Nestle earnings to raise questions over underperformance

Tue Aug 6, 2013 11:16am EDT
 
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By Silke Koltrowitz

ZURICH (Reuters) - Nestle NESN.VX is set to report a weak first half due to sluggish growth in Europe and emerging markets like Asia, putting pressure on the world's largest food group to cut costs and ditch underperforming businesses.

The maker of KitKat bars and Maggi soups, with almost $100 billion in sales last year, has reported disappointing revenue growth for the last three quarters, leaving its share price trailing those of its rivals, and investors questioning how the company can reverse the trend.

To improve its profitability in the face of volatile commodity prices, and falling sales of ice cream and water during a cool spring in Europe, Nestle may consider scaling back some parts of its business, said a buy-side analyst who did not want to be named.

"They will likely take more radical measures on their assets, not necessarily to sell entire businesses but they could stop developing certain activities in some markets," she said, citing ice cream in the United States as a relatively unprofitable area.

She said Nestle, which earmarks cost savings of about 1.5 billion Swiss francs ($1.61 billion) each year, could speed up cost savings in the Americas, which contributes around 45 percent of sales.

"The company saves in good and bad years, that continues. It's not only the supply chain, but also logistics, distribution. They are always saving and this is accelerating."

Investors expect to see Nestle post a flat to slightly lower first-half operating margin, versus 14.8 percent a year ago.

Important raw materials, such as raw sugar and arabica coffee, are at multi-year lows, but Nestle will have hedged them several months forward at higher levels than current spot prices, Kepler Cheuvreux analyst Jon Cox said.   Continued...

 
A Nestle logo is pictured on a factory in Orbe April 20, 2012. REUTERS/Joao Vieria