By Saabira Chaudhuri
LONDON-- Nestlé SA set a new profit-margin target and said it
would accelerate share buybacks amid pressure from activist
investor Dan Loeb, but remained firm on retaining its stake in
cosmetics giant L'Oréal SA.
The company's strategy has been in the spotlight since Mr.
Loeb's Third Point LLC hedge fund built a 1.3% stake in the firm
and called for measures to improve its performance, including the
sale of its stake in L'Oréal, among other moves.
Nestlé on Tuesday said it would strive for a trading operating
profit-margin target of 17.5% to 18.5% by 2020 on an underlying
basis, which strips out restructuring, impairment and other
one-time charges. That compares with a first-half margin of
15.8%.
The company also said it would tweak the $20.8 billion
share-buyback program it announced in June. It will now purchase
shares evenly in each of the three years to 2020, rather than back
load them in 2019 and 2020.
Nestlé said about 10% of its portfolio by sales was ripe to be
shuffled as it looks to divest slow-growth assets and invest in
more promising ventures.
Shares in the company were up nearly 2% in afternoon
trading.
The raft of announcements, made alongside a closely watched
investor day in London, are the latest moves by the Swiss
consumer-goods giant to improve its performance under a new CEO and
pressure from Mr. Loeb.
Since Chief Executive Mark Schneider took the reins in January,
Nestlé has already said it would sell its U.S. confectionery arm
and announced a string of investments Blue Bottle coffee,
food-delivery startup Freshly and plant-protein-based foods brand
Sweet Earth.
The new CEO in February also scrapped a key internal sales
target, which the company had repeatedly missed.
After Mr. Loeb in June publicly disclosed his $3.5 billion stake
in Nestlé and listed his demands, Mr. Schneider announced the
share-buyback program and clarified its investment priorities: The
company will focus on the high-growth areas of petcare, coffee,
infant nutrition and bottled water, while also pursuing growth
opportunities in consumer health care.
Mr. Loeb has said Nestlé should sell its L'Oréal stake, set a
margin target, launch buybacks and use M&A to drive growth.
With Tuesday's announcement, Nestlé has largely met three of Mr.
Loeb's four demands.
But Mr. Schneider said Nestlé wasn't planning on making any
changes to its 23.29% stake in L'Oréal, which has been in focus
following the death last week of Liliane Bettencourt, heiress to
the L'Oréal fortune.
"The investment is not diluting anything," Mr. Schneider said
Tuesday, adding that the L'Oréal stake has delivered an annual 12%
return on investment over the 42 years Nestlé has held it. "Our
approach to this investment is currently not changing."
Third Point declined to comment.
Nestlé is aiming for mid-single-digit organic sales growth by
2020 even as it tries to boost margins, a balancing act Mr.
Schneider described as "going for a run and going for a dive at the
same time."
He said the company is unlikely to raise its margin target
between now and 2020 because of its focus on driving capital
efficiency and revenue growth in addition to profitability.
Nestlé plans to cut costs in manufacturing, procurement and
general and administrative areas, saying it will spend 2.5 billion
francs on restructuring between 2016 and 2020 to achieve annual
cost savings of between 2 billion and 2.5 billion francs by 2020.
To do this, the company will consolidate offices, increase its
global buying, close factories and outsource management of its
pension fund, among other measures.
The company outlined plans to raise sales growth by fixing
underperforming businesses, like its Yinlu peanut milk brand in
China.
RBC analyst James Edwardes Jones said Nestlé's new margin target
was already baked into his estimates, leaving his target price
unchanged.
UBS analyst Pinar Ergun was more bullish, saying the new targets
could prompt analysts to raise consensus expectations for 2020
per-share earnings. "More importantly it is likely to reassure the
skeptics that change is under way at Nestlé," she said.
Nestlé will also further invest in frozen foods, noting that 90%
of U.S. households have a microwave and a freezer, making this a
big market. It also plans to focus on ready-to-drink cold coffee
and out-of-home coffee, said Mr. Schneider, noting a particular
opportunity in raising coffee consumption in China, India and
Africa.
Nestlé has also been working to fix problems in its skin-health
business, which suffered because of what Mr. Schneider described as
"self inflicted issues" after Nestlé invested aggressively in
consumer skin-care products and patents on prescription products
expired.
Last week, the company said it was cutting about 400 of the 550
employees at its Galderma skin-care research and development
facility in France as it pivots away from topical prescription
creams for skin. A global review of the skin-health business is
under way.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
September 26, 2017 11:15 ET (15:15 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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