FE Report

Nestlé, the global food giant demonstrated its ability to deliver a solid operating performance in 2008 in a tough environment, with above-target organic growth and a 50 basis points earnings before interest and tax (EBIT) margin improvement in constant currencies, according to a press release issued from Vevey of Switzerland.

2008 was also a year in which the value of Nestlé's strong balance sheet was proven, enabling the Group to continue to access the debt markets at advantaged rates whilst also pursuing its three-year CHF 25 billion share buyback programme.

In 2008, consolidated sales of the Nestlé Group amounted to CHF 109.9 billion, an increase of 2.2 per cent compared to the prior year, driven by organic growth of 8.3 per cent, including real internal growth of 2.8 per cent. Acquisitions, net of divestitures, added 1.7 per cent to Group sales.

The currency effect reduced Group sales by 7.8 per cent due to the strength of the Swiss franc compared to most other currencies. The Group's Food and Beverages business, with sales of CHF 102.4 billion, was the main contributor to growth, achieving organic growth of 8.2 per cent, including real internal growth of 2.3 per cent.

The Group's EBIT grew to CHF 15.7 billion, resulting in an EBIT margin of 14.3 per cent, up 30 basis points reported, and up 50 basis points in constant currencies. The EBIT margin for Food and Beverages was up 20 basis points reported, and up 40 basis points in constant currencies.

Net profit increased by 69.4 per cent to CHF 18.0 billion, resulting in a net profit margin of 16.4 per cent, up 650 basis points. This includes the CHF 9.2 billion profit on disposal from the sale of 24.8 per cent of Alcon to Novartis.

Total Earnings Per Share grew by 75.2 per cent to CHF 4.87. The underlying earnings per share increased by 0.7 per cent reported, and by 10.9 per cent in constant currencies.

The Group's cost of goods sold increased by 120 basis points to 43.1 per cent of sales. This reflects the impact of higher packaging and raw material costs, partially compensated by operational efficiencies which contributed over CHF 1 billion of savings. Operational efficiencies, enabled by GLOBE, incorporate areas such as supply chain, factories, administrative costs, product line rationalisation and improved returns on marketing and trade spends.

The main engine of Nestlé's growth is the continuous innovation and renovation of its products and brands.

In 2008, an additional 15 per cent of Nestlé products were successfully tested for superior nutritional benefits and taste characteristics over competitors' products. Innovation was driven by a 15 per cent increase of Nestlé's Research and Development investment in Food and Beverages.

Furthermore, the Company's commitment to growing its brands is demonstrated by a 7.5 per cent increase in consumer-facing marketing expenses in constant currencies. Nestlé brands with annual sales of more than CHF 1 billion ("billionaire brands") accounted for over 70 per cent of Nestlé's Food and Beverages sales in 2008 and were the main drivers of organic growth.

The Group's operating cash flow was CHF 10.8 billion, while free cash flow was CHF 5.0 billion. Cash flow was impacted by the decline in value of most currencies relative to the Swiss franc, and also a higher level of inventories as a hedge against the higher cost of certain raw materials.

The Group's net debt decreased to CHF 14.6 billion thanks also to the proceeds from the sale of 24.8 per cent of Alcon, as well as from cash flow generation. The return on invested capital (ROIC), including goodwill, was 12.3 per cent; excluding goodwill, it was 22.2 per cent.