COMMENT: Nestle's strong prospects
A strong start to the year has given Nestle the ability to exude confidence to the investor community. Although the strong Swiss franc has reduced its profitability in absolute terms, organic growth has exceeded analyst predictions.
The company remains on track to realise the significant synergistic savings planned for 2006.
Nestle's chief executive, Peter Brabeck, has reported strong H1 2003 financial results for the world's largest food and drinks company. In an outlook statement, Brabeck further confirmed his confidence that such performance would continue through the end of 2003.
Although H1 operating profits fell 4.5% to CHF5.04 billion (US$3.73 billion), that translates into an operating margin of 12.2%, up from the 11.9% reported in H1 2002. Sales for the same period fell 6.3% to CHF41.44 billion, compared with CHF44.21 billion in the first half of 2002, but this drop is mainly attributable to currency fluctuations.
The strength of the Swiss franc is said to have wiped out 12% of Nestle's sales. However, Brabeck says Nestle has no intention of switching its accounting from Swiss francs to US dollars despite the negative effect of the exchange rates.
Having stopped measuring growth via 'core growth' statistics (Nestle did not meet targets for five consecutive quarters under this measurement) the company fared very well using its new growth measurement: 'organic growth'.
Nestle's organic growth was 5.5% for H1 2003, well ahead of analysts' predictions of 4.6%. By using this particular measure, currency fluctuations are stripped out of the financials, allowing greater clarity. On an underlying basis, net profit rose by 4.9%, and by 19.1% when currency effects are removed.
The sustainability of Nestle's positive results rest on its ability to remain focused on its margins rather than solely on its sales figures. This will require close fiscal management and a tight watch on working towards actualising the synergy savings promised through acquisitions earlier this year. Recent acquisitions include 67% of Dreyer's Grand Ice Cream in 2003, and pet care producer Ralston Purina and frozen food maker Chef America in 2002. Nestle hopes efficiency programs will save CHF5.5 million annually from 2006.
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