Nestlé reports full-year results for 2018, 3.0% organic growth, trading operating profit margin up 30 basis points in constant currency

• Organic growth of 3.0%, with continued strong real internal growth (RIG) of 2.5% and pricing of 0.5%. Growth was supported by stronger momentum in the U.S. and China, as well as in infant nutrition.
• Total reported sales increased by 2.1% to CHF 91.4 billion (2017: CHF 89.6 billion). Net acquisitions had a positive impact of 0.7% and foreign exchange reduced sales by 1.6%.
• The underlying trading operating profit (UTOP) margin reached 17.0%, up 50 basis points. The trading operating profit (TOP) margin increased by 30 basis points to 15.1%, reflecting higher restructuring-related expenses.
• Earnings per share increased by 45.5% to CHF 3.36 on a reported basis. Underlying earnings per share increased by 13.9% in constant currency and by 13.1% on a reported basis to CHF 4.02.
• Free cash flow of CHF 10.8 billion, up 15%.
• Proposed dividend increase of 10 centimes to CHF 2.45 per share. Nestlé intends to complete the current CHF 20 billion share buyback program six months ahead of schedule by the end of 2019, reflecting the strong free cash flow generation. During 2018, CHF 13.9 billion were returned to shareholders through dividends and share buybacks.
• Nestlé will explore strategic options for the Herta charcuterie (cold cuts and meat-based products) business as a further step in positioning the portfolio towards attractive high-growth categories.
• 2019 Outlook: continued improvement in organic sales growth and underlying trading operating profit margin towards our 2020 targets. Underlying earnings per share in constant currency and capital efficiency are expected to increase.

Mark Schneider, Nestlé CEO, said: “We are pleased with our progress in 2018. All financial performance metrics improved significantly and we saw revived growth in our two largest markets, the United States and China, as well as in our infant nutrition business. Nestlé keeps investing in future growth and – at the same time – has increased the amount of cash returned to shareholders through our dividend and share buyback program.

We made significant progress with our portfolio transformation and sharpened our Group’s strategic focus, strengthening key growth categories and geographies in the process. Our unique Nutrition, Health & Wellness strategy, with food, beverage and nutritional health products at its core, has become much clearer as we completed a sizeable number of transactions and announced strategic reviews for Nestlé Skin Health and Herta.

In 2018, we upgraded our innovation engine notably to ensure continued technology leadership and a shorter time to market. In the fast-changing food and beverage space Nestlé has what it takes to truly excite consumers with meaningful innovation and must-have products. We reaffirmed our sustainability leadership at a time when consumers and regulators around the world are increasingly looking for solutions to today’s environmental and societal problems. Our decisive action and strong commitments to tackle the global packaging waste problem are a case in point.

We are on our way to meeting our 2020 targets and positioning Nestlé for sustained and sustainable growth in the years beyond.”

Group results

* 2017 figures have been restated to reflect:

• the implementation of IFRS 15 – Revenue from contract with customers, IFRS 16 – Leases and IFRIC 23 – Uncertainty over income tax treatments as well as other accounting policies and presentation changes; and
• the change in organization of Nestlé Nutrition. Effective January 1, 2018 Nestlé Nutrition is reported in the Zones as a regionally-managed business, with Gerber Life Insurance business reported in Other Businesses.

Group sales

Organic growth reached 3.0%, fully in line with the February 2018 guidance. Group RIG increased to 2.5% for the full year and remained at the high end of the food and beverage industry. This was supported by disciplined execution, faster innovation and successful new product launches. Pricing was 0.5%, with some improvement from 0.3% in the first half to 0.9% in the second half of the year. Net acquisitions increased sales by 0.7%. This was largely related to the acquisitions of the Starbucks license and Atrium Innovations, which more than offset divestments, mainly U.S. confectionery. Foreign exchange reduced sales by 1.6% as several emerging market currencies devalued against the Swiss franc. Total reported sales increased by 2.1% to CHF 91.4 billion.

2018 organic growth was supported by stronger momentum in the U.S. and China, Nestlé’s two largest markets. There was also a step up in organic growth for the infant nutrition and confectionery businesses. Petcare, coffee and Nestlé Health Science continued to make significant contributions with sustained high growth. Organic growth for the Group was 1.6% in developed markets and 4.9% in emerging markets.

Underlying Trading Operating Profit

Underlying trading operating profit increased by 5.1% to CHF 15.5 billion. The underlying trading operating profit margin increased by 50 basis points in constant currency and on a reported basis to 17.0%.

Margin expansion was supported by operational efficiencies, structural cost reductions and improved mix, which more than offset higher distribution expenses. Overall, the impact of commodity costs was broadly neutral, as increases in Zone AMS and Nestlé Waters were compensated by decreases in the other geographies and categories. Consumer-facing marketing expenses increased by 1.3% in constant currency.

Restructuring expenses and net other trading items increased by CHF 238 million to CHF 1.7 billion. This was mainly due to higher impairments and other restructuring-related expenses. Trading operating profit increased by 3.9% to CHF 13.8 billion. The trading operating profit margin increased by 30 basis points on a reported basis to 15.1%.

Net Financial Expenses and Income Tax

Net financial expenses grew by 9.3% to CHF 761 million, largely reflecting an increase in net debt.

The Group tax rate decreased by 280 basis points to 26.5%. The underlying tax rate declined by 320 basis points to 23.8%, mainly as a result of the U.S. tax reform.

Net Profit and Earnings Per Share

Net profit grew by 41.6% to CHF 10.1 billion, and earnings per share increased by 45.5% to CHF 3.36. Net profit benefited from several large one-off items, including income from the disposal of businesses. The increase was also supported by the improved operating performance.

Underlying earnings per share increased by 13.9% in constant currency and by 13.1% on a reported basis to CHF 4.02. Nestlé’s share buyback program contributed 2.0% to the underlying earnings per share increase, net of finance costs.

Cash Flow

Free cash flow grew by 15% and reached CHF 10.8 billion. The increase resulted mainly from higher operating profit, improved working capital and disciplined capital expenditure.

Zone Europe, Middle East and North Africa (EMENA)

• 9% organic growth: 2.6% RIG; -0.7% pricing.
• Western Europe posted positive RIG. Pricing declined resulting in negative organic growth.
• Central and Eastern Europe maintained mid single-digit organic growth, mainly driven by RIG. Pricing was also positive.
• Middle East and North Africa saw continued mid single-digit organic growth. RIG and pricing were positive.
• The underlying trading operating profit margin grew by 80 basis points to 19.0%.

Organic growth was 1.9%, supported by solid RIG at 2.6%. Pricing declined by 0.7% as deflationary trends continued to affect the food and retail sectors across most markets in Western Europe. Net acquisitions increased sales by 0.1%. Foreign exchange increased sales by 0.5%. Reported sales in Zone EMENA increased by 2.5% to CHF 18.9 billion.

Zone EMENA maintained solid organic growth in 2018. RIG was resilient and positive across all subregions. The trading environment in Western Europe remained deflationary, resulting in negative pricing. The Zone’s growth was mainly driven by Purina petcare, infant nutrition and Nestlé Professional. Premium products, representing 22% of the Zone’s sales, saw strong growth of around 10%. This strong momentum came from products such as Felix and Gourmet cat food, as well as NAN infant formula with Human Milk Oligosaccharides (HMOs). Nescafé posted positive growth in spite of lower coffee commodity prices and a challenging competitive environment. Confectionery had positive growth supported by innovation. The new all-natural, vegetarian and gluten-free snack bar Yes! was launched in September.

The Zone’s underlying trading operating profit margin increased by 80 basis points. This improvement was supported by product mix, structural cost savings, operational efficiencies and lower commodity costs.

Other Businesses

• 7% organic growth: 5.4% RIG; 0.3% pricing.
• Nespresso maintained mid single-digit organic growth, with very strong momentum in North America.
• Nestlé Health Science posted mid single-digit growth, driven by strong RIG.
• Nestlé Skin Health saw mid single-digit organic growth. RIG was positive but pricing was slightly negative.
• The underlying trading operating profit margin of Other Businesses increased by 60 basis points to 16.5%.

Organic growth of 5.7% was supported by strong RIG of 5.4% and pricing of 0.3%. Net acquisitions increased reported sales by 5.6% and foreign exchange had a negative 0.2% impact. Reported sales in Other Businesses increased by 11.1% to CHF 12.3 billion.

Nespresso reported consistent mid single-digit growth, with positive growth across all regions. Nespresso continued to expand its distribution and global footprint throughout the year, reaching 792 boutiques. Nestlé Health Science delivered mid single-digit growth supported by medical nutrition and consumer care products. Atrium Innovations grew double-digit, with continued strong demand for its innovative, non-GMO, organic and natural offerings. Nestlé Skin Health posted mid single-digit growth.

The underlying trading operating profit margin of Other Businesses increased by 60 basis points. This was mainly due to an improvement in Nestlé Skin Health and Nespresso.

Board proposals to the Annual General Meeting

At the Annual General Meeting on April 11, 2019, the Board of Directors will propose a dividend of CHF 2.45 per share, an increase of 10 centimes. The last trading day with entitlement to receive the dividend will be April 12, 2019. The net dividend will be payable as from April 17, 2019. Shareholders entered in the share register with voting rights on April 4, 2019 at 12:00 noon (CEST) will be entitled to exercise their voting rights.

Nestlé today also announced that it proposes Dick Boer, former President and CEO of Ahold Delhaize, and Dinesh Paliwal, President and CEO of Harman International, for election to its Board of Directors (see separate press release).

Outlook

2019 Outlook: continued improvement in organic sales growth and underlying trading operating profit margin towards our 2020 targets. Restructuring costs1 are expected at around CHF 700 million. Underlying earnings per share in constant currency and capital efficiency are expected to increase.