VEVEY, SWITZERLAND — Nestle S.A.’s net profit slipped in the first half of the fiscal year as pricing issues affected results. The company’s frozen foods business in North America improved, however.
|Francois-Xavier Roger, c.f.o. of Nestle|
“As anticipated, the pricing environment remains challenging,” said Francois-Xavier Roger, chief financial officer of Nestle S.A., in an Aug. 18 earnings call. “We had deflation in developed markets and low commodity pricing overall. We expect stronger pricing in H2, though. We started to take selective price increases in some categories and geographies.”
Net profit of 4,176 million Swiss francs ($4,374 million) was down 12% from 4,766 million Swiss francs in the first half of the previous fiscal year. Basic earnings per share of 1.35 Swiss francs ($1.41) were down 11% from 1.51 Swiss francs.
Nestle grew gross margin and trading operating profit through further premiumization, cost discipline and input cost tailwinds. Trading operating profit for the half year was 6,611 million Swiss francs, up from 6,435 million Swiss francs.
Nestle has started to see some increases in commodity pricing, Mr. Roger said.
“There is always a time delay between what happens on the commodity market and what is passed on to consumers, but yes, we are confident on the fact that pricing is going to improve,” he said.
Nestle in the first half had total sales of 43,155 million Swiss francs ($45,203 million), up 0.7% from 42,843 million Swiss francs. Foreign exchange had a negative effect of 2%. The net result of acquisitions and divestitures was a negative 0.8%.
“In developed markets we grew by 1.9% in organic growth, which we consider as solid,” Mr. Roger said. “This is the outcome of our strategy of innovation, premiumization, active portfolio management and mix. We had real internal growth in developed markets at 2.6%, which is good. This is actually the highest in many years.
“We are facing in developed markets deflationary pressure across many markets with negative pricing, and we do not expect any improvement in that area.”
In the Americas zone, sales were 12,106 million Swiss francs in the first half. Organic growth was 5%. Trading operating profit margin was nearly 18%. Innovations and marketing investment, particularly for Lean Cuisine and Stouffer’s, helped to grow the frozen meals business in North America.
“Lean Cuisine, as you know, we renovated our entire frozen food franchise in the U.S. and the marketplace line, which is really addressing the need for organic, higher protein, lower salt, lower sugar, and gluten-free, is growing very fast, 19% of organic growth in the first part of the year,” Mr. Roger said.
Coffee-mate maintained a good growth trajectory due to new packaging and flavor extensions. Mr. Roger said innovations are taking place in the natural and organic space, including with Coffee-mate Natural Bliss coffee creamer, which had organic growth above 50%.
In the Europe, Middle East and North Africa zone, first-half sales were 8,091 million Swiss francs behind organic growth of 2.6%. Trading operating profit margin was nearly 17%. Pricing in continental Europe was negative because of the global deflationary environment, Mr. Roger said.
Mr. Roger also discussed Brexit, which refers to the United Kingdom voting in June to leave the European Union.
“The Brexit for the U.K., we don’t see any direct impact in the short term, apart from the fact that obviously the translation of our U.K. business into our group accounts has reduced a little bit because the currency has devalued by close to 15% against the Swiss franc,” he said.
In the Asia, Oceania and Africa zone, first-half sales were 7,099 million Swiss francs as organic growth was 2.3%. The trading operating profit margin was nearly 20%.
“In China, the food and beverage market overall saw its growth decelerating to basically zero growth,” Mr. Roger said.
The Nestle Waters division had sales of 3,937 million Swiss francs behind 4% organic growth and double-digit growth in emerging markets. Trading operating profit margin was 12%, driven by improved product mix through premiumization. International premium brands and Poland Spring drove growth in Nestle Waters in the United States.
“Waters increased its margin by 90 basis points to 12.4%,” Mr. Roger said. “There again we increased our consumer spend, but it has been compensated by a positive mix, by premiumization, rigorous cost management, and we benefited from lower PET cost, and we also experienced some leverage, positive leverage from volume increases.”In Nestle Nutrition, first-half sales were 5,171 million Swiss francs as organic growth was 1.3%. Trading operating profit margin was 23%. Pricing remained limited because of low dairy commodity prices and competitive intensity, notably in China. In the United States in Nestle Nutrition, the exit from some regional Women, Infants and Children (WIC) programs, the transition to new packaging formats, and some temporary supply constraints in pouches impacted growth.