Nestle takes food price rises in its stride

ZURICH Thu Aug 9, 2012 9:32am EDT

The headquarters of food giant Nestle is pictured in Vevey August 8, 2012. REUTERS/Denis Balibouse

The headquarters of food giant Nestle is pictured in Vevey August 8, 2012.

Credit: Reuters/Denis Balibouse

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ZURICH (Reuters) - Nestle (NESN.VX) expects pressure from the rising price of ingredients for its products such as chocolate bars, coffee and soup to ease, helping it meet its target for increasing sales despite tough markets.

The world's biggest food group on Thursday beat forecasts with a 6.6 percent rise in underlying first-half sales as volume growth ticked up, unlike many of its rivals.

Global food prices are near record highs, in part because of soaring grain futures. But many of Nestle's most important ingredients, such as coffee, sugar and dairy products, are less affected than cereals.

Nestle's sales growth was driven by strong demand from emerging markets and price increases, as the company managed to pass on the cost of its raw materials to consumers.

The Vevey-based company also reported solid performance in Europe, despite its weak economy, as it sold more affordable goods like its Nescafe 3-in-1 soluble coffee, KitKat chocolate bars and new peelable banana ice cream.

Analysts had on average forecast 6.3 percent sales growth.

"A very solid set of numbers for what is a class act in the space," said Jon Cox, analyst at Kepler Capital Markets.

Nestle said the rising cost of its ingredients resulted in an increase of 0.5 percent in the cost of goods sold.

The worst U.S. drought in over half a century has pushed up grain prices sharply. The United Nations food agency said on Thursday world food prices surged in July and could rise further.

EUROPE HOLDS UP

Nestle said it expected price rises for its ingredients of only in the low to mid-single digits for the rest of the year, in line with its earlier forecasts and keeping it on track for its target of underlying sales growth of 5-6 percent this year.

While cocoa prices are surging, coffee prices are well below two-year highs on expectations of a good harvest in top producer Brazil. Sugar prices are also down on expectations of a good harvest and milk prices have been falling.

Nestle's first-half sales grew 12.9 percent in emerging markets, compared with just 2.6 percent in developed markets. Volume growth in Europe was practically flat although the company still saw some expansion in the continent's troubled southern nations.

Strong emerging markets also helped Unilever (ULVR.L) (UNc.AS) avoid the recent profit warnings by its French and U.S. peers Danone (DANO.PA) and Procter & Gamble (PG.N), although it did warn of tougher times ahead due to difficult economies and volatile input costs.

Nestle shares rose 3.3 percent to 61.16 francs by 9:19 a.m. EDT (1319 GMT), compared with a 1.2 percent increase for the European food and beverage index .SX3P.

Analysts contrasted Nestle's performance in Europe, where it saw 2.4 percent organic growth, with Unilever's fall in sales in the region of 2.2 percent in the second quarter.

"All businesses/regions beat expectations but perhaps most impressive was the growth seen in Europe in-line with Q1 despite the current economic woes," said Bernstein analyst Andrew Wood.

Growth in Europe came despite a slow start to summer sales for ice cream and bottled water due to poor weather.

Net profit rose 8.9 percent to 5.1 billion Swiss francs ($5.25 billion) on sales of 44.1 billion francs, up 7.5 percent year-on-year, with 3.7 percentage points of the rise in underlying sales coming from price increases.

Analysts surveyed by Reuters had forecast on average a net profit of 4.9 billion francs and sales of 43.8 billion francs.

(Reporting by Emma Thomasson; Additional reporting by Katharina Bart, and David Brough in London.; Editing by Erica Billingham)

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