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Nestlé's diversification keeps sales humming

By Ahmed ElAmin , 17-Aug-2005

Nestle, the world's largest food company, depended on its pet business, beverages and ice creams to keep overall sales growth humming at 5.2 per cent during the first half of the year, although Europe remained sluggish at 1.5 per cent.

Swiss-based Nestle, which reported its half year results today, is facing tough home markets on the continent. Like its competitors Nestle has struggled to boost sales as consumers rein in spendingin Europe. Europe's supermarkets have been cutting prices to meet the challenge of discounters, forcing producers to provide goods for less at a time when input and commodity and fuel costs have beenrising.

The cost pressures are unlikely to abate anytime soon, with oil costs reaching new records. Many like Nestle have depended on diversification into developing and emerging markets, particularly inEastern Europe and Asia, to drive sales growth and preserve margins.

Nestle kept overall margins up by raising prices. The 5.2 per cent organic growth was made up of 1.8 per cent of price increases, and 3.4 per cent of what the company calls "real" growth.

The company reported overall margins on sales rose to 12 per cent in the first half of 2005 compared to 11.9 per cent in the first half of 2004.

"Trading conditions will continue to be challenging in a number of markets, whilst commodity costs and currencies are likely to remain volatile," the company stated in its outlook for the rest of the year.

The company said it expects to save Sfr1.2bn (€774m) in costs to offset rising input costs and further improve margins.

During the first half of 2005, European food sales bounced back into positive territory from a fall of almost one per cent in the first quarter of 2005. Sales in Europe grew on a like-for-likebasis to 1.5 per cent in the first half of the year. Increased pet food sales and the UK helped pull results back into positive territory.

The company reported tough markets in France, Germany and Italy. Eastern Europe organic sales rose 6.2 per cent.

European margins fell to 10.8 per cent from 11.3 per cent achieved in the first half of 2004. Nestle said it would focus on defending or improving its market share positions.

Europe accounts for one-third of the company's sales, with the US another 31 per cent. Asia, Oceania and Africa, water sales and pharmaceutical products make up the rest.

Sales in the Americas division increased by 7.2 per cent in the first half of the year, compared to the first half of 2004. Margins increased to 13.6 per cent from 12.8 per cent. Demand forprepared foods, the Purina PetCare brand and ice cream boosted sales growth.

Asia, Oceania and Africa produced six per cent organic sales growth, with margins falling to 15.9 per cent from 17.8 per cent. Regulatory problems in China, whose regulator faulted Nestle forhaving too much iodine in its milk-powder, held back sales and margins in all brand categories.

"The situation has been addressed and a recovery plan implemented to rebuild consumer confidence and demand during the second half," the company stated.

Nestle's water division, which is reported separately from the food geographical segments, reported organic sales growth of 10.2 per cent. The prices for plastic bottles and increased competitiondragged margins down to 8.2 per cent from 9.4 per cent. North America water sales continued the trend of strong growth for the company, while the European business recovered.

Alcon and Nespresso boosted performance in the "Other Activities" segment, which includes pharmaceuticals. Organic sales growth rose 10.2 per cent while margins increased to 26.8 per centfrom 22.7 per cent.

By segment, sales growth was led by the company's high margin beverages division (6.4 per cent), milk, nutrition and ice cream (5.2 per cent), and by pet care (5.3 per cent). Beverages account for26 per cent of the company's sales, while milk products, nutrition and ice cream make up 28 per cent.

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