting an increase in net debt. The Group reported tax rate increased by 110 basis points to 27.5 percent. The underlying tax rate declined by 280 basis points to 21.4 percent. The decrease resulted mainly from the development of our geographic and business mix.

Net Profit and Earnings Per Share

Net profit declined by 14.6 percent to CHF 5.0 billion, and earnings per share decreased by 12.3 percent to CHF 1.68. In the first half of 2018, net profit benefited from the sale of the U.S. confectionery business. Underlying earnings per share increased by 15.7 percent in constant currency and by 14.6 percent on a reported basis to CHF 2.13. The increase was mainly the result of improved operating performance and lower taxes. Nestle’s share buyback program contributed 1.9 percent to the underlying earnings per share increase, net of finance costs.

Cash Flow

Free cash flow grew by 40.4 percent and reached CHF 4.1 billion. The increase resulted from stronger operating performance and several one-off items.

Share Buyback Program

During the first half of 2019, the Group repurchased CHF 4.2 billion of Nestle shares. As of June 30, 2019, the Group had implemented 73 percent (CHF 14.5 billion) of the CHF 20 billion share buyback program announced in 2017. Nestle intends to complete the current program by the end of December 2019.

Net Debt

Net debt increased to CHF 38.3 billion as at June 30, 2019, compared to CHF 30.3 billion at December 31, 2018. The increase reflected the dividend payment of CHF 7.2 billion and share buybacks of CHF 4.2 billion, partially offset by strong free cash flow generation of CHF 4.1 billion.

Strategic Development

In May, Nestle announced the transition of the U.S. pizza and ice cream businesses from a Direct-Store-Delivery network to a warehouse distribution model. The transition will begin in the second half of 2019 and is expected to be completed in the second quarter of 2020.

Outlook

Full-year guidance for 2019 confirmed. We expect organic sales growth around 3.5 percent and the full-year underlying trading operating profit margin at or above 17.5 percent. Underlying earnings per share in constant currency and capital efficiency are expected to increase.

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