Nestle CFO Jim Singh today (11 August) hinted that the world’s largest food maker could seek to increase prices later this year to deal with pressure on commodity costs.
Singh, speaking to analysts after Nestle published its half-year results, said the Swiss food giant was keeping an earlier forecast of a 2-3% rise in commodity costs in 2010.
“We are maintaining our guidance in terms of our input cost basket. The first half [of 2010] was at the lower end of that range – as a matter of fact was slightly below 2% – and therefore we are expecting a higher level of cost impact in the second half,” Singh said.
“To the extent that we can protect against that we are and we continue to do so. But this is the guidance we gave you at the beginning of the year and we are sticking with that for the full year.”
However, Singh did suggest that Nestle would reappraise its prices during the latter half of 2010 amid “volatility” in the commodity markets.
“I think the volatility that we are seeing in some of these commodities will lead to some pricing actions later in the year and we are engaging with all the parties concerned about the implications for sustained volatility and how we can work together to make sure we minimise the impact on the consumer,” Singh said. “Dairy is one of the areas where we are seeing an escalation in cost and therefore it’s one of the areas where you are likely to see some pricing action.”
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Nestle saw its EBIT margin rise by 80 basis points during the first half of the year, despite a hike in advertising expenditure. Singh said Nestle had no plans to “reduce the level of support we will give our brands” in the second half of 2010.
The owner of brands like Dreyer’s ice cream, Gerber baby food and Maggi noodles, was prudent with its forecast for its annual EBIT, saying only that it was targeting an “improvement” over the year.
However, Nestle did indicate an improvement in its forecast for full-year sales. The company had previously set a target for 2010 sales to be “above 2009 levels”, when the group achieved growth of 4%. Now, Nestle is eyeing “organic growth of around 5%”.
During the first half of 2010, Nestle saw sales from its operations in the Americas climb 6.1% on an organic basis thanks to double-digit growth in Latin America. In Asia, Oceania and Africa, sales were up 9%. “Highlights were the South Asia region, including India, the Indochina region, including Vietnam and Thailand, the Central/West Africa region, Indonesia and China,” Nestle said.
Singh laid out a detailed defence of Nestle’s position in emerging markets and rebutted the suggestion that the company was “under-exposed” in the developing world.
Nestle, he said, was in line to generate 35% of its food and beverage sales in the world’s emerging markets by the end of the year, which equated to some CHF35bn in sales.
However, Singh said breaking down sales by region on a percentage basis only gives investors a “snapshot” of a company’s presence in certain areas of the world.
Industry watchers, Singh argued, should not “underestimate the value of scale” in the developing world. He added: “Nestle does not lack scale in emerging markets – in fact, the opposite is true. Our scale is unmatched.”
Sales in Europe, meanwhile, were up 2.2% on an organic basis during the first six months of 2010. First-half sales from Nestle’s core food and beverage business increased by 3.6% in Europe, although, during the first quarter of the year, sales had climbed 5.1%.
Questioned on Nestle’s second-quarter performance in Europe, Singh said the company had made “good progress” in the region.
“The numbers may say the second quarter is lower than the first quarter but I would not characterise our experience as a slowdown. Whether you look at the first quarter, or second quarter or you look at them together for the first half, I think we are making good progress in Europe,” Singh said.
The Nestle finance chief said the company’s growth in Europe had lagged the growth it had generated in North America over the last five years. He argued that the recent slowing in growth in Europe had to be seen amid a wider “step down” in growth in Nestle’s developed markets.
“All our major markets and all our categories in Europe had positive growth in the first six months [of 2010],” Singh insisted. “Yes, it is one of the difficult areas of the world and we are doing everything possible to make sure we get growth where growth can be had.”