Nestle puts its priorities in perspective

by Josh Sosland
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Nestle's new c.f.o. describes objectives and a difficult global operating environment.

Financial disciplines introduced at Nestle S.A. when Wan Ling Martello served as the company's chief financial officer will be expanded still further, said her successor, Francois-Xavier Roger.

Mr. Roger, who joined Nestle as c.f.o. on July 1, spoke with investment analysts Aug. 13 in connection with the company's financial results for the first half of 2015. In addition to offering his perspective on Nestle's solid financial performance amid a dizzying mix of global economic challenges, Mr. Roger was asked by an analyst to discuss what he expects will be the focus of his tenure.

With an eye toward maintaining sustainable and profitable growth for the company, Mr. Roger said he will work to ensure the company's resources are allocated optimally.

"Securing growth and profitable growth means certainly to work heavily on resource allocation and capital allocation," he said. "By resource allocation I mean making sure that we spend our resources properly from a marketing point of view, in terms of research and development, that we support the right sales growth opportunities, that we make choices between the short term and the long term. I will focus certainly a lot on returns as well, starting with obviously operating profit, as I mentioned earlier, making sure that we deliver a continuous improvement in operating margin.

"And I will continue what my predecessor Wan Ling Martello has done extremely well, which is to introduce that discipline of return on invested capital. And what I saw of the models that she developed, I've been extremely interested and seduced by it. And it is clearly my intention to use that model as a decision-making tool with my colleagues of the executive team to contribute to margin improvement. So capital efficiency will be also at the top of my agenda. By capital efficiency I'm talking of capital expenditures. I see capex as something positive. Capex is a way to invest for growth while we need to make sure that we secure proper returns."

Mr. Roger joined Nestle after Ms. Martello was named executive vice-president and head of Zone Asia, Oceania and Africa, earlier this year. A French citizen, Mr. Roger most recently was c.f.o. of Takeda Pharmaceutical, a Japanese company with annual sales of $14.6 billion. His background includes several years with Groupe Danone, where he was c.f.o. for Danone Asia and then head of finance, treasury and tax for the parent company. His educational background includes business degrees from Audencia Business School in western France and The Ohio State University in Columbus.

Other financial priorities Mr. Roger said he would preserve at Nestle include making sure the company maintains a product portfolio with the potential to meet Nestle's growth objectives.

"Obviously we will work on cost discipline," he said. "We will work on portfolio management. All of these topics are hot topics in this world. I was extremely pleased to see that Nestle obviously didn't wait for my arrival to be on the top of it, and Nestle has been extremely active on the topic of portfolio management and cost discipline. I've been pleased to notice many initiatives and we can elaborate more on it, and it is clearly my intention to pursue these efforts."

In a challenging global economic environment during 2015 in which Nestle has experienced flat profits, sales growth has been a highlight for the company, Mr. Roger said.

"Our real internal growth reached 1.7%," he said. "Wherever necessary we have taken price increases either in response to input cost inflation or as a result of some significant currency depreciation we have seen."

Net profit for the six months ended June 30 was 4,517 million Swiss francs ($4,619.1 million), and reported earnings per share were 1.43 Swiss francs, which compared with 4,634 million Swiss francs and 1.45 Swiss francs, respectively, in the prior-year period. The company said underlying earnings per share rose 7.3% in constant currencies.

Nestle had sales of 42,843 million Swiss francs ($43,811.2 million) in the first half of fiscal 2015, down slightly from 42,981 million Swiss francs, reflecting the negative impact of foreign currency exchange. Acquisitions and divestitures contributed 1% to sales, according to the company.

The U.S. frozen foods market has been an area of focus at Nestle over the past year, and Mr. Roger offered insights into progress the company has made in this category.

Overall, Zone AMS (Americas) generated 18% profit margins in the first half of 2015, representing an improvement of 10 basis points from the year before. Sales were 11,993 million Swiss francs, up 5%.

The company's prepared dishes and cooking aids business had profit margins of 12.1%, a narrowing of 60 basis points from the year before. Sales were 6,062 million Swiss francs, up 0.8%.

Mr. Roger was upbeat about initial indicators in connection with efforts to revitalize the frozen foods business.

"We are seeing positive early signs from the launch of the Lean Cuisine Marketplace and Stouffer's Fit Kitchen lines, which are performing in line with our expectations," he said. "They were rolled out in the second quarter of the year, and we will add communication support in the third quarter. In frozen snacks, innovations such as Hot Pockets Snack Bites did well and contributed to the good organic growth of Hot Pockets, also helped by favorable comps."

In developed markets overall, organic sales growth was 2.2% in the first half. Mr. Roger described this strength as a continuation of positive momentum that has emerged over the past two years.

Francois-Xavier Roger, chief financial officer of Nestle S.A.

Sales trends were even stronger, specifically in the company's EMENA (Europe, Middle East, North Africa) market, but operating conditions were tough. The challenges include but extend well beyond the political unrest in the Middle East.

"The environment across the zone remains volatile, with inflationary conditions in certain European markets, Eastern European markets, leading to price increases and volume pressure," Mr. Roger said. "On the other hand, in many parts of Western Europe organic growth was mainly driven by volume, as pricing is negative in a deflationary environment. And additionally, political and economic uncertainties in parts of Eastern Europe and Middle East were also challenging. In that context EMENA's results were strong in the first half of the year. They prove that our strategy and the investment that we make behind innovation, behind renovation and premiumization pay off in spite of the macro environment."

Mr. Roger highlighted efforts the company has made to introduce innovation to brands such as Buitoni (pasta and pasta sauces) and Wagner (frozen pizza).

"Looking at the dynamics by country, France, Benelux and the Nordics did well," Mr. Roger said. "Germany, U.K. and Italy were more challenging. Switzerland was impacted by the strength of the Swiss franc, and the business in Greece also continues to be challenged, given the political and economic conditions."

Nestle faced different kinds of challenges in other markets, most notably China. Organic growth in emerging markets was described by Mr. Roger as a "still strong" 7.3%, a figure lower than in recent years.

Nestle is seeing positive returns from the reboot of some of its frozen brands in the U.S.

"It is an encouraging result, given the economic and political volatility in some countries," he said. "The overall economic situation is difficult, and I'm sure that you have read and seen that as well. That also impacts our business there. Nevertheless, we continued our efforts to update our portfolio in line with fast-changing consumer expectations. The process of the turnaround is on track and the business has shown some encouraging results, with most categories showing signs of initial improvement. We did say, however, that the recovery will be a continuous process throughout 2015. For H1 in China, ambient dairy, confectionery and soluble coffee all contributed to growth. Nescafe ready-to-drink beverages delivered double-digit growth and ambient culinary made a solid contribution."

Looking at its business in China, Nestle is cautious about expectations.

"Regarding China, we are experiencing an interesting growth," Mr. Roger said. "Actually, if you look at the last three months we were having mid-single-digit growth in China, which is good, which is satisfactory. And there, once again, we see an improvement, which we are very pleased with, post cleaning of some inventory issues. So we are pleased with that. That being said, I want to be careful. As you saw and as you read and as you heard over the last couple of days, there is a lot of volatility today in China. So we are satisfied with what we have seen and the turnaround that we see in China. That being said, we are very careful about the outlook, given the volatile trading environment."

Summarizing Nestle's business through July 1, Mr. Roger said results were broad-based, sustainable, consistent and in line with the company's expectations. They were achieved despite some difficult circumstances in the global operating environment and some headwinds.

"After six weeks on the job I've been really impressed by the capacity of Nestle to deliver on more than one dimension, both short and long term, across geographies, both in terms of strategy and execution, and to work on both the P.&L. as well as the balance sheet and the cash flow," Mr. Roger said. "The first half is, in my opinion, an excellent illustration of this unique capability. Let me just provide a few examples. We have delivered both top- and bottom-line growth both in developed and emerging markets, and across all three zones. We have been able to drive efficiencies, and we have been able to reinvest in the business in the form of consumer-facing marketing activities as well as R.&D. We improved operating performance and working capital. We saw good performances from Zone EMENA, Nestle Waters, Nestle Health Science, Nestle Skin Health, Nestle Professional, pet care and beverage systems."

He zeroed in on the U.S. frozen foods market and China as major areas of focus for Nestle for the second half of 2015.

"So altogether I believe that these results allow us to confirm the outlook for the full year," he said. "And I'll repeat what the outlook is. We aim to achieve organic growth of around 5%, with improvement in margins, with improvement in underlying earnings per share in constant currencies as well as improvement in capital efficiency."

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