Nestle Reports Slowest First-Half Sales Growth in 4 Years

Nestle SA (NESN) Chief Financial Officer Wan Ling Martello said reaching the organic sales growth needed in the rest of the year to meet the company’s forecast will be a “stretch” as the world’s biggest food company wrestles with sluggish demand in Europe.

Nestle said today it expects to reach organic sales growth of about 5 percent this year, the low end of its long-term target. Attaining 6 percent growth in the second half in order to make the goal for 2013 “won’t be easy,” Martello said on a conference call.

“Markets are clearly shaky and organic sales growth could come in slightly below 5 percent for the year,” Alicia Forry, an analyst at Canaccord Genuity Ltd in London, said in a phone interview. “It could be somewhere between 4.8 percent and 5.2 percent. We wouldn’t be surprised if it was below 5 percent.”

Nestle, located in Vevey, Switzerland, reported the slowest first-half revenue growth in four years as price reductions and cold weather in Europe weighed on sales of ice cream and frozen food. The maker of Haagen-Dazs remains committed to its long-term model despite continuing to grapple with weaker demand for frozen foods, bottled water and diet products.

Revenue increased 4.1 percent, excluding acquisitions, divestments and currency shifts, the company said in a statement. That missed the median estimate of 4.5 percent growth, with Martello blaming pricing for the “disconnect” with expectations. Lower prices in Europe were primarily driven by the company’s coffee business. The shares fell as much as 2.6 percent in Zurich trading.

Photographer: Valentin Flauraud/Bloomberg

An attendee uses a smartphone to photograph an illuminated advert for Nestle SA's Perrier water ahead of the company's annual general meeting (AGM) in Lausanne, Switzerland on April 11, 2012. Close

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Photographer: Valentin Flauraud/Bloomberg

An attendee uses a smartphone to photograph an illuminated advert for Nestle SA's Perrier water ahead of the company's annual general meeting (AGM) in Lausanne, Switzerland on April 11, 2012.

’Top-Line Issue’

“The organic sales growth is disappointing,” Jon Cox, head of European consumer equities at Kepler Cheuvreux in Zurich, said by phone. “It’s going to take a while to sort out the top-line issue with the company.”

Unilever, the British-Dutch maker of Magnum ice cream, said last month that underlying sales, which exclude acquisitions, disposals and currency fluctuations, gained 5 percent in the first half. Danone, the world’s biggest yogurt maker, said that revenue on the same basis increased 6 percent during the period.

Nestle shares fell as much as 1.65 Swiss francs to 63.05 francs and traded down 2.4 percent at 63.15 francs at 12:23 p.m. in Zurich, paring the gain this year to 6 percent. Nestle reiterated it expects an improvement in margins and underlying earnings per share at constant rates of exchange in 2013.

‘Sensitive’ Europeans

Customers in Europe are “extremely sensitive” to price, leading Nestle to boost investment in brands to win market share. The situation in southern Europe is still “extremely tough,” Martello told investors and analysts today.

Pricing added 0.8 percentage point to sales growth, according to Andrew Wood, an analyst at Sanford C. Bernstein, lower than the 2.1 percentage-point gain he had anticipated. That was the weakest growth in Nestle’s pricing since 2002, he said, leading to “fears of a collapse in pricing in coming quarters.”

Nespresso coffee capsules, one of Nestle’s largest brands, had a “sharp acceleration” and posted “double-digit” growth, while measures the company took to improve its underperforming Jenny Craig weight-loss business have yet to show results, the company said. First-half net income rose to 5.12 billion Swiss francs ($5.57 billion) from 4.94 billion francs.

Nestle’s CFO said that the Jenny Craig business is a “problem that must be fixed” and the company is addressing issues. The business, which closed operations in the U.K., is now mainly operating in the U.S. The company is also wrestling with a contracting market for diet foods such as Lean Cuisine and has introduced new products such as “Honestly Good” meals to combat that.

The company is also facing difficulty in emerging markets, where growth in some countries slowed in the first half. The environment in Asia, Oceania and Africa remains “relatively buoyant even though there has been a slowdown in the last 18 months,” amid austerity measures in China and other cutbacks, Martello said. Emerging markets have pushed up sales at the company’s water division, though.

To contact the reporters on this story: Matthew Boyle in London at mboyle20@bloomberg.net; Julie Cruz in Frankfurt at jcruz6@bloomberg.net

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

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