Nestle profits down as currency and material costs take toll

Swiss food giant Nestlé has reported a 13% drop in first-half profit after being hit by high raw-material prices and an elevated Swiss franc.

Nestlé, the world's largest food group by sales, said that trading in the first half of the year had been tough, with sales in the six months falling to CHF41 billion, from over CHF55 billion last year. However the company stuck to forecasts that sales would rise in the full year.

“For the full year, we expect organic growth at the top end of the 5% to 6% range, combined with a margin increase in constant currencies,” said Paul Bulcke, Nestle chief executive.

Net profit fell by 14% from CHF5.5 billion in 2010 to 4.7 billion.

Food and nutrition

Nestle said Maggi and Nescafe brands performed well in the emerging markets, with sales performing particularly well in China, South Asia, Pakistan, North-East and South Africa, Indonesia, and the Indochina region.

The company, who recently introduced the Popularly Positioned Product (PPP) business model, added that deeper distribution into more rural areas of the Asian region – aimed to sell items in a million stores by next year – has led to sales growth of 11.7 per cent in the Asia, Oceania and Africa region to CHF 7.5 billion.

Reduced sales in weight management products, coupled with increased raw material costs saw the company’s nutrition division’s operating profit fall despite growth in infant nutrition areas.

Tough times

Bulcke pointed to the rocketing Swiss franc and higher raw materials prices have “made for an extremely tough, volatile and competitive environment.”

“Nestlé continued to make good progress in a period characterised by political and economic instability, natural disasters, rising raw material prices and, yes, a strong Swiss franc,” he added.

The company’s profits have been hit hard by the rise in the Swiss franc, which gained 2.6% against the euro and 10.5% against the dollar in the first six months of 2011.

The surge in the franc is believed to have knocked CHF600 million to CHF700 million from the company's operating cash flow, however it said that the strong franc has had little effect on operational performance.

Chief Financial Officer James Singh said the currency impact was not meaningful, noting that the company’s underlying operating performance remained strong.

“If you look at the U.S. dollar in the first six months of this year compared to the first six months of last year, it has gone from an average of 1.08 to 0.90 {against the franc]. That's a decline of 16%, 17%," Singh said.

The situation had been the same with the euro, Singh said, adding the overall trend was difficult was to predict.