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Nestlé – revenues grow but pressure remains on volumes

Nestlé's full-year sales reached CHF 93.0bn.

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Nestlé's full-year sales reached CHF 93.0bn. This reflects organic growth of 7.2%, as price hikes of 7.5% offset a small decline in volumes. Both developed and emerging markets delivered organic growth.

Underlying operating profit fell 0.3% to CHF 16.1bn due to negative foreign currency effects. Ignoring the effect of exchange rates, underlying operating margins increased 40 basis points to 17.3%.

Net debt was CHF 49.6bn as at December 31, 2023, compared to CHF 48.2bn a year earlier. Free cash flow was CHF 10.4bn, an increase of CHF 3.8bn mainly due to a reduction in inventory levels.

For the new financial year, organic sales are expected to grow by around 4% and underlying operating profit margins are expected to show a “moderate increase”.

A final dividend of CHF 3.00 per share was proposed, a 5-centime increase.

Nestlé shares were down 4.8% in early trading.

Our view

Nestlé appear to have reached the limit with price hikes. The strong suite of brands has allowed high single-digit increases during a period of high inflation without much consequence for volumes. But customers are now feeling the pressure and demand has softened as a result. That’s not to say the 2023 outcome was a bad result. Growth was driven by price and mix, with volumes declining at a faster rate than the prior year, which may be one reason sales came in a little below analyst forecasts.

It’s no surprise questions are being asked as to whether price increases have gone too far. Focus now is on recovering volumes, with management prioritising volume and mix-led growth in 2024. Real internal growth, the company’s key measure of sales volumes has slowly been improving over the year. We’ll be tracking this metric closely to see the success of their volume recovery.

On a longer-term view there's still a lot to like about Nestlé. 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 pull in revenues from all corners of the market. These items are also exactly the kind of thing people buy over and over again in normal times.

More recently there's been a bit of housekeeping, clearing out low-potential brands and stocking up in growth areas such as The Bountiful Company's nutrition and supplements business. The positive effects of these changes and focus on premium brands is starting to be felt, with underlying operating margins increasing 40 basis points to 17.3%.

Nestlé also relies on hefty research & development spending 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 dividend increase every year for 29 years - remember, all dividends are variable and not guaranteed.

Nestlé's a strong business, with a host of great brands but it needs to start pulling on its growth levers. Exactly how volumes will react to increased investment in brand marketing remains to be seen, but for now management’s guidance for organic growth of 4.0% in 2024 appears relatively cautious.

Despite a recent pull-back in the valuation, at roughly 19 times expected earnings it’s still above the ten-year average and vulnerable to disappointments. The next few quarters will be vital. Volumes need to start trending back in the right direction if sentiment is to improve.

Nestlé key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.

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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 22nd February 2024