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Nestle profit up on higher prices despite costs

Written by: Staff

VEVEY, Switzerland, Feb 23: Price increases and booming sales of Nespresso coffee helped Nestle boost its net profit to a record in 2005, weathering the storm of rising input costs better than some of its rivals.

Net profit at the world's largest food group increased 20.7 per cent to 7.995 billion Swiss francs (.11 billion), the firm said on Thursday, in line with expectations, after strong brands allowed it to raise prices by an expected 2 per cent in the year.

High costs of raw materials and energy have made life tough for food firms by increasing the price of food production, transport and packaging. Kraft Foods Inc has said it would cut jobs to offset commodity costs.

''You can't argue with that. They are raising prices in a largely-commoditised business,'' a Zurich-based trader said. ''But the margins did not surprise on the upside and show that they do indeed also take the pinch from raw materials.'' The maker of KitKat chocolate wafers and Nescafe coffee reiterated that high oil prices and a volatile political environment could affect business in 2006.

''High crude oil prices will continue to mark energy and packaging costs and there is a clearly more volatile political situation in some parts of the world,'' said the maker of Purina pet food.

''Also, a negative outcome of the Doha (world trade talks) round might impact trade and the overall economic outlook.''


Sales of Nespresso coffee, an example of Nestle's effort to focus on high-margin products, rose an underlying 36.2 per cent. Nespresso single-serving capsules fit into coffee machines designed for home and office use.

Group sales climbed to a record 91.075 billion francs, better than expected and up an underlying 6.2 per cent.

That beat the company's own target on underlying sales -- Nestle's benchmark that strips out currency movements and acquisitions -- of 5 to 6 per cent.

Nestle reiterated that target for 2006 and said it aimed for higher margins of earnings before interest, tax and amortisation in constant currencies.

It also said it had ''some modest growth expectations even in Western Europe'', where Nestle only had 2 per cent underlying growth in the face of subdued consumer sentiment, high unemployment and cut-throat price competition.

Sales in the higher-margin Americas overtook those in Europe, highlighting Nestle's efforts to focus on higher-growth areas as Europe is stifled by fierce retailer rivalry and a slowdown in consumer spending and high unemployment.

The company joined the long line of firms increasing cash returns to shareholders, saying it would raise its 2005 dividend payout by one franc per share to 9.00 francs and return more than 6 billion francs to shareholders this year.

Nestle launched its first-ever share buyback for 1 billion francs last year and another programme for 3 billion francs is currently running.

''This is a solid set of results,'' said Kepler analyst Jon Cox.

''The EBITA margin is excellent in particular because of higher commodities costs. You have others going on about that all the time ... but Nestle has delivered.'' Nestle shares, which had a strong run-up to the results, fell by 1.6 per cent to 393.00 francs by 0826 GMT (1356 IST), below its sector rivals, as investors fretted about the outlook.

Currency swings -- in particular a stronger dollar and Latin American currencies -- helped Nestle's sales by 1.8 per cent this year, the first positive effect in five years.

Switzerland's largest company by sales said the margin on earnings before interest, tax and amortisation rose to 12.9 per cent in 2005 from 12.7 per cent in 2004, restated for discontinued business and share-based payments.

An average of 19 analysts in a Reuters poll had expected Nestle's net profit to be 7.99 billion francs on sales of 92.1 billion francs.


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