NSRGY Nestle SA (PK)

By Brian Blackstone 

Nestlé SA fell short of a longstanding sales growth objective during the first half of the year in the face of weak pricing and slack demand in important markets for the Swiss consumer-goods company such as China.

The owner of Kit Kat candy bars, Perrier mineral water and DiGiorno frozen pizza reported first-half net profit of 4.1 billion francs, down 8.9% from 4.5 billion francs over the same period in 2015.

Nestlé notched up revenue of 43.2 billion Swiss francs ($45 billion) in the six months to end-June, equivalent to organic growth--which strips out the effects of currencies changes, acquisitions and divestments--of 3.5%, aided by strong sales in North America.

Organic sales growth weakened during the second quarter compared with the first, noted analysts at Baader Helvea Equity Research, adding that the result was "weak, especially as it is not only driven by low pricing."

The company has missed its sales target of organic growth of 5% to 6%--dubbed the "Nestlé Model"--for three years running, raising questions about its long-term growth prospects.

Analysts polled by Dow Jones Newswires had expected first-half sales of 43.2 billion francs, net profit of 4.6 billion francs and organic sales growth of 3.6%.

"While we continued to address challenges in China, we enjoyed good performances across the U.S., Europe, South East Asia and Latin America and expect this to continue in the second half," Chief Executive Paul Bulcke said in a statement.

"We also expect pricing, which reached historically low levels in the first half, to recover somewhat in the coming months."

The company reaffirmed its outlook that organic growth for 2016 will match the rate of 2015, when it grew 4.2%.

Nestle's shares fell slightly in early trading, down 0.3%.

In the first half, organic sales growth was 4.7% in the Americas, offsetting weaker growth in Asia, Europe and Africa. "In China, growth in the food and beverage market slowed down significantly," Nestlé said.

Like other major consumer products companies, Nestlé faces challenges from changing global demographics--with populations growing in emerging markets and aging in wealthier advanced economies. It also confronts new consumer tastes that include an increasing emphasis on nutrition and locally-grown products.

Nestlé's sales have also been hurt in recent years by the strong Swiss franc, slowdowns in major markets like China and Europe and ultralow inflation in many parts of the world that makes it hard to increase prices.

"Pricing has reached a historically low level owing to deflationary environments across a number of developed markets and low commodity prices," Nestlé said.

When inflation is unusually subdued, or when consumer prices fall, consumers get a boost in the nutrition-and-health-sciences next chief executiveshape of higher disposable incomes. The flip side is that companies such as Nestlé rely in part on being able to lift their own prices to generate growth, and when they can't, it affects revenues.

Nestlé has faced specific problems of its own, having had to recall its Maggi noodles in India last year.

To stimulate sales growth, the company has expanded its nutrition-and-health-sciences business. Reflecting that emphasis, the company in late June tapped Ulf Mark Schneider--the head of German health-care company Fresenius SE--to be its next chief executive.

It was a surprise move, given the Mr. Schneider will be the first outsider to run Nestlé in over a century and lacks a food and beverage background. But investors seem to like the move, with Nestlé shares up about 10% since he was announced as the next CEO.

Nestlé's board has proposed that current CEO Mr. Bulcke become the company's next chairman after Peter Brabeck-Letmathe retires from that position next year.

Analysts said second-half sales growth should benefit from an unwinding of the effect of the Maggi noodle recall.

--John Letzing contributed to this article

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

August 18, 2016 04:02 ET (08:02 GMT)

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