UN Unilever NV

Swiss food giant Nestle S.A. (NESN.VX) Wednesday reported a 13% drop in first-half profit after being hit by rising raw material prices and the soaring Swiss franc.

The world's biggest food company's sales fell 5%, partly as a result of no further contribution from the Alcon eye care business it sold to Novartis in the second half of 2010.

But Nestle, whose brands include Nespresso, Kit Kat and Maggi stock cubes, was also hit by the rise in the franc, which gained 2.6% against the euro and 10.5% against the dollar in the first six months of 2011. The company said the strong franc had a major impact on consolidation, but little effect on operational performance.

Sales in the six months to end-June were CHF41.0 billion, down from CHF55.34 billion last year, slightly under analyst expectations of CHF41.06 billion. On a continuing operations basis, the decline from CHF43.17 billion represented a 5% drop.

Profit of CHF4.7 billion, down from CHF5.45 billion in 2010, matched expectations of CHF4.63 billion in a poll by Dow Jones Newswires.

Nestle said it would not launch another share buy back to replace the current CHF10 billion scheme.

"As we look forward to the second half of 2011, we expect continued challenging conditions including political and economic instability, volatile raw material prices and subdued consumer confidence in the developed world," said Chief Executive Paul Bulcke in a statement.

But the company's efficiency drive continues and he said he expects pricing strategy to bring benefits in the second half.

"We are therefore confident of achieving organic growth at the top end of the 5% to 6% range, combined with a margin increase in constant currencies," Bulcke said.

Nestle's rivals Danone (BN.FR) and Unilever NV (UN), also spoke of raw material pressures when they reported their first half figures.

Danone said it expected costs to rise between 6% and 9%, as it reported a 2.7% rise in net profit at the end of July. It said it would offset this through increased production and price increases.

Unilever said it is streamlining packaging, paring logistics, sourcing and purchasing costs and selectively increasing prices to stem margin losses as it reported a 9.8% rise in profits last week.

Nestle stock closed Tuesday at CHF46.7, and has lost 14.7% in value since the start of the year.

-By John Revill, Dow Jones Newswires; +41 43 443 8042 ; john.revill@dowjones.com

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