Nestlé reports full-year results for 2019

Nestlé will continue to focus on fast innovation. The launch of our premium Starbucks products, for example, has been a great success. We are very pleased with the speed of the product rollout and the positive response by consumers. The company is fully embracing the need for speed, as the rapid expansion of our new plant-based food and beverage offerings has shown. We are getting to market faster with must-have products.

Our shareholders are seeing reliable, sustainable and increasing cash returns even in turbulent times. A key driver is our sustainable dividend practice. We are proud to propose the 25th consecutive annual dividend increase to our shareholders this year.

We have also reaffirmed our sustainability leadership at a time when society is increasingly looking to business for solutions to the major environmental problems we are facing. In addition, we have made significant progress in making our workplace even more diverse and inclusive. New initiatives, such as our enhanced parental leave policy, reaffirm Nestlé’s status as an employer of choice around the world.

In the past few weeks, the spread of the coronavirus has required extraordinary effort from our team in China. We have focused on ensuring the safety of our people and their families and introducing protective measures for all our facilities. We are working closely with the Chinese authorities as they take measures to contain this epidemic, building on our significant experience and expertise on the ground. Our immediate thoughts are with the people directly impacted by this global health emergency. We stand in solidarity with the Chinese people and are working hard to ensure our nutritious food and beverages continue to be widely available, particularly those for the most vulnerable, the youngest and the oldest in society. The Greater China region is our second largest market, representing about 8% of global sales. It is too early to quantify the financial impact of this outbreak at the present time."

Group Results

* 2018 figures have been adjusted to reflect reallocation of some marketing and administration expenses from Unallocated items into the Operating segments. This was done to better reflect the use of central overheads by each Zone and Globally Managed Business.

Group Sales

Organic growth reached 3.5% in 2019, fully in line with our guidance. RIG accelerated to 2.9% for the full year, the highest level in the last six years. Growth was supported in particular by innovation and portfolio management. Pricing contributed 0.6% and returned to positive territory in the fourth quarter.

Year-on-year organic growth acceleration was supported by strong growth in the United States and Brazil, as well as improved momentum in Western Europe. Our Zone AOA saw solid growth despite softness in some categories in China and Pakistan. Organic growth accelerated to 2.6% in developed markets and remained largely unchanged in emerging markets at 4.7%.

All product categories saw positive organic growth. The largest contribution came from Purina PetCare and its premium brands Purina Pro Plan and Purina ONE. Coffee had good momentum, helped by strong demand for Starbucks products, which by now have been rolled out in more than 40 countries. In total, Starbucks products generated more than CHF 300 million of incremental sales in 2019. Nestlé Health Science made good progress, based on strong sales development for medical nutrition and Atrium products. Water was subdued, reflecting pricing pressure in the mainstream segment and soft demand in Europe. Vegetarian and plant-based food products, including the Sweet Earth Awesome Burger and the Garden Gourmet Incredible Burger, saw strong double-digit organic growth, reaching sales of close to CHF 200 million.

Net acquisitions had a negative impact of 0.8%, largely related to the divestment of Nestlé Skin Health and Gerber Life Insurance. Foreign exchange reduced sales by 1.5%. Total reported sales increased by 1.2% to CHF 92.6 billion.

Underlying Trading Operating Profit

Underlying trading operating profit increased by 4.8% to CHF 16.3 billion. The underlying trading operating profit margin reached 17.6%, an increase of 60 basis points in constant currency and on a reported basis.

Margin expansion was supported by structural cost reductions, portfolio management, pricing and improved mix, which more than offset input cost inflation. Consumer-facing marketing expenses increased by 3.4% in constant currency.

Restructuring expenses and net other trading items increased by CHF 854 million to CHF 2.6 billion, largely reflecting increased impairments of assets related to the Yinlu business. As a result, trading operating profit decreased by 0.8% to CHF 13.7 billion and the trading operating profit margin decreased by 30 basis points on a reported basis to 14.8%.

Net Financial Expenses and Income Tax

Net financial expenses grew by 33.5% to CHF 1.0 billion, largely reflecting an increase in average net debt during the year.

The Group reported tax rate decreased by 550 basis points to 21.0% due to exceptional items including the sale of Nestlé Skin Health. The underlying tax rate declined by 220 basis points to 21.6%, mainly due to the evolution of the geographic and business mix.

Net Profit and Earnings Per Share

Net profit increased by 24.4% to CHF 12.6 billion, and earnings per share increased by 28.0% to CHF 4.30. Net profit benefited from the sale of Nestlé Skin Health.

Underlying earnings per share increased by 11.1% in constant currency and by 9.8% on a reported basis to CHF 4.41. The increase was mainly the result of improved operating performance. Nestlé’s share buyback program contributed 1.9% to the underlying earnings per share increase, net of finance costs.

Cash Flow

Free cash flow grew by 10.9% to CHF 11.9 billion. The increase resulted from stronger operating performance and improved capital discipline. Cash flow is expected to remain at around 12% of sales, with working capital trending to zero.

Dividend

At the Annual General Meeting on April 23, 2020, the Board of Directors will propose a dividend of CHF 2.70 per share, an increase of 25 centimes. If approved, this will be the company's 25th consecutive annual dividend increase. The company has maintained or increased its dividend in Swiss francs over the last 60 years. Nestlé is committed to maintaining this long-held practice to increase the dividend in Swiss francs every year.

The last trading day with entitlement to receive the dividend will be April 24, 2020. The net dividend will be payable as from April 29, 2020.

Shareholders entered in the share register with voting rights on April 16, 2020 at 12:00 noon (CEST) will be entitled to exercise their voting rights.

Share Buyback Program

During 2019, the Group repurchased CHF 9.7 billion of Nestlé shares. On December 30, 2019, Nestlé completed the CHF 20 billion share buyback program initiated in July 2017 at an average price per share of CHF 88.82. On the same day, Nestlé announced that it will start a new share buyback program of up to CHF 20 billion. Share repurchases under this program are foreseen over a three-year period and commenced on January 3, 2020. Should any extraordinary dividend payments or sizeable acquisitions take place during this period, the amount of the share buyback will be reduced accordingly.

Net Debt

Net debt decreased to CHF 27.1 billion as at December 31, 2019, compared to CHF 30.3 billion at the end of 2018. The decrease in net debt largely reflected strong free cash flow generation and a net cash inflow from acquisitions and divestments, mainly the disposal of Nestlé Skin Health. This more than offset the CHF 16.9 billion returned to shareholders through dividends and share buybacks.

Return on Invested Capital (ROIC)

The Group's ROIC increased by 20 basis points to 12.3%. The improvement was the result of improved operating performance and disciplined capital allocation. ROIC will trend towards 15% over time, including the impact of any future mid-sized acquisitions.

Portfolio Management

Nestlé completed acquisitions and divestments with a total value of around CHF 10.4 billion in 2019. The most significant transaction was the divestment of Nestlé Skin Health for CHF 10.2 billion.

In December 2019, an agreement was reached to sell Nestlé's U.S. ice cream business for USD 4 billion to the Froneri ice cream joint venture with PAI Partners. The transaction was closed on January 31, 2020.

Nestlé also agreed to sell a 60% stake in its Herta charcuterie (cold cuts and meat-based products) business to Casa Tarradellas and create a new joint venture for Herta with the respective equity stakes of 40% and 60%. The total business has been valued at EUR 690 million. Closing is expected to take place in the first half of 2020.

Strategic Developments

In May 2019, Nestlé announced the transition of the U.S. pizza and ice cream businesses from a Direct-Store-Delivery network to a warehouse distribution model. The transition was successfully completed at the end of 2019, six months ahead of schedule.

In October 2019, Nestlé announced the integration of its Waters business into the Group's three geographical Zones, effective January 1, 2020. This move will help utilize the company’s strong local expertise, better respond to rapidly-changing consumer preferences and create synergies. Nestlé will take further steps to improve profitable growth in Waters and to address underperformance in certain segments of this business.

Zone Americas (AMS)

• 3.9% organic growth: 2.6% RIG; 1.3% pricing.
• North America saw mid single-digit organic growth, with positive RIG and pricing.
• Latin America reported mid single-digit organic growth, with positive RIG and pricing.
• The underlying trading operating profit margin increased by 10 basis points to 21.1%.

Organic growth increased to 3.9%, supported by higher RIG of 2.6%. Pricing improved to 1.3% with positive contributions from both North and Latin America. Net acquisitions increased sales by 3.5%, largely related to the acquisition of the Starbucks license. Foreign exchange had a negative impact of 0.4%. Reported sales in Zone AMS increased by 7.0% to CHF 33.2 billion.

North America grew at a mid single-digit pace. RIG was strong, reaching its highest level in the last decade, reflecting a pipeline of successful innovations and strong demand for premium products across categories. The largest contributors to organic growth were Purina PetCare and the beverages category. Purina PetCare saw strong sales development in e-commerce, premium brands such as Purina Pro Plan and Purina ONE, and veterinary products. Tidy Cats litter had double-digit growth. The beverages category saw high single-digit growth based on strong demand for Starbucks, Coffee mate and Nescafé products. Gerber baby food returned to positive growth following innovations in the organic range and healthy snacking. The transition of the U.S. pizza and ice cream businesses from a Direct-Store-Delivery system to a warehouse distribution model was successfully completed ahead of time. Ice cream performed well helped by new product launches for Häagen-Dazs, Outshine and Drumstick. Frozen food posted low single-digit growth, supported by pizza, Hot Pockets and Stouffer’s.

Latin America posted mid single-digit growth with positive contributions across all categories. Brazil reached mid single-digit growth, supported by stronger sales in dairy, infant nutrition, KitKat and Nescafé. Mexico grew at a mid single-digit rate with continued robust demand for Nescafé. Sales in Chile declined following a challenging trading environment in the fourth quarter. Latin America recorded double-digit growth for Purina PetCare and strong mid single-digit growth in dairy and coffee.

The Zone's underlying trading operating profit margin increased by 10 basis points. Pricing and structural cost reductions more than offset cost increases from commodity inflation and one-off Direct-Store-Delivery transition costs. Marketing and commercial investments increased to support innovation and brand building.

Zone Europe, Middle-East and North Africa (EMENA)

• 2.7% organic growth: 4.2% RIG; -1.5% pricing.
• Western Europe posted strong RIG and positive organic growth. Pricing was negative.
• Central and Eastern Europe maintained mid single-digit organic growth with strong RIG. Pricing was slightly negative.
• Middle East and North Africa saw mid single-digit organic growth based on strong RIG and flat pricing.
• The underlying trading operating profit margin grew by 20 basis points to 18.9%.

Organic growth was 2.7%, with strong RIG of 4.2% supported by both volume and mix. RIG more than offset negative pricing of 1.5%, mainly related to coffee prices. Net acquisitions reduced sales by 0.2%. Foreign exchange negatively impacted sales by 3.0%. Reported sales in Zone EMENA decreased by 0.5% to CHF 18.8 billion.

Zone EMENA recorded its best RIG in the last five years. In a low-growth environment Nestlé made broad-based market share gains across categories and geographies. Each sub-region had positive organic growth, with an acceleration in both Western Europe and Eastern Europe, particularly Russia. By category, the largest growth contributor was Purina PetCare, supported by Felix, Purina ONE and Tails.com. Infant nutrition grew at a mid single-digit rate with strong growth in Eastern Europe and MENA. Innovation, in particular human milk oligosaccharides (HMOs), contributed to growth. Coffee saw positive growth with mid single-digit RIG, helped by the launch of Starbucks products in 28 countries. Confectionery maintained good momentum with strong growth for KitKat. Vegetarian and plant-based food products posted double-digit growth, supported by the expansion of the Garden Gourmet range with new offerings such as the Incredible Burger and Incredible Mince.

The Zone's underlying trading operating profit margin increased by 20 basis points. This improvement was supported by structural cost reductions, operational efficiencies and product mix. Marketing and commercial investments increased to support innovation and brand building.

Zone Asia, Oceania and sub-Saharan Africa (AOA)

• 3.2% organic growth: 2.5% RIG; 0.7% pricing.
• China posted slightly positive organic growth, with flat RIG and positive pricing.
• South-East Asia and South Asia saw mid single-digit organic growth, with strong RIG and positive pricing.
• Sub-Saharan Africa reached high single-digit organic growth, with strong RIG and positive pricing.
• Japan and Oceania had low single-digit organic growth, as strong RIG more than offset negative pricing.
• The underlying trading operating profit margin was unchanged at 22.7%.

Organic growth was 3.2%, with RIG of 2.5% and pricing of 0.7%. Net acquisitions had a minimal negative impact of 0.1%. Foreign exchange reduced sales by 1.8%. Reported sales in Zone AOA increased by 1.3% to CHF 21.6 billion.

Zone AOA saw solid growth despite slower momentum in China and negative sales development in Pakistan due to challenging trading conditions.

China posted slightly positive growth, with some benefit in the fourth quarter from the timing of Chinese New Year. Culinary, coffee and ice cream performed well. Infant nutrition in China slowed to slightly positive growth as strong sales momentum for illuma was largely offset by a decline for the S-26 range. Yinlu peanut milk and congee continued to see a decrease in sales.

South-East Asia posted good growth, with strong momentum in Indonesia and Vietnam. Bear Brand, ready-to-drink Milo and Nescafé grew double-digit. South Asia grew at a mid single-digit rate driven by strong growth in India. Maggi, NAN and Nescafé performed well, helped by innovations and distribution expansion. Sub-Saharan Africa accelerated to mid single-digit growth, supported by infant nutrition, Maggi and Nescafé. Japan and Oceania maintained low single-digit growth with strong demand for Purina PetCare products and the newly launched Starbucks range.

By product category the largest contributions to the Zone's growth came from culinary products, infant nutrition, and Purina PetCare. Infant nutrition maintained mid single-digit growth, with good momentum in all markets except S-26 range in China.

The Zone's underlying trading operating profit margin was unchanged. Structural cost reductions, pricing and favorable mix offset cost increases from commodity inflation. Marketing investments increased to support innovation and brand building.

Nestlé Waters

• 0.2% organic growth: -1.9% RIG; 2.1% pricing.
• North America saw slightly positive organic growth. Positive pricing was mostly offset by negative RIG.
• Europe reported negative organic growth largely due to lower RIG. Pricing declined slightly.
• Emerging markets posted mid single-digit organic growth, with strong pricing and positive RIG.
• The underlying trading operating profit margin increased by 80 basis points to 11.8%.

Organic growth was 0.2% as pricing increased by 2.1% and RIG declined by 1.9%. Net acquisitions reduced sales by 0.1%. Foreign exchange had a negative impact on sales of 0.9%. Reported sales in Nestlé Waters decreased by 0.8% to CHF 7.8 billion.

In North America organic growth was slightly positive. International premium brands saw double-digit growth with strong demand for S.Pellegrino and Perrier in sparkling and Acqua Panna in still water. The ReadyRefresh direct-to-consumer business grew at a mid single-digit rate, helped by pricing and the deployment of a new online platform. The mainstream segment, particularly the case-pack format and Nestlé Pure Life, remained challenged.

Europe saw negative growth with a weak second half of the year. Emerging markets posted mid single-digit growth.

Nestlé Waters is managed and reported as part of the Group's three geographical Zones since January 1, 2020.

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