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ANALYSIS

Nestle registers 3.2% organic growth; Sales up by 0.8% to CHF 89.5 billion
Saturday, 18 February, 2017, 08 : 00 AM [IST]
Vevey
Total sales increased by 0.8 per cent to CHF 89.5 billion, with a foreign exchange impact of -1.6 per cent. Acquisitions net of divestitures reduced sales by 0.8 per cent.

Organic growth was 3.2 per cent, with real internal growth reaching a three-year high of 2.4 per cent.

Pricing was limited at 0.8 per cent, with some improvement in the second half of the year. Pricing is expected to improve further for the full year 2017.

Organic and real internal growth were broad-based, highlighting the strength and resilience of our diversified portfolio.

    
          Developed Emerging
  Group EMENA AMS AOA markets markets
Sales (in CHF billion) 89.5 26.8 40.2 22.5 52.1 37.4
RIG percentage 0.024 0.024 0.02 0.03 0.023 0.024
Pricing percentage 0.008 -0.005 0.025 -0.002 -0.006 0.029
Organic growth percentage 0.032 0.019 0.045 0.028 0.017 0.053

Innovation supported volume growth, with 30 per cent of the sales coming from products introduced or renovated in the last three years.

E-commerce accounted for five per cent of sales, up 18 per cent year-on-year.

Trading operating profit
Trading operating profit was CHF 13.7 billion with a margin of 15.3 per cent, up 20 basis points on a reported basis and up 30 basis points in constant currency.

This margin improvement was achieved while:

Investment increased in brand support, digital marketing, research and development, and in the new nutrition and health platforms. Consumer-facing marketing spend increased by 6.3% in constant currency.

Restructuring costs doubled to CHF 300 million in 2016 to support structural cost-saving initiatives.

Net profit
The net profit of CHF 8.5 billion was impacted by several items, the largest one being a one-off non-cash adjustment to deferred taxes.

Reported earnings per share decreased by 4.8 per cent to CHF 2.76, for the same reasons.

Underlying earnings per share in constant currency increased by 3.4 per cent.

Cash flow and working capital
Operating cash flow improved by CHF 1.3 billion to CHF 15.6 billion (17.4 per cent of sales) due in part to the reduction of working capital.

Free cash flow improved by CHF 200 million to CHF 10.1 billion (11.3 per cent of sales). This demonstrated the company’s ability to generate strong cash flow consistently even in a challenging foreign exchange environment.

Average working capital decreased by 190 basis points from 4.7 per cent to 2.8 per cent of sales (average of last five quarters).

The return on invested capital (ROIC), including goodwill and intangible assets, improved by 30 basis points to 11.2 per cent. ROIC before goodwill and intangible assets improved by 180 basis points to 31.7 per cent.

Zone AMS

Sales were worth CHF 26.4 billion; organic growth was 4.2 per cent, real internal growth was 1.3 per cent and trading operating profit margin was 19.3 per cent, -10 basis points

The zone reported good and consistent organic growth.

In North America growth accelerated year-on-year:

In petcare, innovation supported good growth across the cat food range. In dog food, the premium portfolio performed well as Merrick, Purina ONE and Pro Plan all delivered double-digit growth.

Beneful stabilised as there was progress in restaging the brand.

Coffee Mate sustained good momentum through innovations such as 64oz and new flavours in natural bliss.

Lean Cuisine and Stouffer’s Fit Kitchen delivered strong organic growth supported by new line extensions.

The performance of confectionery in the United States was disappointing, impacted by the competitive environment and low growth in the mainstream chocolate market.

In Latin America strong organic growth was led by price increases following currency depreciation, as real internal growth slowed:

In Brazil the company had high single-digit organic growth. Significant price increases at the end of the first half of the year impacted volumes in the short term. Nescafé Dolce Gusto and KitKat continued to grow in double digits.

In Mexico there was another year of good growth, which was broad-based across dairy, coffee creamers, soluble coffee, Nescafé Dolce Gusto and chocolate.

Petcare continued to deliver strong growth across the region.

The trading operating profit margin decreased by 10 basis points, due to an increase in restructuring costs.

The profitability margin improved in North America, but Latin America was largely affected by high cost inflation caused by currency depreciation and commodity prices.

Zone EMENA

Sales were worth CHF 16.2 billion; organic growth was two per cent, real internal growth was 16.7 per cent and trading operating profit margin, +100 basis points

The zone delivered strong real internal growth, accelerating for a fourth consecutive year and gaining market share, showing the ability to innovate.

In Western Europe positive organic growth was due to solid real internal growth. Pricing was negative, affected by sustained low commodity prices, trade pressure and intense competition. Petcare, Nescafé and pizza continued to be the key sources of growth across most markets.

In Germany and France we had solid real internal growth, while there was good organic and real internal growth in Southern Europe. In the United Kingdom, it was a particularly challenging year with both volume and pricing declining slightly.

Central and Eastern Europe continued to deliver strong organic growth on the basis of good real internal growth and positive pricing:

In Russia the company achieved double-digit organic growth with positive real internal growth. This included strong growth in Nescafé soluble coffee, especially Barista. Russia was Nestlé’s strongest performing market in petcare globally, led by Felix cat food.

Inflation in Russia and Ukraine drove positive pricing in the region, whilst all other markets experienced deflationary pricing.

Business remained resilient in the Middle East and North Africa with positive organic growth, but the unstable environment and deflationary pressure slowed momentum.

Events in Iraq, Yemen, Libya and Syria continued to have an effect. There was also deflationary pressure on dairy in the region

In Turkey, Nescafé and confectionery drove double-digit growth. The North Africa market also did well.

The trading operating profit margin improved by 100 basis points even as restructuring costs and marketing investment increased. Profitability improved across most categories as a result of premiumisation, volume leverage, efficiency savings and favourable input costs. Portfolio management also contributed positively with the creation of the Froneri joint venture in ice cream.

Zone AOA

Sales were worth CHF 14.5 billion; organic growth was 3.2 per cent, real internal growth was 2.9 per cent and trading operating profit margin was 19 per cent, +60 basis points.

The zone saw real internal growth and organic growth gain increasing momentum throughout the year, with market shares recovering and almost all markets contributing.

The Zone’s emerging markets had a good year overall with growth accelerating in most businesses. Yinlu was the main exception, decreasing the Zone’s organic growth by 260 basis points.

In China, the double-digit decline of Yinlu affected overall growth. Several initiatives to turn around the business are in place and stabilisation is expected in 2017. Dairy (excluding Yinlu) and confectionery grew positively and Nescafé performed well.

South East Asia was strong with double-digit growth in Vietnam and Indonesia, especially from dairy and Milo. The Philippines also performed well, with high single-digit growth, particularly due to Bear Brand in dairy.

There was good growth in sub-Saharan Africa. Real internal growth remained positive despite price increases to offset currency depreciation. There was double-digit growth in Central and West Africa (including Ghana, Côte d’Ivoire and Nigeria) and in Equatorial Africa (including Angola), with Maggi and Nido doing well.

The company’s business in India grew strongly despite some disruptive impact from demonetisation at the end of the year. Maggi noodles continued to regain market share. Confectionery also did well with KitKat. There was also strong growth in Pakistan from dairy, ready-to-drink and other categories.

In the developed markets, there was good growth in Japan and solid real internal growth in Oceania.

Japan’s organic growth was above the zone and group averages, balanced evenly between real internal growth and pricing. This was based on innovation and premiumisation across Nescafé and KitKat.

In Oceania, there was solid real internal growth in line with the group, which was largely offset by continuing deflationary pressure.

The zone improved its trading operating profit margin by 60 basis points, while also increasing marketing investment. Positive gross margin development was helped by favourable input costs, particularly in dairy, as well as cost efficiencies and improved volumes and product mix. The effect of an increase in restructuring spend was more than offset by lower one-off costs related to Maggi in India.

Nestlé Waters

Sales were worth CHF 7.9 billion; organic growth was 4.5 per cent, real internal growth was 4.5 per cent and trading operating profit margin was 11.9 per cent, +110 basis points.

Nestlé Waters maintained its good organic growth momentum based on real internal growth. Pricing remained flat.

In the United States, international premium brands saw another year of dynamic growth and there were contributions above the group and Nestlé Waters averages from regional brands Poland Spring, Ice Mountain and Deer Park. The shutdown of a factory in Texas following a tornado in April had a negative impact.

In Europe, the majority of markets maintained growth after 2015 had been a strong year due to the heatwave. There were good contributions from the United Kingdom, Spain and Germany.

Of the other markets, South East Asia, Mexico and North Africa did well.

Further strong growth came from the international premium sparkling brands, Perrier and S.Pellegrino, which grew twice as fast as the mainstream portfolio.

The flagship international brand, Nestlé Pure Life, made a good contribution, with organic growth above the Nestlé Waters average.

There was a strong trading operating profit margin improvement of 110 basis points while marketing investment also increased. This was possible due to a combination of volume growth, positive product mix through premiumisation, operational cost efficiencies and favourable input costs.

Mark Schneider, chief executive officer, Nestlé, said, “Our 2016 organic growth was at the high end of the industry but at the lower end of our expectations. We saw a solid trading operating profit margin improvement and our cash flow grew significantly.”

“Based on these results, our board of directors is pleased to propose the 22nd consecutive dividend increase, underlining our commitment to continuity,” he added.

“In 2017, we expect organic growth between two and four per cent. In order to drive future profitability, we plan to increase restructuring costs considerably in 2017,” Schneider said.

“As a result, the trading operating profit margin in constant currency is expected to be stable. Underlying earnings per share in constant currency and capital efficiency are expected to increase,” he added.

“Nestlé continues to invest in future growth and operating efficiency, targeting mid-single digit organic growth and significant structural cost savings by 2020,” Schneider said.
 
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