Business & Money | Sunday 29 July, 2018 11:17 am |

 

•       Organic growth of 2.8%, with 2.5% real internal growth (RIG) and pricing of 0.3%. 

•       Total sales increased by 2.3% to CHF 43.9 billion (6M-2017: CHF 42.9 billion). Acquisitions and divestments netted to zero. Foreign exchange reduced sales by 0.5%.  

•       Underlying trading operating profit margin was 16.1%, an increase of 20 basis points in constant currency and on a reported basis.  

•       Trading operating profit margin was 14.6%, 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% to CHF 1.92 on a reported basis. Underlying earnings per share increased by 9.2% in constant currency and by 10.4% to CHF 1.86 on a reported basis. 

•       Free cash flow increased by 52%, 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%; underlying trading operating profit margin improvement in line with our 2020 target. Restructuring costs[1]are expected at around CHF 700 million. Underlying earnings per share in constant currency and capital efficiency are expected toincrease. 

 

Mark Schneider, Nestlé CEO said: “Our first half results confirmed that our strategic initiatives and rigorous execution are clearly paying off. Nestlé 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 EMENA		Nestlé Waters	Other  Businesses
Sales 6M-2018 (CHF m)  Sales 6M-2017 (CHF m)*	43’920		9’303		3’967	5’863
	42’926		8’741		3’988	5’235
Real internal growth (RIG)  Pricing  Organic growth  Net M&A  Foreign exchange  Reported sales growth	2.5%		3.1%		-0.7%	5.4%
	0.3%		-0.6%		1.7%	0.3%
	2.8%		2.5%		1.0%	5.7%
	0.0%		-0.2%		-0.8%	4.9%
	-0.5%		4.1%		-0.7%	1.4%
	2.3%		6.4%		-0.5%	12.0%
6M-2018 Underlying TOP Margin  6M-2017 Underlying TOP Margin*	16.1%		18.9%		10.0%	16.4%
	15.9%		18.2%		12.7%	14.8%

* 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 Nestlé 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% in the first half was in line with our expectations and within our guidance for 2018. RIG was 2.5% and remained at the high end of the food and beverage industry.  Pricing contributed 0.3%, reflecting the challenging environment in Europe and lower inflation in some emerging markets.. All categories reported positive growth, led by coffee, petcare, 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 U.S. confectionery. Foreign exchange had a negative impact of 0.5%. Total sales increased by 2.3% on a reported basis to CHF 43.9 billion.  

 

Underlying Trading Operating Profit 

Underlying trading operating profit increased by 3.5% 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%.  

 

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% to CHF 6.4 billion and the trading operating profit margin decreased by 50 basis points on a reported basis to 14.6%. 

 

Net Profit and Earnings Per Share 

Net profit increased by 19.0% to CHF 5.8 billion and earnings per share increased by 21.4% 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% in constant currency and by 10.4% on a reported basis to CHF 1.86. Nestlé’s share buyback program contributed 1.5% to the underlying earnings per share increase, net of finance costs. 

 

Cash Flow 

Free cash flow increased by 52%, 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 

Nestlé 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 Nestlé 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. 

 

 

 

 

Zone Europe, Middle East and North Africa (EMENA) 

•       2.5% organic growth: 3.1% RIG, -0.6% pricing.  

•       Western Europe returned to positive organic growth in the second quarter. RIG accelerated, offsetting negative pricing. 

•       Central and Eastern Europe posted mid single-digit growth, with strong RIG. Pricing was negative. 

•       Middle East and North Africa saw mid single-digit organic growth, both RIG and pricing were positive. 

•       The underlying trading operating profit margin grew by 70 basis points to 18.9%.  

 

	Sales 6M-2018	Sales 6M-2017	RIG	Pricing	Organic  growth	UTOP  6M-2018	UTOP  6M-2017	Margin 6M-2018	Margin 6M-2017
Zone EMENA	CHF 9.3 bn	CHF 8.7 bn	3.1%	-0.6%	2.5%	CHF 1.8 bn	CHF 1.6 bn	18.9%	18.2%

 

Organic growth increased to 2.5%. RIG was strong at 3.1% following an acceleration in the second quarter. This more than offset negative pricing. Net divestments reduced sales by 0.2%. Foreign exchange had a positive impact of 4.1%. Reported sales increased by 6.4% to CHF 9.3 billion.  

 

Zone EMENA saw positive growth across most geographies and categories. Petcare, coffee and nutrition were the main contributors. Petcare maintained strong momentum, based on the success of Felix in Russia. Coffee also saw good growth with stronger RIG, supported by the relaunch of Nescafé Gold. Nutrition and dairy performed well in Central and Eastern Europe, and the Middle East and North Africa. Confectionery saw improved growth, particularly in the United Kingdom. New product launches included KitKat Ruby andMilkyBar Wowsomes, a new chocolate bar with 30% less sugar based on Nestlé’s breakthrough natural structured sugar.

 

The Zone’s underlying trading operating profit margin increased by 70 basis points, supported by operational efficiencies, structural cost savings and lower commodity costs. Strong RIG also led to better capacity utilization and operating leverage. 

 

 

Nestlé Waters 

 

•       1.0% organic growth: -0.7% RIG; 1.7% pricing.  

•       Europe had slightly negative growth, reflecting weak RIG and slightly positive pricing. 

•       The underlying trading operating profit margin decreased by 270 basis points to 10.0% following higher commodity and distribution costs. 

 

	Sales 6M-2018	Sales 6M-2017	RIG	Pricing	Organic  growth	UTOP  6M-2018	UTOP  6M-2017	Margin 6M-2018	Margin 6M-2017
Nestlé Waters	CHF 4.0 bn	CHF 4.0 bn	-0.7%	1.7%	1.0%	CHF 0.4 bn	CHF 0.5 bn	10.0%	12.7%

 

Organic growth for the first half was 1.0% following a sequential improvement in the second quarter,. RIG declined by 0.7%, mainly due to Europe and some emerging markets. Pricing increased to 1.7%. Net divestments and foreign exchange reduced reported sales by 0.8% and 0.7%, respectively. Reported sales in Nestlé Waters decreased by 0.5% to CHF 4.0 billion.  

 

 

The underlying trading operating profit margin decreased by 270 basis points as higher costs related to PET packaging and distribution were not yet compensated by price increases. 

 

 

Other Businesses 

•       5.7% organic growth: 5.4% RIG; 0.3% pricing.  

•       Nestlé Health Science delivered mid single-digit organic growth, with strong RIG.  

•       Nestlé Skin Health saw mid single-digit growth, with positive RIG but negative pricing.  

•       The underlying trading operating profit margin increased by 160 basis points to 16.4%.  

 

	Sales 6M-2018	Sales 6M-2017	RIG	Pricing	Organic  growth	UTOP         UTOP      6M-2018   6M-2017	Margin 6M-2018	Margin 6M-2017
Other Businesses	CHF 5.9 bn	CHF 5.2 bn	5.4%	0.3%	5.7%	CHF 1.0 bn CHF 0.8 bn	16.4%	14.8%

 

Organic growth of 5.7% was based on strong RIG of 5.4% and pricing of 0.3%. Net acquisitions increased reported sales by 4.9%, mainly due to the consolidation of Atrium Innovations into Nestlé Health Science from March 2018. Foreign exchange also had a positive 1.4% impact. Reported sales in Other Businesses increased by 12.0% to CHF 5.9 billion. 

 

 

The underlying trading operating profit margin increased by 160 basis points. This was mainly driven by an improvement in Nestlé Skin Health and Nespresso. 

 

 

Outlook 

Full-year guidance for 2018 confirmed, with organic sales growth expectation narrowed to around 3%; underlying trading operating profit margin improvement in line with our 2020 target. Restructuring costs[2]are expected at around CHF 700 million. Underlying earnings per share in constant currency and capital efficiency are expected to increase.