Tate & Lyle
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Nestle Annual Results

Emerging market weakness hits Nestlé

Nestlé expects another challenging year that could see it undershoot its long-term targets again, after pressure on prices in Europe and weaker emerging market demand slowed sales growth to 4.6 percent in 2013.

Food companies face slacker sales both in emerging markets, where economies are losing steam, and in austerity-hit Europe where consumers are tightening their belts.

Chief Executive, Paul Bulcke, said the European market was not getting better and voiced concern that the region could enter a “deflationary spiral”. He said America was not bouncing back as quickly as it did in the past.

“The emerging markets are growing more slowly. I think they are getting to a pace that is possible to maintain. We see some headwinds in Latin America and Asia,” he said at the group’s annual results conference.

Nestlé experienced a slowdown in organic sales growth, which strips out the effects of currency swings and acquisitions, to 4.6 percent in 2013 from 5.9 percent a year earlier.

The world’s biggest food group said that, as in 2013, it was targeting “around 5 percent” organic sales growth this year, below its long-term goal of 5-6 percent.

Bernstein analyst Andrew Wood said the guidance was fairly cautious. “But this is still reasonable in a tough market environment,” he said, adding that Nestlé’s rivals had given similar guidance.

Some analysts said Nestlé’s forecasts were unimpressive. Helvea’s Andreas von Arx said investors might shift their interest to Nestlé peers such as Unilever and possibly Danone.

Shares in Nestlé, which had risen almost 3 percent this year, were down 1.8 percent at 1117 GMT, lagging a 1 percent fall in a European food sector index.

They are trading at about 18.9 times forward earnings – a premium to Danone at 17.4 times and Unilever at 17.2.

“While today’s results may disappoint some investors, we continue to view Nestlé as an attractive investment in the current challenging environment,” Bank of America Merrill Lynch analysts said, adding Nestlé remained their top pick in food. They said they saw scope for earnings upgrades during 2014.

Nestlé said on Tuesday it was selling an 8 percent stake in L’Oreal to the cosmetics group and would use cash proceeds of 3.4 billion euros for a share buyback. Chief Financial Officer Wan Ling Martello said details would be communicated when the deal closes, probably before July.

It said it was committed to its remaining 23 percent stake in L’Oreal.

RECOVERY SIGNS

Food groups started to feel the pinch from slower emerging market demand towards the end of 2012 but signs of a recovery have accumulated in recent months, reports Reuters.

Lipton tea maker Unilever said last month it would stick to its growth strategy for emerging markets after quarterly sales growth there accelerated to 8.4 percent.

Danone said on Wednesday it was raising its stake in China’s top dairy firm to tap into booming local demand. The yoghurt maker will post results on Feb. 20.

Sales at Swiss-based Nestlé rose to 92.2 billion francs, lagging a forecast of 93.1 billion francs in a Reuters poll of analysts.

Sales growth in emerging markets, which accounted for 44 percent of group sales, stood at 9.3 percent last year, an acceleration from 8.8 percent in first nine months.

In Europe, prices of Nestlé products continued to fall, eclipsing volume growth, and the deflationary environment is likely to continue this year, Martello said.

Bulcke said that, overall, price increases might make a bigger contribution to Nestlé’s growth rate this year.

Vontobel analyst Jean-Philippe Bertschy said Nestlé’s proposed dividend of 2.15 francs per share, up 5 percent versus last year, was disappointing given an 11 percent increase in underlying earnings per share.

Nestlé’s net profit fell slightly to 10.02 billion Swiss francs ($11.12 billion), short of a 10.69 billion franc forecast in a Reuters poll of analysts, due to the costs of portfolio restructuring and a negative currency impact.

The company, which also makes Maggi soups and Perrier mineral water, has said it wants to get rid of underperforming brands and already sold the bulk of its Jenny Craig weight management activities and the PowerBar sports nutrition brand.

Source: Reuters

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