Nestlé Health Science Beats Expectations In Q1
Executive Summary
Nestlé Health Science beat management's expectations in Q1 to post a solid organic sales rise despite facing a high comparative with the prior-year period. While Nestlé's group-wide sales were up in the three months, CEO Mark Schneider warned that further price rises were coming down the track, which would inevitably impact consumer spending.
Nestlé Health Science performed better than expected in the first quarter putting it on the right track for the rest of the year.
While acquisitions helped to drive up sales by 56% to CHF1.45bn ($1.52bn), Nestlé management were pleased to see the business record organic growth of 5.6% – which included a 1.3% rise in pricing – given the high base of comparison with the prior-year period.
“We're actually quite happy with how the first quarter went, including in vitamins, minerals and supplements,” Nestlé CEO Mark Schneider told analysts on the firm’s Q1 earnings call. “Growth was more muted than before, but it was still positive. And in fact, some of the early scenarios when we looked at the situation from last year were actually pointing to potentially slight negative dip for one or two quarters and we have been able to avoid that.”
Health Science's organic sales rise in Q1 was driven by strong online demand as the COVID-19 pandemic entered a new phase with the spread of the Omicron variant.
“This was one of the peak COVID quarters,” Schneider reflected. “It was before the time that most of us received the first COVID jab, and hence it was one of those moments when interest in all matters related to personal health and boosting the immune system were at the peak, and so clearly that translated into a super strong quarter.”
Prices Rises To Continue
Despite total group pricing rising by 5.2% in the first quarter, Schneider warned analysts to expect further increases in the months to come due to significant cost inflation.
Since 17 February when Nestlé published its full-year guidance, inflationary pressures had “increased a lot…in ways that were not foreseeable at that time,” Schneider explained, due largely to the war in Ukraine.
The company was facing rising prices for energy, trucking and distribution and packaging materials, he said. “I think by now everyone has understood that there is such a significant surge underway starting from last year that clearly price stability is simply not in the cards.”
“We're defending our margins here,” he insisted. “We're not expanding our margins and we're doing the pricing as responsibly as possible.”
Price rises had not yet hit Nestlé’s sales, Schneider noted, with consumer demand resilient. But that could not be expected to last forever. “We do expect now some elasticity later in the year because of the fact that simply when you stack all of these price increases on top of each other, it does have some impact on what the consumer has to pay for the basket.”
Procter & Gamble also recently noted “consumer elasticity” when it came to paying higher prices for products. But it too did not expect this to hold. (Also see "Consumer Elasticity Exceeds P&G Expectations" - HBW Insight, 21 Apr, 2022.)
With Q1 out of the way, Schneider predicted it would be “smoother sailing for the rest of the year” at Health Science. “Overall, we're quite excited about the underlying growth dynamic,” he insisted.
Health Science’s 2022 sales will receive a boost from the recent acquisition of plant-based nutrition player Orgain Inc., which Nestlé completed on 1 April.
Announcing the deal in February, Nestlé said it would take a majority stake in California’s Orgain, which markets a broad portfolio of products spanning protein powders, shakes and bars with a focus on organic, protein-rich, clean ingredients. The agreement includes the option for Health Science to fully acquire Orgain in 2024. (Also see "Nestle Harvests Plant-Based Protein Firm Orgain As Latest US Nutrition Business Investment" - HBW Insight, 2 Feb, 2022.)
Consumer Care Up
Reviewing Health Science’s Q1 performance by business, both the Consumer Care and Medical Nutrition unit’s posted organic sales rises.
Consumer Care organic sales advanced at a low single-digit rate, Nestlé reported, as VMS posted slightly positive growth. Vital Proteins and Solgar – the latter of which was acquired from The Bountiful Company last year – continued to see strong momentum, the firm said. (Also see "Nestlé Pens $6bn Deal For The Bountiful Company's Core Brands" - HBW Insight, 30 Apr, 2021.)
Healthy-aging products grew at a double-digit rate, which Nestlé attributed to strong demand for its Boost and Nutren lines.
Medical Nutrition posted organic sales up double-digits, the company noted, thanks to the performance of its pediatric products. Peanut allergy treatment Palforzia saw signs of increased adoption after COVID-related delays.
By geography, Health Science’s sales in North America grew at a mid-single-digit rate, while Europe saw a slight sales decrease. Other regions posted double-digit growth.
Health Science accounted for 6.5% of Nestlé’s Q1 group sales, which advanced by 5.4% as reported. The company recorded organic growth of 7.6%, which included a 5.2% rise in pricing. The firm’s organic growth measure now excludes the Russia region, which Nestlé said reflected “significantly disrupted trading conditions,” due to the sanctions imposed on the country following its invasion of Ukraine, and the company’s decision to focus on providing essential food in the market.