KUALA LUMPUR (May 2): Nestle Bhd, the local unit of Swiss food giant Nestle SA, expects its sales this year to be largely driven by pricing growth as volume growth slows amid a flat food and beverage (F&B) market, said its managing director Alois Hofbauer.
Hofbauer, who is also the group’s regional head for Malaysia and Singapore, said the situation is expected to last for “a certain period until consumers get used to the new prices” of Nestle products and resume their previous buying patterns.
“I think the reality will be that you may see a faster value (pricing) growth than what you see in volume growth,” Hofbauer told The Edge Financial Daily in an interview.
Nestle Malaysia had raised the selling prices of some of its milk and ready-to-drink products in the first quarter ended March 31 of financial year 2014 (1QFY14). It recently announced that it will be raising the prices of its Milo range by 5% to 7% this month.
Hofbauer, however, stressed that the group had turned to increasing the prices of its products as a last resort as it copes with rising prices of milk, coffee and cocoa, which make up the bulk of its raw material costs.
Nestle Malaysia’s revenue grew in the range of 5.1% to 7.5% for the past five years, from FY09 to FY13. For 1QFY14, the group recorded a 3.7% increase in revenue to RM1.27 billion, buoyed by a 9.2% rise in domestic performance. Domestic sales accounted for 75% of the group’s revenue last year.
For 1QFY14, the group’s gross margin rose slightly to 37.2% from 36.5% a year ago.
Hofbauer said the group sees slight impact from the “flattish” F&B market as consumer sentiment weakens due to rising inflation. He, however, assured that the impact on the group’s earnings is not material as there will still be demand for Nestle products.
“We are in a business where most people need to eat and drink. Yes, there is negative impact (from inflation), but are you going to stop drinking Milo, or stop having Maggie Mee?” he asked. He noted that Malaysians’ overall disposable income for food is still “manageable”, adding that the drop in the group’s sales volume was much worse during the global financial crisis of 2008.
“When you talk about our (F&B) industry, yes, there will be an impact if the whole economy slows down, but it’s still a safer place to be than let’s say, luxury goods or fashion.”
While any price increase is done “sensitively” to manage any adverse impact, Hofbauer said the group is also mindful of offering “value-up” products, that is, giving more to its consumers for the same amount of money. This is done through continuous “renovation and innovation” of its product line.
Moving forward, Nestle Malaysia will remain focused on growing its net profit and revenue as it continues to deliver the “Nestle model” which seeks 5% to 6% organic growth annually.
The group has allocated RM280 million in capital expenditure (capex) this year, the bulk of which will go to its new Sri Muda factory in Shah Alam, Selangor, which will boost the capacity of its ready-to-drink segment by 75%. It is worth noting that its capex for 2014 is the highest in five years.
Nestle Malaysia currently has 500 products under its portfolio, and sells almost eight million products daily, said Hofbauer.
While it is hard to generalise the growth attributed by various product categories as they each have a different base, Hofbauer said: “What we have seen in the last few years in Malaysia is that convenience and ready-to-drink offerings tend to grow faster than some of our more traditional products.”
He noted that there are no products that fall below the management’s performance expectations.
Meanwhile, Hofbauer said the group still allocates the bulk of its advertising money to the traditional media.
But as consumers’ media consumption habits have changed, and unless traditional media has a convincing case to retain its audience, Nestle Malaysia will shift its ad spend “massively” to the digital space.
“Today, we are one of the top three advertisers in Malaysia. If I say we will double our (advertising and promotion) spend on digital (media), it’s a number which may be even understating what we’re going to do,” he added.
Selling and distribution expenses accounted for RM824.4 million or 17.2% of Nestle Malaysia’s revenue of RM4.79 billion for FY13, up from 16.6% in FY12.
CIMB Research and HLIB Research in their April 18 reports have a “hold” call on the stock, with target prices of RM67.62 and RM67.16 respectively.
Based on Nestle Malaysia’s closing price of RM68.50 on Wednesday, and FY13 earnings per share of 239.53 sen, it has a price-earnings ratio of 28.6 times. Its dividend yield stood at 3.43%, based on an annual dividend per share of 235 sen for FY13.
This article first appeared in The Edge Financial Daily, on May 2, 2014.
Hofbauer, who is also the group’s regional head for Malaysia and Singapore, said the situation is expected to last for “a certain period until consumers get used to the new prices” of Nestle products and resume their previous buying patterns.
“I think the reality will be that you may see a faster value (pricing) growth than what you see in volume growth,” Hofbauer told The Edge Financial Daily in an interview.
Nestle Malaysia had raised the selling prices of some of its milk and ready-to-drink products in the first quarter ended March 31 of financial year 2014 (1QFY14). It recently announced that it will be raising the prices of its Milo range by 5% to 7% this month.
Hofbauer, however, stressed that the group had turned to increasing the prices of its products as a last resort as it copes with rising prices of milk, coffee and cocoa, which make up the bulk of its raw material costs.
Nestle Malaysia’s revenue grew in the range of 5.1% to 7.5% for the past five years, from FY09 to FY13. For 1QFY14, the group recorded a 3.7% increase in revenue to RM1.27 billion, buoyed by a 9.2% rise in domestic performance. Domestic sales accounted for 75% of the group’s revenue last year.
For 1QFY14, the group’s gross margin rose slightly to 37.2% from 36.5% a year ago.
Hofbauer said the group sees slight impact from the “flattish” F&B market as consumer sentiment weakens due to rising inflation. He, however, assured that the impact on the group’s earnings is not material as there will still be demand for Nestle products.
“We are in a business where most people need to eat and drink. Yes, there is negative impact (from inflation), but are you going to stop drinking Milo, or stop having Maggie Mee?” he asked. He noted that Malaysians’ overall disposable income for food is still “manageable”, adding that the drop in the group’s sales volume was much worse during the global financial crisis of 2008.
“When you talk about our (F&B) industry, yes, there will be an impact if the whole economy slows down, but it’s still a safer place to be than let’s say, luxury goods or fashion.”
While any price increase is done “sensitively” to manage any adverse impact, Hofbauer said the group is also mindful of offering “value-up” products, that is, giving more to its consumers for the same amount of money. This is done through continuous “renovation and innovation” of its product line.
Moving forward, Nestle Malaysia will remain focused on growing its net profit and revenue as it continues to deliver the “Nestle model” which seeks 5% to 6% organic growth annually.
The group has allocated RM280 million in capital expenditure (capex) this year, the bulk of which will go to its new Sri Muda factory in Shah Alam, Selangor, which will boost the capacity of its ready-to-drink segment by 75%. It is worth noting that its capex for 2014 is the highest in five years.
Nestle Malaysia currently has 500 products under its portfolio, and sells almost eight million products daily, said Hofbauer.
While it is hard to generalise the growth attributed by various product categories as they each have a different base, Hofbauer said: “What we have seen in the last few years in Malaysia is that convenience and ready-to-drink offerings tend to grow faster than some of our more traditional products.”
He noted that there are no products that fall below the management’s performance expectations.
Meanwhile, Hofbauer said the group still allocates the bulk of its advertising money to the traditional media.
But as consumers’ media consumption habits have changed, and unless traditional media has a convincing case to retain its audience, Nestle Malaysia will shift its ad spend “massively” to the digital space.
“Today, we are one of the top three advertisers in Malaysia. If I say we will double our (advertising and promotion) spend on digital (media), it’s a number which may be even understating what we’re going to do,” he added.
Selling and distribution expenses accounted for RM824.4 million or 17.2% of Nestle Malaysia’s revenue of RM4.79 billion for FY13, up from 16.6% in FY12.
CIMB Research and HLIB Research in their April 18 reports have a “hold” call on the stock, with target prices of RM67.62 and RM67.16 respectively.
Based on Nestle Malaysia’s closing price of RM68.50 on Wednesday, and FY13 earnings per share of 239.53 sen, it has a price-earnings ratio of 28.6 times. Its dividend yield stood at 3.43%, based on an annual dividend per share of 235 sen for FY13.
This article first appeared in The Edge Financial Daily, on May 2, 2014.
