Nestle’s sales slowed in the first quarter of the year amid weaker sales growth from its Asia, Oceania and Africa division. The performance of the world’s largest food manufacturer in emerging markets has become a cause for concern among analysts.
Investec analyst Martin Deboo
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A lacklustre Q1. Organic growth of 4.3% in Q1 was below the 4.7% consensus. The miss was driven by volume, where the out-turn was 2.3% (consensus 3.2%). Relative to our numbers, the miss was in waters, hit by cold weather.
Of more concern to us and, apparently, the market, is the slowdown in Asia, Oceania and Africa, [which is] 21% of sales and 26% of profits, which decelerated sharply in H2 FY12 and is yet to recover.
The moving parts are complex and Nestle points to destocking and geo-political impacts. But there are signs of general competitive and demand pressures. Ultimately, the absolute growth rate in Asia, Oceania and Africa, which has been persistently mid-single digit for the most recent three quarters, is a concern for us.
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Andrew Wood, senior research analyst, European food and HPC at Sanford Bernstein
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By GlobalDataWhile it is always worthwhile taking the longer-term view, and not over-focusing on one quarter (especially as management reiterated guidance for achieving the Nestle model of 5-6% growth for FY 2013), it is noteworthy that Nestle has now missed consensus expectations for 3 straight quarters – the first time this has occurred in the 11-plus years we have been covering it. It had only missed for 2 straight periods once before, in Q3/Q4 2003.
The biggest surprise to us was that the balance of growth was much more skewed to pricing (+2.0%) and less to real internal growth (+2.3%) than we had expected. The good news in this is that Q4 2012 pricing (+1.6%) might prove to be the nadir for Nestle. The bad news is that +2.3% is the worst RIG performance since the dark days of the global recession in Q3 2009.
The Asia Oceania Africa zone remains the big disappointment with just +4.4% organic growth, and 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.
Kepler Capital Markets analyst Jon Cox
In terms of regions, Asia decelerates to 6.1% in Q1 from 8.8% in Q4 while Europe also decelerates from 2.1% growth in Q4 to 1% in Q1 (likely affected by less shopping days). Emerging market growth 8.4% vs. 8.9% in Q4. In terms of product category, nutrition was up 7.6% compared with 7% in Q4. There was no discernable benefit from China infant nutrition boom but company notes performance nutrition was weak. Prepared dishes and cooking aids saw 0.1% decline in organic sales after 2.6% growth in Q4, which we suspect might be partly caused by the horse meat issue in Europe.
Disappointing with whisper numbers of 5%+ organic sales growth post Danone‘s strong baby formula numbers. We expect 5.5% organic sales growth consensus for the year to come under pressure as well as dividend expectations after company hinted at a lower payout ratio going forward.
