Nestle Expects Challenging 2013 as Emerging Markets Slow

Nestle SA (NESN) said it expects 2013 to be as challenging as last year, when sales missed analysts’ estimates on a slowdown in emerging markets, where the world’s largest food company makes more than 40 percent of its revenue.

Sales advanced 5.9 percent in 2012 on a so-called organic basis, missing the 6 percent average estimate of 11 analysts surveyed by Bloomberg. The stock fell as much as 2.7 percent, the steepest intraday decline in almost four months, after the Vevey, Switzerland-based maker of Nescafe soluble coffee said revenue growth in emerging markets slowed to 11 percent last year from 13 percent in 2011.

Nestle Chief Executive Officer Paul Bulcke said this year will be “challenging” even as the Nespresso capsule maker is confident for organic sales growth of 5 percent to 6 percent. Unilever, the world’s second-largest consumer-goods maker, said last month it expects to outperform the competition in 2013 as the Dutch company expands in emerging countries such as Brazil.

The results were “certainly not the strong outperformance we have come to expect from Nestle over many years,” Andrew Wood, an analyst at Sanford C. Bernstein, wrote in a note to investors.

Russian Coffee

Lower pricing dented sales growth in emerging markets just as Nestle got within 2 percentage points of a 2020 target for such countries to contribute 45 percent of total revenue. Price increases amounted to 2.5 percent in Asia, Oceania and Africa in 2012, compared with 4 percent in 2011. One of the key changes was a cut in the price for Gold Blend Nescafe coffee in Russia last year, according to Roddy Child-Villiers, head of investor relations.

“Pricing is reflecting what’s happening in terms of raw-material costs,” Child-Villiers said. Volume growth improved in the fourth quarter in emerging markets, he also said.

The shares traded 2.6 percent lower at 62.80 Swiss francs at 1:42 p.m. in Zurich. Nestle, Europe’s largest company by market value, worth 203 billion Swiss francs ($220 billion), has gained 16 percent in the past year and closed at a record yesterday. Unilever shares have gained 14 percent and Danone SA (BN) 1.9 percent in the past 12 months.

“The party isn’t over for emerging markets,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel in Zurich. “The market was too optimistic. Pricing was down but input costs went down as well. Nestle will continue to grow in the high single-digits in emerging markets.”

Pfizer Divestments

Nestle agreed last year to buy Pfizer Inc. (PFE)’s infant-nutrition business for $11.9 billion to expand in markets such as China. Regulators in South Africa and Australia have imposed conditions on the purchase, and Nestle said it expects to sell off about 15 percent of the unit this year. The company is awaiting decisions from authorities in Latin America.

“There’s a lot of interest” from companies interested in acquiring the assets, Bulcke said in an interview. Nestle said it estimated their fair value at 774 million francs at the end of 2012. Nestle, whose policy is to consider “bolt-on” acquisitions, doesn’t plans to sell any of its current brands, he also said.

Nestle’s sales advanced 8.4 percent on a so-called organic basis in the Asia, Oceania and Africa region in the full year, slowing from the 9.4 percent pace in the first nine months. Analysts had expected a rebound after Nestle said in October the third quarter was weighed down by one-time factors such as flooding in the Philippines.

Bounce-Back?

“The expected bounce-back” in that region “didn’t seem to materialize,” said Warren Ackerman, an analyst at Societe Generale.

Emerging markets now account for 43 percent of Nestle’s total sales, 2 percentage points away from the target the company set for 2020.

“The fundamental long-term thrust for sustainable growth” in the Asia, Oceania and Africa region is “unchanged,” Nandu Nandkishore, head of that region for Nestle, said in an interview.

Organic revenue growth in Europe was 1.8 percent. Sales of Nespresso rose by a “double-digit” percentage, the company said. That’s the first time Nestle didn’t give a numerical growth rate for the business in at least three years. Chief Financial Officer Wan Ling Martello said Nestle is limiting the amount of detail it gives on Nespresso as competition increases in the single-serve coffee market. Companies including D.E Master Blenders 1753 NV make capsules compatible with the machines.

Net income rose 12 percent to 10.6 billion francs, more than the 10.4 billion-franc average estimate. The trading operating margin widened 0.2 percentage point to 15.2 percent in 2012, less than the 15.3 percent analysts expected.

Nestle said it plans to raise its dividend 5.1 percent to 2.05 francs a share this year. That’s less than a Bloomberg forecast of 2.10 francs.

The company defines organic growth as sales growth excluding acquisitions, disposals and currency shifts.

To contact the reporter on this story: Dermot Doherty in Geneva at ddoherty9@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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