Michelle Russell

On the money: Nestle plays down concerns over emerging markets

By Michelle Russell | 14 February 2013

In the Kit-Kat makers AOA division, Nestle recorded organic growth of 8.4%

In the Kit-Kat maker's AOA division, Nestle recorded organic growth of 8.4%

Nestle has dismissed suggestions its days of "easy gains" in emerging markets are over as the group recorded what one analyst described as "sustained weakness" in Asia, Oceania and Africa.

The Swiss food giant this morning (14 February) reported an 11.8% increase in net earnings for 2012, with operating profit up 11.7% on last year.

Sales climbed 10.2%. However, underlying sales growth slowed and analysts pointed to Nestle's weaker-than-usual growth in Asia, Oceania and Africa

However, in the Kit-Kat maker's AOA division, Nestle recorded organic growth of 8.4% and real internal growth of 5.9%.

Bernstein analyst Andrew Wood said Nestle's sales growth in Asia, Oceania and Africa came in below his expectations in the fourth quarter, following disappointing growth in the third quarter.

Wood said Nestle was seeing "sustained relative weakness" in the region and added: "Management had promised that the relative weakness in AOA in Q3 (+5.0%) was a "one-off" due to numerous external factors...but now has turned into a "two-off."

Nestle CEO Paul Bulcke, however, was quick to defend the performance of its emerging markets on the firm's earnings call this morning, dismissing suggestions the region might be a "concern" for the firm.

"[The days of easy gains] are definitely not over I must say. Emerging markets had growth of 11% last year so this is very commendable growth. Growth in emerging markets is as valuable as ever. You just have to travel the world to just feel the energy ... that is what we are looking for, that is what is driving us. I don't really see this slowing down."

Bulcke suggested it was difficult to sustain high growth in all markets.

"You have to find new balances in these countries that have accelerations and decelerations. But 5, 6, 7% [growth] in a huge country like [India] ... having a broader footprint as a company is part of the 5-6% growth that what we as a global company worldwide are committing for. If you look at Africa, that has had 5, 6, 7% growth over the last 5-6% years. One balances out the other, that is why we are committing to this line of growth of 5-6%."

Nestle has said it still expects to meet its standard outlook for a 5% to 6% increase in underlying group sales, as well as improved margin and underlying earnings per share in constant currencies in 2013.

Of Nestle's group performance, Bulcke said the results represented a "good, broad-based performance".

"All our businesses, both in developed and in emerging markets contributed . . . We increased the support behind our brands. We further strengthened our global [research and development] network with new facilities in India and China," he said.

Separately, Nestle moved to distance itself from the horsemeat scandal that has hit Europe and resulted in retailers across the continent pulling frozen foods from shelves.

The scandal, which has been ongoing since January, intensified last week when frozen food giant Findus recalled beef lasagne and other products on sale in the UK, France and Sweden after finding horsemeat in the meals.

Nestle had owned the Findus brand from 1962 to 2000 but sold the rights to the brand in most of Europe in 2000, retaining ownership only in Switzerland.

"The Findus brand is ours only in Switzerland. Quality has a price so that is why we are sometimes more expensive. It is clear when such a thing occurs we check everything double and triple. We are confident that what we produce is not affected and we have been priding ourselves on having local ingredients, but that is the advantage we have there."

Bulcke said the company has invested "heavily" in traceability in the ingredients of the foods its produces.

"The knowledge, the way we go about [producing] food, the new insights we have are definitely allowing better and safer food. That is what we are striving for as a company. We have been investing very heavily on traceability because we know in a world that is so interconnected today that it is so important."

Despite Bulcke's optimistic comments, in the firm's trading update this morning the CEO admitted 2013 looks every bit as "challenging" as 2012.

However, on the call he added: "2013 does look different from the last few years we've had. 2013 will have its difficulties, definitely. It will also have lots of opportunities to leverage our competitive advantage. Therefore we expect 2013 once again to deliver organic growth of 5-6% ... while also improving capital efficiency. That is our commitment."

Nestle's share price was down 2.48% to CHF62.90 at 15:04 GMT.

Sectors: Baby food, Cereal, Confectionery, Dairy, Financials, Frozen

Companies: Nestle, Findus

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