The rate at which Nestle ‘s organic sales rose in the first quarter of 2017 was the slowest this century but the results, issued on Thursday, were dampened by calendar effects and were a tick above analyst expectations. Dean Best reports on the key takeaways from the figures and from Nestle’s discussions on the numbers with analysts.

Weakest sales growth this century – but beat to analyst consensus

On an organic basis, Nestle’s sales rose 2.3% in the first three months of 2017, the slowest growth against that metric so far this century, according to Sanford Bernstein analyst Andrew Wood.

However, the 2.3% increase was above the 2% consensus analyst forecast. Nestle’s so-called “real internal growth” – which excludes the impact of pricing on the organic figure – was 1.3%, with prices adding another percentage point of growth to the result.

The calendar affected the result, with Easter falling in the second quarter and the business lapping the extra selling day from 2016’s leap year.

Zeroing on the 1.3% increase in Nestle’s real internal growth, the world’s largest food maker saw that metric slow from the 2% it reported in the fourth quarter of 2016 and the 2.4% it booked for last year as a whole. The timing of Easter had an impact but Nestle’s business in the Americas, amid the impact of the company’s moves to increase prices in Latin America and subdued trading conditions in North America.

Alain Oberhuber, an analyst at Switzerland-based financial services firm MainFirst , expects Nestle’s organic sales growth to accelerate in the second quarter, arguing the calendar changes dampened the company’s first-quarter performance by 150 basis points. CFO François-Xavier Roger estimated the impact at “probably north of 100 basis points”.

Oberhuber forecast Nestle’s organic sales will rise by 3.1% in 2017, in the middle of the KitKat maker’s own forecast of growth 2-4%, which it maintained after the first-quarter numbers.

Recovery from Asia, Oceania and Africa division continues

Nestle saw sales in the division housing its operations in Asia, Oceania and Africa rise 4.5% on an organic basis, a result Virginie Roumage, an analyst at European investment bank Bryan, Garnier & Co. described as the “most outstanding performance” from the business during the quarter.

Analysts had forecast growth of 3%; the “real internal growth” from the division reached that level, with prices adding another 1.5 points.

Roumage said the result marked “the fourth consecutive quarter of acceleration” from the division, adding “south-east Asia, India and sub-Saharan Africa gained momentum”. However, she added: “China remained an issue.” The timing of the Chinese New Year weighed on Nestle’s confectionery business but the company is struggling to improve the performance of local unit Yinlu, a business it acquired in 2011. Nestle, however, pointed to some improvement. “Yinlu continues to be negative, but the pace of decline is reducing [and] has reduced basically by half. So we see some progress there,” Roger said.

Roger said Nestle’s operations in south-east Asia had seen “good organic growth and was “the largest contributor” to the real internal growth the company had generated from its Asia, Oceania and Africa division. Notably, Roger cited “a good performance” in India, which he said was “driven by Maggi”, the part of the business recovering from the 2015 safety scare and recall. He added Nestle was also seeing “progressive normalisation” in India after the country’s demonetisation in November.

Challenges in the Americas

On an organic basis, Nestle’s sales in the Americas inched up by 0.4% in the first quarter but that growth was through pricing – against the company’s “real internal growth” metric, sales fell 1.4%.

Roger said Nestle’s real internal growth was “slightly negative” in Latin America, highlighting declining sales in Brazil, where the company had “a difficult quarter, particularly in confectionery”.

Further north, Roger said Nestle had seen “an environment of soft consumer demand” in North America, where the company had had “a challenging start of the year with lower organic growth”.

The results meant Nestle faced questions on its outlook for the US for the rest of 2017. Recently-installed CEO Mark Schneider said: “There’s a general observation here and that is pretty weak consumer demand and that’s not a particular issue here for Nestle. I think that’s all throughout. That typical transmission belt we’ve seen in the past between good economic performance as measured by GDP and then consumer spending, that doesn’t seem to be working one for one this time. And so category by category, whether it’s us or anyone else, what you’re seeing is fairly soft demand, even in the face of pretty good fundamental economic data.”

What will Nestle do on margins?

Nestle’s announcement on Thursday only covered sales, with the company providing no details on margins or profits.

The company confirmed the guidance it issued in February for 2017, which, with regard to its profitability forecast its trading operating profit margin in constant currency (a metric that, at Nestle, unlike some of its peers, comes after restructuring costs) to be “stable” and its underlying earnings per share in constant currency to increase.

The outlook statement Nestle provided last week confirmed that guidance. Notably, however, the company added: “In order to drive future profitability, we plan to increase restructuring costs considerably in 2017.”

Nestle said precious little else on its conference call with analysts about any planned restructuring, with Roger saying only: “We are now entering into the execution phase and we will provide regular feedback on restructuring and cost-saving progress.”

However, Schneider made some comments that sparked some questions from analysts on Nestle’s plans to expand margins. The Nestle chief said: “This past quarter saw a significant level of M&A transactions, attempted M&A transactions as well as activist investor activity in our industry. In this context of significant change, we would like to underline our commitment to improving growth and efficiency at the same time. We do understand … that you want to see meaningful steps towards improved combinations of growth rates and margins.”

David Hayes, an analyst at Bank of America Merrill Lynch , said some of Nestle’s peers had set out plans to take margins “towards 20% over the next few years” and asked if that was a target for the company. In 2016, Nestle’s trading operating profit margin was 15.3% and has forecast for that metric to be “stable” this year. It has not been specific on targets for the future, although has said it expects to “mid-single digit” growth in sales on an organic basis by 2020.

Schneider said: “We don’t have at this point anything to add to the targets that we laid out in February. We’re encouraged by our progress towards those and I think margin improvement is one of them. We emphasize growth and efficiency, but we have no specific new target to add at this point.”

However, Schneider’s answer sparked Jon Cox, head of Swiss equities at finance house Kepler Chevreux, to ask if Nestle would introduce margin targets, pointing to Unilever ‘s recent announcement and the context of listed food companies looking more closely at margins after the emergence of the cost-focused 3G Capital into the sector.

Schneider said it was a “fair question” but added: “Let me also underline that this past quarter until basically two weeks ago was a period that was focused on one significant item and that is a smooth handover in [the] leadership of this company.

“And we elected a new board, a new chairman and now that transition process is complete and, now, it’s basically rolling up our sleeves and getting to it through the execution stage. It’s a little early at this point to comment specifically to anything over and above what we laid out in February, but we got the message and I think I acknowledged that in my opening remarks very clearly that you are looking for improved combinations of organic growth and margin and we’re certainly determined to move in that direction.”

Schneider’s comments on margins were guarded but it would be a surprise if Nestle, under its new CEO, did not announce a target in the quarters ahead.

Earlier this month, Schneider, at his first Nestle AGM, told shareholders its peers had been looked too closely at their costs. “Many companies are focusing on radical cost-cutting to deliver higher profits in the short-term,” he said. “This approach is not sustainable.” However, since the arrival of 3G Capital into packaged food in 2013, investors in other food companies have been looking for executives to work harder on profitability. It may be that even a company the size of Nestle is not immune to that pressure.