February 17, 2011 / 6:27 AM / 9 years ago

UPDATE 5-Nestle emerging market growth to offset cost rises

* FY continuing operations underlying sales growth 6 pct

* Beats 5.5 pct forecast in Reuters poll

* Says well placed to cope with volatile raw material prices

* Sees 8-10 pct increase in input costs in 2011

* Nestle shares up 1.1 pct, outperform 0.5 pct higher index

(Adds CEO comments, updates shares)

By Silke Koltrowitz

VEVEY, Switzerland, Feb 17 (Reuters) - Nestle NESN.VX, 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.

The company could raise prices on its popular coffee products Nescafe and Nespresso — the latter exceeded 3 billion Swiss francs annual sales for the first time — Chief Executive Paul Bulcke said at a media conference.

Underlying sales growth at the group rose 6 percent in 2010 to beat a Reuters poll 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.

Nestle shares were up 1.1 percent at 1210 GMT, outperforming a 0.5 percent rise in the STOXX 600 European Food & Beverage index .SX3P. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a comparison graphic with global peers see

r.reuters.com/bus77r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Peers Danone (DANO.PA) and Unilever (ULVR.L)UNc.AS recently said they were confident about passing on higher costs, but Kraft Foods KFT.N cut its 2011 forecast for earnings growth because it expects some consumers to be put off by price increases. [ID:nLDE71D163] [ID:nN10142276] [ID:nLDE711130]

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

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 ACL.N to pharma group Novartis NOVN.VX. [ID:nLDE7191P4]

Nestle CFO Singh said the group could use part of its cash for smaller acquisitions, particularly in its nutrition business, as it intends to boost its medical food activities.

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 slightly disappointing.

Nestle aims to conclude its current 10 billion Swiss franc buyback in the first half of the year and will subsequently decide on a new one, Singh said.

Asked about Nestle’s 30 percent stake in cosmetics group L’Oreal (OREP.PA), Bulcke said there was no reason to change the status quo.

Nestle shares 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. (Editing by Sophie Walker and Will Waterman)

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