Nestlé (NESN) H2 2017 (Media) earnings summary

Executive summary

• FY17 organic growth was 2.4%, comprising 1.6% RIG and 0.8% pricing; Q4 growth slowed to 1.9%.

• Organic growth was at the higher end of the industry range but the lower end of guidance; 2020 growth and margin targets were reaffirmed.

• Underlying trading operating margin improved 50 bps in constant currency, supported by cost savings that largely offset higher commodity costs.

• Priorities included organic sales growth, operating efficiency, portfolio realignment and long-term value creation; initiatives and acquisitions carry lead times before full contribution.

Financial highlights

• FY17 sales were CHF 89.8bn, up 0.4%; net divestments reduced sales by 1.9%, mainly following the Froneri joint venture formation.

• Underlying trading operating profit rose 2.9% to CHF 14.7bn; reported trading operating profit fell 3.4% to CHF 13.2bn.

• Net profit declined 15.8% to CHF 7.2bn and EPS fell 15.8% to CHF 2.32, mainly due to a Skin Health goodwill impairment; underlying EPS rose 4.7% in constant currency to CHF 3.55.

• Free cash flow was CHF 8.5bn, or 9.5% of sales, down from CHF 10.1bn as working-capital improvement slowed after a large 2016 reduction.

• Additional commodity costs were CHF 900m; structural-cost actions contributed 40 bps to margin improvement, while marketing efficiencies added 110 bps and commodity costs reduced it by 70 bps.

Outlook and guidance

• FY18 organic sales growth guidance was 2%-4%, with growth expected to improve and the range to narrow during the year.

• Underlying trading operating margin was expected to improve in line with the 2020 target; restructuring costs were forecast at ~CHF 700m, excluding specified impairments, litigation and onerous contracts.

• FY18 underlying EPS in constant currency and capital efficiency were expected to increase; the 2020 organic growth target remained mid-single digit.