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Nestle Hopes for a Better 2018

By Dan Caplinger - Feb 15, 2018 at 9:18AM

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The food giant closed the year with extremely weak revenue growth.

The food industry is massive, and Nestle (NSRGY 1.38%) has a commanding presence in the global market. Throughout much of 2017, Nestle faced headwinds that sapped much of its sales growth, and changing consumer trends have required the food giant to stay on its toes in order to stay at the forefront of the industry.

Coming into Thursday's fourth-quarter financial report, Nestle investors would have preferred to see signs of a return to sales growth with stronger momentum. Instead, the company finished the year on a down note, and executives will have to look for the potential for a rebound in 2018. Let's sift through Nestle's latest results and figure out what they say about its future.

Timeline of development of KitKat candy bar, on a red background with images of KitKats through the years.

Image source: Nestle.

Nestle can't achieve faster sales growth

Nestle's 2017 results continued the company's string of subpar performance. Total sales managed to rise just 0.4% to 89.8 billion Swiss francs, which was at the low end of what it had hoped to see on its top line. Net profit was down 16% to 7.2 billion Swiss francs, but on an adjusted basis, underlying earnings climbed 4.7% to 3.55 Swiss francs per share.

Despite being a Swiss company, Nestle reported some positive gains from U.S. tax reform. The company said that it earned a one-time deferred tax of 850 million Swiss franc as a result of the legislation, and it sees reductions in U.S. corporate taxes at about a 300 million Swiss franc annual rate going forward.

More broadly, some of the pressure on Nestle's top line came from divestitures, which cost the company almost 2 percentage points of potential sales gains. But even after taking that into account, organic growth of 2.4% was weak following 1.9% fourth-quarter gains. Pricing accounted for about a third of the rise in organic revenue.

As previous quarters have foreshadowed, Nestle saw very different performance across its global segments. The Asia, Oceania, and sub-Saharan Africa segment had 4.7% organic growth, with China seeing a noteworthy return to surging sales and Africa seeing double-digit growth rates. The Europe, Middle East, and North Africa segment had reasonably good organic growth of 2.3%, with disruptions from the Froneri joint venture receiving Nestle's ice cream assets weighing on reported results. Only in the Americas was organic growth below 1%, with the company citing soft consumer demand, challenging category dynamics, and deflationary pressure specifically in the Brazilian market.

Nestle's product-specific divisions showed similar behavior. Organic growth of 2.1% in the water segment came largely from international premium brands, while regional names in the North American market were weak. The Western Hemisphere also weighed on growth at the nutrition segment, but other units had generally positive performance, including the health science and skin health areas.

Can Nestle recover in 2018?

CEO Mark Schneider wasn't satisfied with the numbers. "Our 2017 organic sales growth was within the guided range," Schneider said, "but below our expectations, in particular due to weak sales development toward the end of the year." He pointed to encouraging conditions in Europe and Asia but sees continued weakness in Brazil and North America.

Nestle, however, is hopeful that 2018 will improve. Organic sales growth expectations are for 2% to 4% growth, but all that Nestle would commit to was that underlying earnings per share in constant currency are likely to increase -- without any hint as to how much.

Some further potential strategic moves also captured investor attention. Nestle said it would look at strategic alternatives for its Gerber Life Insurance business while fully intending to retain the key baby food brand. The company also said it would not renew a shareholder agreement with family shareholders of skin care franchise L'Oreal, instead weighing options with no intent to buy the company outright or increase its stake.

Nestle shareholders weren't entirely satisfied, with shares falling between 1% and 2% in Europe before U.S. markets opened for trading Thursday following the announcement. Although the food business will remain vital to customers all over the world, Nestle will have to work harder to find ways to grow its revenue in 2018 and beyond.

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