Nestlé perks up on improved sales of coffee and bottled water

Food group Nestlé gave investors something to celebrate yesterday, with coffee and water the drinks of choice.

Though its reported figures were hit by the strength of the Swiss franc, the group reported a better-than-expected sales performance as well as higher margins in what it described as a "very challenging environment".

Nestlé said most of its products contributed to the 5.5% organic growth - with currency effects stripped out - in first-half sales with Nescafé instant coffee and bottled water brands, which include Perrier and Vittel, among the star performers.

Laggards included chocolate and confectionery, which takes in lines such as KitKat and Smarties, and the Felix to Fancy Feast pet care operation.

Peter Brabeck, chief executive, was in mildly upbeat mood. Nestlé "is confident that the higher margins and cash flow are not one-off events, but indicate a trend, and that an organic growth growth between 5% and 6% is sustainable for the full year", he said.

The group said underlying earnings were up by 4.9%; the increase would have been almost 20% without the effect of currency movements.

First-half sales fell 6.3% to Sfr41.4bn (£18.7bn) but Nestlé said the strength of the Swiss currency - in which it reports its figures - against almost all its operating currencies had knocked the equivalent of more than 12% off the reported total.

Yesterday Mr Brabeck said the group was looking forward to "a more favourable trading environment". Initiatives already taken would ensure the group's competitive position "in the remaining months and beyond".

Mr Brabeck stressed that efficiency programmes designed to save Sfr5.5bn annually from 2006 were "absolutely on target" as the company concentrated on digesting acquisitions like Dreyer's Grand Ice Cream and pet food group Ralston Purina.

The results pushed Nestlé's share price about 2% higher at one point, dragging other food stocks in its wake.

"Overall there were no disappointments and these were a good set of results," said Rudi Buxtorf, a fund manager at Coutts Bank Switzerland.

Andrew Wood, European consumer goods analyst at Sanford C Bernstein in New York, said the results showed that Nestlé had got three fundamental operating elements - sales, margins and cash and capital allocation - in line.

He said: "As Nestlé continues to turn in strong top-line performance, coupled with solid margin improvements, and as the negative impact of [foreign exchange] on sales and margins begins to wane, we believe investors should increasingly feel comfortable with Nestlé's growth potential."