Nestle has indicated that it expects a jump in restructuring charges during 2017 as it booked net earnings that failed to meet analyst expectations this morning (16 February). 

Nestle FY group results

Source: Nestle

Nestle's 2016 net earnings of CHF8.5bn (US$8.47bn) were lower than 2015's earnings of CHF9.01bn and well below analyst forecasts of CHF9.5bn, according to expectations compiled by the company. The Maggi owner said "several items" dented the bottom line, including a "large" one-time deferred tax charge. Those financial expenses more than offset Nestle's growth in operating profit, which increased by 6% year-on-year. 

Nestle FY operating profit margin

Source: Nestle

The world's largest food maker said it was able to strengthen its operating profit margin, which it raised back to 2014 levels after a dip in 2015. The result represented a 20 basis point improvement on a reported basis or a 30 basis point  increase when currency exchange is excluded. The improvement was achieved despite increased brand support and CHF300m in restructuring charges, Nestle said. 

Nestle FY segment results - operating profit

Source: Nestle

Operating profit improvements were broad-based with all of Nestle's food operating units reporting higher operating profit, with the exception of its business in the Americas, which declined 10 basis points due to restructuring costs and cost inflation in Latin America amid currency devaluation. The greatest improvements were seen in Nestle's operations in Europe, the Middle East and North Africa, where the KitKat maker said "profitability improved across most categories as a result of premiumisation, volume leverage and favourable input costs". 

Nestle FY segment results - sales

Source: Nestle

On a group-wide basis, Nestle's sales edged up by 0.8% as modest growth from two parts of the group - the operations in the Americas and the businesses in Asia, Oceania and sub-Saharan Africa - offset lower sales from its division covering Europe, the Middle East and north Africa, as well as the SMA owner's infant nutrition unit. Nestle said growth accelerated in North America while the top line was supported by pricing in Latin America.

Higher sales in Asia, Oceania and sub-Saharan Africa were achieved despite the ongoing decline of Nestle's joint venture in China, Yinlu, which the company said was down at double-digit rate. Nestle said the "stabilisation" of Yinlu is expected to be achieved next year. Nestle's nutrition business was also impacted by "challenging" conditions in China, with adjustments in trade inventory levels taking place ahead of the introduction of new legislation governing the sector in 2018. Nestle stressed its Europe, the Middle East and north Africa division was able to deliver organic growth, although currency exchange meant reported sales were down. 

Nestle FY organic growth

Source: Nestle

Nestle's new CEO, Mark Schneider, said the company's 2016 organic growth was "at the high end of the industry" but "at the lower end of our expectations". The organic growth rate also failed to meet consensus analyst expectations, which forecast organic growth of 3.6%. Nestle said real internal growth - an internal company metric that strips out pricing, M&A and currency exchange - reached a "three-year high" of 2.4%. Nestle said pricing - which contributed 0.8 percentage points - was "limited". But, with higher pricing coming in at the end of the year, the company suggested it anticipates an improved pricing environment in 2017. 

Outlook

Looking to 2017, Nestle suggested it anticipates organic growth of 2-4%. This is below the "Nestle model" which calls for 5-6% annual organic growth. The company also revealed that it will step up its restructuring efforts in 2017 and revealed it will "increase restructuring costs considerably" in the year. Nestle said that it expects "stable" trading operating profit at constant currencies. Underlying earnings per share and capital efficiency are, however, expected to increase. 

MainFirst analyst Alain Oberhuber suggested the reduced sales outlook and focus on margin was expected given Schneider's recent assumption of CEO responsibilities. "The weaker outlook on organic growth rate and operating margin improvement is clearly offset by Mark Schneider's handwriting to do what we expected, e.g. a) guidance cut to a more realistic level; b) increase of restructuring programme and c) focus on capital efficiency improvement," he wrote in an investor note.

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