Harimau Capital

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.

NESTLE SA, the world’s largest food company, is looking at sustaining its growth in the various food categories globally this year despite the softening in demand triggered by the slow recovery in the world economy.

Chief executive officer Paul Bulcke says the world economy is still growing albeit at a slower rate of about 3% particularly in developing and emerging markets. Hence Nestle is seeing more opportunities in these market segments given the growing middle-class population there.
“Everyone is aware that countries with double-digit growth, after a few years, will show signs of overheating.

“Therefore, countries which have more sustainable growth phase are seen to be healthier and Nestle wants to be part of that growth too.

Bulcke tells StarBizWeek in a recent interview that Nestle posted a good growth last year which was mainly volume-driven and the cost of major raw materials such as milk, coffee and cocoa are not too high and still manageable “which is not a bad thing after all.”

“At the end of the day, it is a relative game on how much we have grown versus the others. In fact, I believe we have outgrown in many different food categories globally.”

Nestle has also experienced a balanced growth in the Western Europe and North America with growth performance registered in many different food-based categories.

“This can be considered as quality growth that has delivered good bottomline for us after having to invest more behind the many brands through innovations drive and fairly compelling new product offerings,” adds Bulcke.

Nestle is best described as a global group with significant “local” presence in 196 countries, with 465 factories in 86 countries and with around 340,000 staff from many different nationalities. 

Its products include baby food, bottled water, breakfast cereals, coffee and tea, confectionery, dairy products, ice cream, frozen food, pet foods, and snacks. Its famous brands are Nespresso, Nescafé, KitKat, Smarties, Nesquik, Milo Stouffer’s, Vittel, and Maggi. 

In Malaysia, Nestle has a strong reputation given its over 100 years of existence with eight factories nationwide which truly reflects its long-term commitment and serious investments here.

“Two years ago, I was here to share the pride with the other Nestle staff for the company’s 100th Year celebration. We have been through thick and thin in Malaysia for many years and still staying strong,” says Bulcke.

Nestle Malaysia also had a good year in 2013, says Bulcke who adds that “It is not only in the what but also in the how”. 

For Malaysia, Nestle has increased its innovation drive with fairly compelling new offerings.
“Milo for example is the brand of Malaysia. It has grown handsomely and been deepening its nutritional profile in many household in the country.

“Our new offerings include coffee based drink Dolce Gusto, an enhanced version Nescafe and chocolate based two-finger KitKat version. 

Nestle has recently invested about RM150mil in a factory for the production of ready-to-drink beverages, which caters both for Malaysia and the Asean region.


Halal products
“We are also into halal products of which Nestle Malaysia is so much part of it. In Europe and other parts of the world, halal products are fast gaining more prominence now. Bulcke says Nestle is one of the biggest branded producers of halal products in the world. 

“Nestle Malaysia is the Nestle Halal Centre of Excellence for halal products for the group. Therefore, it is all about adding value to society in a meaningful way that also creates value to our company as well.”

“This is what I meant about the quality of growth linked to innovation after having invested in the right things for the right products while we continue to further invest behind the brands to fuel our growth for the future,” explains Bulcke. 

Another strength which Nestle has is that “90% to 95% of what the company sells to the world market is produced locally.”

“Quite a sizeable will be exported, which means Nestle Malaysia is a good example where many of its products are going out to other markets of the world.”

As the world’s largest food company, Bulcke points out that Nestle tries to be in charge of its own destiny as “we have the natural edge in terms of geographical locations and different product categories.” 

“We are taking action to drive our own growth through accelerated initiatives, innovation and creativeness. 

“Nestle has also accelerated its investments particularly when the financial crisis started five to six years ago. We felt there is a need for it because there are more new opportunities and new technologies at play. 

“Our fundamental belief is that there is potential thrust of growth going forward.
“Last year, our growth is about 4.6% but we also hope to be able achieve 5% to 6% growth overtime,” he adds.


Good food, good life
On another aspect, Nestle, being heavily involved in the food business, is fully committed to drive the nutrition, health and wellness (NHW) agenda to improve and enhance the eating lifestyle of its consumers particularly in the developing and emerging markets, says Bulcke.
“This is more so with the constant changes in the food and eating trends. Food has been part of humanity but there has yet to be deeper understanding on how nutrients interact with the human body and how they can influence health.

“There is also a negative dimension such as obesity as we live in a society that is having an overdose of calories and getting less exercise,” Bulcke points out. 

Towards this, the group has set up the Nestle Institute of Health Sciences on top of the several R&D centres. We have to go specifically into all these insights that are driving our value added and nutritional arguments and also, the pricing of Nestle’s products.”

“We do believe there is a future breakthrough in developing nutrients that can prevent degeneration of health in a society that is aging where brain health, gastro and intestinal health dimensional issues are fast cropping up,” adds Bulcke.

At the same time, Nestle has placed utmost importance on the fact that raw materials supplied must be obtained from reliable and sustainable sources. 

Bulcke points out that: “It is our company’s policy not to own any farms but we have very close working relationship with our suppliers for many years. 

“In fact, Nestle has over 12,000 agronomists in the fields working closely with over 700,000 farmers directly and millions of them (farmers) indirectly through our suppliers to ensure long term quality and volume of our agriculture raw materials.”

In Pakistan, Nestle has built many milk districts that involve almost 100,000 farmers which in turn has help to stabilise their income. Similar working relationships can also be seen in India and Brazil.

As for cocoa, Nestle through its R&D centres has developed high yielding plantlets and distributed them to farmers in Ivory Coast and Ecuador where Nestle is also involved in rural development, building schools and championing against child labour.

While Nestle is not a major purchaser of palm oil, Bulcke says that the group is a dedicated member of the Roundtable on Sustainable Palm Oil (RSPO).

He claims that 100% of Nestle palm oil imports is RSPO-certified with 45% of its purchase traceable to the mills.

“Tracebility is important to us. That is why we are working closely with the right NGOs such as The Forest Trust on this matter. 

“Right now there are a lot of emotions involved when we talk about palm oil imports but bear in mind it is not entirely about palm oil but also on the deforestation issue in general,” adds Bulcke.