Nestle said trading conditions in Brazil remained challenging

Nestle said trading conditions in Brazil remained challenging

The 2.8% rise in Nestle's first-quarter sales on an organic basis beat analyst expectations as volumes offset the company's weakest pricing since 2000. The result meant the world's largest food maker stuck to its forecast for its organic sales to grow by 2-4% this year. However, beyond the numbers, Nestle's senior management issued some interesting commentary on trading in countries key to many food multinationals, on its pricing dispute with European buying group AgeCore and gave a flavour of its appetite for M&A. Dean Best reports.

Nestle's organic growth driven by volume expansion

The KitKat-to-Maggi owner this morning (19 April) reported a 2.8% increase in its first-quarter sales, when measured on an organic basis.

CEO Mark Schneider described Nestle's performance as "a solid start to the year" and said "all regions" had contributed to the growth the world's largest food maker had seen in the three months to the end of March.

On an annual basis, Nestle's organic growth slowed in 2017, marking the sixth straight year in which the company had seen the growth in that metric decelerate, meaning its performance in the opening three months of 2018 was being closely watched.

Sanford Bernstein analyst Andrew Wood said the 2.8% growth was above the consensus forecast among analysts of growth of 2.6% and represented "a reasonable recovery" from the 1.9% rise seen in the fourth quarter, which he said was "the weakest quarter of growth for Nestle this century".

However, the 0.2% rise in pricing Nestle saw in the first three months of this year was the most meagre it had seen since 2000, with its organic growth being driven by volumes.

On the face of it, shifting more units may appear a better way of growing than through price increases, though much has been made today of the fact Nestle and Unilever both this morning reported sales boosted by volumes, which some industry watchers arguing the numbers highlighted how challenging it can be to push through price increases amid stiff competition. A more balanced mix behind the sales growth is what some in the investment community may be seeking.

"Be aware of one thing as far as pricing is concerned is that last year {we} were [up] 0.8%. We are 0.2% in Q1. The difference between the two is almost entirely coming from emerging markets where we had basically pricing coming from offsetting currency depreciation, which we don't really have now. I'm talking there of Brazil to a large extent, Russia and maybe some countries in sub-Saharan Africa," CFO Francois-Xavier Roger said.

Brazil remains challenging

That Brazil remains one of the tougher emerging markets for FMCG companies is not new news but, given Nestle's scale and its presence in the Latin American country, its comments on trading conditions there will be scrutinised.

"Brazil continues to see a challenging trading environment," Schneider told investors and analysts on a conference call this afternoon.

Nestle said its sales across Latin America rose in the first quarter both on an organic basis and when measured against an internal metric called "real internal growth", or RIG, which is organic growth excluding pricing. RIG also rose in Brazil.

However, the company acknowledged its pricing on the continent was lower, which it said "mainly due to Brazil", where prices declined, a factor that also contributed to the decline it saw in pricing across the Americas as a whole.

"Brazil in particular faced a challenging trading environment with deflationary pressures," CFO Francois-Xavier Roger said. "Pricing in Brazil remained negative in most categories particularly in dairy following the price reductions taken in the second half of 2017."

Nevertheless, Nestle said it is seeing its own position in Brazil improve, which, it argued, should stand the business in good stead when trading conditions in the country recover. "We are gaining market share in Brazil, which should position us well when and if the market rebounds," Roger added.

Still some dissatisfaction in China despite broad-based growth

China is Nestle's second-largest market and is therefore often the subject of investor questions. The company has had issues with some parts of its Chinese business in recent quarters, including confectionery and Yinlu, but Schneider said all parts of its local operations had grown in the first quarter.

However, Nestle's nutrition business, which houses its infant formula brands, still remains a concern, the company's management admitted. Nestle grew its nutrition sales in China in the opening three months of 2017 but the business wants more.

"For China, what we wanted to point here is that we saw positive growth in all categories which in some previous years and quarters was not always the case. We had some real disappointments there. That was not the case in the first quarter of 2018. That was not meant to say we are totally happy where we are on nutrition," Schneider said. "As we discussed on previous conference calls, there's a significant opportunity especially from cross-border e-commerce and especially when it comes to the top end of the market, premiumisation, we need to better on. We're not happy with the results there, we want to do better."

Nestle remains happy with US frozen, some questions over baby food

In recent years, Nestle has exited the frozen-food business in certain markets in Europe and the underwhelming performance of that side of its business in the US had prompted to market analysts to question whether the company should stay in the sector on that side of the Atlantic.

However, as questions intensified over the future of Nestle's US frozen-food division in 2015 and 2016, the company, which owns brands like DiGiorno pizza and Lean Cuisine ready meals, stepped up its investment in the business.

Roger today sought to underline how Nestle "believes" in US frozen food and pointed to some positives from the portfolio in the first quarter, while acknowledging not all brands were in growth.

"The category growth has improved and is healthier than it was. We have a business we are happy with because it has good cashflow and margin. We have different growth trends by product. We have mentioned pizza, which is doing well. We have a lot of innovation there with DiGiorno. Hot Pockets is doing well as well and we relaunched part of the offer with a more healthy proposition. We are suffering a little bit more maybe on some of the sub-categories like Stouffer's because of tough competition and Lean Cuisine," he said.

Another category where Nestle has invested in the US is baby food, working on areas such as recipes and packaging. It remains, Roger says, early days when it comes to judging the results of those initiatives.

"We are renovating part of our offerings and we moved into organic and natural as well. This relaunch is in progress and it is too early to draw any conclusion. We had some issues in Q1 but which were temporary issues in terms of inventory shortages for pouches - but on the other hand we did well with infant cereal. We need a little bit of time to assess the outcome of the relaunch and repositioning of the Gerber brand into natural and organic," he reflected.

Nestle and retailer pricing row in Europe

During the first quarter, Nestle became embroiled in a pricing spat with members of the European retail buying group AgeCore, which represents six European grocers, including Belgium's Colruyt, the Switzerland-based retailer Coop and Germany's Edeka.

The dispute has led to members of the buying pact pulling selected Nestle brands from their shelves. Talks between Nestle and AgeCore are ongoing and Schneider was asked whether, amid a number of existing or planned purchasing deals between Europe's grocers, investors had to start to bear that dynamic in mind.

"Every time you have a geography that has large markets side by side that has some pricing differences over time it's a safe bet to assume those will converge somewhat. The broader trends we're seeing here should not be surprising," Schneider said. "That's clearly something we have to adjust to by improving our cost structures and the category-led approach across Europe that [Europe CEO] Marco Settembri has been spearheading is very helpful in making the most of the situation.

The Nestle chief had some brief comments on the specific issue with AgeCore. "I want to just make it very clear we are in ongoing negotiations there. Of course, we will only agree to a balanced arrangement and only sign when we're satisfied that we get something out of an agreement. This is not the time for one-sided concessions."

Nestle on M&A

The Swiss food giant had a relatively active first quarter in its work to reshape its portfolio. It struck a deal to sell its confectionery business in the US, sold its waters arm in Brazil and acquired a Latin American organic foods supplier.

At one stage, Nestle was also rumoured to be eyeing Merck's consumer-health business, although that talk soon fizzled out (and, in any case, Procter & Gamble today agreed a deal for those assets).

Nonetheless, given the issuance of Nestle's growth priorities last summer included a bid to "pursue growth opportunities in consumer healthcare", the company was specifically asked today about its M&A ambitions in this area. In December, Nestle announced a move to buy Canada-based vitamins and supplements group Atrium Innovations.

Schneider said today: "I can fully confirm our continued interest [in consumer healthcare] but let me balance by reiterating ... we stand for a disciplined and very focused approach. What we're not interested in is building a broad-based consumer health portfolio that is from soup to nuts. It really has to be focused on some of the core things we bring to the table. Nutrition and metabolism expertise is at the core of what we do and hence and when there's broad-based portfolios for sale that may not be right up our alley. However, when, for example, the Atrium business was for sale that was clearly something we were interested in."