Nestle Sa (NESN) Ordinary CHF0.01
HL comment (29 July 2021)
Organic sales rose 8.1% to 41.8bn Swiss Francs (CHF), with volumes rising 6.8% and pricing up 1.3%. There was "broad based" growth" across most geographies', and in products, coffee was the biggest driver of organic growth.
Underlying operating profit rose 1.3% to CHF7.3bn, which was lower than the market expected. The group expects organic sales growth of 5-6% for the full year, but operating margin expectations have been tempered to 17.5%, reflecting the timing of cost inflation and acquisition integration costs.
The shares fell 1.3% following the announcement.
The market wasn't pleased with the KitKat maker's outlook for margins. Trimmed profitability is never nice news, but in this case it's also not the be-all-and-end-all.
Higher commodity prices are outside Nestlé's control. And beyond that, performance has actually been very impressive. The group digested the seismic shifts in consumer demand through the latest pandemic effects well. An incredibly far-reaching global footprint and varied product base means sales keep growing. Exposure to pet care, health and at-home coffee products in particular help 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 focusses on volume instead of price increases. That's helped deliver underlying sales growth of at least 2% for over 20 years. Even in these unusual times, not all consumer groups have managed to capitalise on the increased demand.
And sales are expected to keep moving in the right direction over the medium-term - with targets even upgraded.
That being said there has long been pressure on prices, which reflects a lack of brand power potency in the wider industry. The volume-centred approach means Nestlé 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 for sales.
Nestlé's modus operandi relies on a research and development spend of close to 2bn Swiss Francs (CHF) at the last count, providing firepower to create new products and varieties. Once innovations are established, the much larger marketing and admin budget ensures they're front and centre of consumers' minds, 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.
And it's this virtuous cycle that's seen the group increase the dividend every year for 26 years. Nestlé's huge scale and lower reliance on pricing power means this should be sustainable for now, but remember, all dividends are variable and not guaranteed.
Attempts to streamline the business means Nestlé is now focused on the core food, beverage and nutritional health products. What that means for the group's 23% shareholding in L'Oreal remains to be seen.
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
- Price/earnings ratio: 24.6
- Ten year average Price/earnings ratio: 20.2
- Prospective dividend yield (next 12 months): 2.6%
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.
Half Year results (organic)
Zone Americas recorded organic sales growth of 7.6% to CHF16.2bn, with volumes making up 5.3% of that. There was strong growth in online sales and a rebound in out-of-home consumption. Purina PetCare did well, as did Starbucks' off the shelf products. Underlying operating profit fell 1.2% to CHF3.1bn, because of the effect of asset sales and adverse foreign exchange rates.
There were similar levels of growth in Europe, Middle East and North Africa, with sales rising 7.3% to CHF10.2bn. Almost all growth was driven by volume, with prices up just 0.6%. Russia, Turkey, the UK and Italy did especially well, and pet food, coffee, plant based food and water were stand out performers. Underlying operating margins improved 0.5% because of the benefits of scale, cost savings and a more lucrative mix of products sold.
Double digit growth in China helped the Asia, Oceania and sub-Saharan Africa region boost sales by 6.8% to CHF10.2bn. South East Asia sales saw a modest decline because of tough economic conditions. Underlying operating margins fell 0.4% because of cost inflation and the sale of less profitable items, underlying operating profit was flat at CHF2.3bn.
Nespresso had sales growth of 14.6% largely thanks to new customers and a return to growth in shops. Underlying operating profit rose slightly to CHF800m. Nestlé Health Sciences sales rose 13.6% to CHF1.9bn, driven entirely by volume.
The higher volumes meant capital spending increased, so free cash flow fell from CHF3.1bn to CHF2.8bn. Net debt stood at CHF38.5bn, compared to CHF31.3bn at the start of the year. The increase includes the cost of dividends and the share buyback programme.
In the first half, Nestlé repurchased CHF 3.1bn of shares, as part of the 3 year CHF20bn share buyback program, which began in January 2020.
The group sold its regional spring water brands, purified water business and delivery service in the US and Canada for $4.3bn, in March. It's also entered into an agreement to acquire core brands of The Bountiful Company, a nutrition and supplement company, for $5.75bn.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
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