Nestle bets on innovation, price hikes to revive sales growth

By Silke Koltrowitz

ZURICH (Reuters) - Nestle (NESN.S), the world's largest packaged foods maker, is counting on new products and price increases in the second half of the year to meet its full-year sales growth target after a weaker than expected first half, the company said on Thursday.

The company has missed its long-term target of 5-6 percent annual sales growth for three years but it said it still expects organic growth this year will be in line with the 4.2 percent seen last year.

The shares were up 1 percent at 79.1 Swiss francs by 1100 BST.

Organic sales growth, which excludes the impact of acquisitions, divestitures and currency, slowed to 3.1 percent in the second quarter, hit by weakness in China and deflation in Europe, while growth in the first half was 3.5 percent.

Analysts had been expecting a rise of 3.6 percent in the second quarter and 3.8 percent for the full six months, according to a Reuters poll.

But Chief Financial Officer Francois-Xavier Roger said he thought pricing had hit the bottom in the second quarter and, to underscore the importance of innovation, explained that a third of Nestle sales came from products new to the market in the last two years.

New products often fetch higher prices, which in turn boost profit margins.

The maker of Kitkat chocolate bars and Maggi noodles has also been cutting costs, shedding underperforming businesses and expanding its presence in the more profitable and faster-growing market for healthcare products.

Liberum analysts, who have a "hold" stock rating, said that "may lead to upside surprise although current progress is slow" and the shares remained "an attractive defensive haven".

HEALTH DRIVE

Faced with more demanding consumers asking for fresh, healthy products, makers of packaged foods are reformulating recipes, cutting sugar, salt and fat.

To accelerate its health push, Nestle recruited Ulf Mark Schneider from German healthcare group Fresenius (FREG.DE) as its next chief executive.

"In our view, the Nestle investment case hinges on incoming CEO Ulf Mark Schneider, who takes over on 1 January 2017. In the meantime, though, we regard this as a competent set of results," RBC Europe analyst James Edwardes Jones said in a note.

Asked whether Nestle would increase its dividend this year, Roger only said Nestle had done so in the past despite the strong Swiss franc.

($1 = 0.9609 Swiss francs)

(Additional reporting by John Revill and Angelika Gruber; Editing by Michael Shields, Greg Mahlich.)