Nestlé reports full-year results for 2017, 2.4% organic growth

• Organic growth of 2.4%, with 1.6% of real internal growth (RIG) and pricing of 0.8%.
• Total reported sales increased by 0.4% to CHF 89.8 billion (2016: CHF 89.5 billion). Net divestments had a negative impact of 1.9% (mainly due to the creation of the Froneri joint venture).
• Underlying trading operating profit margin ahead of expectations, up 50 basis points in constant currency and up 40 basis points on a reported basis to 16.4%.
• Trading operating profit margin decreased by 60 basis points on a reported basis to 14.7%, in line with our October 2017 expectations. This included a CHF 900 million increase mainly in restructuring and related costs to CHF 1.5 billion.
• Underlying earnings per share increased by 4.7% in constant currency and by 4.6% to CHF 3.55 on a reported basis.
• Proposed dividend increase of 5 centimes (2.2%) to CHF 2.35 per share.
• Nestlé announces Board decisions regarding the Gerber Life Insurance business and the L’Oréal investment.
• 2018 Outlook: organic sales growth between 2% and 4%; underlying trading operating margin improvement in line with our 2020 target. Restructuring costs1 are expected at around CHF 700 million. Underlying earnings per share in constant currency and capital efficiency are expected to increase.

Mark Schneider, Nestlé CEO, said: "Our 2017 organic sales growth was within the guided range but below our expectations, in particular due to weak sales development towards the end of the year. Sales growth in Europe and Asia was encouraging while North America and Brazil continued to see a challenging environment.

Our cost reduction initiatives delivered margin improvement ahead of 2017 expectations, in spite of considerable commodity price increases.

During the past months, we have completed initial portfolio adjustments with very favorable results. We will continue this active portfolio management approach in a disciplined manner and fully in line with our strategy. Regarding our core portfolio, accelerating our growth through product innovation and renovation is high on the agenda.

Organic sales growth is expected to improve in 2018 and we are firmly on track for our 2020 margin improvement target."

Group results

Group sales

Organic growth of 2.4% was at the low end of our expectations following slow growth of 1.9% in the fourth quarter. RIG was 1.6% for the full-year and remained at the high end of the food and beverage industry. Pricing of 0.8% was consistent with the prior year. Organic growth was 0.7% in developed markets and 4.8% in emerging markets. Net divestments reduced sales by 1.9%, largely related to the creation of the Froneri joint venture. Foreign exchange had a minimal negative impact of 0.1%. Total reported sales were CHF 89.8 billion, a 0.4% increase for the year.

Organic growth in Zone AMS was subdued and decelerated in the back half of the year. Excluding the confectionery business, growth in the United States was flat, reflecting soft consumer demand and challenging category dynamics. Brazil maintained solid RIG in a difficult trading environment, but pricing was negative due to deflationary pressures. Mexico was resilient and other parts of Latin America sustained good momentum.

Growth in Zone EMENA increased following a significant improvement in the second half of the year, with two consecutive quarters in excess of 3%. This was largely driven by strong results in petcare and coffee.

Zone AOA saw its highest growth in four years, with positive RIG and pricing. This was based on a return to positive growth in China, which was achieved despite difficult comparables in the fourth quarter due to the timing of Chinese New Year. There was continued good growth across the other sub-regions.

Nestlé Waters posted high single-digit growth in the international premium brands. The regional brands in North America faced weak demand and pricing pressure. Growth remained soft in Nestlé Nutrition as sales were subdued in North America and declined in Brazil. There was modest improvement in China, driven by new organic offerings. Nespresso reported consistent mid single-digit growth, with positive momentum in all regions and sustained mid-teen growth in North America. Nestlé Health Science maintained solid growth and Nestlé Skin Health improved slightly.

All categories reported positive growth, led by coffee, petcare and Nestlé Health Science.

Underlying Trading Operating Profit

Underlying trading operating profit increased by 2.9% to CHF 14.7 billion. The underlying trading operating margin was up 50 basis points in constant currency, and up 40 basis points on a reported basis to 16.4%. This improvement puts us on track to meet our 2020 target.

Margin expansion was supported by operating efficiencies and successful execution of ongoing restructuring initiatives. These cost savings largely offset the increase in commodity costs of around CHF 900 million.

Restructuring expenditure and net other trading items increased by CHF 900 million to CHF 1.5 billion due to the acceleration of restructuring projects. As a consequence, trading operating profit decreased by 3.4% to CHF 13.2 billion. The trading operating profit margin decreased by 60 basis points on a reported basis to 14.7%, in line with our guidance.

Net Profit and Earnings Per Share

Net profit decreased by 15.8% to CHF 7.2 billion and earnings per share decreased by 15.8% to CHF 2.32. This was mainly due to an impairment of goodwill related to Nestlé Skin Health, which was taken to reflect the current prospects of the business.

Underlying earnings per share increased by 4.7% in constant currency and by 4.6% on a reported basis to CHF 3.55.

Cash Flow

Free cash flow declined from CHF 10.1 billion to CHF 8.5 billion. This was driven by working capital development, which saw a slower rate of improvement following the exceptionally large reduction in the prior year.

Zone Europe, Middle-East and North Africa (EMENA)

o          2.3% organic growth: 1.7% RIG, 0.6% pricing.

o          Western Europe maintained positive organic growth with balanced contributions of RIG and pricing.

o          Central and Eastern Europe achieved mid single-digit organic growth, driven entirely by RIG.

o          Middle East and North Africa saw mid single-digit organic growth, both RIG and pricing were positive.

o          The underlying trading operating profit margin grew by 80 basis points to 18.1%.

Organic growth increased to 2.3% as the Zone finished the year with good momentum, reporting two consecutive quarters in excess of 3%. RIG remained solid at 1.7% and pricing improved to 0.6%, driven by a return to positive pricing in Western Europe. Net divestments reduced reported sales by 8.0%, mainly reflecting the transfer of the ice cream business to the Froneri joint venture. However, foreign exchange effects increased reported sales by 0.6%. Reported sales in Zone EMENA decreased by 5.1% to CHF 16.5 billion.

Zone EMENA saw positive growth across all sub-regions and categories, with petcare and coffee the main contributors. Petcare’s performance was supported by very strong growth in Russia and other emerging markets. Nescafé had good growth in Western Europe, the Middle East and North Africa, following price increases taken during the year. Confectionery, culinary and dairy all delivered improved growth, helped by successful product launches. The United Kingdom returned to solid growth after a challenging start to the year, with positive RIG and pricing.

The Zone’s underlying trading operating profit margin increased by 80 basis points, despite higher commodity costs. This improvement was driven by price increases, portfolio management, operational efficiencies and structural cost savings.

Outlook

In 2018, we expect organic sales growth between 2% and 4%, and underlying trading operating margin improvement in line with our 2020 target. Restructuring costs2 are expected at around CHF 700 million. Underlying