Nestle cautions on margins, raises sales goal

A Nestle logo is pictured before the news conference announcing their 2010 full-year results, at Nestle's headquarters in Vevey, February 17, 2011.

PARIS (Reuters) - Nestle (NESN.VX), the world's biggest food group, said weakening consumer sentiment in developed markets would make it harder to improve margins, when raising its 2011 sales growth outlook after beating forecasts for the first nine months.

Prices for key commodities such as coffee, grains, milk and sugar should remain high despite small recent falls, which will keep pressure on profit margins, the Swiss company said on Thursday.

The maker of KitKat chocolate bars and Nespresso coffee capsules softened its optimism about margins, saying it was now looking for an increase this year, having used a more confident tone at its half-year results back in August.

"For the year as a whole, in spite of input cost pressures, we expect to slightly overperform against our long-term organic growth range of 5-6 percent and continue to strive for a margin improvement in constant currencies," chief executive Paul Bulcke told a news conference.

Underlying nine-month sales at the owner of brands such as Carnation, Maggi, Nescafe and Perrier, rose 7.3 percent, compared with a forecast for 7.1 percent in a Reuters poll and down from 7.5 percent in the first half.

Analysts said price hikes and strong demand in emerging markets allowed Nestle, like other big European food groups, to make up for weakening consumer sentiment in mature markets in western Europe and the United States.

"Very solid set of figures with a clear beat of consensus at the organic growth and raises its guidance," Kepler Capital Markets analyst Jon Cox said. He noted Nestle had tweaked its margin outlook comment to say it was "striving" for an increase in constant currencies. "That may raise some eyebrows."

Asked about this change in wording, Nestle investor relations head Roddy Child-Villiers said: "Consumer sentiment has turned down in Europe and the United States. So if we say 'striving', we are just taking into account the tougher environment."

"We are still committed to the Nestle model and working to achieve a margin improvement," he told a conference call.

Nestle shares close down 0.5 percent at 51.30 Swiss francs, compared to a flat European food and beverages index .SX3P.

Nestle achieved volume growth of 4.1 percent and raised prices by 3.2 percent between January and September. It said in a presentation the underlying sales growth contribution was more weighted to pricing as the year progressed.

Child-Villiers confirmed this year's input costs would increase at the upper end of a 2.5-3.0 billion Swiss francs ($2.8-3.3 billion) range.

Emerging markets remained the growth driver with 13.1 percent underlying sales growth, and Child-Villiers said there was no sign of a slowdown in these markets, including China.

Nestle spoke, however, of a challenging environment in developed markets, which grew 4.0 percent.

Vontobel's Jean-Philippe Bertschy noted a slowdown in Europe in the third quarter to 3.4 percent underlying sales growth from 7.7 percent in the second quarter.

"Water was particularly hit due to unfavorable weather in Europe with a flat volume growth in the third quarter."

Chief financial officer Jim Singh said the group was focused on investing in its business and making bolt-on acquisitions rather than share buybacks.

The Vevey-based group has been linked to potential deals, such as for Russian babyfood group Progress and Pfizer's (PFE.N) Wyeth baby formula unit.

Overall group sales in francs fell 15.1 percent, hit by the currency's strength, to 60.9 billion francs, compared with a forecast for 61.9 billion francs.

Nestle shares, which have lost about 6 percent so far this year, compared with a 3.6 percent drop in the sector index, trade at 15.9 times estimated 2012 earnings, a premium to Danone (DANO.PA) on a 14.4 multiple and Unilever (ULVR.L) (UNc.AS) on 14.1.

($1 = 0.899 Swiss franc)

(Editing by Hans-Juergen Peters and David Jones)