Standout performance at Nestle

by Josh Sosland
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Maintaining its earnings growth momentum in the face of what the company called a "difficult external environment," Nestle S.A. posted net income of 10,649 million Swiss francs ($9,774 million) in 2007, up 16% from 9,179 million Swiss francs in 2006. Sales for the year were 107,552 million Swiss francs ($98,715 million), up 9%.

"This milestone performance was achieved in a difficult external environment and for the twelfth year in a row has demonstrated the power of the Nestle model — organic growth of at least 5% to 6% coupled with a sustainable EBIT margin improvement, irrespective of prevailing economic conditions," said Peter Brabeck-Letmathe, chairman and chief executive officer.

Zone Americas had sales of 32,917 million Swiss francs ($31,298 million) with 3.3% real internal growth and 8.1% organic growth for the year. While Nestle does not break out operating profits by geographic zones, the company said margins were better in the Americas.

"EBIT margins increased by 50 basis points led by timely pricing, operational improvements and successful innovative product launches such as Nescafe Protect (instant coffee made with a process that preserves antioxidants in the beans resulting in coffee with three times the antioxidants of green tea), Panini Lean Cuisine or Cat Chow," Nestle said.

Ice cream margins were boosted by a better focus on more value-added products, the company said. Adding value has received greater emphasis on a company-wide basis.

"Nestle has ventured far beyond the traditional food industry, our success is now driven more by our capacity to innovate and use our R.&D. pipeline to launch new, added-value products and services than by raw material prices or the economic climate," Mr. Brabeck-Letmathe said. "Combined with our strong emphasis on excellence in execution and discipline in capital management, we have over time created powerful momentum that will deliver profitable growth for years to come."

In a Feb. 21 conference call to discuss results, Jim Singh, chief financial officer, said Nestle USA "performed well," benefiting from the value-added emphasis. Additionally, Latin America sales enjoyed double-digit growth.

"The focus on improving quality of sales was beneficial in North America as has been the focus on affordability in Latin America," he said. "By product category, shelf-stable dairy, soluble coffee and pet care were the best performers. In soluble coffee, much of the growth in the U.S. is coming from the successful (launch) of Nescafe Classico, imported from Latin America and selling into the Hispanic community."

In a review of results by product category and brands, Nestle said sales of prepared dishes and cooking aids were 18.5 billion Swiss francs in 2007, representing organic growth of 4%. Double-digit gains were enjoyed by Lean Cuisine and Buitoni in North America, "where the business continued to benefit from strong innovation focused on health and wellness," Nestle said.

Offering a different perspective in the conference call, Mr. Singh showed Lean Pockets and Buitoni as the only major Nestle brands to experience declining sales in 2007, on a company-wide basis. The difference with the earlier assessment of Buitoni appeared to suggest that while the brand was strong in the United States, it did not perform well in Italy, the United Kingdom or France. He said several initiatives have been launched to improve performance of Buitoni and Lean Pockets going forward.

Related to profitability, Mr. Singh singled out prepared dishes and cooking aids as an area of decline.

"The main reason for the margin decline here is the Buitoni business, as was the case with the growth," he said. "Clearly, too, we would expect an improved growth from Hot Pockets to be reflected in improved profitability."

Strong performance generated in the Nestle Nutrition business stood out among the company’s product lines with 8.4 billion Swiss francs of sales, representing organic growth of 9.7%. In addition to the integration of Jenny Craig (acquired in 2006) and Novartis Medical Nutrition and Gerber (acquired in 2007), the unit generated strong sales and profit growth in its established business, Nestle said.

In Confectionery, organic sales growth was 5.3% in 2007, of which 3 percentage points were pricing.

"The general theme here was that growth was strongest in dark and in tablets, particularly premium," Mr. Singh said. Growth was strong in the Americas, he said.

Nestle said its water business, Nestle Pure Life, maintained its momentum in 2007 and "is now a key growth driver in over 20 countries." Sales grew at a double-digit rate in the United States.

The strength of its largest brands (29 with more than 1 billion Swiss francs in annual sales), was an area of particular pride for Nestle in 2007. Mr. Singh said the strong sales growth of so many mature brands was a testament to the strength of the brands and the "core competence of the Nestle organization." For example, Stouffer’s and Nestle grew about 12%, Carnation sales were up 9% and Coffeemate sales surged 20%.

"These are multi-decade brands that continue to benefit from innovation and renovation from opening new markets," Mr. Singh said. "Newer brands like Nestea, Lean Cuisine and NAN are growing about 15% or more with Pure Life and Nespresso around 40%."

Commenting broadly on its results in 2007, Mr. Singh said one of the reasons the company was able to achieve growth was because it was not caught off guard by the surge in ingredient prices.

"Nestle benefited in 2007 from first mover advantage, having already identified the raw material issue before the start of the year and put in place the necessary strategies to respond to it, including early pricing option and further increasing our efficiency drives," he said.

Looking forward, the company expressed confidence that its momentum "will be maintained over the coming years." The company said it expects to achieve organic growth of 5% and 6% in 2008 along with continued EBIT margin improvement in constant currencies as well as further capital efficiency improvement.

"Nestle’s rich R.&D. pipeline promises many new, innovative product launches over the coming years," the company said.

Offering further detail on trends the company said would impact its business in the years ahead, Nestle identified away-from-home eating of food and beverages in the U.S. and other mature markets as a key. The company’s food service business has annual sales of 7.2 billion Swiss francs with 10,000 employees in 97 countries.

"Nestle is already the uncontested world leader in this highly fragmented market," the company said. "With the ongoing transformation of Nestle’s FoodServices Strategic Business Division into Nestle Professional, the company is well poised to take advantage of a business opportunity over the coming years estimated at around 400 billion Swiss francs."

Still another trend highlighted by the company is the strength of luxury and premium products such as Haagen-Dazs ice cream in North America as well as products in confectionery.

"The strong growth of darker, premium chocolate is another visible sign of ‘premiumization’ and explains Nestle’s partnership with Belgian luxury chocolatier Pierre Marcolini, as well as the acquisitions of Ruzskaya Confectionery Factory, producer of Russia’s leading premium chocolate brands Comilfo and Ruzanna. The ‘premiumization’ of mainstream Nestle products, as witnessed for instance by the recently launch of Nido Excella Gold (a dairy product) in Asia and Latin America, will pick up further speed over years to come."

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