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Under activist pressure, Nestle sets margin goal

  • Nestle set an operating margin target for the first time, although it was seen as conservative and fell short of rival Unilever's ambitions.
  • The Swiss maker of KitKat chocolate bars and Nespresso coffee is under pressure from activist shareholder Third Point.
  • Investors are looking for proof that the world's largest packaged food company can improve its performance under new Chief Executive Mark Schneider.

Nestle, under pressure from activist shareholder Third Point, set an operating margin target for the first time, although it was seen as conservative and fell short of rival Unilever's ambitions.

Investors are looking for proof that the world's largest packaged food company can improve its performance under new Chief Executive Mark Schneider as the food sector faces a challenge from smaller upstart brands and changing consumer tastes and habits.

The Swiss maker of KitKat chocolate bars and Nespresso coffee was setting out explaining how it will reach mid-single figure organic growth and an underlying trading operating profit margin of 17.5-18.5 percent by 2020.

Nestle chocolate products are displayed on the shelves of a Kroger supermarket in Decatur, Georgia.
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Nestle chocolate products are displayed on the shelves of a Kroger supermarket in Decatur, Georgia.

Nestle, which is Europe's largest company, said the comparable margin figure was 16 percent in 2016. It has previously focused more on setting sales growth targets, but Schneider said it was important at this stage to balance both.

He added it was unlikely this new target would be followed by another higher one at a later stage.

Unilever, which this year rebuffed a $143 billion takeover bid from Kraft Heinz, has set a goal of 20 percent for its underlying operating profit margin by 2020.

Schneider took over in January as the first external CEO at Nestle in nearly a century. In June Third Point unveiled a $3.5 billion Nestle stake and asked for a series of actions including a formal margin target of 18-20 percent.

Playing a long game

Nestle said strong cash generation would let it accelerate its share buyback program of up to 20 billion Swiss francs ($20.67 billion) by spreading it evenly over three years, instead of backloading it in 2019 and 2020 as initially announced in June.

Nestle shares were up 1 percent at 81.95 Swiss francs by 5.10 a.m. ET and investors were broadly supportive of the plan.

"This is a balance that gives them the ability to stay at work without having the distraction of whether they'll concede a margin guidance, but at the same time not burden themselves from making the kind of bold investments that are required to deliver long-term value," said Thomas Russo of Gardner Russo & Gardner, which has a Nestle stake worth more than $1 billion.

Russo, whose firm is based in Lancaster, Pennsylvania, has been a sizeable shareholder for over 30 years.

The difference between Nestle and other consumer companies that have a higher margin target, Russo said, is that "they have enormous fuel in their tank going forward and others end up running out of gas by virtue of making higher near-term results than Nestle's."

ZKB analyst Patrik Schwendimann was also positive.

"We consider the new margin target as reasonable because it leaves room for investment in the future and to reach the unchanged target of mid-single digit sales growth by 2020," he said in a note.

Pet sectors

Last week's death of French billionaire Liliane Bettencourt, heiress of L'Oreal, in which Nestle has a 23 percent stake, also stirred speculation on potential changes in the cosmetics firm's ownership.

But Schneider said there was currently no change to Nestle's approach to this investment.

Nestle will "pursue external growth opportunities that fit within targeted categories and geographies, deliver attractive returns, and build on the company's leadership positions", the company said.

It confirmed it would focus capital spending on high-growth categories coffee, petcare, infant nutrition, and bottled water and said it also wanted to pursue opportunities in consumer health care.

Nestle this month bought a majority stake in California-based Blue Bottle Coffee, its first step into the hipster world of specialty bars and brews.