Food & Beverage

Nestle cuts full-year outlook on Maggi, US rebates

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Nestle, the world's largest packaged food company, lowered its full-year outlook on Friday, as a Maggi noodle recall in India knocked sales and undercalculated U.S. Skin Health rebates weighed on the Swiss company's profits.

"I am an ambitious man so I am disappointed, because the one-off (costs), because they are high, they overshadow good things, fundamental structural good things," CEO Paul Bulcke told CNBC from Nestle's headquarters in Vevey, Switzerland on Friday.

Sales dropped 2.1 percent to 64.9 billion Swiss francs ($68 billion) in the nine months through September, missing analysts' average forecast of 65.9 billion in a Reuters poll.

Kuni Takahashi | Bloomberg | Getty Images

Organic or underlying growth, adjusted for currency swings, acquisitions and divestitures, slowed to 4.2 percent in the period from 4.5 percent in the first half, sliding further behind its 5 percent target for 2015.

The company cut its 2015 outlook to around 4.5 percent, below its long-term model calling for 5 to 6 percent growth.

"The shortfall comes from pricing, as Nestle does not seem to have been able to pursue its pricing actions as hoped, and more importantly the issue seems to be again the Asia, Oceania, Australia region, with sales down in the third quarter," Barclays analysts wrote in a note.

Bulcke said that Nestle had performed well in the first half of the year, but taken a hit in the third quarter due to the recall of Maggi noodles in India and a rebate adjustment in Nestle Skin Health.

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Nestle India stopped selling Maggi after an Indian government laboratory said it had detected overly high levels of lead in a sample.

Although the Bombay High Court overturned the government's ban on the noodles, the court ruled that Nestle must conduct fresh tests before sales could recommence. Nestle hopes to have Maggi back on the market by the end of the year.

Regarding the recall, Bulcke told CNBC: "We have been cleaned again, we always said the product was safe. But that has had a major impact… I expected to be back sooner. But it is deeper and you have to work with the authorities and get it back on the shelf, that's what we do now."

In the United States, frozen food sales began improving after a revamp of Nestle's Lean Cuisine brand, but this contrasted with lagging sales in China, which showed a slower sales recovery, Bulcke said. India's Maggi noodle recall continued to have a significant impact on growth in the South Asia Region, Nestle said.

"I am confident and optimistic for China, but we should not be spoiled by double digits (in terms growth) always," Bulcke told CNBC.

"I do believe we have the fundamental structural strength of our portfolios there. Our brands are there, we have a good innovation pipeline for us to really make it work."

In its Skin Health division, Nestle's U.S. prescription drug rebates exceeded what it had set aside for this purpose, resulting in an additional one-off charge in the third quarter.

Despite prospects that Europe's hot summer would have consumers grabbing ice cream out of freezers, sales at the group's milk products and ice cream unit fell 350 million francs year-on-year to 11 billion. Water, however, achieved 7.1 organic growth through September, second only to confectionery at 7.8 percent.

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"Europe is continuing to go very well. Our water business, health side, North America, is coming back strongly with the frozen (food). You saw also Latin America," Bulcke told CNBC.

Nestle earlier this month confirmed it was in advanced talks to merge its international ice cream business with R&R Ice Cream, in its latest effort to refocus on other, higher-performing brands and advance its goal of becoming a "nutrition, health and wellness" company.

Unilever, the global number one in ice cream, on Thursday posted third-quarter underlying sales up 5.7 percent, thanks in part to a strong summer. But the Anglo-Dutch group said it expected sluggish global markets to keep weighing on performance.

Nestle stock trades at around 21.4 times 12-month forward earnings, above Danone and Unilever, according to StarMine, which weights analysts' estimates by their track record.

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Following Nestle's results, RBC Capital Markets reiterated its "outperform" recommendation on Nestle stock.

"This has not been a good quarter for Nestle, but we continue to believe it's in a good place as far as market growth and the opportunities for improving ROIC (Return on Invested Capital)," James Edwardes Jones, analyst at RBC Capital Markets, said in a note.

— By CNBC's Katy Barnato with contribution from Reuters. Follow her on Twitter @KatyBarnato.