Nestlé reports half-year results for 2022

Nestlé reports half-year results for 2022

• Organic growth reached 8.1%, with real internal growth (RIG) of 1.7% and pricing of 6.5%. Growth was broad-based across most geographies and categories, with increased pricing and resilient RIG.
• Total reported sales increased by 9.2% to CHF 45.6 billion (6M-2021: CHF 41.8 billion). Net acquisitions had a positive impact of 1.0%. Foreign exchange increased sales by 0.1%.
• The underlying trading operating profit (UTOP) margin was 16.9%, decreasing by 50 basis points. The trading operating profit (TOP) margin decreased by 200 basis points to 14.7%, mainly due to one-off items.
• Underlying earnings per share increased by 8.1% in constant currency and increased by 7.3% on a reported basis to CHF 2.33. Earnings per share decreased by 9.5% to CHF 1.92 on a reported basis.
• Free cash flow was CHF 1.5 billion, as working capital and capital expenditure increased temporarily in the context of supply chain constraints and high volume demand.
• Continued portfolio management progress. In the second quarter, Nestlé Health Science agreed to acquire Puravida in Brazil and The Better Health Company in New Zealand.
• Full-year 2022 outlook updated: we expect organic sales growth between 7% and 8%. The underlying trading operating profit margin is now expected around 17.0%. Underlying earnings per share in constant currency and capital efficiency are expected to increase.

Mark Schneider, Nestlé CEO, commented: “In the first half of the year, we delivered strong organic growth and a significant increase in underlying earnings per share. Our local teams implemented price increases in a responsible manner. Volume and product mix were resilient, based on our strong brands, differentiated offerings and leading market positions. We limited the impact of unprecedented inflationary pressures and supply chain constraints on our margin development through disciplined cost control and operational efficiencies. At the same time, investments behind capital expenditure, digitalization and sustainability increased significantly.

We are focused on creating shared value over both the short and long term. Growing food insecurity around the world and heightened climate concerns, following an increase in unusual weather patterns, underlines the importance of this strategic direction. Good for you and good for the planet are the two key strategic pillars that our company pursues in an unwavering manner, even in the face of significant short-term challenges."

*2021 figures restated following the creation of Zone North America (NA) and Zone Greater China (GC) as of January 1, 2022. Zone AOA includes Middle East and North Africa (MENA) previously included in Zone EMENA

**RIG, pricing and organic growth figures exclude the Russia region, with a corresponding impact on the M&A and foreign exchange lines

Group sales

Organic growth was 8.1%. Pricing increased to 6.5% to reflect significant and unprecedented cost inflation. RIG was resilient at 1.7%, given the high base of comparison in 2021 and supply chain constraints.

Organic growth was 6.9% in developed markets, with strong pricing and positive RIG. Organic growth in emerging markets was 10.0%, with increased pricing and solid RIG.

By product category, Purina PetCare was the largest contributor to organic growth, with continued momentum for science-based and premium brands Purina Pro Plan, Purina ONE and Fancy Feast as well as veterinary products. Sales in coffee grew at a high single-digit rate, with broad-based growth across brands and geographies, supported by a strong recovery of out-of-home channels. Confectionery reported double-digit growth, reflecting particular strength for KitKat and seasonal products. Growth in Infant Nutrition reached a high single-digit rate, with a return to positive growth in China and improving market share trends. Water posted double-digit growth, led by premium brands and a further recovery of out-of-home channels. Nestlé Health Science recorded high single-digit growth, driven by Medical Nutrition and healthy-aging products. Dairy reported mid single-digit growth, with strong sales developments for coffee creamers and affordable nutrition offerings. Prepared dishes and cooking aids posted low single-digit growth, following a high base of comparison in 2021, with continued strong demand for Maggi. Sales in vegetarian and plant-based food continued to grow at a double-digit rate, led by Garden Gourmet.

By channel, organic growth in retail sales remained robust at 6.7%. Within retail, e-commerce sales grew by 8.3%, building on growth of 19.2% in the first half of 2021. Organic growth in out-of-home channels reached 29.6%, with sales exceeding 2019 levels.

Net acquisitions increased sales by 1.0%, largely related to the acquisitions of the core brands of The Bountiful Company as well as Orgain. The impact on sales from foreign exchange was positive at 0.1%. Total reported sales increased by 9.2% to CHF 45.6 billion.

Underlying Trading Operating Profit

Underlying trading operating profit increased by 6.0% to CHF 7.7 billion. The underlying trading operating profit margin decreased by 50 basis points to 16.9% in constant currency and on a reported basis, reflecting time delays between cost inflation and pricing actions.

Gross margin decreased by 280 basis points to 46.0%, following significant broad-based inflation for commodity, packaging, freight and energy costs. Pricing, growth leverage and efficiencies helped to significantly offset the impact of cost inflation.

Distribution costs as a percentage of sales decreased by 10 basis points, mainly as a result of the divestment of the Nestlé Waters North America brands.

Marketing and administration expenses as a percentage of sales decreased by 210 basis points, supported by sales growth leverage and disciplined cost control. Marketing spend decreased temporarily, following a lower level of promotion and marketing activities in the context of supply chain constraints.

Restructuring expenses and net other trading items were CHF 1.0 billion, reflecting higher impairments. As a result, trading operating profit decreased by 4.3% to CHF 6.7 billion, and the trading operating profit margin decreased by 200 basis points on a reported basis to 14.7%.

Net Financial Expenses and Income Tax

Net financial expenses increased by 4.5% to CHF 434 million, reflecting higher average net debt.

The Group reported tax rate increased by 680 basis points to 24.2% as a result of one-off items. The underlying tax rate increased by 70 basis points to 20.9%, mainly due to the geographic and business mix.

Net Profit and Earnings Per Share

Net profit decreased by 11.7% to CHF 5.2 billion. Net profit margin decreased by 270 basis points to 11.5% as a result of one-off items, including higher impairments and taxes. As a consequence, earnings per share decreased by 9.5% to CHF 1.92 on a reported basis.

Underlying earnings per share increased by 8.1% in constant currency and by 7.3% on a reported basis to CHF 2.33. The increase was mainly the result of strong organic growth. Nestlé's share buyback program contributed 1.7% to the underlying earnings per share increase, net of finance costs.

Cash Flow

Cash generated from operations decreased from CHF 5.8 billion to CHF 5.7 billion mainly due to an increase in working capital. The Group increased its inventory levels temporarily, due to significant supply chain constraints. Excluding the increase in working capital, cash generated from operations increased from CHF 7.9 billion to CHF 8.8 billion, driven by strong organic growth. Free cash flow decreased from CHF 2.8 billion to CHF 1.5 billion reflecting higher taxes and a temporary increase in capital expenditure to meet strong volume demand, particularly for Purina PetCare and coffee.

Share Buyback Program

In the first half, the Group repurchased CHF 6.9 billion of Nestlé shares as part of the three-year CHF 20 billion share buyback program, which began in January 2022.

Net Debt

Net debt increased to CHF 48.5 billion as at June 30, 2022, compared to CHF 32.9 billion at December 31, 2021. The increase largely reflected the dividend payment of CHF 7.6 billion and share buybacks of CHF 6.7 billion.

Portfolio Management

On April 1, 2022, Nestlé Health Science completed the acquisition of a majority stake in Orgain, a leader in plant-based nutrition. Orgain complements Nestlé Health Science's existing portfolio of nutrition products that support healthier lives. The deal is expected to be slightly accretive to Nestlé's organic growth, while slightly dilutive to the Group's underlying trading operating profit margin in 2022. The agreement includes the option for Nestlé Health Science to fully acquire Orgain in 2024.

On May 23, 2022, Nestlé Health Science agreed to acquire Puravida, a premium Brazilian nutrition and health lifestyle brand. The acquisition will enable Nestlé Health Science to expand its consumer health portfolio in Latin America.

On June 25, 2022, Nestlé Health Science agreed to acquire The Better Health Company. The acquisition includes the GO Healthy brand, New Zealand's leading supplement brand, and New Zealand Health Manufacturing, an Auckland-based manufacturing facility for vitamins, minerals and supplements. The acquisition will expand Nestlé Health Science's portfolio of vitamins, minerals and supplements in AOA.

Zone Asia, Oceania and Africa (AOA)

• 8.2% organic growth: 2.1% RIG; 6.1% pricing.
• The underlying trading operating profit margin decreased by 90 basis points to 23.5%.

Organic growth reached 8.2%, with RIG of 2.1%. Pricing increased to 6.1%, with broad-based contributions from all geographies and categories. Foreign exchange reduced sales by 3.0%. Reported sales in Zone AOA increased by 5.2% to CHF 9.3 billion.

Organic growth in Zone AOA accelerated to a high single-digit rate, driven by increased pricing, a further recovery of out-of-home channels and strong supply chain execution. The Zone saw market share gains across categories, particularly in culinary, portioned and ready-to-drink coffee as well as dairy.

South-East Asia posted mid single-digit growth, with positive contributions from most geographies, led by Malaysia. Nescafé, particularly ready-to-drink offerings, as well as Maggi and KitKat saw strong demand. South Asia recorded broad-based double-digit growth, due to distribution expansion and increased brand equity, particularly for Maggi, KitKat and Nescafé. Growth in Middle East and Africa was close to a double-digit rate, based on strong momentum for affordable offerings in Central and West Africa. Japan reported mid single-digit growth, based on solid demand for coffee and Purina PetCare. Sales in South Korea grew at a double-digit rate, driven by Starbucks products. Oceania reported high single-digit growth, fueled by new product launches, including KitKat Dark Tablet and the relaunch of Nescafé coffee mixes.

By product category, culinary was the largest growth contributor, led by Maggi. Coffee posted high single-digit growth, with continued strong demand for Nescafé and Starbucks products. Sales in Nestlé Professional grew at a double-digit rate. Infant Nutrition reported mid single-digit growth, with a broad-based recovery in the second quarter. Sales in cocoa and malt beverages as well as confectionery saw double-digit growth, based on strong demand for Milo and KitKat. Purina PetCare recorded high single-digit growth, with continued momentum for Purina ONE, Purina Pro Plan and Felix.

The Zone's underlying trading operating profit margin decreased by 90 basis points. Significant cost inflation more than offset pricing, growth leverage and disciplined cost control.

Nespresso

• 2.6% organic growth: - 1.6% RIG; 4.2% pricing.
• The underlying trading operating profit margin decreased by 170 basis points to 24.3%.

*RIG, pricing and organic growth figures exclude the Russia region, with a corresponding impact on the M&A and foreign exchange lines.

Organic growth was 2.6%, with increased pricing of 4.2%. RIG was - 1.6% following strong double-digit growth in 2021 during the pandemic. Foreign exchange negatively impacted sales by 1.7%. Reported sales in Nespresso increased by 1.0% to CHF 3.2 billion.

Nespresso reported low single-digit organic growth, following strong double-digit growth in 2021. Out-of-home channels saw further recovery, with strong demand for the Momento system. The Vertuo system saw sustained momentum and is now sold in 44 countries. Innovation continued to resonate with consumers with new product launches, including the summer collection of Barista Creations Liminha over Ice and Exotic Liminha over Ice.

By geography, North America posted double-digit growth with continued market share gains. Europe reported a sales decrease, following a high base of comparison in 2021. Other regions combined recorded high single-digit growth.

In the second quarter, Nespresso obtained global certification as a B Corp, reflecting the business's ongoing commitment to sustainability and transparency.

The underlying trading operating profit margin of Nespresso decreased by 170 basis points, impacted by investments in the roll-out of the Vertuo system and cost inflation.

Nestlé Health Science

• 6.6% organic growth: 4.4% RIG; 2.2% pricing.
• The underlying trading operating profit margin increased by 20 basis points to 13.7%.

*RIG, pricing and organic growth figures exclude the Russia region, with a corresponding impact on the M&A and foreign exchange lines

Organic growth was 6.6%, with robust RIG of 4.4% and increased pricing of 2.2%. Net acquisitions increased sales by 57.2%, largely related to the acquisition of the core brands of The Bountiful Company as well as Orgain. Foreign exchange positively impacted sales by 1.7%. Reported sales in Nestlé Health Science increased by 65.5% to CHF 3.2 billion.

Nestlé Health Science posted high single-digit organic growth, building on strong sales developments in 2020 and 2021. Growth was supported by innovation, geographic expansion and market share gains.

Consumer Care posted mid single-digit growth. Healthy-aging products grew at a double-digit rate, supported by Boost and Nutren. Vitamins, minerals and supplements reported low single-digit growth, following a high base of comparison and supply chain constraints. Sales of Pure Encapsulations, a super-premium offering recommended by healthcare professionals, grew at a double-digit rate. Vital Proteins saw robust demand, helped by geographic expansion. Orgain, the newly acquired plant-based nutrition business, posted strong double-digit growth, based on innovation and increased distribution.

Medical Nutrition reported double-digit growth, with strong sales developments for pediatric products, Althéra, Alfaré and Alfamino. Zenpep posted strong growth with market share gains. Palforzia, the peanut allergy treatment, saw further patient adoption.

By geography, sales in North America grew at a high single-digit rate. Europe saw positive growth. Other regions combined posted double-digit growth.

The underlying trading operating profit margin of Nestlé Health Science increased by 20 basis points. Growth leverage and acquisition synergies more than offset cost inflation and growth investments.

Business as a force for good: innovative plan to tackle child labor risks and achieve full traceability in cocoa

Supply chain disruptions and inflationary pressures have been exacerbated by the war in Ukraine and extreme weather events related to climate change. People's purchasing power has been reduced. In this context, offering affordable, nutritious food to lower-income consumers is more important than ever.

Working to make nutritious food products affordable and accessible is part of Nestlé's mission. The company focuses on four areas:

• Micronutrient deficiencies are widespread globally. Nestlé helps tackle the issue through micronutrient fortification based on local needs. In Pakistan, for example, one out of two children are deficient in iron. The company recently launched BUNYAD IRON+, an affordable dairy-based drink fortified with a new source of iron that is more easily absorbed in the body. In the Central and West Africa Region (CWAR), where iron deficiency is also widespread, Nestlé fortifies Maggi bouillon with iron and iodine. These products are used widely and regularly in the region to add flavor to home-cooked meals. Last year, Nestlé sold 82 billion fortified servings of affordable Maggi bouillon in CWAR alone. Nestlé also addresses inadequacies in macronutrients, like fiber, healthy fats and protein, through its products.
• To increase the availability and accessibility of affordable nutrition products, Nestlé aims to offer them at a price people can afford on their daily wages. It's also about making products available wherever consumers shop. In remote areas around the world, Nestlé leverages different channels specific to local markets to distribute its affordable nutrition products. The traditional open markets in CWAR, where Maggi bouillon is sold, is just one example.
• Nestlé works on value chain optimization to keep costs low and secure supply. It sources ingredients from local producers and strives to minimize food waste. Nestlé Cerevita Instant Sour Porridge, for instance, is an affordable nutritious solution for consumers in southern Africa. It uses high-quality ingredients that are locally and sustainably sourced. Production of the product leverages existing roller drying and dry-mixing technologies. In this way, Nestlé minimizes production costs and provides a porridge that is adapted to local consumer taste preferences and nutritional requirements.
• Nestlé is expanding its nutrition education programs and partnerships to help consumers. For example, its 'Live Strong with Iron' campaign in CWAR promotes the awareness and consumption of iron-rich foods. In Australia, Nestlé developed and produced the first custom-made product for Foodbank, a food relief organization. The Maggi Hearty One Pot Recipe Mix is used in combination with the fresh ingredients Foodbank provides and has added flavor to one million meals so far. The product is helping fight food insecurity and minimizing food waste at the same time.

Outlook

Full-year 2022 outlook updated: we expect organic sales growth between 7% and 8%. The underlying trading operating profit margin is now expected around 17.0%. Underlying earnings per share in constant currency and capital efficiency are expected to increase.

Annex

Half-year sales and underlying trading operating profit (UTOP) overview by operating segment

*2021 figures restated following the creation of Zone North America (NA) and Zone Greater China (GC) as of January 1, 2022. Zone AOA includes Middle East and North Africa (MENA) previously included in Zone EMENA

**RIG, pricing and organic growth figures exclude the Russia region, with a corresponding impact on the M&A and foreign exchange lines

Half-year sales and underlying trading operating profit (UTOP) overview by product

**RIG, pricing and organic growth figures exclude the Russia region, with a corresponding impact on the M&A and foreign exchange lines