Nestlé maintains strong momentum over first half of 2007 - 7.4% organic growth, EBIT margin up 60 basis points - CHF 25 billion three-year share buyback programme

   
Back to News archiveVevey,Aug 15, 2007

  • Sales of CHF 51.1bn, up CHF 4bn (+8.4%)
  • 7.4% organic growth, 5.3% real internal growth
  • EBIT of CHF 6.9bn (+14.2%), margin of 13.5%, +60 basis points
  • Food and Beverages: 7.1% organic growth, EBIT margin +60 basis points
  • Net profit of CHF 4.9bn (+18.4%), earnings per share CHF 12.79 (+19.0%)
  • Operating cash flow CHF 4.3bn, up 29.4%
  • CHF 25bn three-year share buyback programme announced
  • Full-year outlook: above-target organic growth with sustainable margin improvement

Peter Brabeck-Letmathe, Chairman and CEO of Nestlé: "The Group again achieved both strong growth and improved margins, the hallmark of the Nestlé model. These results are due to the strong performance of the Food and Beverages business and Nestlé's ongoing transformation into the world's leading nutrition, health and wellness company. In spite of increasing input cost pressures, I am confident of Nestlé achieving above-target organic growth for 2007, as well as a sustainable margin improvement. Finally, the Board has approved a new, three-year CHF 25 billion share buyback programme. This reflects our commitment to an efficient capital structure and our continued confidence in the business."

    EBIT Margins
  Jan.-June
2007
Change vs.
Jan.-June 2006 (a)
Jan.-June
2007
vs. Jan.-June
2006 (a)
Sales CHF 51 114m  +  8.4% CHF 3 956m    
EBIT CHF  6 919m  + 14.2% CHF   859m 13.5% +60 bps
Net profit CHF 4 916m + 18.4% CHF   765m  9.6% +80 bps
Total EPS  CHF 12.79 + 19.0%      
Real internal growth
Organic growth
  5.3%
  7.4%
       
(a) see note at end of release
All calculations based on non-rounded figures

Group sales, profitability and financial position

In the first six months of 2007 consolidated sales of the Nestlé Group amounted to CHF 51.1 billion, an increase of 8.4% over the same period last year. This was mainly driven by organic growth of 7.4%, consisting of real internal growth of 5.3% and price increases of 2.1%. Foreign exchange pushed sales up by 0.5%, while acquisitions, net of divestitures, added another 0.5%. The Group's Food and Beverages business achieved organic growth of 7.1%, consisting of real internal growth of 4.9% and price increases of 2.2%.

Food and Beverages' strong organic growth of 7.1% yielded scale benefits both in cost of goods sold and marketing. Combined with a continued drive for efficiencies, these benefits of scale more than compensated for higher input costs. As a result, Food and Beverages’ EBIT margin (Earnings Before Interest and Taxes) was up 60 basis points and was the main contributor to the Group's overall EBIT margin improvement of 60 basis points to 13.5%. The Group’s EBIT rose 14.2% to CHF 6.9 billion. The cost of goods sold decreased by 20 basis points. Distribution expenses increased by 40 basis points, mainly as a result of the Jenny Craig acquisition in August 2006 and the strong growth of other distribution intensive businesses such as Nestlé Waters. In spite of increased investment in Nestlé's brands, marketing and administrative costs dropped by 80 basis points due to the good management of trade spend and economies of scale.

Net profit grew 18.4% to CHF 4.9 billion, resulting in a net margin of 9.6%, up 80 basis points. Earnings per share grew 19.0% to CHF 12.79.

The Group’s operating cash flow increased by 29.4% or CHF 1 billion over the same period last year, to CHF 4.3 billion. The continued focus on working capital resulted in a further improvement in this area as compared to the first half of 2006. The Group’s net debt was CHF 13.4 billion, a level similar to the corresponding period last year.

New, three-year CHF 25 billion share buyback programme

Nestlé's Board of Directors approved a new CHF 25 billion share buyback programme to be completed over the next three years, subject to market conditions and strategic opportunities. This decision takes into account the strong momentum, improving capital efficiency and future prospects of the Food and Beverages business, which is increasingly benefiting from the move towards nutrition, health and wellness. Furthermore, the recent acquisitions of Novartis Medical Nutrition and Gerber create critical mass in Nutrition, with annualised sales of over CHF 10 billion. Therefore, while the Board continues to believe that driving the performance of the Food and Beverages business offers the greatest opportunity for value creation within Nestlé, it takes the view that a significant share buyback programme should further enhance shareholder value. The scale of the buyback programme is in line with Nestlé’s financial management objectives, which aim to retain flexibility.

Sales and EBIT margins by management responsibilities and geographic areas
  Jan.-June 2007
Sales in CHF millions
Jan.-June 2007
Organic Growth(%)
EBIT Margins
Jan.-June 2007 Change vs.
Jan.-June 2006 (a)
Food        
  - Zone Europe 13 561 +  1.4 11.4%  +50 bps
  - Zone Americas 15 289 +  7.4 14.5%  +80 bps
  - Zone Asia, Oceania and Africa  8 030 +  9.7 16.3%  +30 bps
Nestlé Waters  5 411 + 10.3  9.3%  +10 bps
Nestlé Nutrition  3 441 + 10.5 18.7%  -20 bps
Other Food & Beverages (b)  1 673 + 22.7 18.9% +190 bps
Total Food & Beverages 47 405  + 7.1 12.0%  +60 bps
Pharma  3 709 + 11.0 32.9% +130 bps
Group Total 51 114 + 7.4 13.5%  +60 bps
(a) see note at end of release
(b) Mainly Joint ventures managed on a worldwide basis and Nespresso
All calculations based on non-rounded figures

Sales in Food and Beverages by geography

In the first half of 2007, the organic growth of Nestlé's total Food and Beverages business (including globally-managed businesses such as Nestlé Waters, Nestlé Nutrition and Nespresso, as well as Food and Beverages joint ventures) amounted to 3.5% in Europe, 8.7% in the Americas and 10.5% in Asia, Oceania and Africa.

Zones: sales and profitability

Zone Europe: sales of CHF 13.6 billion, 0.9% real internal growth and 1.4% organic growth. The Zone continued to achieve double-digit growth in Eastern Europe. Growth in Western Europe was slow as the region focused on restoring margins, which showed a 50 basis points improvement. Confectionery experienced a notable performance improvement, particularly in the UK, and PetCare continued to do well. The Zone’s efficiency programmes and restructuring also contributed. The launch of Nescafé Dolce Gusto in Western Europe at the end of 2006 started very well.

Zone Americas: sales of CHF 15.3 billion, 4.2% real internal growth and 7.4% organic growth. The Zone’s EBIT margin increased by 80 basis points. There were good performances across the Zone, with both North and Latin America experiencing strong growth and the Ice Cream and PetCare businesses also performing well. The successful implementation of price increases in categories most impacted by input costs, especially Milk products, improved the EBIT margin. However, cost pressures will be greater in the second half and are likely to affect the EBIT margin.

Zone Asia, Oceania and Africa: sales of CHF 8 billion, 6.9% real internal growth and 9.7% organic growth. The Zone’s EBIT margin increased by 30 basis points. All the Zone's emerging markets (Asia, Africa and the Middle East) grew strongly. The Zone was also successful in achieving price increases in anticipation of the impact of rising milk costs. Together with efficiency improvements, this contributed to the Zone's better first half margin, although it too will face margin pressure as input costs escalate in the second half of the year.

Sales and EBIT margins by product groups
  Jan.-June 2007
Sales in CHF millions
Jan.-June 2007
Organic Growth(%)
EBIT Margins
Jan.-June 2007 Change vs.
Jan.-June 2006 (a)
Powdered and Liquid Beverages  8 447  + 9.2 22.7%  +60 bps
Nestlé Waters  5 411 + 10.3  9.3%  +10 bps
Milk Products and Ice Cream 10 098  + 7.1 10.5% +160 bps
Nestlé Nutrition  3 441 + 10.5 18.7%  -20 bps
Prepared Dishes and Cooking Aids  8 785  + 3.1 12.1%  -40 bps
Confectionery  5 307  + 4.6  9.0% +120 bps
PetCare  5 916  + 7.2 14.9%  +20 bps
Pharmaceutical Products  3 709 + 11.0 32.9% +130 bps
Group Total 51 114 + 7.4 13.5%  +60 bps
(a) see note at end of release
All calculations based on non-rounded figures

Product groups: sales and profitability

Powdered and Liquid Beverages: 9.2% organic growth. Nescafé did well, with its mixes and the launch of Nescafé Dolce Gusto the catalysts for growth. There was double-digit growth from the three other "billionaire" brands, Nespresso, Milo and Nestea. Milo benefited from renovation which reinforced its nutritional credentials with consumers. High growth, efficiency improvements as well as selling price adjustments resulted in a strong, 60 basis points EBIT margin improvement for the category.

Nestlé Waters: 10.3% organic growth. This was mainly driven by North America, where Nestlé Pure Life experienced over 40% organic growth. Europe achieved reasonable growth, while the smaller businesses in regions such as the Middle East and Latin America enjoyed good performances. Despite increases in packaging costs, the category's EBIT margin improved by 10 basis points due to the scale benefits of growth in North America and cost efficiencies.

Milk Products and Ice Cream: 7.1% organic growth. Milk products responded well to a challenging cost environment in Asia, Africa and Latin America, with early selling price increases to defend margins ahead of rapidly escalating milk costs. The CoffeeMate "billionaire" brand continued to perform well. Ice Cream started the year with reasonable growth, thanks to a strong innovation platform and winning initiatives in super-premium and health-focused offerings. Continued attention to manufacturing efficiencies and profitable growth contributed to the segment achieving a significant margin improvement. The EBIT margin for the total category was up 160 basis points, with all segments contributing.

Nestlé Nutrition: 10.5% organic growth. There were strong performances in the Infant formula and Healthcare Nutrition segments. This result is due to a robust innovation and renovation pipeline, including NAN premium starter formulas and Cerelac enriched with probiotics to strengthen infants' immune systems, as well as continued business recovery in China. Since its acquisition in August 2006, Jenny Craig has performed well but, as expected, the acquisition caused a slight EBIT margin decline of 20 basis points for the category as a whole. Jenny Craig is, however, accretive to Group margins on an annualised basis.

Prepared dishes and cooking aids: 3.1% organic growth. This category only saw marginal price increases in the first half of the year, but experienced good volume growth in Culinary in emerging markets and in Chilled culinary in North America and parts of Europe. Frozen recipe dishes started the year slowly in Europe. In North America, Lean Cuisine continued to benefit from strong innovation and consumers' increasing focus on health. Growth in the North American Frozen food range is expected to accelerate in the second half of the year. The product group's EBIT margin declined by 40 basis points, reflecting tough competitive conditions in some markets and a realignment of internal costs.

Confectionery: 4.6% organic growth. Double-digit performances were sustained in emerging markets such as Brazil, South Asia, Venezuela and the Middle East. The category's focus on simplification, product range rationalisation and restructuring in industrialised markets contributed to an EBIT margin improvement of 120 basis points. The main contributors were the US and the UK. The UK strategy of focusing on key brands while rationalising smaller brands and underperforming ranges resulted in key brands gaining market share as well as delivering improved EBIT margins and working capital.

PetCare: 7.2% organic growth. Good performances were achieved by key strategic global and regional brands competing in the super premium and premium dry segments, such as Dog Chow, Pro Plan and ONE. The EBIT margin increased by 20 basis points due to pricing gains and portfolio mix improvements which more than offset higher input costs.

Pharmaceutical Products: 11.0% organic growth. Both Alcon and the joint ventures achieved double-digit performances. The EBIT margin increased 130 basis points to 32.9%, mainly due to operational efficiencies and a positive product mix at Alcon.

Nutrition, health and wellness

Nestlé's strategic transformation into a nutrition, health and wellness company has continued apace. Sales of products containing Branded Active Benefits (BABs) grew by over 18% in the first half of the year, exceeding CHF 2.1 billion. The integration of Novartis Medical Nutrition into Nestlé Nutrition's Healthcare business started on 2 July and steps have been taken to ensure a speedy integration of Gerber as soon as the deal closes during the second half of the year. The addition of these businesses will create a Nutrition operation with annual sales of CHF 10 billion, the clear global leader.

Outlook

Nestlé’s first half performance was helped by the scale benefits of strong volume growth as well as the positive impact of price increases ahead of higher input costs. In the second half of the year, these higher prices are likely to slow volume growth slightly, while the increasing impact of higher raw material costs, particularly milk, will heighten pressure on EBIT margins. Nonetheless, the strong start to the year allows Nestlé to expect above-target organic growth as well as a further sustainable improvement in margins for the full year.

Notes to the financial tables
(a) 2006 comparatives have been restated to reflect internal changes in management responsibility as of 1 January 2007, as well as the decision to transfer the fresh cheese activities in Italy, not disposed of to Lactalis Nestlé Produits Frais, to Nestlé Nutrition.

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