Aug 04, 2020 by bcw-global
Mark Schneider, Nestlé CEO, commented:"COVID-19 continues to impact people around the world. We stand with all those affected and are committed to helping where we can. I would like to thank every member of the Nestlé team for their dedication and hard work in the face of incredible challenges. Our priorities remain the same; keeping our people safe, assuring continued supply of essential food and beverages to consumers and caring for our communities and business partners through financial and in-kind support.
Nestlé has remained resilient in a rapidly changing environment, delivering solid organic growth and improved margins in the first half. These results demonstrate the agility of our business and the strength of our diversified portfolio across geographies, product categories and channels. With consumer behavior evolving faster than ever, we are adapting to this new reality by strengthening our innovation, leveraging our digital capabilities and executing with speed. Our engaged teams and their commitment to deliver business results while driving progress against our societal and environmental commitments make us a stronger company every day."
* 2019 figures restated following the decision to integrate the Nestlé Waters business into the Group’s three geographical Zones, effective January 1, 2020
Organic growth reached 2.8%, with RIG of 2.6%. Pricing contributed 0.2% and was positive in all three Zones in the second quarter.
After a stronger-than-expected start to the year, organic growth moderated in the second quarter to 1.3%, reflecting the severe impact of movement restrictions on out-of-home businesses and some consumer destocking. In the first half, Nestlé saw sustained momentum in the Americas and positive sales development in Zone EMENA. Zone AOA saw a sales decrease, with growth turning positive in the second quarter. Organic growth was 4.1% in developed markets, based entirely on RIG. Growth in emerging markets was 1.1%.
By product category, the largest growth contributor was Purina PetCare, led by its premium brands Purina Pro Plan and Purina ONE. Dairy saw high single-digit growth, based on strong demand for fortified milks such as Nido and Bear Brand, as well as Coffee mate. Prepared dishes and cooking aids grew at a mid single-digit rate, with strong momentum in frozen foods. Vegetarian and plant-based food products grew by 40%, supported by further expansion of Garden Gourmet in Europe and increased growth for Sweet Earth in the United States. Coffee remained resilient, with low single-digit growth, as a double-digit sales increase for coffee at home outweighed a sharp decline in the out-of-home channel. Our Starbucks products continued to grow at a double-digit rate, driven by further global expansion and the launch of new offerings. Nestlé Health Science reported double-digit growth, reflecting elevated demand for products that support health and the immune system. Water and confectionery saw negative growth, due to their high exposure to the out-of-home channel and on-the-go consumption.
Divestitures decreased sales by 5.3%, largely related to the divestment of Nestlé Skin Health and the U.S. ice cream business. Foreign exchange reduced sales by 7.0%, reflecting the appreciation of the Swiss franc versus most currencies. Total reported sales decreased by 9.5% to CHF 41.2 billion.
Business impact of the COVID-19 crisis
The COVID-19 crisis has led to profound changes in operating environments across markets. The global economy has entered a recession, supply chains have been tested and consumer behavior has changed at a rapid pace. Nestlé quickly deployed effective measures to address this new reality. The company’s supply chain has proven resilient, as manufacturing and distribution facilities continued to operate without significant disruptions. With shifting consumer habits, Nestlé has been developing solutions to meet increased demand for at-home consumption, products that support health and boost the immune system as well as affordable offerings. The company has also accelerated the development of its digital capabilities and expanded e-commerce and online communication.
In the first half, the effects of COVID-19 on organic growth varied materially by geography, product category and sales channel, depending on the timing of outbreaks, scope of restrictions and consumer behavior:
In the first half, COVID-19 related costs were CHF 290 million, including expenses for bonuses paid to frontline workers, employee safety protocols, donations and other staff and customer allowances. In addition, the Group absorbed costs of CHF 120 million related to staff and facilities made idle due to lockdown measures.
Consumer-facing marketing expenses* decreased. In many markets in-store activation could not be implemented during COVID-19 related lockdowns. Nestlé increased media spend, particularly in digital channels, to support brand building and consumer engagement. Lower media rates allowed for increased consumer reach.
The exact financial impact of COVID-19 for the full year remains difficult to quantify and will depend on the duration and economic consequences of this crisis as well as the speed of recovery in the out-of-home channel.
*In constant currency, excluding divestitures of Nestlé Skin Health and the U.S. ice cream business.
Underlying Trading Operating Profit
Underlying trading operating profit decreased by 7.9% to CHF 7.2 billion. The underlying trading operating profit margin reached 17.4%, an increase of 30 basis points in constant currency and on a reported basis.
Margin expansion was supported by portfolio management and stronger operating performance. Reduced in-store activation during lockdowns and lower structural costs more than offset COVID-19 related costs and commodity inflation.
Restructuring expenses and net other trading items were CHF 186 million. Trading operating profit decreased by 1.2% to CHF 7.0 billion. The trading operating profit margin reached 16.9%, an increase of 140 basis points in constant currency and on a reported basis.
Net Financial Expenses and Income Tax
Net financial expenses decreased by 11.3% to CHF 447 million, largely reflecting a reduction in average net debt.
The Group reported tax rate decreased by 40 basis points to 27.1%. The underlying tax rate was stable at 21.4%.
Net Profit and Earnings Per Share
Net profit grew by 18.3% to CHF 5.9 billion. Net profit margin increased by 340 basis points to 14.3%, benefiting from one-off income related to divestitures and improved operating performance.
Earnings per share increased by 22.2% to CHF 2.06 on a reported basis. Underlying earnings per share increased by 0.5% in constant currency, and decreased by 5.9% on a reported basis to CHF 2.01. Divestitures and lower contributions from associates and joint ventures had a negative impact of 4.4%. Nestlé's share buyback program contributed 1.4% to the underlying earnings per share increase, net of finance costs.
Free cash flow decreased by 19.1% to CHF 3.3 billion. This reduction was mainly due to the delay of a dividend payment by an associate company from April to July, the impact of foreign exchange rates and divestitures. When adjusted for this dividend payment, free cash flow increased by 40 basis points to 9.3% of sales, reflecting improved capital discipline and stronger operating performance.
Share Buyback Program
In the first half, the Group repurchased CHF 4.2 billion of Nestlé shares as part of the three-year CHF 20 billion share buyback program, which began in January.
Net debt increased to CHF 33.4 billion as at June 30, 2020, compared to CHF 27.1 billion at December 31, 2019. The increase reflected the dividend payment of CHF 7.7 billion and share buybacks of CHF 4.2 billion, which more than offset free cash flow generation and a net cash inflow from divestitures and acquisitions.
In January, Nestlé completed the sale of its U.S. ice cream business for USD 4 billion to Froneri, the successful global joint venture with PAI Partners. The Group closed the sale of a 60% stake in its Herta charcuterie (cold cuts and meat-based products) business to Casa Tarradellas in June.
In April, Nestlé completed the acquisition of Lily's Kitchen, a premium natural pet food business. In May, the Group completed the purchase of the Zenpep business from Allergan. In July, Nestlé completed the acquisition of a majority stake in Vital Proteins, America’s leading collagen products brand.
In May, Nestlé announced the decision to explore strategic options, including a potential sale, for the majority of the Waters business in North America. As part of this process, the Group agreed to sell the Canadian Nestlé Pure Life business to Ice River Springs in July. The strategic review of the Yinlu peanut milk and canned rice porridge businesses in China is ongoing. Both reviews are expected to be completed in early 2021.
Zone Europe, Middle East and North Africa (EMENA)
Organic growth was 2.4%, with solid RIG of 2.8%, supported by favorable mix. Pricing decreased by 0.4%, turning positive in the second quarter with improvements across all sub-regions. Divestitures reduced sales by 0.5% and foreign exchange negatively impacted sales by 7.0%. Reported sales in Zone EMENA decreased by 5.1% to CHF 10.0 billion.
Zone EMENA grew at a low single-digit rate. After an exceptionally strong start to the year, organic growth turned negative in the second quarter due to a sharp sales decline in the out-of-home channel, particularly for water, and Nestlé Professional. Overall, the other product categories performed well and posted high single-digit growth. The Zone saw continued market share gains in most geographies and product categories, particularly in pet food, coffee and culinary products. Each region saw positive growth, with strong momentum in Russia.
By product category, coffee, Purina PetCare and culinary products all grew at a double-digit rate. Coffee was supported by strong momentum for Nescafé and Starbucks products. In PetCare, Felix, Purina ONE and Tails.com were the key growth platforms. Lily's Kitchen, the newly acquired premium pet food business, also performed strongly. Culinary saw elevated demand across all segments, particularly Maggi and Garden Gourmet’s plant-based products. Infant nutrition decelerated to low single-digit growth, reflecting consumer destocking. Growth in confectionery turned slightly negative, following reduced demand for impulse and gifting products. Water gained market share but recorded negative growth due to a substantial sales drop in the out-of-home channel. Nestlé Professional saw a double-digit sales decline, in line with channel dynamics.
The Zone's underlying trading operating profit margin increased by 40 basis points. Reduced in-store activation during lockdowns and lower commodity spend outweighed COVID-19 related costs.
Organic growth of 6.1% was based on strong RIG of 5.5% and pricing of 0.6%. Divestitures reduced sales by 24.9%, largely related to the divestment of Nestlé Skin Health. Foreign exchange negatively impacted sales by 6.0%. Reported sales in Other Businesses decreased by 24.8% to CHF 4.4 billion.
Nespresso grew at a mid single-digit rate, supported by significant sales acceleration for e-commerce and the Vertuo system. North America saw strong double-digit growth, with continued market share gains. AOA grew at a double-digit rate, with positive contributions from most markets. Sales in Europe decreased, reflecting significantly reduced demand in the out-of-home channel and boutique closures. Globally, at the end of June, 86% of boutiques had reopened. In July, Nespresso announced a CHF 160 million investment in the expansion of its Romont production center in Switzerland to meet growing consumer demand worldwide.
Nestlé Health Science posted double-digit growth, boosted by strong momentum for consumer and medical nutrition products. Vitamins, minerals and supplements that support overall health and the immune system continued to experience elevated demand. Garden of Life and Pure Encapsulations saw increased growth, particularly in e-commerce. Persona, the subscription-based personalized vitamin business, more than tripled its sales. Medical Nutrition experienced strong sales, particularly in pediatric food allergy, adult medical care and Vitaflo products for rare genetic diseases.
The underlying trading operating profit margin of Other Businesses increased by 260 basis points, with positive contributions from both Nespresso and Nestlé Health Science.
Business as a force for good: Accelerating our Nestlé Needs YOUth program
More than one in six young people are out of work due to the COVID-19 pandemic while those who remain employed have seen their working hours cut, according to the International Labour Organization (ILO). Particularly in low- and middle-income countries, up to 75% of young people work in the informal economy with no job security and little to no social protection.
Nestlé Needs YOUth is our workforce initiative that provides job and training opportunities for young people across the globe. Amid the pandemic, we have scaled up online training to ensure continuity of our internship and apprenticeship programs. We are also working with public and private institutions in many countries to create new programs to help young people develop the skills and resiliency they need to be successful in today’s challenging job market. Examples include:
We are deeply concerned about social, racial and economic inequalities. We continue to work on fostering an inclusive culture at work and in our communities, particularly in the United States where the pain of racial inequity has been brought to the forefront of public awareness. As part of this work, Nestlé is donating USD 1.5 million to the National Urban League, UNCF and other organizations dedicated to ending racial discrimination and providing economic empowerment through education and job training. From 2021, our company holiday calendar in the United States will include Juneteenth, a day of reflection that commemorates the freeing of enslaved people in America on June 19, 1865.
2020 Outlook: We expect full-year organic sales growth between 2% and 3%. The underlying trading operating profit margin is expected to improve. Underlying earnings per share in constant currency and capital efficiency are expected to increase. This guidance is based on our current knowledge of COVID-19 developments and assumes no material deterioration versus present conditions.
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