Nestle Price Increases Drive Up 2007 Profit


Nestle, the world's largest food company, brushed off fears of commodity price inflation and global slowdown to post an above forecast 15.8 percent rise in 2007 net profits sending its shares higher.

The Swiss-based maker of Nescafe coffee and KitKat chocolate bars sidestepped higher input costs such as for milk, coffee, cocoa and grains by raising its prices to boosted its underlying sales to an above target 7.4 percent and was confident for 2008.

Chief Executive Peter Brabeck expected continued global economic growth in 2008 to support his business, especially in emerging markets, while the recent record rises in commodity prices will start to cool off in the second half of 2008 with coffee and cocoa prices likely to go down rather than up.

Price Rises Sweeten Nestle's Profit

"In general, 2008 will be another year of global growth. There will be important growth in 2008," he told Reuters in an interview after results. "I am a little bit optimistic."

But he would not commit to match 2007's pace of growth this year even with commodity price expected to wane and stuck to Nestle's medium-term outlook to see 5-6 percent underlying sales growth and a sustainable rise in operating margins for 2008.

Brabeck, who will pass the CEO baton to Paul Bulcke later this year and assume the chairman's role, has said the group has the wherewithal to weather an economic slowdown in the United States, where Nestle generates around 30 percent of its profit.

Chief Financial Officer James Singh added that its strong sales performance in 2007 had helped to shrug off raw material price increase and currency impacts. "We are in good shape and look forward to another successful year," he added.

Nestle shares rose 3.5 percent after outperforming the DJ Stoxx European food and beverage index by nearly 4 percent since the start of 2008.

"The overall picture of Nestle is excellent... Nestle is able to pass on rising commodity prices to consumers," said analyst Marco Gulper at ING.

While Alex Molloy at Credit Suisse added, "Nestle's early pricing action in 2007 mean that the increase in the raw material bill did not materially impact margins."

Nestle's Brabeck does not expect coffee and cocoa prices to climb further from their already high levels and should ease later in 2008, in line with the recent fall in milk prices.

"When I look at coffee and cocoa, those prices should come down rather than go up," he told a results press conference.

Coffee Futures at Record Levels

Coffee futures in London and New York are trading at around the highest levels in a decade and cocoa futures are at close to five-year peaks, driven higher by investment fund and speculator buying, as well as tight supplies and rising demand.

The group, which also markets Perrier bottled water, Buitoni pasta and Maggi soups, posted 2007 net profits of 10.65 billion Swiss francs ($9.7 billion) in 2007, fuelled by a 3 percent increase in prices that helped push overall group sales up 9.2 percent to 107.55 billion francs.

Net profit was seen rising 11 percent to 10.22 billion francs while annual sales were expected at 107 billion, according to average forecasts of 14 analysts polled by Reuters.

Nestle's underlying sales growth of 7.4 percent in 2007 was above expectations and beat rivals Danone and Unilever which saw 7.2 and 5.5 percent rises. The Swiss group's operating margins rose 50 basis points to 14 percent.

The company said it would seek shareholder approval for a 10-for-1 share split at its upcoming annual meeting and a dividend increase of 17.3 percent to 12.20 francs.

Asked about the future of Nestle's stakes in U.S.-based contact lens company Alcon and French cosmetics and beauty group L'Oreal, Brabeck told CNBC television that Alcon does not need Nestle anymore and vice versa, while there was nothing he wanted to do about its L'Oreal stake.

Nestle has a 75 percent stake in Alcon with a market value of around $34 billion and a 29 percent stake in L'Oreal with a market value of around $22 billion, according to Reuters data.

Nestle shares trade on 16 times forecast 2008 earnings, ahead of the slower-growing Unilever at 15.3 but behind the traditionally faster-growing Danone at 18.8 times.