Nestle ups outlook as price hikes offset higher costs

ZURICH: The world's biggest food group Nestle raised its full-year outlook after strong demand for its Maggi and Nescafe brands in emerging markets helped it post a forecast-beating 7.5 percent rise in underlying first-half sales.

The Vevey-based maker of KitKat chocolate bars and Nespresso portioned coffee said on Wednesday it expected full-year underlying sales growth at the top end of its long-term target range of 5-6 percent along with higher margins in constant currencies.

"Nestle continued to make good progress in a period characterised by political and economic instability, natural disasters, rising raw material prices and, yes, a strong Swiss franc," Chief Executive Paul Bulcke said in a statement.

The group said it expected conditions to remain challenging in 2011 due to these factors as well as subdued consumer confidence in the developed world, but said its momentum was strong and pricing should help more in the second half.

Nestle shares were 1.7 percent higher at 47.5 francs by 0735 GMT. They had lost 15 percent so far this year, underperforming a 5 percent drop in the STOXX Europe 600 Food & Beverage index .

Unlike its peers, Nestle also has to deal with a huge rise in its reporting currency, the Swiss franc, which chopped 13.8 percent off sales. Although its underlying sales rise of 7.5 percent beat forecast of 6.5 percent, overall sales fell to 41 billion francs ($55.4 billion), in line with forecasts in a Reuters poll.

Price increases of 3.8 percent in the second quarter, up from 1.5 percent in the first quarter, helped Nestle to partly offset soaring costs for raw materials such as coffee, cocoa and sugar, which hit 30-year highs earlier this year.

Nestle said it decided not to launch a new share buyback programme, which had been expected by many analysts, partly due to the tough economic environment and also to keep cash available for possible bolt-on acquisitions.

Vontobel analyst Jean-Philippe Bertschy said this would stoke rumours of Nestle being interested in Pfizer's nutrition business which is up for sale.

A spokeswoman for Nestle declined to comment on Nestle's possible interest in the baby food business on Tuesday.

"A stronger than expected set of figures driven by pricing and ongoing strong results in Asia -- I expect the stock to react positively," Kepler Capital Markets analyst Jon Cox said.

Citi analyst Sara Welford added, "Headlines are good, demonstrating the resilience and quality of the business. The growth is broad-based and margin growth is impressive compared to the large cap food peer group which saw margin declines at H1. The lack of further buybacks is likely to disappoint".

Nestle half year margins rose 0.2 points to 15.1 percent.

Price increases helped rivals Kraft Foods and Unilever post better than expected second-quarter results last week. At yoghurt maker Danone , however, they led to lower dairy sales volumes. – Reuters