Global headwinds challenge Nestle

by Keith Nunes
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VEVEY, SWITZERLAND — Slow and slower describe the market conditions Nestle S.A. faced in emerging and developed markets during the first six months of 2014.

“The global operating environment has not changed much since the last time we spoke,” said Wan Ling Martello, chief financial officer, in a conference call with the investment community on Aug. 7. “The emerging markets continue to grow but at a lower rate than historically. The developed markets still face deflationary pressures and weak consumer sentiment.

“What has become more dramatic is the effect of foreign exchange. This has had a significant impact at all levels of our performance, from sales to profits to cash flow to earnings per share.”

For the six-month period ended June 30, Nestle’s net income equaled 4,634 million Swiss francs ($5,095 million), equal to 1.45 Swiss francs ($1.59) per share of common stock and a decline compared with the first half of fiscal 2013 when the company earned 5,120 million Swiss francs, or 1.60 Swiss francs per share.

Sales for the period were 42,981 million Swiss francs ($47,267 million) and down from the same period of the previous year when sales were 45,168 million Swiss francs.

“Our emerging markets grew 9.7% and today represent 19.1 billion Swiss francs of sales,” Mr. Martello said. “The environment in the emerging markets remains a mixed picture. We continue to see very good growth in many of the smaller markets, some recovery in South Asia, while China remains soft in some categories.

“Our businesses in developed markets grew 0.6%. I don’t need to tell you that the trading environment in these markets has remained tough around the world. In many cases we’re dealing with deflation. Consumer confidence also remains low. So ensuring that our portfolio is fit to win is more important than ever. We need to make sure we’re truly differentiated and offering value to the consumers …”

In North America, Mr. Martello said the frozen food category continues to be weak and Nestle is focused on improving its performance in the category through innovation.

“Confectionery had tough comparables for the half in the U.S. and the Butterfinger Cups remain the highlight,” he said. “Confectionery in Canada enjoyed a strong performance, driven by Kit Kat and Aero. Soluble coffee accelerated as we went through the half and Coffee-mate delivered another good performance, especially given the good growth we saw at the same time last year. As with many positive stories, it is our support in innovation and renovation, particularly the special flavors we have launched in liquid, which continue to drive this growth.”

Despite the weak results, Mr. Martello said Nestle sees signs of economic improvement in developed markets, but it is not translating into more food and beverage spend.

Nestle also announced plans to initiate a share buy-back program totaling approximately 8 billion Swiss francs and beginning this year and continuing into 2015.
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