Swiss
food group Nestlé posted half-year results this week that beat financial
market expectations and pushed share prices higher on assumptions that the Group’s
reinvigorated strategy will continue to reap rewards.

The world’s largest food
group, Nestlé on Wednesday reported 2000 net profits up 34.6%, to 2.798
billion Swiss francs on the first six months of 1999, on a rise in sales of
9.9% to CHF 38.8 bn. The results translated into increased earnings per share
(EPS) of 35.9% for investors.

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“The strong sales
performance reflects the Group’s emphasis on internal growth,” said the
company statement, citing improved internal operating efficiency.

The successful strategy
is widely seen as the brainchild of CEO Peter Brabeck.

Brabeck is credited with
streamlining, amongst other things, the Group’s advertising budget by concentrating
on a few key brands such as Nescafé, and divesting the company of frozen
food business Findus in Europe, the sweet chain Laura Secord in Canada and Roast&Ground’s
coffee business in the US.

Nevertheless, the Group
also bought the Ueshima Coffee Company’s vending business in Japan and PowerBar
in the US. Nestlé’s new bottled water and pharmaceuticals divisions also
“added significantly” to sales growth, said the company.

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The slimmer portfolio of
companies and lower raw material prices (particularly cocoa and coffee) “were
able to offset higher packaging costs,” according to the company’s results.
Production costs have fallen CHF 600 million annually according to some estimates.

Improvements in internal
growth were apparent across the world, said Nestlé, especially in Asia,
Oceania, Africa, Latin America and Eastern Europe. The only regions in the world
to buck the positive Nestlé trend were Western Europe, Canada and Brazil.

An appreciating US dollar
against the Swiss franc, along with all other major currencies except the Euro,
also boosted earnings by 6.2%. Operating profit rose 24.1% to CHF 4.296 bn,
increasing operating margins to 11%, compared to 9.8% over the same period last
year.

“Nestlé,”
said the statement, “remains confident about its potential to achieve performance
improvements for the full year 2000, and … to reach higher sales and profits
than in 1999.”

Still, the Group itself
cautions against “the extrapolation of the sales and profit growth rates
recorded during the first half of 2000 for the full year.” The end of 2000
“will be less favourable,” warns the company.

Market analysts immediately
recommended the company as “a good defensive pick” (Merrill Lynch)
and said they expect restructuring throughout the company to push more modest
growth in the second half of the year.

“Evidence of CEO Peter
Brabeck’s strategic focus on organic growth and operational efficiency is clearly
emerging” reported an upbeat analysis by Salomon Smith Barney, which said
the results “vindicate” Brabeck’s work. The financial advisors suggested
that the “dramatic improvement in margins and real internal growth”
are the fruit of a three-year efficiency-drive.

However, a number of the
factors (falling commodity prices and favourable exchange rates) enabling Nestlé
to capitalise on improved internal efficiency were globally determined and beyond
the Group’s immediate control. And question marks remain over the Group’s business
in Western Europe where price deflation is adding to organisational difficulties.

Nestlé in recent
years has set itself a 4% annual growth target, without ever getting there,
which makes first half growth of 4.5% this year look unusually good. Some financial
market watchers think the multinational Group could surprise again at the end
of the year with good results giving annual earnings per share of 16% upwards.
Investors certainly hope so.

By
Warren Giles

Key figures (consolidated)
  January/June January/June

In millions of CHF (except for per share data)		 2000 1999
Sales 38’784 35’277
EBITDA(a) 5’867 5’010
as % of
sales		 15.1% 14.2%
EBITA(b) 4’500 3’681
as % of
sales		 11.6% 10.4%
Trading
profit		 4’296 3’461
as % of
sales		 11.1% 9.8%
Net
profit		 2’798 2’079
as % of
sales		 7.2% 5.9%
Expenditure
on tangible fixed assets		 1’327 1’171
Equity,
end June		 26’386 22’208
Market
Capitalisation, end June		 126’085 108’289
 
Per
share:
Net profit CHF 72.7 53.5
Equity,
end June		 CHF 686 571
(a)
Earnings before interest, taxes, depreciation, and amortisation.
(b) Earnings before interest, taxes, and amortisation.
Principal
key figures in USD(c)
In millions
of USD (Except for per share data)		 2000 1999
Sales 23’794 22’759
EBITDA(a) 3’599 3’232
EBITA(b) 2’761 2’375
Trading
Profit		 2’636 2’233
Net
profit		 1’717 1’341
Equity,
end June		 16’188 14’328
Market
capitalisation, end June		 77’353 69’864
 
Per
share:
Net profit USD 44.6 34.5
Equity,
end June		 USD 421 368
(c)
Figures translated at end June rates.
Principal
key figures in Euro(c)
In millions
of Euro (except for per share data)		 2000 1999
Sales 24’862 22’048
EBITDA(a) 3’761 3’131
EBITA(b) 2’885 2’301
Trading
Profit		 2’754 2’163
Net
profit		 1’794 1’299
Equity,
end June		 16’914 13’880
Market
capitalisation, end June		 80’824 67’681
 
Per
share:
Net profit EUR 46.6 33.4
Equity,
end June		 EUR 440 357
(a)
Earnings before interest, taxes, depreciation, and amortisation.
(b) Earnings before interest, taxes, and amortisation.
(c) Figures translated at end June rates.