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The Nestlé Group's results for the first half of 2004: Increased sales, EBITA and net profit, with a record operating cash flow, confirm positive outlook for the full year

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  • Consolidated sales up 2.5 percent to CHF 42 454 million
  • Constant currency EBITA margin up 10 basis points
  • Real internal growth accelerates to 2.8 percent, organic growth 4.6 percent
  • Operating cash flow up 8.7 percent to a record CHF 3 347 million, free cash flow up 22.3 percent
  • Net profit of CHF 2 838 million and an unchanged net margin of 6.7 percent
  • Earnings per share up to CHF 7.30


Peter Brabeck-Letmathe, Vice-Chairman and Chief Executive Officer of Nestlé S.A.: "Nestlé's results for the first half of 2004 are resilient in the face of higher raw material prices, poor weather conditions and continued challenging trading conditions in western Europe. The constant currency EBITA margin is up 10 basis points from last year and, if the impact of acquisitions and divestitures is also excluded, there is a 20 basis points improvement in margins. This performance, delivered in spite of higher raw material and packaging costs as well as increased investment in our brands, shows that our efficiency programmes are on track. I expect a further acceleration of real internal growth in the second half of the year and remain optimistic that organic growth between 5 and 6 percent will be achieved for the full year."

Half-Year Figures at a Glance
  January-June 2004 January-June 2003 January-June 2004
Margins (%)
January-June 2003
Margins (%)
Sales CHF 42 454m CHF 41 437m    
EBITA CHF  5 122m CHF  5 045m 12.1% 12.2%
Net profit CHF  2 838m CHF  2 780m  6.7%  6.7%
EPS CHF 7.30 CHF 7.19    
Operating Cash Flow CHF  3 347m CHF  3 080m    
Real internal growth 2.8% 2.1%    
Organic Growth 4.6% 5.5%    


During the first half of 2004, the Nestlé Group's consolidated sales amounted to CHF 42 454 million, an increase of 2.5 percent, resulting in a 2.1 percent increase in net profit to CHF 2 838 million and an unchanged net margin of 6.7 percent. Earnings per share stood at CHF 7.30, up 1.5 percent from CHF 7.19 last year. EBITA increased 1.5 percent to CHF 5 122 million. Although the reported Swiss franc EBITA margin declined slightly by 10 basis points, the constant currency EBITA margin increased by 10 basis points. Operating cash flow grew 8.7 percent to CHF 3 347 million, while free cash flow increased 22.3 percent to CHF 2 002 million. These results were achieved in the face of higher prices for raw materials such as milk, coffee, sugar, energy and packaging materials, poor weather conditions, and a difficult business environment in western Europe.

Sales Performance

At constant currencies, sales improved 3.6 percent, while reported sales grew 2.5 percent. Organic growth was 4.6 percent, consisting of real internal growth of 2.8 percent (up from 2.1 percent in the first half of 2003). Prices increased 1.8 percent, compared with 3.4 percent in 2003, reflecting a more normal trading and currency environment. The strength of the Swiss franc against most currencies reduced the Group's consolidated sales by 1.1 percent, and divestitures, net of acquisitions, had a negative impact of 1.0 percent.

Trading conditions in western Europe remained challenging throughout the first half of the year and were exacerbated by the poor weather contrasting sharply with the 2003 heat wave. This had a particular impact on ice cream and water. Among the other categories, culinary and healthcare nutrition performed well. Western Europe will see a heavier product launch programme in the second half of the year, which should improve its contribution to real internal growth. Eastern Europe continued to perform well, with organic growth of close to 10 percent.

The Americas delivered a good performance with real internal growth of 4.0 percent and organic growth of 7.3 percent. PetCare in North America continued to do well, as did Latin America, with outstanding results for chocolate and soluble coffee. Brazil accelerated from a slow first quarter and is expected to grow for the full year, while Mexico has continued to perform extremely well. The US grocery business had 1.7 percent real internal growth and 2.5 percent organic growth. Frozen food, the biggest category in this area, was under temporary pressure while new product launches were being planned.

Asia, Oceania and Africa did well, in spite of continuing turmoil in the Middle East and West Africa. Greater China achieved 13.2 percent organic growth, a similar level to that of the Middle East. Japan achieved 4.4 percent real internal growth. Both real internal growth and organic growth were achieved in all regions of the Zone.

Nestlé Waters had a slow start to the year. Organic growth of 10.6 percent in North America, reflecting continued market share gains there, was offset by a slower performance in Europe, not least due to bad weather contrasting with last summer's exceptionally hot conditions.

Sales and EBITA Margins by Management Responsibilities and Geographic Areas
  January-June 2004
Sales in CHF millions
January-June 2003
Sales in CHF millions
January-June 2004
Organic Growth (%)
January-June 2004
EBITA margins (%)
January-June 2003
EBITA margins (%)
Food          
  - Europe (a) 13 999 13 763  -0.4 11.4 12.2
  - Americas (b) 13 058 12 354  +7.3 12.8 13.7
  - Asia, Oceania and Africa  7 181  6 834  +7.3 17.8 17.7
Nestlé Waters  4 128  3 948  +2.4  9.4  9.6
Other Activities (a)(c)(d)  4 088  4 538 +10.4 23.9 17.5
Group Totals 424 454  41 437  +4.6 12.1 12.2
(a) "Europe" restated for 2003 by excluding Eismann; "Other Activities" include Eismann
(b) Includes impact of Dreyer's acquisition, except for organic growth
(c) Mainly pharmaceutical products, joint-ventures, Eismann and Trinks
(d) Includes impact of Trinks disposal
All calculations based on non-rounded figures

 

Sales and EBITA Margin by Product Groups
  January-June 2004
Sales in CHF millions
January-June 2003
Sales in CHF millions
January-June 2004
Organic Growth (%)
January-June 2004
EBITA margins (%)
January-June 2003
EBITA margins (%)
Beverages (a) 10 847 11 195  +3.8 18.4 17.2
Milk Products, Nutrition and Ice Cream (b) 11 647 11 031  +4.7 10.8 12.2
Prepared Dishes and Cooking Aids  7 863  7 573  +2.8 10.9 11.6
PetCare  4 865  4 674  +7.0 13.9 13.7
Chocolate, Confectionery and Biscuits  4 486  4 415  +2.7  6.6  6.2
Pharmaceutical Products  2 746  2 549 +10.6 30.3 27.1
Group Totals 42 545 41 437  +4.6 12.1 21.2
(a) Includes impact of Trinks disposal
(b) Includes impact of Dreyer's acquisition, except for organic growth
All calculations based on non-rounded figures


Profit Performance

The Group's EBITA increased 1.5 percent to CHF 5 122 million. In constant currency terms, the EBITA margin for the first half of 2004 would have been 10 basis points higher than in the first half of 2003, and 20 basis points higher if the effects of acquisitions and divestitures had been excluded. This margin improvement, achieved despite higher raw material costs and increased investment in brands, shows that the Group's efficiency programmes are on track and that the Company is committed to protecting and building its market positions over the long term, regardless of short-term market challenges. Net profit was up 2.1 percent to CHF 2 838 million and the net profit margin remained unchanged at 6.7 percent. Earnings per share increased, up 1.5 percent to CHF 7.30.

In Europe the EBITA margin declined from 12.2 percent in 2003 to 11.4 percent, mainly due to increased marketing spend and raw material costs, as well as lower volumes. In the Americas, the 90 basis point decline in EBITA margin is due to the inclusion of the Dreyer's numbers in the consolidated results. This reduces the EBITA margin by 120 basis points. A like-for-like comparison, without the US ice cream business for 2003 and 2004, shows a 30 basis point increase of the EBITA margin. This was due mainly to strong performances in PetCare and Latin America. The 640 basis point EBITA margin increase of Other Activities from 17.5 to 23.9 percent includes the positive impact of the disposal of Trinks. A like-for-like comparison, without the Trinks figures, shows an impressive increase of 290 basis points, mainly due to Alcon's strong performance. In Asia, Oceania and Africa, the EBITA margin rose from 17.7 to 17.8 percent, a good result in the face of rising milk costs in the Zone. With a decline of only 20 basis points, Nestlé Waters' EBITA margin was resilient in the face of slower volume growth than in 2003 as well as lower pricing.

There was a mixed performance from the product groups. The positive impact of the disposal of Trinks distorts the EBITA margin evolution of beverages: without this, the margin is virtually unchanged, with a good performance of liquid beverages following the restructuring of the Japanese operation offsetting a weaker performance in water. In milk products, nutrition and ice cream, the like-for-like comparison, excluding the US ice cream operations, shows a 20 basis point increase in EBITA margin, highlighting good performances in shelf stable dairy products and the smaller nutrition businesses. PetCare's slight margin improvement masks a particularly strong improvement in North America and a flat performance in Europe. The chocolate, confectionery and biscuits margin recovered from the impact on margins in the first half of 2003 caused by high raw material costs. Prepared dishes and cooking aids experienced a decline in margins as a result of difficult trading conditions in North America. The margin of pharmaceutical products was up from 27.1 to 30.3 percent, reflecting the strong performance of Alcon.

Financial position

Nestlé continues to benefit from an exceptionally healthy financial position. Operating cash flow grew 8.7 percent to CHF 3 347 million, while free cash flow increased 22.3 percent to CHF 2 002 million. Capital expenditure fell slightly as a percentage of sales, while cash expenditure on acquisitions, net of divestitures, was significantly reduced. Net indebtedness fell from CHF 21 079 million at the end of the corresponding period in 2003 to CHF 15 362 on 30 June 2004. The ratio of net debt to equity fell from 59 percent at the end of June 2003 to 40 percent mid 2004.

Group strategy

After four years during which Nestlé achieved leadership in core categories such as PetCare and Ice Cream through acquisitions, the first half of 2004 saw substantial disposals of non-strategic businesses in areas such as distribution, culinary, and cocoa processing. This is in line with the Group's strategy to focus on high value-added, R&D-driven food and beverage products.

Internally, the Group has continued to focus on internal efficiencies through its Target 2004+ and Project FitNes programmes, facilitated by the GLOBE project which remains on track. These initiatives have enabled the Group to deliver an improved performance in the face of higher raw material and packaging costs and increased investment in brands. The decision to continue investing in brands and market positions in spite of higher raw material and packaging costs reflects the long-term nature of the Company's strategy.

Outlook

The first half of 2004 has seen a deterioration of the general environment for manufacturers due to the rise of raw material and packaging costs. Western Europe has also continued to be a very challenging market, not least due to poor weather conditions. On the other hand, trading conditions in Asia, Oceania and Africa and Latin America have improved, and a more positive market sentiment is expected in North America in the second half of the year. Consequently, the Group expects an acceleration of real internal growth helping it achieve its organic growth target of between 5 and 6 percent for the full year. The Company also expects to deliver a higher constant currency EBITA margin and improved cash flow for the full year.

Contacts:
Media: François-Xavier Perroud Tel.: +41-21-924 2596
Investors: Roddy Child-Villiers Tel.: +41-21-924 3622

Related Links:
H1 2004 sales and results financials
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H1 2004 sales and results events