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Nestle - volume uplifts offset price declines, guidance unchanged

Sophie Lund-Yates, Equity Analyst | 24 April 2020 | A A A
Nestle - volume uplifts offset price declines, guidance unchanged

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Nestle Sa Ordinary CHF0.01

Sell: 103.84 | Buy: 103.86 | Change 1.02 (0.99%)
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Nestlé has reported a 4.3% rise in organic sales for the first quarter, to CHF 20.8bn. This was driven by a 4.7% increase in volumes, as pricing fell 0.4%.

Coronavirus is severely affecting Nestlé's out-of-home and food service customers - although the majority of markets saw significant growth in March because of stockpiling. The group is maintaining its original full year guidance, and expects further improvements in organic sales and underlying operating margins.

The shares rose 1.3% following the announcement.

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Our View

Customers stockpiled as coronavirus and government restrictions spread in March. So it's no huge surprise the KitKat and Nescafe maker benefited.

But we think the group has some individual features to shout about too.

The first is a successful volume-led approach to sales, which we tend to prefer over relying on price increases. That's helped deliver underlying sales growth of at least 2% for over 20 years, with dividends increasing every year over that timeframe too. Even in these unusual times, not all Nestlé's rival consumer groups have managed to capitalise on the increased demand.

Crucially, the group thinks sales will hold up for the remainder of the year. With margins set to improve too, earnings per share will be taken along for the ride. We should say though that it's still too early to be sure about what's going to happen, and it's not all peachy.

There's long been pressure on prices, which reflects a lack of brand power potency in the wider industry. The volume-centred approach means Nestle is better placed to tackle this dilemma than some other groups, but any major downward pressure on price tags wouldn't be the best news. A bigger problem would be a generally less brand- loyal customer base.

Nestle's modus operandi relies on a research and development spend of CHF 1.7bn, providing firepower to create new products and varieties. Once innovations are established, the marketing and admin budget of almost CHF 20bn ensures they're front and centre of consumers' mind, which in turn encourages reliable revenues. Extra sales boost profits, and profits can be paid out as dividends or reinvested in next year's products. The cycle can start again.

Attempts to streamline the business means Nestle is now focussed on the core food, beverage and nutritional health products. However, what it means for the group's 23% shareholding in L'Oreal remains to be seen.

Overall Nestle is well placed, and we don't have worries about it surviving the current disruption. The priority from here will be protecting its brands and continuing to harness the strong demand for its products. The shares change hands for 23.1 times expected earnings, which is a vote of confidence from the market, but also means the shares could fall hard if progress disappoints.

At the time of writing the shares offer a prospective yield of 1.8%, but remember this isn't guaranteed.

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First quarter trading details (underlying)

Nestlé's largest division, the Americas, saw sales rise 7.4% to CHF 8.3bn. That reflects a 7.9% increase in volumes, which offset a 0.5% decline in average prices. The largest contributor to growth was Purina PetCare, which sold well online. Frozen food posted high single-digit growth.

Asia, Oceania and Africa saw sales decline 4.6% to CHF 5bn. That came as pricing remained flat and volumes fell. Performance was led by double-digit declines in China as a result of lockdowns. South East Asia saw solid growth in the period.

There was a more positive result in the Europe, Middle-East and North Africa region, where sales were up 7.1% to CHF 5.3bn. Again this was driven by a strong uplift in volumes, with prices down 1.1%. Germany, Russia, Israel and Spain saw particularly strong growth, and there were market share gains across most products and geographies.

Prepared dishes and cooking aids, coffee, Purina PetCare and infant nutrition reported double-digit growth. Water saw sales fall, reflecting declines in out-of-home spending.

Sales in the other businesses rose 8.5% to CHF 2.2bn. Nespresso saw mid-single-digit growth, although boutique closures meant sales declined in Europe.

In response to coronavirus Nestlé is extending payment terms, suspending rental fees for coffee machines and offering some free products. The total value of this initiative is expected to be around CHF 500m.

The sale of the U.S. ice cream business for $4bn completed on January 31, 2020. The sale of a 60% stake in the Herta charcuterie is expected to close in the first half of 2020. The group is considering a sale of its Yinlu peanut milk and canned rice porridge business in China.

Nestlé expects underlying earnings per share to increase year-on-year in 2020.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance.

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