UPDATE 3-Slowing emerging markets and MidEast unrest hit Nestle

Thu Apr 18, 2013 8:54am EDT

* Q1 organic sales growth 4.3 pct vs 4.8 pct in poll

* Emerging markets growth slows

* Bombing of Syria factory hits supply chain

* Confirms 2013 guidance for lower end of 5-6 pct sales growth

By Silke Koltrowitz

ZURICH, April 18 (Reuters) - Nestle's first quarter sales growth undershot rival Danone's after some retailers in Asia cut inventories back to match poor demand, and the destruction of a key Middle East factory in Syria slowed supplies.

In Europe, a cold spring hit consumption of bottled water and ice-cream, while a horse meat scandal and pizza and chocolate egg recalls in the region turned off consumers already counting pennies in austere conditions.

"Organic growth (is) likely (to) come in at the lower end of our 5-6 percent guidance," investor relations head Roddy Child-Villiers told a conference call.

Sales at the world's largest food company rose 4.3 percent to 21.9 billion Swiss francs ($23.52 billion), below an average estimate of 22.6 billion in a Reuters poll.

Sales growth in Asia, Oceania (Australia and New Zealand) and Africa (AOA) slowed to 4.4 percent overall, from 8.4 percent in full-year 2012. They were slowed further by shortages in Nido milk powder, Maggi bouillons and Crelac infant cereals after a mortar shell destroyed a major production plant in Syria.

"The most immediate impact of the slowdown has been on our downstream distributors who have found themselves with too much stock," Child-Villiers said, adding this stock had to be dispersed before order levels could normalise.

He said India and the Philippines had a slow start to the year. Even China slowed but still saw double-digit growth.

Bernstein analyst Andrew Wood said the AOA zone was the biggest disappointment: "We feel management has still not been able to adequately explain how a business that had been growing 11-12 percent for six quarters ... suddenly dropped to 5 percent in Q3 (2012) and has stayed in mid-single digits since."

Across the group as a whole, pricing recovered a bit versus the fourth quarter but growth from volume and product mix fell to its weakest in over three years, he added.

Child-Villiers said pricing was down from last year reflecting the "rather different raw material cost environment", but would not give details of input costs and profitability. He also said rising global milk prices could affect demand for dairy products among lower income consumers in coming quarters.

Kepler Capital Market analyst Jon Cox said the figures looked disappointing, particularly compared to Danone, which earlier this week reported quarterly sales growth of 5.6 percent on strong demand for baby food in Asia - a category Nestle boosted with its recent Pfizer baby food buy , but which is not yet included in its underlying growth rate.

Nestle shares, which have risen about 8 percent this year, recovered from an early dip to be up 0.5 percent at 64.60 euros by 1237 GMT, in line with the European food sector index .

They trade at about 17.6 times estimated earnings for the next twelve months, at a premium to Danone at about 17.2 but at a discount to Unilever at over 18 times.

Unilever reports first-quarter results on April 25, and Mondelez International on May 7.

EUROPE SUBDUED

Nestle, which makes Kitkat chocolate bars and Nespresso coffee pods, said consumer sentiment remained subdued in Europe, where volume growth was partly offset by falling prices. Sales in the region grew 1.5 percent to 3.7 billion francs.

Nestle's bottled water business grew only 1.8 percent, hit by the late arrival of spring that also weighed on ice-cream.

ZKB analyst Patrik Schwendimann said 4.4 percent growth in the coffee and chocolate beverage category was disappointing.

Nestle is facing increasing competition in its fast-growing portioned coffee business, through copycat versions of its Nespresso capsules and rival coffee brewing systems.

It will also have to compete with the global hot drinks empire created by the $9.8 billion acquisition of D.E. Master Blenders, maker of Douwe Egberts coffee and the Senseo coffee system, by German investor Joh A Benckiser that already owns Caribou Coffee and Peet's Coffee & Tea.

However, Child-Villiers said, Nestle was gaining market share in Europe thanks to products like its petcare brands Gourmet and Felix.

Business in North America is improving as the pizza category returned to growth and soluble coffee brand Nescafe performed well, the group said. Overall sales in the Americas increased 5.3 percent to 6.6 billion francs.

Child-Villiers confirmed Nestle aimed to increase its dividend each year.

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