Nestle posts strong H1 profit but outlook is tough

AP News
Posted: Aug 09, 2012 1:54 PM
Nestle posts strong H1 profit but outlook is tough

GENEVA (AP) — Swiss food and drinks giant Nestle SA posted an 8.9 percent rise in first-half profits Thursday and strong sales that showed it was taking the rising costs for many of its ingredients in stride.

But the company predicted the remainder of 2012 will be challenging as it warned of a slowdown in its key U.S. market.

Helped by price increases and strong demand from emerging markets, Nestle beat expectations with a net profit of 5.12 billion Swiss francs ($5.27 billion) in the January to June period, up from 4.7 billion francs in the same six months of 2011.

The world's biggest food and drink company's sales rose 7.5 percent to 44.1 billion Swiss francs ($45.37 billion), up from last year's comparable 41 billion francs.

Based in Vevey, Switzerland, the maker of dozens of household name brands such as Nescafe, Haagen Dazs and Jenny Craig said it expects pressure from higher costs of ingredients to ease and reaffirmed a strong growth outlook for the rest of the year.

And despite what it called a "tough trading environment, especially in developed markets," Nestle said it expects underlying sales growth of 5 to 6 percent for the remainder of the year due to its strong first half.

Shares of Nestle jumped 2.35 percent Thursday to close at 61.05 francs ($62.73) on the Zurich exchange. Investors have bid up shares of the company 13.79 percent since the start of the year.

Faced with high global food prices and higher grain prices driven in part by a severe U.S. drought, Nestle passed on the cost of its raw materials to customers. It said the price of its ingredients is expected to rise by only low to mid-single digits for the rest of the year.

Chief Executive Paul Bulcke said the first half shows the company is "making the right choices at the right time" and its strategic roadmap is working.

"We are continually opening new routes-to-market to reach emerging consumers, and using new media to increase both our direct engagement with consumers and our return on brand investment," he said. "This approach has delivered profitable growth in both emerging and developed markets."

In North America, its biggest market, Nestle reported that consumer confidence remained weak. Competition from rivals, such as supermarkets selling their own brands, has increased, with sales of several food categories under pressure.

In particular, sales of Jenny Craig weight loss products, infant nutrition, frozen pizza and ice cream were not faring as well as hoped with U.S. consumers, said the chief financial officer, Wan Ling Martello.

The lagging U.S. sales reflect the predicament of food companies trying to pitch to consumers who have cut back spending due to tight household budgets and high unemployment.

In Europe, where demand has lessened with the financial crisis, the "trading environment has deteriorated," Martello noted, though at least sales had not decelerated. Coffee sales were strong in Britain and Russia, where chocolate and pet food also were in demand, she added.