Nestle saw organic sales increase 4.5% in the first half of 2015 and confirmed it is on track to meet full-year guidance of growth of "around 5%". The company pushed through efficiency initiatives it is feeding back into marketing investment and said it is starting to see a turnaround in its problem areas – US frozen and China. However, the company remained cautious on the outlook for China while the impact of the Maggi recall in India weighed. Here are just-food's key takeaways from Nestle's first half.
1. Growth outlook maintained – but should we expect the lower end?
Nestle hit organic growth of 4.5% in the first half. CEO Paul Bulcke said the result was "in line with our expectations". He stressed growth was "broad-based across categories and geographies" and said the "good momentum" enabled Nestle to confirm its organic sales outlook for the full year. Nestle has targeted organic growth of "around 5%". Speaking during a conference call, recently-appointed CFO François-Xavier Roger declined to confirm growth is expected to step up in the second half. He said the first half had seen "some positives" but also "some negatives as well". "Net net we are comfortable of maintaining our guidance of around 5% [organic growth]… I don't have any specific comment to make if H2 will be better than H1." Steffen Kindler, head of investor relations, added the current performance met Nestle's (somewhat vague) guidance but said "4.5% would be at the lower end of what we expect to reach."
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2. Margin growth and investment
Nestle also expects "improvements in margins" in the full year. During the half, Nestle's efforts to drive cost efficiencies, as well as the integration of its skin care business, led to a 160 basis point drop in the cost of goods sold. Some of these cost savings were reinvested in increased consumer-facing marketing support. "We have decided to invest most of the benefits in marketing for future growth," Roger said. Trading operating margin rose by 20 basis points, in constant currencies.
3. Foreign exchange uncertainty
Net profit attributable to shareholders dipped to CHF4.52bn (US$4.63bn), versus CHF4.63bn in the year-ago period. The main reason for the decline was the strength of the Swiss franc, which impacted Nestle's reported results. Stripping out currency exchange, however, underlying earnings rose 7.3%. For the full year, there remains some uncertainty over the impact of forex on Nestle's bottom line. Roger, however, sounded a note of optimism. "We have some pressure from the Swiss franc but we have recovered some of it already," he stressed.
4. Developing versus developed market growth
Nestle's rate of sales growth in emerging markets accelerated in the half, with sales rising 7.3% versus 6.7% in the first quarter. However, the company also stressed growth increased in developed markets – up 2.2%. Roger said rising sales across its geographies and the breadth of Nestle's operations are an advantage for the Swiss food maker. "Growth was in developed and developing markets and across all regions. We have been able to drive efficiencies and increase investment in marketing as well as R&D," he said. "If you look at the trend from 2013-15… we clearly see an improvement in the organic growth in developed markets… which I see as something very positive because it means we aren't dependent on emerging markets. I am very positive about emerging markets but it demonstrates the capability of Nestle to grow in developed and emerging markets."
5. Maggi recall in India weighs
The Maggi recall in India dented sales from Nestle's combined Asia, Oceania and Africa division – which nevertheless returned to growth in the period, rising 0.8%. "While performance is still soft this shows the zone is gradually improving in line with our plans," Roger said. The executive revealed the Maggi recall hit real internal growth – stripping out pricing – by 20 to 40 basis points in the region. He estimated the cost of the recall has totalled CHF66m so far. However, Nestle had some good news on India yesterday. The Bombay High Court lifted the ban placed on the sale of Maggi noodles by the country's food safety regulator and ordered further tests of Maggi products. Speaking to just-food, a spokesperson said "respects" the decision "to revoke the ban order" and "will comply with the order to undertake fresh tests".The spokesperson continued: "It is Nestle India’s endeavour to get Maggi Noodles back on the shelves as soon as possible for the benefit of our consumers."
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By GlobalData6. Early signs of China turnaround
Nestle was also able to point to the early signs of a turnaround in China, where the group has struggled to adapt to changing consumer preferences. In China, Nestle said an improvement could be seen "across the categories" with ambient dairy, confectionery and soluble coffee all contributing. Roger said Nestle had seen "mid-single digit" growth in the market. "We continue our effort to adapt our portfolio in line with fast changing consumer expectations… the recovery will be a continual process through 2015," he said.
7. Nestle positive on US frozen
Nestle also said it is encouraged by the early results of efforts to turn around its other struggling unit, US frozen. During the period, Nestle has undertaken substantial renovation and innovation work for its US brands such as Lean Cuisine and Stouffer's. Consumer-facing communications are scheduled to begin in the third quarter. "We expect gradual improvement through year. Growth was soft in the first half but trends are improving," Roger noted.
8. Verdict mixed on turnaround
The verdict remains mixed on Nestle's performance in turning around the problem areas of its business – particularly US frozen. Early signs of improvement caused some pundits to hail the start of a recovery and point to an improved earnings outlook for the company. Kepler Cheuvreux analyst Jon Cox noted: "We foresaw a generally improved earnings picture for Nestle, and as a result only nudge up estimates by 1%… However, it is happening sooner than expected: the company talked about progress in terms of its North American frozen business relaunch and a recovery in China. In particular, a 150 basis point gross margin gain, half of which was related to synergies, was impressive." However, others believe that US frozen needed to show greater signs of live. Mainfirst analyst Alain-Sebastian Oberhuber said: "Disappointing remains the US frozen prepared dish business with grew just +0.8% vs. our estimate of +2.4%. Obviously this could be a hint that Nestle could be willing to divest some of its US frozen meals activities."
