Nestle says upward trend in raw materials to persist

By John Mair

MANILA (Reuters) - Nestle <NESN.VX>, the world's largest food group, expects the upward trend in raw material prices to persist, and its global operations provide a natural hedge against the strength of the Swiss franc, its chief executive said on Saturday.

Swiss-based Nestle, which has factories in 81 countries making products such as KitKat chocolates, milk products and pet food, is working to improve efficiencies and reduce costs as the prices of its inputs and packaging rise.

"It is clear that the upward trend, in our eyes, is going to be there to stay," chief executive Paul Bulcke told reporters said in Manila, where he was marking the 100th anniversary of Nestle's Philippine unit.

"Which is not a bad thing, if you put it in context of the fact that agricultural raw material prices went down for so many years to a level that agriculture was not an interesting activity, or there was no R&D investment, or there was no political impulse."

Nestle, which makes Nescafe, Maggi soups and Gerber baby food, has said it expects to meet its goal of 5-6 percent sales growth in 2011 and higher margins, although higher raw material costs and a strong Swiss franc would dampen first-half results.

It had projected rises in input costs to be at the top end of its guidance of 8-10 percent in 2011, with pricing expected to tick up during the year.

That guidance on input costs remained, even after some moderation in global commodity prices in recent months after a sharp surge earlier in 2011, Bulcke said.

"When we speak, we don't speak on the cost-on-the-day cost, we speak on the trend we see," he said, saying Nestle tried to read trends and set prices that could be stable amid market volatility.

"We never calculate our cost price on the peaks of every raw material," he said. Nestle, whose shares have fallen 4 percent this year, expects emerging markets to account for 45 percent of turnover by 2020, from 35 percent, or 39 billion Swiss francs ($46 billion) now.

"I do see the growth of the emerging markets double, give and take, the growth of the developed markets," Bulcke said.

STRONG FRANC

The Swiss franc has hit record highs against the dollar and the euro in June, and that will weigh on Nestle's consolidated results, when income from its foreign operations is converted to francs for reporting.

Bulcke said the franc did not affect the day-to-day operations of foreign units, which work in local currencies.

The company hedged its raw material needs to provide price certainty, but was not going to start hedging the Swiss franc purely for account consolidation," he said.

"No, because we have a natural hedge. What you can have is less Swiss francs, but they are Swiss francs so there's more dollar equivalent.

"We are growing very, very handsomely, and with less francs at the end of the day. And that is a little bit more the ego stuff -- you say 'all that effort, all that growth, where is it?' Well, it's in the Swiss franc."

(Editing by Nick Macfie)