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Innovation raises Nestle above raw material impact

By Jess Halliday , 21-Feb-2008

Repositioning on a healthy food platform and investing in research of value-added ingredients has lifted Nestle out of the reach of raw material prices and other economic encumbrances.

The world's largest food company has reported sales of CHF 107.55bn (€66.4bn) in full year 2007 - up 9.2 per cent on the previous year - and a 12.9 per cent in EBIT to CHF 15.02bn (€9.26bn). The fine set of results, representing the 12th year of organic growth of at least 5-6 per cent, are validation for a strategy that is now becoming common-place in the industry. Chairman and CEO Peter Brabeck-Letmathe said: "Nestle has ventured far beyond the traditional food industry: our success is now driven more by our capacity to innovate and use our R&D pipeline to launch new, added-value products and services, than by raw material prices or the economic climate." He said that Nestle is now "uniquely positioned as the world's foremost nutrition, health and wellness company". Nestle Nutrition Nestle Nutrition reported sales of CHF 8.4bn (€5.19bn) and EBIT of CHF1.45bn (€0.89bn) - up 41 and 43 per cent respectively. Key features of the year have been the acquisition and integration of Novartis Medical Nutrition and Gerber, as well as the continued integration of Jenny Craig, which was acquired in 2006. Nestle is not alone in establishing a health and nutrition arm, however. Other companies traditionally associated with confectionary, such as Mars, have also been making waves in the area. On the ingredients front, Tate & Lyle, since reducing its reliance on sugar to generate strong margins, has switched focus to value-added ingredients, particularly those with a health twist. But the sheer amount of investment it has made in R&D (CHF1.87bn, €1.15bn, for the global group as a whole in 2007) means that the pipeline "will continue to drive growth of all Nestle Nutrition businesses" for years to come. In addition, it expects the R&D to fuel its performance of mainstream products enriched with what it calls BABs - Branded Active Benefits. Nestle Waters Although Nestle Waters achieved sales growth of 7.9 per cent to CHF 10.4bn (€6.42bn), EBIT margin took a fall of 50 basis point. EBIT was CHF851m (€525m). This was a result of the second half of the year marred by unfavourable weather conditions in Europe, as well as a weak performance in home and office delivery, and higher packaging and distribution costs. In North America and emerging markets, however, double-digit sales growth was achieved. In addition, the Nestle Pure Life brand gained momentum. Powdered and Liquid Beverages This division saw sales of CHF 17.8bn (€11bn), representing 7.6 per cent real internal growth and 10.3 per cent organic growth. The main drivers were the core brands, such as Nescafe, including the launch of Nescafe Dolce Gusto. Nespresso saw 40 per cent growth, and Milo and Actigen-E saw good growth in Asia, Africa and Central and Eastern Europe. EBIT margins were unchanged at 22.4 per cent. Milk products and ice cream The company said its strong brands in shelf-stable milk products allowed it to compensate for the high dairy price increases, and boost volume growth at the same time. Chilled dairy also improved its profit performance; and Coffeemate saw impressive volume growth, especially in the USA and Asia. Ice cream performed well in Latin America, Asia and Eastern Europe. Sales for this division were CHF20.7bn (€12.8bn), and EBIT margin improved 90 basis points "a notable achievement in view of prevailing high input costs. Confectionery The emerging markets of Latin America ands Asia led growth in all three of Nestle's confectionery areas - chocolate, sugar and biscuits. EBIT margin improved by 10 basis points overall, thanks to a focus on core strategic and local brands. Sales were CHF12.2 bn (€7.5bn) - 2.3 per cent real internal growth, 5.3 per cent organic growth.

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