Nestle emerging market growth to offset cost rises

Friday, 18 February 2011 02:28 - - {{hitsCtrl.values.hits}}

VEVEY, Switzerland (Reuters) - Nestle, the world’s biggest food maker, said strong demand in emerging markets would help it offset a steep rise in input costs in 2011 after it beat sales forecasts for 2010.

The maker of Nescafe coffee and Gerber baby food said it was well placed to cope with rising commodity prices by making cost savings and pushing up its own prices.

“We saw a significant uptick in raw material prices in the second half,” Chief Financial Officer Jim Singh said in a conference call on Thursday. “We expect 2.5-3 billion Swiss francs additional input costs in 2011.”

The increase would be about 8-10 percent on a cost base of about 30 billion Swiss francs, a Nestle spokesman said.

Nestle can rely on its strong presence in emerging markets, where underlying sales growth was 11.5 percent in 2010, and the appeal of brands such as KitKat chocolate bars to offset rising costs for milk, cocoa, coffee, sugar and grain.

“I cannot tell you what the pricing will be, that depends on the different markets,” Singh said.

Underlying sales growth in 2010 rose 6 percent to beat a Reuters forecast of 5.5 percent, and accelerated to 6.4 percent in the fourth quarter, making the group confident of meeting its long-standing target of 5-6 percent growth in 2011.

Peers Danone and Unilever recently said they were confident about passing on higher costs, but Kraft Foods cut its 2011 forecast for earnings growth because it expects some consumers to be put off by price increases.

“We see Nestle as best placed to escape the volatility of costs which are impacting the food sector in 2011,” Deborah Aitken, an analyst at brokers Bryan Garnier said.

Full-year net profit at Nestle rose to 34.2 billion Swiss francs, including the proceeds from the sale of its remaining stake in eyecare group Alcon to Novartis.

Annual sales at its Nespresso premium coffee capsules brand exceeded 3 billion Swiss francs ($3.1 billion) for the first time, Nestle said.

“A very strong set of figures with underlying earnings ... on the back of stronger-than-expected top-line growth driven by emerging markets and Asia. Its outlook statement is reassuring,” Kepler Research analyst Jon Cox said.

Vontobel analyst Jean-Philippe Bertschy said the dividend increase of 15.6 percent to 1.85 francs per share was high, but the lack of comment on an additional share buyback was a bit disappointing.

Nestle currently has a 10 billion Swiss franc share buyback under way and is expected to conclude it in the first half of the year.

Singh said the board would make a decision on a potential new share buyback once the current one was concluded.

Nestle shares, which gained 9 percent in 2010, but have lost about 4 percent since the beginning of the year, as investors worry about input cost inflation and forex headwinds.

They trade at about 14 times estimated 2012 earnings, a slight premium to Danone, Kraft and Unilever.