Nestle 9 month numbers - slow and steady

21-OCT-16

Nestle is a business that stands tall on brand excellence. When you talk of Nestle, you imagine the gold standard in food products, the best of the best. The company is very close to our newest colleague, Bright, who has nearly been here for a year. Bright used to work there, not a bad first employer, you would say? The company delivered a 9 month sales update yesterday, delivered from the canton of Vaud, the town of Vevey. Charlie Chaplin lived there for a quarter of a century, perhaps the attraction of fine chocolate never made him leave. Or was it the communism thing? Either way, Chaplin lived there to the end of his days, checking out on Christmas Day of 1977.

Vevey is very important for humanity, a fellow by the name of Daniel Peter, a native of the town, is said to have invented milk chocolate here in 1875. Or there, and thereabouts. Henri Nestle, the founder of the company, was brought in to help Peter fulfil a seven year experiment. Henri was actually a German pharmacist by trade, and is credited with "inventing" infant milk formula. Whilst him and his wife (the Nestle family) had no children of their own, Henri was struck by the high infant mortality rates at the time, and knew that better nutrition would help improve matters. And it did. He wasn't alone in his thinking, Justus von Liebig, who founded a company that gave us the cube stock blocks Oxo, also worked on a similar project.

In the end, Henri Nestle gave us the birds nest, the surname Nestle in a "German" dialect (Swabian) means exactly that, birds nest. Nestle gave us condensed milk. And helped the Peter fellow with milk chocolate. He actually sold the business to his partners, who retained the early name - Societe Farine Lactee Henri Nestle. Or Henri Nestle's Milk Flour Company. And when the business joined forces with the Anglo-Swiss Condensed Milk Company in 1905, they kept the Nestle name. The First World War made condensed milk even more popular, it is easy to move around in bulk. Coffee was only a business post the war and the Great Depression as a result of the decline of the popularity of their core products, they needed another iron in the fire. Milo was founded down under in 1934, and quickly becomes a favourite. And why not?

Thanks to a fellow by the name of Max Morgenthaler, and a coffee surplus from the Brazilian government, Nescafe and instant coffee was born. It took nearly a decade to develop instant coffee, in the end it was worth it, right? Check out the fascinating story: What did we do when the bank called? Invented Nescafe. The story was a little more traumatic for old Max, other readings on the matter saw the company drop the project and he was forced to work on it alone. And then back at the company. Either way, the Bern born pharmacist is credited with creating coffee granules. I just took a gulp of coffee as I wrote that. I am a coffee snob, there was no granules with the making of that cup. Sigh.

Today the company spans the globe, the brands themselves are gold standards in their respective fields, Gerber, Maggi, the water (they even own Perrier), the coffee and associated products (milk creamer), pet food (Purina, Friskies), infant formula and food (Cerelac and the like), chocolate and frozen foods. The list goes on. There are also nutritional and weight management products. All come with the gold standard promise that you are unlikely to find much better at a similar price, stocked in most places in the world.

Nine month numbers - Nestle nine-month sales: 3.3% organic growth, 2.5% real internal growth. Full-year outlook: organic growth around 3.5% with margin improvement. You do not own this business for tearaway growth. You own it for the standards, and the whole idea that as people across the globe become richer, they would gravitate towards quality. The company has a *nice* spread between developed and developing markets, a good slide from the investor presentation below breaks it out:



Inside of the next decade, their products are more likely to be sold more in emerging markets than developed markets. By which stage it may be clear that some developing markets may have obtained developed market status. What then? I guess as the collective humanity, this is what we hope for. And less conflict. More getting along. Less poverty.

The company is geared towards urbanisation and upward mobility. The simple things in life, like a better cup of coffee, be it Nescafe Gold or Nespresso. Be it their milk products or ice cream. And of course, making your life simpler, with quality, prepared dishes and cooking aids. And, as per the annual report of Nestle: "Good nutrition and the right feeding practices during the first 1000 days of life, from conception to a child's second birthday, are crucial for a child's health, growth and development."

As the world demands healthier products with healthier lifestyles, the company will continue to innovate and give you only the best. The company generates strong cashflows, has relatively low debt levels and is in a "sweet" space globally, nutrition and food. I like it a lot. What I also like a lot is that the share price in Dollars has not "done much". The five year Dollar performance of the share price has been staid at best, up only 27 percent. For the gold standard of food, with a three percent dividend yield (less the excessive Swiss DWT tax), and a not so demanding multiple, this is quite simply a stock you could own "forever".

With the appointment of the first outsider since 1922 (i.e. not from Nestle), Ulf Mark Schneider is due to start 1 January 2017, replacing Paul Bulcke. He is an interesting guy, a German who is an American citizen, he studied to obtain an Economics Doctorate from the University of St. Gallen (the German or Northern part of Switzerland), and an MBA from Harvard. He has been busy with running Fresenius, a German healthcare company. It is going to be interesting, the analyst community are expecting "big things" from this fellow. We continue to accumulate at the fringes for those looking for a long term anchor.