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Nestle Q1 sales jump but dollar drags

By Thomas Atkins
/ Source: Reuters

By Thomas Atkins

ZURICH (Reuters) - Nestle SA sales grew 6 percent to 25.7 billion Swiss francs ($25.30 billion) in the first quarter, in line with expectations, as a weak dollar eroded strong gains in volume and pricing.

Underlying or "organic" growth, which strips out currency effects and acquisitions, rose 9.8 percent, beating expectations, in a clear sign that the world's largest food group was performing well despite wild swings in global markets for raw materials such as coffee, flour and cocoa.

Nestle's strategic focus on health and nutrition and targeted acquisitions has made it the darling of the food sector and has pushed sales and profits higher even in tough markets.

The maker of Nescafe coffee and KitKat chocolate bars, confirmed its earnings outlook -- which it raised in March -- for underlying sales to rise in 2008 at a similar rate to the 7.4 percent of last year and for operating margins to improve.

Analysts had expected sales to rise to 25.5 billion francs as Nestle uses its brand-name pricing power to pass on higher costs to its wholesale buyers. Nestle shares were seen up 0.6 percent in opening trade.

"These are good quality results. It was pretty much at the high end of expectations," said Chevreux analyst Mario Montagnani in Zurich.

"There was a strong contribution from volume increases -- it wasn't just pricing coming through," Montagnani said. "So there is no evidence of a slowdown or of people trading down (to cheaper products)."

Nestle raised prices 5.3 percent during the period while "real internal growth," which primarily measures volume, rose 4.5 percent, Nestle said in Monday's statement.

"The group expects raw material cost pressures to abate somewhat in the course of 2008 and its reported pricing to come down in the second half of the year," it said.

The dollar, which probed all-time record lows versus the Swiss franc during the quarter, creamed 7 percent off sales figure.

Nestle says it was one of the first major food firms to recognize the threat of rising raw material costs. Its hedging and price hikes gave it an edge over competitors such as Danone and Unilever .

Nestle is poised to reap $39 billion in windfall gains from a deal to sell its contact lens division Alcon in several stages. With the proceeds, analysts say Nestle will buy a big player in health and nutrition, as well as paying down debt and buying back shares.

Analysts had expected organic growth of 8.9 percent and real internal growth of 4.6 percent.

The Vevey, Switzerland-based company -- which also makes Perrier water, Buitoni pasta and Maggi soups -- trades at about 17 times forecast 2008 earnings, according to Reuters data. That is near Anglo-Dutch Unilever's multiple of 16.8, but behind France's Danone at 20.8.

(Editing by Louise Ireland)