Nestle Celebrates a Winning 2018

The food company saw organic sales growth rise for the first time since the early 2010s.

Dan Caplinger
Dan Caplinger
Feb 14, 2019 at 9:05AM
Consumer Goods

Many investors turn to the food industry as a defensive play when markets get jittery, and it's hard to find a bigger player in food than Nestle (NASDAQOTH:NSRGY). Yet even though people around the world have to eat, that hasn't insulated Nestle from having to deal with the changes in consumer appetites that have forced companies across the globe to adjust their offerings and find products that their customers want.

Coming into Thursday's fourth-quarter financial report, Nestle investors were hopeful that the company's turnaround efforts would continue to generate some positive momentum. Nestle's results were good, and the company seems more optimistic than ever that the food giant is moving in the right direction.

Nestle logo featuring three dairy products.

Image source: Nestle.

A good year for Nestle

Nestle's fourth-quarter report showed encouraging signs of progress. For the full year, total sales climbed 2.1% to 91.4 billion Swiss francs, even after accounting for substantial currency headwinds. Net profit jumped 42% to 10.1 billion Swiss francs, and even though the bottom line benefited from several extraordinary items, Nestle saw a 14% rise in what it calls its underlying earnings per share metric, which adjusts for such items.

Nestle's internal numbers showed the health of the food giant. Organic growth climbed 3%, with price increases representing 0.5 percentage points of those gains and the remaining 2.5 percentage points coming from real internal growth in supporting its product lines. Mergers and acquisitions added another 0.7 percentage points to Nestle's overall growth rate, and that helped the company overcome 1.6 percentage points of downward pressure from foreign exchange due to the strength of the Swiss franc against other key currencies.

Organic sales growth was solid across nearly all of Nestle's regional segments. The company had the strongest showing in the Asia, Oceania, and sub-Saharan Africa segment, where a combination of strong pricing power and real internal growth sent organic sales higher by 4.3%. Improved margin figures also boosted operating profit there by nearly 5%. Sales gains in Europe, the Middle East, and northern Africa came in at 1.9% on an organic basis, as weaker pricing weighed on results, but operating profit picked up 7% from year-ago levels. The Americas once again showed relative weakness, with organic growth of 2% but only a 1.5% rise in operating profit. The performance was due largely to extreme currency weakness, which affected the Americas more than any other segment of Nestle's business.

Once again, Nestle did the best in its other businesses segment, which includes product lines like Nespresso and the health science and skin health units. Organic growth of 5.7% was extremely positive, and total growth of 11% stemmed from extensive merger and acquisition activity. Meanwhile, the water segment saw organic sales gains of 2.1%, but divestitures and foreign exchange weakness pushed the unit to a 15% drop in operating profit.

Check out the latest Nestle earnings call transcript.

What's next for Nestle?

CEO Mark Schneider celebrated a good year. "All financial performance metrics improved significantly," Schneider said, "and we saw revived growth in our two largest markets, the U.S. and China, as well as in our infant nutrition business." The CEO also noted that its portfolio transformation saw significant progress as it sought to realign its businesses and focus on its best growth opportunities.

Nestle is also optimistic about its future. The company's outlook for 2019 was relatively simple, with expectations for "continued improvement in organic sales growth and underlying trading operating profit margin." Nestle remains on track to reach key 2020 financial targets, and the food giant intends to keep focusing on capital efficiency in order to maximize its profitability.

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Nestle shareholders seemed pleased with the report, and the stock climbed 4% in trading on European markets following the announcement. With the food giant finally showing signs of progress on all the efforts it's made recently, investors are hopeful that the company will return to consistent growth and show the defensive properties that make it such an attractive stock for conservative investors.