Nestle will require organic sales gains to accelerate in the second half of the year if it is to meet its target of “around 5%” growth, an aim finance chief Wan Ling Martello admitted today (8 August) is “a stretch”.
The company booked a 4.1% increase in first-half organic revenue this morning, missing consensus estimates of 4.5%. The company also nudged down its organic sales target of 5-6%, part of the so-called “Nestle Model”, to “around 5%” growth.
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In order to hit the target, Nestle would require second-half organic sales growth to rise to around 6%.
“We are guiding around 5% [organic growth],” Martello said during a conference call following the group’s results release. “Some of my colleagues are optimistic that we can make that number but it is not going to be easy. It is going to be a stretch… It is the organisation’s intention to get there, but it is a stretch.”
While there seems to be some uncertainty surrounding Nestle’s organic growth prospects this year, Martello insisted Nestle remains fully committed to delivering growth in-line with the Nestle Model “over time”.
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“Let me be very clear, categorically, we are committed to the Nestle Model,” she told just-food. “The 5-6% organic growth is a line we want to walk over time. If you look at the last ten years, we average 6%, over 6%, of organic growth. There are times that we might come lower than 5% but over time its going to be 5-6% and we are very committed to that.”
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By GlobalDataMartello said a number of factors are acting in Nestle’s favour in the second half. The group is lapping easier sales comparisons, particularly in its closely-watched Asia Oceania and Africa division, which saw a deceleration in sales growth in the back half of last year.
It is also “recovering from” issues that impacted first-quarter sales, such as the destruction of a factory in the Middle East and the horsemeat scandal in Europe, Martello added.
Sanford C. Bernstein analyst Andew Wood attributed much of the group’s first-half sales miss to pricing, which was “far below” expectations.
During the second quarter, pricing contributed 0.8% to the top line, compared to consensus expectations of 2%. “This is the lowest quarterly pricing since Q2 2002 and brings fears of a collapse in pricing in coming quarters,” Wood warned in a note to investors.
However, the finance chief stopped short of reassuring the market on the direction that Nestle’s pricing will take, refusing to give guidance on pricing. “Pricing is a local decision, so a lot depends on input costs and competition… There are lots of moving parts,” she insisted.
While pricing has dented Nestle’s top line, the company emphasised it also helped to lift volume trends in the second quarter. The company’s real internal growth – which excludes M&A, price increases and currency movements – accelerated from 2.3% in the first quarter to 3.1% in second.
The company also stressed it has driven operating margin improvements in the face of softer pricing, through lower input costs and internal efficiencies, Martello said.
“In terms of margin… you have heard us talk about more focus in terms of portfolio management. Timing is difficult to predict, but we are actively looking at our portfolio and what we need to do. There will be restructuring,” Martello revealed.
Martello said the market should consider asset and resource allocation when thinking about Nestle’s portfolio management, rather than simply a slimming down process that would lead to SKU reductions or disposals.
“We are very fortunate… in terms of the breadth and depth of [our] categories, our geographic footprint… The thing that we need to be careful of, when it comes to asset allocation or resource allocation, is how do you compare noodles in India, versus pizza in the US, versus coffee in China?
“Having a tool, a common language, that looks at all the cells, putting everything on an equal footing is very important for us to do. Not just knowing… this business has been struggling [so] we give it two years, three years, and say ‘you get to this point or there is going to be a sell-by-date’. Knowing we need to not just cut our losses, but also where we need to accelerate.”
Commenting specifically on the Jenny Craig weight management business in the US, which again posted another period of decline, Martello said the performance was “very much below” internal expectations.
The weak weight management results weighed on Nestle’s first-half nutrition sales, which rose 6.5% on an organic basis thanks to a strong contribution from infant nutrition.
However, Martello played down the suggestion that the group could look to offload the unit.
“The whole [US weight management] industry is contracting but we are not going to hide behind that. We are trying different things… we are painfully aware that it is a problem that we need to address,” Martello said.
Click here to view just-food’s coverage of Nestle’s first-half numbers, or click here for our exclusive in-depth interview with group CEO Paul Buckle on how Nestle intends to deliver on the Nestle Model.
