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Nestle - sales up as volumes and prices rise

Nestle reported sales of 87.1bn Swiss francs (CHF), reflecting organic growth of 7.5%...

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Nestle reported sales of 87.1bn Swiss francs (CHF), reflecting organic growth of 7.5% as volumes grew 5.5% with prices rising 2.0%. There was growth across most geographies and categories, with coffee the main contributor to organic growth.

Underlying operating profit increased 1.4% to CHF 15.1bn. In 2022, the group expects organic sales growth of 5% and underlying operating margins between 17-17.5%.

The board has proposed a dividend of CHF 2.80 per share.

The shares were broadly flat in early trading.

View the latest Nestlé share price and how to deal

Our view

For a business with a volume led strategy like Nestlé, cost inflation and supply chain headwinds can cause extra pain. For others, simply raising prices can be the answer, but Nestlé have managed well to cover rising costs with minimal price hikes.

We think the underlying performance has been very impressive. A global footprint and varied product base mean the group's been able to move with the market over the past couple of years. Exposure to pet care, health and at-home coffee products in particular helped in lockdown conditions. They're also exactly the kind of thing people buy over and over again in normal times.

We also admire the operating model, which as mentioned focuses on volume instead of price increases. That's helped deliver underlying sales growth of at least 2% for over 20 years. And sales are expected to keep moving in the right direction over the medium-term - with targets even upgraded last year.

That being said, the price side of the equation is facing some headwinds. Pricing pressure from new entrants and supermarkets' own-brands is a threat alongside the broader market issues of inflation. But Nestlé's business model is better placed to tackle this dilemma than some other groups.

Nestlé relies on a research & development spend of more than 1.5bn Swiss Francs (CHF) a year to provide fuel for volume growth. New varieties and formats of existing popular brands benefit from the much larger marketing and admin budgets, ensuring they're front and centre of consumers' minds. That in turn encourages reliable revenues. Extra sales boost profits, and profits can be paid out as dividends or reinvested in next year's products.

That virtuous cycle has seen the group increase the dividend every year for 29 years - although remember all dividends are variable and not guaranteed.

The group has been doing a bit of housekeeping recently, clearing out low potential brands and stocking up in growth areas such as The Bountiful Company's nutrition and supplements business. A higher growth portfolio can only be a good thing, and the groups been trimming its stake in L'Oréal which now stands at 20.1%.

Nestlé's not a company likely to deliver dizzying levels of growth from here. It's more steady-eddie than stellar growth stock. However, Nestlé's resilience comes at a price, with a Price/Earnings ratio above the long-term average. That reflects the group's strengths, but also means there's pressure for sales to keep moving forwards.

Nestlé key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results (organic)

Zone Americas sales grew 8.5% to CHF 33.8bn, with volumes and prices increasing 4.8% and 3.7% respectively. There was strong growth in online sales and a rebound in out-of-home consumption. Market share gains were led by coffee, pet food, frozen and chilled food. Underlying operating profits were flat at CHF 7.0bn.

Sales grew 7.2% in Europe, Middle East and North Africa to CHF 21.1bn, mainly due to a 6.0% increase in volumes. All markets grew with the United Kingdom, Russia, Italy and France leading the way. E-commerce performed well as market share gains were prominent in pet food, coffee and food. Underlying operating profits rose slightly to £3.9bn.

A 3.5% rise in volumes helped sales in Asia, Oceania and sub-Saharan Africa grow 4.2% to CHF 20.7bn. That reflected broad based growth across geographies. Coffee was the key growth driver, with new launches for Nescafé and Starbucks products. Underlying operating profits fell slightly to CHF 4.5bn as cost inflation weighed on margins.

Nespresso saw sales grow 8.8% to CHF 6.4bn, almost entirely down to volumes with sales up 0.6%. That came as boutiques and out-of-home channels recovered, E-commerce continued its momentum and the Vertuo system attracted new customers. Underlying operating profits rose slightly to CHF 1.5bn.

It was a similar story for Nestlé Health Science, where sales growth of 13.5% to CHF 4.8bn was almost entirely down to volumes. Increased sales were able to offset a drop in margins, with underlying operating profits rising CHF 0.2bn to CHF 0.7bn.

Free cash flow decreased by 14.9% to CHF 8.7bn, reflecting temporarily higher capital expenditure and inventory levels. Net debt at the end of the period increased CHF 1.6bn to CHF 32.9bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 17th February 2022