Nestle SA Reports 7.5 Percent Organic Growth In First Half 2011

Aug. 12, 2011

Nestle SA reported sales of CHF 41.0 billion for the first half of 2011, representing 7.5 percent organic growth and 4.8 percent real internal growth.

Underlying earnings per share were up 5.2 percent in constant currencies.

Full-year outlook: organic growth at top end of 5 percent to 6 percent range, combined with a margin increase in constant currencies

Paul Bulcke, Nestlé CEO, said in a prepared statement: “Nestlé continued to make good progress in a period characterized by political and economic instability, natural disasters, rising raw material prices and, yes, a strong Swiss franc. This has made for an extremely tough, volatile and competitive environment. But by leveraging our competitive advantages, investing behind our growth drivers and excelling in operational efficiency and effectiveness, we managed to drive growth not only in emerging markets but also in developed countries, especially in Europe. Furthermore we improved our trading operating margin while increasing investment in our brands. For the full year, we expect organic growth at the top end of the 5 percent to 6 percent range, combined with a margin increase in constant currencies.”

The Group reported organic growth of 7.5 percent and a trading operating profit margin of 15.1 percent, up 20 basis points reported, up 40 basis points in constant currencies, from that achieved by the continuing operations in the first half of 2010.

The company continued to deliver growth both in emerging and developed markets, with organic growth of 5.7 percent in the Americas, 5.8 percent in Europe and 13.3 percent in Asia, Oceania and Africa. This performance reflects strong alignment and investment in strategic growth priorities and brands to support fast-flowing innovation pipeline. The company also continued to step up our investment in R&D, factories and capabilities to support our growth in both emerging and developed markets.

As announced in February 2011, Nestlé has made certain changes in presentation for revenue and operating profit, as from January 2011, which have no impact on net profit and earnings per share. The 2010 figures have been restated for all the changes as a comparable basis. Following the disposal of Alcon in August 2010, the 2010 comparatives are reported on a continuing basis, which excludes Alcon, except for net profit and earnings per share figures, which include the contribution from Alcon. This is reflected in the analysis below.

In the first half of 2011, the Nestlé Group’s organic growth was 7.5 percent, including real internal growth of 4.8 percent. Pricing increased in the second quarter to 3.8 percent compared to 1.5 percent in the first quarter, resulting in 2.7 percent pricing for the half year. There was a decrease in group sales of 12.9 percent to CHF 41 billion, due to an impact of 13.8 percent from foreign exchange and of 6.6 percent from divestitures, net of acquisitions.

The group’s trading operating profit margin increased by 20 basis points and by 40 basis points in constant currencies.

The cost of goods sold was higher by 180 basis points. The increase in input costs was partially offset by Nestlé Continuous Excellence savings, innovation, growth, sales mix and pricing.

Distribution costs increased by 10 basis points, as sales mix and savings compensated much of the higher oil-related costs compared to the first half of 2010.

Total marketing costs, including the cost of the sales and marketing organizations, were down by 20 basis points. More specifically, the consumer facing marketing spend increased by 6.2 percent in constant currencies. This was on top of a 14 percent increase in the first half of 2010.

Administrative costs were down by 150 basis points. This demonstrates a rigorous approach to efficiency and shows the benefit of rolling out Nestlé Continuous Excellence, enabled by GLOBE, to areas beyond operations, and continues the trend we experienced last year.

Nestlé Continuous Excellence savings are in line with our target of at least CHF 1.5 billion for the full year.

The net other trading income and expenses improved by 40 basis points, resulting mainly from lower restructuring costs in the half year.

The underlying earnings per share (EPS) rose 5.2 percent in constant currencies. The reported EPS were CHF 1.46 compared with CHF 1.60 last year. Net profit was CHF 4.7 billion.

The group’s operating cash flow was CHF 1.7 billion. This number is impacted by the sale of Alcon, foreign exchange and higher commodity costs.

For the Americas zone, sales were CHF12.8 billion; 5.6 percent organic growth; 1.1 percent real internal growth; trading operating profit margin 17.3 percent.

In North America, where consumer confidence is subdued, the company continued to grow. The frozen business saw gains in pizza, in the U.S. for DiGiorno and in Canada for Delissio.

Stouffer’s also gained market share, and Lean Cuisine picked up momentum in recent months through launches such as Market Creations and by increasing its presence in snacking.

Necessary pricing in ice cream impacted volumes for Dreyer’s, although Häagen Dazs proved more resilient and Nestlé Drumstick continued to grow well. Skinny Cow was launched into the chocolate category.

Both Nescafé in soluble coffee and Coffee-Mate in non-dairy creamers performed well. The launch of Coffee-Mate Natural Bliss was very well received. The pet care business gained market share in a weak category.

Latin America had a strong first half. Brazil achieved high single-digit growth while the rest of the markets or regions were double-digit. Highlights included Nescafé, powdered beverages such as Nescau and Nesquik, pet care with products such as Dog Chow and Cat Chow, culinary, chocolate, dairy and biscuits as well as popularly positioned products (PPPs) in many categories.

The zone’s trading operating profit performance reflects the impact of severe cost pressure, compensated by necessary pricing action and efficiencies. The level of marketing spend was higher than in the first half of last year.

Nestlé Waters sales were CHF 3.4 billion; 5.8 percent organic growth; 4.8 percent real internal growth; trading operating profit margin 8.6 percent.

Nestlé Waters achieved growth in all three zones. Market shares were generally positive, with Europe being a highlight. The international brands, S. Pellegrino, Vittel, Acqua Panna, Contrex and Perrier, performed particularly well.

In North America the competitive environment is tough, and increased pricing is impacting volume for the regional brands such as Poland Spring and Arrowhead, as well as for Nestlé Pure Life. However, the U.S. was a key contributor to the good performance of the international brands.

Nestlé Nutrition sales were CHF 3.7 billion; 8.8 percent organic growth; 6.5 percent real internal growth; trading operating profit margin 21.1 percent.

Infant nutrition, which represents about 90 percent of the division’s sales, achieved double-digit organic growth in the first half. There were strong performances from all areas, both by category and geography, resulting in market share gains in key markets and on a global basis. All three zones grew, with highlights including France and Russia, the Greater China and South Asia regions, the US and Mexico. Amongst the brands, Cerelac, Good Start and Lactogen achieved double-digit growth. Switzerland saw the launch of Nestlé’s newest innovation, BabyNes, the first comprehensive nutrition system for babies.

Performance nutrition enjoyed a high level of growth in Oceania and Europe, with successful innovations such as PowerBar fruit gels. A high level of promotions in North America also drove strong volume growth.

Jenny Craig had a tough first half in North America, due to the weak economic environment and a high level of competitive pressure. Its launch in France and the U.K. continues to make good progress, while the Oceania business is performing well.

Nestlé Nutrition’s trading operating profit margin was impacted by high raw material costs, reduced sales in weight management and the phasing of investment behind new product launches. The benefit of pricing taken in the first half will be more evident in the second half.

,000 re? t`?? P? st1:place w:st="on">Europe. In Brazil, Senseo was successfully launched in Rio de Janeiro following the promising results of the initial introduction of Senseo in São Paulo. The integration of Brazilian Damasco is ahead of plan, with better than expected synergies and growth. Australia successfully launched two new products, Piazza D’Oro and Moccona Café Classics Frappé, which helped to reach a record-high value share of 67 percent in the freeze-dried instant coffee segment. In Foodservice, the trend in machine placements picked up in the quarter and the recent successful roll-out of Cafitesse Excellence contributed to the positive momentum.

The international beverage business is making good progress in aligning its organizational structure with its future growth ambitions. As part of this process, the marketing and R&D functions are being redesigned to optimize the innovation process and allow for a faster product to market process.

Adjusted operating segment income decreased 13 percent to $121 million resulting in an adjusted operating margin of 12.4 percent which largely reflects the time lagging effect between commodity cost increases and subsequent price increase. MAP spending in the fourth quarter was below the significant investment in the prior-year period which in large part is attributable to last year’s launch of L'OR EspressO in France. On a full year basis, MAP investment was up 3 percent providing adequate support to the coffee and tea brands. Reported operating segment income declined 4 percent to $119 million.

Adjusted net sales for international bakery declined 8 percent to $182 million mainly due to difficult macro-economic and competitive conditions in Spain. Reported net sales declined 1 percent to $182 million.

Adjusted operating segment income was $13 million lower than the prior year while reported operating segment income declined $10 million. In Spain, further price reductions were required to maintain market share, which led to additional short-term margin pressure. Restructuring activities to transform the company’s sales force to independent operators are progressing as planned.

In the fourth quarter corporate expenses, excluding significant items, were $33 million lower than the prior-year period. For the full year, corporate expenses, excluding significant items, declined $94 million primarily attributable to the impact of headcount reductions, lower employee benefits costs, the sale of the company plane and a reduction in franchise taxes


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