Europe Equity Research
03 June 2009
Nestle
A Very Close Look at the Emerging Markets Franchise
• Bottomline: This is more a descriptive note in nature, which we hope will help investors better understand Nestle’s emerging market franchise strength. We rate the stock Neutral, but with EM’s garnering higher margins for Nestle than DMs, accounting for half of EBIT as per our estimates, and so far driving a good part of the company’s price realization YTD, EMs may be the bigger factor determining Nestle's ability to meet/beat guidance in 2009. All in all, in order of franchise strength, we would rank EMs first (Latam over Asia and EE), then the US unit, and further back the WE unit. • Close to 75% of Nestle EM sales come from three product lines, and 43% of EM sales come from LatAm. In terms of the seven product lines disclosed by Nestle, 30% of EM sales come from "milk products and ice cream" (Nido being a key contributor), 25% from "powder liquid beverages" (Nescafe, Milo, Nesquick), and almost 20% from confectionery (mostly chocolate). In terms of the three regional "Zones" (which exclude product lines like Water and Nutrition), LatAm accounts for 43% of Nestle’s combined emerging market sales, emerging Asia for 24%, Middle East and Africa for 19%, and Central and Eastern Europe for 14%. • One third of company F&B sales come from emerging markets, but this varies across product lines and regions. Almost half of the company's sales in the "Milk Products and Ice Cream” business and in Confectionery (80% chocolate) are generated in EMs. The Powder and Liquid Beverages unit generates 44% of sales from EMs. The Nutrition unit (of which 73% of sales come from baby nutrition) generates 39% of sales from EMs (though EMs are 53% of Nestle baby nutrition).The Nestle product lines with the least emerging market penetration are Pet Care (8% of Nestle's pet care sales are done in EMs) and Water sales (10%); also below the total company average of 33% is the Prepared...