Nestle First-Half Profit Rises 7.5%

by Goran Mijuk at goran.mijuk@dowjones.com - 11/08/2010

"Nestle SA on Wednesday warned of a difficult second half as the Swiss food and beverages giant reported a 7.5% rise in first-half net profit."

The Vevey, Switzerland-based company reiterated its full-year forecast but said higher raw material costs are set to dent business, reflecting the bearish mood in the food and beverages industry that has worsened amid a recent sharp spike in commodity prices.

Nestle, owner of household brands such as Perrier mineral water and Dreyer's ice cream, said net profit rose to 5.45 billion Swiss francs ($5.2 billion) from 5.07 billion francs a year earlier, as cost cutting and investments in its distribution network paid off.

Revenue, which was helped by strong growth in Asia, increased 5.9% to 55.34 billion francs from 52.27 billion francs as the company also benefited from strong demand for its pet food products and its Nescafe coffee system.

Despite the increase, Chief Executive Paul Bulcke said in a letter to shareholders that the second half will be more difficult due to "a more challenging input cost environment."

His warning comes as food companies around the world are struggling with higher raw material prices and slowing consumer demand, which prevents food firms from raising retail prices to balance higher costs.

Costs for powdered milk, cocoa, coffee and wheat have risen at double-digit rates over the past few months, prompting food majors such as Danone SA, Unilever PLC and Kraft Foods Inc. to turn more cautious for the next few quarters.

Premium chocolate producer Lindt & Spruengli AG said Wednesday that cost cuts were needed to balance the recent 30% spike in cocoa prices but that retail price increases were difficult to hammer through.

Nestle, meanwhile, expects that cost cutting and investments should help support its full-year organic growth rate as well as its operating profit margin. "We have increased investment in our brands, people and capabilities and have prepared the company for a more challenging second half," Mr. Bulcke said.

The company is forecasting a full-year organic growth rate—which strips out the foreign exchange and acquisition impact but includes price changes—of about 5% compared with about 4% a year earlier.

Analysts welcomed the strong set of results and said that despite the more difficult economic environment Nestle is likely to excel in the months ahead as the company also stands to get a $28 billion cash inflow from the sale of its stake in U.S. eye-care company Alcon Inc., which is expected to be finalized in the third quarter.

"Nestle's figures are very strong and with the company's focus on cost cutting and its push in advertising spending, it is set to outperform the food and beverages sector," said Jon Cox, analyst at brokerage Kepler Capital Markets.

Analysts expect Nestle to continue to expand its market presence through small to medium-sized acquisitions. Nestle recently took over a U.K. nutrition firm and a food producer in Guatemala, helping it to broaden its presence in fast-growing markets.

More Details: http://online.wsj.com/article/SB10001424052748704164904575422520495417874.html