Nestlé plans RM43.3b revamp as activist Loeb takes aim

Selective acquisitions and divestments could affect about 10% of total revenue, CEO says

by BLOOMBERG

ZURICHNestlé SA plans to switch in or out of businesses with combined sales of almost 10 billion francs (RM43.3 billion) as CEO Mark Schneider focuses on coffee, bottled water and pet care to prioritise profitability over scale.

Selective acquisitions and divestments could affect about 10% of total revenue, Schneider said as he unveiled his new strategy to investors at a conference in London yesterday. Nestlé is already trying to sell its US chocolate business, its first major retreat from sugary snacks, as it embarks on its biggest revamp in at least a decade.

“We’ll need to trade out of some product areas and into others,” Schneider said. “We’ll act decisively, and the US confectionery is a good example of that.”

For the first time, the Swiss owner of Nespresso coffee and Perrier water set a fixed profitability target, aiming for an underlying trading margin in 2020 that’s as much as 2.5 percentage points higher than what it achieved last year. That’s still shy of the level sought by activist investor Dan Loeb, whose hedge fund firm Third Point bought a US$3.5 billion (RM14.73 billion) stake in Nestlé earlier this year.

Loeb, who was attending the London presentation, declined to comment on Nestlé’s plans. The shares traded 0.9% higher as of 11:12am in Zurich yesterday.

“The target is certainly attainable,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel AG. “While it will please some investors, others — like Loeb — may be a bit disappointed.”

The adoption of a profit target by Nestlé, which has about 90 billion francs in sales, marks a broader shift among the world’s biggest food companies. With many mass-market brands facing scepticism from consumers seeking healthier and hipper alternatives, sales growth is slowing and consumer-goods giants are under pressure from investors to cut costs and to move into more profitable niches.

The CEO already announced a share buyback worth as much as 20 billion francs, the planned disposal of Nestlé’s US confectionery unit and acquisitions of coffee and fresh-food businesses. The company has also been cutting jobs at its skincare unit.

Schneider said Nestlé isn’t immediately changing its stance on its stake in French cosmetics maker L’Oreal SA, which he described as a “fabulous” investment, contributing 9% of the Swiss company’s earnings per share over the past decade. The death

of L’Oreal heiress Liliane Bettencourt last week prompted speculation about the future of Nestlé’s 23% holding in the French cosmetics company.

Nestlé plans to keep its US frozen unit, and the ailing skin-health business has a strategic fit, according to the CEO. He also said the company is trying to revamp its Gerber baby nutrition division in the US and Yinlu food in China.

Nestlé has faced calls for a shake-up from Third Point, whose stake is equal to about 1%, while rival Unilever fended off a takeover bid earlier this year from Kraft Heinz Co, backed by buyout firm 3G Capital Partners.

Unilever is targeting an underlying operating margin of 20% by 2020, while Danone aims to exceed 16% that year. That compares to Nestlé’s new goal for an underlying trading margin of 17.5% to 18.5% by 2020.

Last year, Nestlé announced plans to improve its margin by at least two percentage points by 2019 or 2020 through cost savings. The Nescafé maker’s unadjusted trading operating margin has hovered between 15% and 15.3% during the past six years.

In July, Schneider said Nestlé may expand restructuring beyond its original plan. The company, which had 328,000 employees in 2016, has forecast reorganisation costs will rise about 67% to 500 million francs this year.

“Virtually all of you underestimate the will to win at this company,” Schneider said. “It’s hellbent on not losing its leadership position.”

Among other highlights: Company plans to accelerate three-year buyback programme by adopting an even pace on repurchases over the period; Nestlé previously said it would be back-loaded to 2019 and 2020. Nestlé confirms target for mid-single-digit organic growth in 2020. Company says it will keep consumer healthcare as additional growth platform to complement food and beverages. — Bloomberg