Nestlé’s lacklustre results fuel activist investor’s campaign for strategy change
Vevey, Switzerland — Nestlé forecast modest organic sales growth this year and reported its weakest gain on record in 2017 on Thursday, giving fresh fuel to investor Daniel Loeb’s campaign to overhaul strategy at the world’s biggest food group.
Shares in the maker of KitKat chocolate bars and Nescafé coffee hit a 10-month low after it said organic growth, which excludes acquisitions and currency moves, was only 2.4% in 2017, missing the lowest estimate of 2.6% in a Reuters poll of analysts.
Nestlé and its rivals have been buying and selling brands to improve performance as sales slow due to a shift in consumer tastes towards healthier foods and independent labels.
Loeb’s hedge fund Third Point took a $3.5bn Nestlé stake last year and has been pushing to speed up its transformation into a higher-growth, more-efficient health food company.
"Work on costs usually kicks in faster than work on growth," CEO Mark Schneider said at Nestlé’s headquarters in Vevey, Switzerland, in part due to the lag between buying a new brand and it contributing to performance.
Nestlé also said it had decided not to renew a shareholder agreement with L’Oreal beyond March 21 to maintain "all available options", but had no intention to increase its 23% stake and remained committed to the cosmetics company.
That is likely to fuel speculation about Nestlé selling its stake, according to a London-based trader. L’Oreal’s CEO last week said the company was ready to buy back the stake, should Nestlé decide to sell.
The sale of the L’Oreal stake, worth nearly €23bn, figured prominently among Loeb’s demands.
Nestlé also said it had decided to explore strategic options including a sale for its Gerber Life insurance business, which had sales of Sf840m in 2017. It will hold on to Gerber baby food.
"We continue to believe that Nestlé has a lot of potential for improvement and a mechanism by which that potential will be realised. But in our view these results don’t advance the argument," said RBC Capital Markets analysts.
Weak North America and Brazil
Nestlé’s organic sales growth slowed to 1.9% in the fourth quarter to December 31, well below the 2.85% estimate in the Reuters poll, hit by weak performance in North America and Brazil, particularly in water and nutrition.
"We expect most of these issues to be transitory in nature," Schneider said, adding that he expected an improvement this year. Still, he gave a wide target for 2018 growth of 2%-4%, which will be narrowed as the year progresses.
Net profit in the full year dropped 16% to Sf7.2bn ($7.76bn), short of the Sf9.625bn average poll estimate, hit by a goodwill impairment in its skin health unit that "was taken to reflect the current prospects of the business", Nestlé said in a statement.
Schneider would not comment on whether Nestlé was still committed to the unit, but said portfolio management would continue this year with a focus on small to mid-sized deals.
"But we do not rule out anything," he said.
Nestlé proposed a dividend of Sf2.35 per share for 2017, also shy of the Sf2.40 average in the poll.