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Organic Growth Below Expectations at Nestlé

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Organic Growth Below Expectations at Nestlé

Organic Growth Below Expectations at Nestlé
July 28
09:48 2017

First half reported sales at Nestlé declined by 0.3% to SFr43.0 billion (€37.9 billion), impacted by divestments (chiefly due to the creation of the Froneri joint venture) and foreign exchange factors, while underlying trading operating profit was flat at SFr6.8 billion. Organic growth was below expectations at 2.3% although RIG (Real Internal Growth) was resilient at 1.4% as pricing remained soft at 0.9%.

Nestlé’s Zone AMS was broadly in line with expectations as petcare in the US recovered after a slow start to the year. Zone EMENA delivered softer growth than anticipated in the second quarter. Selective price increases in Western Europe and unfavourable weather in June resulted in a short-term negative impact on RIG. Zone AOA accelerated for a fifth consecutive quarter, re-establishing its position as a growth engine for the group.

Nestlé Waters demonstrated a consistent level of growth. Nestlé Nutrition saw weak growth as the Chinese market remained difficult and developed markets overall were slightly negative. Nestlé Skin Health diluted group sales growth due to difficult comparables and pressure from generics in the prescription business. Nespresso continued to be a key growth driver.

Overall, developed markets delivered soft organic growth of 0.8%, with solid RIG of 1.1% offset by negative pricing of 0.3%. In emerging markets, organic growth decelerated by 100 basis points to 4.4%, with RIG of 1.9% and pricing of 2.5%.

Growth by category was broad-based, led by water, coffee and petcare. Confectionery was the only category with negative growth although it stabilised in the second quarter.

The trading operating margin held stable during the first half at 15.8% but increased by 10 basis points in constant currency. Efficiency projects, pricing and portfolio management generated 100 basis points of additional value. However, these benefits were absorbed by a broadly equal increase in input costs as Nestlé’s basket of commodities saw inflation for the first time in two years. Consumer-facing marketing spend decreased only slightly.

As expected, both restructuring expenditure and net other trading items increased overall by 77% to SFr166 million and SFr349 million, respectively, as Nestlé implemented its structural savings initiatives. As a consequence, trading operating profit (TOP) decreased by 2.5% to SFr6.4 billion. The TOP margin decreased by 30 basis points on a reported basis (-20 basis points in constant currency) to 15.0%.

Mark Schneider, chief executive of Nestlé.

“We are pleased with our value creation progress in the first half of 2017. This includes solid operational improvements as well as portfolio management choices and our decision to increase balance sheet efficiency,” comments Mark Schneider, chief executive of Nestlé.

He adds: “Organic growth in the first half did not fully meet our expectations. While volume growth remains at the high end of our industry, pricing continues to be soft. Asia and Africa confirmed their positive growth momentum. Western Europe experienced a volume decline, which we consider largely transitory. North America and Latin America saw a slight improvement in organic growth, mainly driven by volume. Our coffee, water and petcare businesses confirmed their growth potential with solid first-half results.”

“Profitability is in line with our expectations, as restructuring savings and efficiencies have offset higher commodity costs,” he says. “We are accelerating our margin improvement initiatives.”

Nestlé has confirmed its 2017 guidance with organic growth likely to be in the lower half of the 2-4% range but its 2020 mid-range expectations for organic growth remain unchanged.

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