Growth formula eludes under-fire Nestle

This file photo shows a logo of the world's leading food industry group Nestle at the group's Research Center in Vers-chez-les-Blanc above Lausanne. (AFP)

VEVEY, Switzerland: Nestle 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 Nescafe coffee hit a 10-month low after it said organic growth, which excludes acquisitions and currency moves, was only 2.4 percent in 2017, missing the lowest estimate of 2.6 percent in a Reuters poll of analysts.
Nestle and its rivals have been buying and selling brands to improve performance as sales slow due to a shift in consumer tastes toward healthier foods and independent labels.
Loeb’s hedge fund Third Point took a $3.5 billion Nestle stake last summer 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 Nestle’s headquarters in Vevey, Switzerland, in part due to the lag between buying a new brand and it contributing to performance.
Nestle 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 percent stake and remained committed to the cosmetics company.
That is likely to fuel speculation about Nestle 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 Nestle decide to sell.
The sale of the L’Oreal stake, worth nearly €23 billion, figured prominently among Loeb’s demands.
Nestle also said it had decided to explore strategic options including selling its Gerber Life insurance business, which had sales of 840 million Swiss francs last year. It will hold on to Gerber baby food.
“We continue to believe that Nestle has a lot of potential for improvement and a mechanism by which that potential will be realized. But in our view these results don’t advance the argument,” said RBC Capital Markets analysts.
Nestle’s organic sales growth slowed to 1.9 percent in the fourth quarter to Dec. 31, well below the 2.85 percent estimate in the Reuters poll, hit by weak performance in North America and Brazil, particularly in waters 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 percent, which will be narrowed as the year progresses.
Net profit in the full year dropped 16 percent to 7.2 billion Swiss francs ($7.8 billion), short of the 9.6 billion average poll estimate, hit by a goodwill impairment in its skin health unit that “was taken to reflect the current prospects of the business,” Nestle said in a statement.
Schneider would not comment on whether Nestle 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.