Being the leader in a key global industry isn't as easy as it might seem. Nestle (NSRGY 2.15%) has a strong grip over much of the world's food industry, but its size has made it difficult for Nestle to sustain growth at the levels investors would prefer to see. Moreover, as those who buy its products change their minds about what types of food they want to eat, the Swiss giant must follow suit with food products that appeal to shifting tastes among its customers.
Coming into Thursday's first-quarter financial report, Nestle investors wanted to see the pace of sales growth pick up from sluggish gains during most of 2017. Nestle's report indicated a modest acceleration in growth, and even though currency impacts held back its top-line figures, some encouraging signs of regional strength gave investors hope that the food giant will see a better 2018.
Image source: Nestle.
Nestle speeds up
Nestle's first-quarter sales figures showed some improvement in key areas for the food company. Total reported sales were higher by 1.4% to 21.3 billion Swiss francs. The company only reports earnings information on a semi-annual basis, so there wasn't any indication from Nestle about how profitable its sales were.
Going beyond the reported numbers, foreign exchange movements prevented Nestle from seeing even bigger sales growth. Currency impacts cost the company 1.6 percentage points of growth, and after taking acquisitions and divestitures into account, Nestle's real internal growth was higher by a healthier 2.6%. Pricing power made a small contribution to growth as well, helping to boost total organic growth to 2.8% for the quarter.
Nestle celebrated the fact that its Americas segment saw improvement, even though it remained the weakest of its three regional divisions. Real internal growth was higher by 1.6%, and although weakness in the U.S. dollar and other regional currencies compared to the Swiss franc created a drag of more than five percentage points on reported sales, Nestle pointed to the success of its pet care and Coffee Mate product line in the U.S. market.
Other regions continued to perform well. The Asia, Oceania, and sub-Saharan Africa business reported organic growth of 4.7%, level with Nestle's full-year results in 2017. China continued to contribute strongly to sales gains, and efforts to build out its Kit Kat and Maggi brands in South Asia had good results. In Europe, the Middle East, and North Africa, Nestle's 2.2% organic growth overcame deflationary trends throughout Europe. Accelerating gains in the Middle East overcame weakness in Western Europe, but pet care and coffee played key roles in growth across the region.
Only in the water segment did Nestle have particularly disappointing results, with a 1.2% drop in real internal growth on weakness in Europe, China, and Brazil. Poor weather patterns held back the segment as well. The other business segment, which includes Nespresso coffee and health science and skin care products, saw extremely strong organic growth of 6.4%, with contributions coming from most of its products in the segment.
What's next for Nestle?
CEO Mark Schneider explained what contributed to the sales growth. "Our volume growth improved noticeably," Schneider said, "while pricing remained soft. We are encouraged by our innovation pipeline, continued progress with the implementation of our portfolio management strategy, and our efficiency initiatives." The CEO was especially pleased that all of Nestle's regions now appear to be contributing to sales growth.
Nestle confirmed that it still expects 2018 to play out the way it originally thought. The food giant sees organic sales growth of between 2% and 4% for 2018, and it still believes that underlying earnings after accounting for currency and capital impacts will increase from 2017 levels. Nestle thinks it will spend about 700 million Swiss francs on restructuring efforts as it seeks to improve efficiency as part of its longer-term 2020 growth initiatives.
Nestle shareholders seemed content with the sales report, and the stock rose modestly in European trading before the U.S. market open on Thursday following the announcement. It's good to see Nestle's sales growth back on track, and many are hopeful that the company will be able to find new ways to stoke growth in the months and years to come.
