Nestlé reports half-year results for 2022

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  • Organic growth reached 8.1%, with real internal growth (RIG) of 1.7% and pricing of 6.5%. Growth was broad-based across most geographies and categories, with increased pricing and resilient RIG.
  • Total reported sales increased by 9.2% to CHF 45.6 billion (6M-2021: CHF 41.8 billion). Net acquisitions had a positive impact of 1.0%. Foreign exchange increased sales by 0.1%.
  • The underlying trading operating profit (UTOP) margin was 16.9%, decreasing by 50 basis points. The trading operating profit (TOP) margin decreased by 200 basis points to 14.7%, mainly due to one-off items.
  • Underlying earnings per share increased by 8.1% in constant currency and increased by 7.3% on a reported basis to CHF 2.33. Earnings per share decreased by 9.5% to CHF 1.92 on a reported basis.
  • Free cash flow was CHF 1.5 billion, as working capital and capital expenditure increased temporarily in the context of supply chain constraints and high volume demand.
  • Continued portfolio management progress. In the second quarter, Nestlé Health Science agreed to acquire Puravida in Brazil and The Better Health Company in New Zealand.
  • Full-year 2022 outlook updated: we expect organic sales growth between 7% and 8%. The underlying trading operating profit margin is now expected around 17.0%. Underlying earnings per share in constant currency and capital efficiency are expected to increase.

Mark Schneider, Nestlé CEO, commented: “In the first half of the year, we delivered strong organic growth and a significant increase in underlying earnings per share. Our local teams implemented price increases in a responsible manner. Volume and product mix were resilient, based on our strong brands, differentiated offerings and leading market positions. We limited the impact of unprecedented inflationary pressures and supply chain constraints on our margin development through disciplined cost control and operational efficiencies. At the same time, investments behind capital expenditure, digitalization and sustainability increased significantly.

We are focused on creating shared value over both the short and long term. Growing food insecurity around the world and heightened climate concerns, following an increase in unusual weather patterns, underlines the importance of this strategic direction. Good for you and good for the planet are the two key strategic pillars that our company pursues in an unwavering manner, even in the face of significant short-term challenges.”

Group sales

Organic growth was 8.1%. Pricing increased to 6.5% to reflect significant and unprecedented cost inflation. RIG was resilient at 1.7%, given the high base of comparison in 2021 and supply chain constraints.

Organic growth was 6.9% in developed markets, with strong pricing and positive RIG. Organic growth in emerging markets was 10.0%, with increased pricing and solid RIG.

By product category, Purina PetCare was the largest contributor to organic growth, with continued momentum for science-based and premium brands Purina Pro Plan, Purina ONE and Fancy Feast as well as veterinary products. Sales in coffee grew at a high single-digit rate, with broad-based growth across brands and geographies, supported by a strong recovery of out-of-home channels. Confectionery reported double-digit growth, reflecting particular strength for KitKat and seasonal products. Growth in Infant Nutrition reached a high single-digit rate, with a return to positive growth in China and improving market share trends. Water posted double-digit growth, led by premium brands and a further recovery of out-of-home channels. Nestlé Health Science recorded high single-digit growth, driven by Medical Nutrition and healthy-aging products. Dairy reported mid single-digit growth, with strong sales developments for coffee creamers and affordable nutrition offerings. Prepared dishes and cooking aids posted low single-digit growth, following a high base of comparison in 2021, with continued strong demand for Maggi. Sales in vegetarian and plant-based food continued to grow at a double-digit rate, led by Garden Gourmet.

By channel, organic growth in retail sales remained robust at 6.7%. Within retail, e-commerce sales grew by 8.3%, building on growth of 19.2% in the first half of 2021. Organic growth in out-of-home channels reached 29.6%, with sales exceeding 2019 levels.

Net acquisitions increased sales by 1.0%, largely related to the acquisitions of the core brands of The Bountiful Company as well as Orgain. The impact on sales from foreign exchange was positive at 0.1%. Total reported sales increased by 9.2% to CHF 45.6 billion.

Underlying Trading Operating Profit

Underlying trading operating profit increased by 6.0% to CHF 7.7 billion. The underlying trading operating profit margin decreased by 50 basis points to 16.9% in constant currency and on a reported basis, reflecting time delays between cost inflation and pricing actions.

Gross margin decreased by 280 basis points to 46.0%, following significant broad-based inflation for commodity, packaging, freight and energy costs. Pricing, growth leverage and efficiencies helped to significantly offset the impact of cost inflation.

Distribution costs as a percentage of sales decreased by 10 basis points, mainly as a result of the divestment of the Nestlé Waters North America brands.

Marketing and administration expenses as a percentage of sales decreased by 210 basis points, supported by sales growth leverage and disciplined cost control. Marketing spend decreased temporarily, following a lower level of promotion and marketing activities in the context of supply chain constraints.

Restructuring expenses and net other trading items were CHF 1.0 billion, reflecting higher impairments. As a result, trading operating profit decreased by 4.3% to CHF 6.7 billion, and the trading operating profit margin decreased by 200 basis points on a reported basis to 14.7%.

Net Financial Expenses and Income Tax

Net financial expenses increased by 4.5% to CHF 434 million, reflecting higher average net debt.

The Group reported tax rate increased by 680 basis points to 24.2% as a result of one-off items. The underlying tax rate increased by 70 basis points to 20.9%, mainly due to the geographic and business mix.

Net Profit and Earnings Per Share

Net profit decreased by 11.7% to CHF 5.2 billion. Net profit margin decreased by 270 basis points to 11.5% as a result of one-off items, including higher impairments and taxes. As a consequence, earnings per share decreased by 9.5% to CHF 1.92 on a reported basis.

Underlying earnings per share increased by 8.1% in constant currency and by 7.3% on a reported basis to CHF 2.33. The increase was mainly the result of strong organic growth. Nestlé’s share buyback program contributed 1.7% to the underlying earnings per share increase, net of finance costs.

Cash Flow

Cash generated from operations decreased from CHF 5.8 billion to CHF 5.7 billion mainly due to an increase in working capital. The Group increased its inventory levels temporarily, due to significant supply chain constraints. Excluding the increase in working capital, cash generated from operations increased from CHF 7.9 billion to CHF 8.8 billion, driven by strong organic growth. Free cash flow decreased from CHF 2.8 billion to CHF 1.5 billion reflecting higher taxes and a temporary increase in capital expenditure to meet strong volume demand, particularly for Purina PetCare and coffee.

Share Buyback Program

In the first half, the Group repurchased CHF 6.9 billion of Nestlé shares as part of the three-year CHF 20 billion share buyback program, which began in January 2022.

Net Debt

Net debt increased to CHF 48.5 billion as at June 30, 2022, compared to CHF 32.9 billion at December 31, 2021. The increase largely reflected the dividend payment of CHF 7.6 billion and share buybacks of CHF 6.7 billion.

Portfolio Management

On April 1, 2022, Nestlé Health Science completed the acquisition of a majority stake in Orgain, a leader in plant-based nutrition. Orgain complements Nestlé Health Science’s existing portfolio of nutrition products that support healthier lives. The deal is expected to be slightly accretive to Nestlé’s organic growth, while slightly dilutive to the Group’s underlying trading operating profit margin in 2022. The agreement includes the option for Nestlé Health Science to fully acquire Orgain in 2024.

On May 23, 2022, Nestlé Health Science agreed to acquire Puravida, a premium Brazilian nutrition and health lifestyle brand. The acquisition will enable Nestlé Health Science to expand its consumer health portfolio in Latin America.

On June 25, 2022, Nestlé Health Science agreed to acquire The Better Health Company. The acquisition includes the GO Healthy brand, New Zealand’s leading supplement brand, and New Zealand Health Manufacturing, an Auckland-based manufacturing facility for vitamins, minerals and supplements. The acquisition will expand Nestlé Health Science’s portfolio of vitamins, minerals and supplements in AOA.

Zone Asia, Oceania and Africa (AOA)

  • 8.2% organic growth: 2.1% RIG; 6.1% pricing.
  • The underlying trading operating profit margin decreased by 90 basis points to 23.5%.
  Sales 6M-2022 Sales 6M-2021 RIG Pricing Organic growth UTOP 6M-2022 UTOP 6M-2021 Margin

6M-2022

Margin

6M-2021

Zone AOA CHF 9.3 bn CHF 8.9 bn 2.1% 6.1% 8.2% CHF 2.2 bn CHF 2.2 bn 23.5% 24.4%

Organic growth reached 8.2%, with RIG of 2.1%. Pricing increased to 6.1%, with broad-based contributions from all geographies and categories. Foreign exchange reduced sales by 3.0%. Reported sales in Zone AOA increased by 5.2% to CHF 9.3 billion.

Organic growth in Zone AOA accelerated to a high single-digit rate, driven by increased pricing, a further recovery of out-of-home channels and strong supply chain execution. The Zone saw market share gains across categories, particularly in culinary, portioned and ready-to-drink coffee as well as dairy.

South-East Asia posted mid single-digit growth, with positive contributions from most geographies, led by Malaysia. Nescafé, particularly ready-to-drink offerings, as well as Maggi and KitKat saw strong demand. South Asia recorded broad-based double-digit growth, due to distribution expansion and increased brand equity, particularly for Maggi, KitKat and Nescafé. Growth in Middle East and Africa was close to a double-digit rate, based on strong momentum for affordable offerings in Central and West Africa. Japan reported mid single-digit growth, based on solid demand for coffee and Purina PetCare. Sales in South Korea grew at a double-digit rate, driven by Starbucks products. Oceania reported high single-digit growth, fueled by new product launches, including KitKat Dark Tablet and the relaunch of Nescafé coffee mixes.

By product category, culinary was the largest growth contributor, led by Maggi. Coffee posted high single-digit growth, with continued strong demand for Nescafé and Starbucks products. Sales in Nestlé Professional grew at a double-digit rate. Infant Nutrition reported mid single-digit growth, with a broad-based recovery in the second quarter. Sales in cocoa and malt beverages as well as confectionery saw double-digit growth, based on strong demand for Milo and KitKat. Purina PetCare recorded high single-digit growth, with continued momentum for Purina ONE, Purina Pro Plan and Felix.

The Zone’s underlying trading operating profit margin decreased by 90 basis points. Significant cost inflation more than offset pricing, growth leverage and disciplined cost control.

Nespresso

  • 2.6% organic growth: – 1.6% RIG; 4.2% pricing.
  • The underlying trading operating profit margin decreased by 170 basis points to 24.3%.