Nestle forecasts full year growth

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The world’s biggest food group Nestle raised its full-year outlook on Wednesday after strong demand for its Maggi and Nescafe brands in emerging?markets?helped it post a forecast-beating 7.5 percent rise in underlying first-half sales.

Sales excluding acquisitions, disposals and currency shifts, grew in all regions, even in crisis-shaken Europe and North America, and the group managed to keep margins and net profits largely stable for its continuing operations despite soaring raw material costs and a record-high Swiss franc.

The Vevey-based maker of KitKat chocolate bars and Nespresso portioned coffee said it expected full-year underlying sales growth at the top end of its long-term target range of 5-6 percent along with higher margins in constant currencies.

“Our guidance is cautious due to the environment we’re operating in,” Nestle Chief Financial Officer James Singh told analysts at a conference call, adding the group’s input costs would rise about 3 billion Swiss francs this year.

‘2011 challenging’

Chief Executive Paul Bulcke said Nestle made good progress in a period characterized by political and economic instability, natural disasters, rising raw material prices and a strong Swiss franc after the 7.5 percent half-year underlying sales rise beat a consensus forecast for a 6.5 percent increase.

These factors as well as subdued consumer demand in mature markets will make the rest of 2011 equally challenging, Nestle said, but momentum was strong, particularly in emerging markets, and pricing should help more in the second half.

Nestle decided not to launch a new share buyback programme, which had been expected by many analysts, partly due to the tough economic environment and also to keep cash available for possible bolt-on acquisitions.

“Investing in our business, both organically and through bolt-on buys, and increasing our dividend is our priority,” CFO Singh said, adding the company was looking for buys across all regions.

Vontobel analyst Jean-Philippe Bertschy said the absence of a new share buyback would stoke rumours of Nestle being interested in Pfizer’s nutrition business which is up for sale. A Nestle spokeswoman declined to comment.

Nestle has been pushing its range of products designed for lower-income consumers into more rural regions of Asia as it aims to sell the items in a million stores by next year. That led to sales growth of 12 percent in the region in the period. Nestle last month agreed to buy a stake in snack and candy maker Hsu Fu Chi International Ltd. to expand in China.

Price increases

Like peers Kraft Foods and Unilever, Nestle accelerated price increases in the second quarter to offset soaring costs for?commodities?such as coffee, cocoa and sugar, which hit 30-year highs earlier this year.

On top of that, Nestle also has to deal with a huge rise in its reporting?currency, the safe-haven Swiss franc, which prompted new measures from the Swiss National Bank on Wednesday.

The currency impact chopped 13.8 percent off sales that fell to 41 billion francs ($55.4 billion) in the first half, in line with forecasts in a Reuters poll.

Singh said this was mainly a translation effect and hardly affected the strong underlying performance.

Nestle net profit fell 13.7 percent to 4.7 billion francs compared with a year ago, but was flat excluding the impact of the sale of its Alcon eyecare business. The group’s operating profit margin rose 0.2 points to 15.1 percent.

“Headlines are good, demonstrating the resilience and quality of the business. The growth is broad-based and margin growth is impressive compared to the large cap food peer group which saw margin declines at H1,” Citi analyst Sara Welford said. ($1=0.740 Swiss Francs)

Nestle climbed as much as 1.15 Swiss francs, or 2.5 percent, to 47.85 francs in Zurich trading. The shares traded up 1.7 percent at 47.50 francs at 11:36 a.m.

Middle East performance

Nestl? Middle East ? which has invested more than?USD?400 million in the region since its presence in 1997 ? operates17 factories and 37 offices, and employs more than 7,000 people.

In May this year, Nestl? Middle East today announced the launch of its direct sales and distribution operations in Saudi Arabia, marking a new phase of expansion in the region.

Set to employ around 225 people in the first year of operations, Nestl? Saudi Arabia will be headquartered in the city of Jeddah, with branch offices in capital city Riyadh and Khobar.

Talking about the Mena region, Head of Investor Relations, Roddy-Child Villiers mentioned that, ‘we are seeing good growth in Africa, the Middle East and a number of Asian markets.’

Sources: reuters, todayonline, sfgate, Bloomberg, seekingalpha, nestle

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