Nestle today (18 April) insisted it expects its sales growth in Asia and Africa to increase amid concerns among analysts over its performance in some emerging markets.
The world’s largest food maker saw its revenue slow in the first quarter of 2013, with a weaker performance from its operations in Asia, Oceania and Africa. On an organic basis, sales from these businesses increased 4.4%. Nestle’s real internal growth from the division, which strips out price increases, was 3.3%.
In 2012, Nestle’s sales from its Asia, Oceania and Africa division rose 8.4% on an organic basis and by 5.9% when price hikes were excluded from the results.
The slowdown in the first quarter reinforced concerns among some in the financial community about the performance of Nestle’s operations in these emerging markets.
However, speaking to analysts after Nestle’s first-quarter sales were announced, Roddy Child-Villiers, the head of the company’s investor relations, said it expects growth to improve during 2013.
“Q1 is a very tough comparison and actually Q2 is an even tougher comparison for AOA. Then the comparisons ease off somewhat. We would certainly expect to see a good acceleration in AOA from where we are today,” he said. “My one caveat on that is that last year we had some quite considerable pricing even if that eased during the year. We don’t have the same cost pressure so therefore might not have the same level of price contribution in 2013 [but] certainly we expect to see a pick-up in real internal growth and meaningfully higher organic growth from where we are today.”
However, analysts are asking questions of the performance of this part of Nestle’s business. Growth from Nestle’s Asia, Oceania and Africa division was the lowest since “at least 2004”, Andrew Wood, an analyst at Sanford Bernstein said. He described the region as the “big disappointment” in Nestle’s first quarter.
“We feel management has still not been able to adequately explain how a business that had been growing 11-12% for 6 quarters in 2011-2012 suddenly dropped to +5% in Q3 and has stayed in mid-single digits since, with this quarter being the lowest quarterly growth since at least 2004 (when the disclosure began). The ‘one-off’ stories of Q3 2012 have clearly been proven to be misguided,” Wood said in a note to clients after the results were published.
Child-Villiers said the trading environment in emerging markets had “slowed” and admitted Nestle’s “market share performance” across the division was “mixed”. However, he said Nestle’s market shares “are up as a whole at the zone level” and said the company was seeing sales increase at a double-digit rate in some countries, including China.
Nestle’s ambient dairy, infant formula and confectionery businesses performed well in China, Child-Villiers said, and he picked out other notable performances. “Ambient dairy had a strong start generally, including good perfomances in China, Indonesia and parts of Africa.”
However, he said the “slowdown” in some emerging markets had left some distributors with “too much stock”, which had impacted their orders from Nestle. The Nestle investor relations chief also pointed to the crisis in Syria. “A further issue for us has been the destruction of our factory in Syria, which was a supplier for several categories across the Middle East,” he said.
Nevertheless, Nestle maintained its target for annual sales to be up 5-6% on an organic basis. It also held its forecast for an improvement in trading operating margin and underlying earnings per share on a constant-currency basis.
“We expect Nestle to achieve all of these targets. We do believe that Nestle can accelerate growth from the Q1, which had the toughest comp by far from 2012,” Wood added. “Overall, for the 3rd consecutive quarter we would term this reporting as slightly disappointing, below expectations and certainly not the strong outperformance we have come to expect from Nestle over many years.”
Shares in Nestle, which fell in early trading, closed up 1.09% at CHF65.