Zurich: Nestle SA’s new chief executive officer (CEO) Mark Schneider said it will take years to return to the growth rates targeted by his predecessors as the world’s largest food company considers exiting underperforming businesses and trimming its factory network.
The KitKat maker forecast revenue will increase 2% to 4% on an organic basis this year, below a long-held goal of 5% to 6%. Schneider also said Thursday restructuring costs will rise to about 500 million francs ($498 million) in 2017, putting pressure on profitability and sending the shares down as much as 2.3%.
It’s taken less than two months in the job for Schneider to modify the annual growth forecasts Nestle has held onto for more than a decade. Revenue growth was 3.2% in 2016, missing analysts’ estimates and the slowest in at least a decade, illustrating the long list of challenges facing the new CEO. Those include deflation in Europe, declining sales in China, inflation in Brazil and Russia, and increasing competition in the US chocolate market.
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“It is a kind of a back-to-reality," Pierre Tegner, an analyst at Natixis, said in a note. “The outlook shows that there is a lot to do."
Since 2005, Nestle has targeted 5% to 6% average annual sales growth and improvement in the margin, excluding currency shifts. Schneider said that range is too narrow for coming years, without saying whether the goals, dubbed the “Nestle Model," are being retracted. He said the new guidance is “roughly" the same thing. The food company forecast this year’s margin will be little changed due to the restructuring.
It’s “perhaps, the implicit official ‘death’ of the Nestle Model," Andrew Wood, an analyst at Sanford C. Bernstein, wrote in a note.
Schneider, the first outsider Nestle has picked to be CEO in almost a century, said he sees acquisition opportunities in the health, food and beverage industries, speaking in an interview on Bloomberg Television. However, it’s not the time to make “big-ticket M&A" as valuations of consumer-goods companies are “lofty" amid low interest rates and rising stock markets, he said.
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Nestle will first attempt to fix underperforming businesses such as the Chinese Yinlu food business, and sell those that are non-strategic if it’s not possible to return them to growth, said Schneider, a veteran of the healthcare industry. Nestle’s 23.2% stake in L’Oreal SA is a “highly strategic" asset and there is no short-term urgency to alter the relationship, he added. Analysts have speculated for years that Nestle could sell the stake to fund acquisitions.
“A turnaround and a durable earnings inflection will take longer than most expect," said Robert Waldschmidt, an analyst at Liberum in London. “Schneider will first attack the weakness in the core portfolio. Disposals will likely precede larger acquisitions."
Coffee is a business Schneider said he plans to expand, and there’s “no flagrant contradiction" in holding onto chocolate businesses amid the health push, Schneider also said.
About half of the savings Nestle targets by 2020 will come through streamlining production at its network of more than 400 factories, chief financial officer Francois-Xavier Roger said in an interview. The other half will stem from measures such as centralizing purchasing and cuts in administration, Roger said.
“For chocolate within Europe, we don’t necessarily have to have plants in each and every single country producing chocolate," he said in his office. “We can have more synergies within given geographic areas: instead of having the same kind of production in different locations, we can better specialize them."
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Nestle reduced its total headcount by 7,000 to 328,000 employees last year as it folded part of its ice-cream business into a joint venture. Roger said the company doesn’t plan any “massive shrinking," but rather will close factories gradually.
Most analysts said the new CEO came across well in his first public appearance since starting in the role.
“We were impressed," James Edwardes Jones, an analyst at RBC Europe, wrote. “Let’s hope he executes as well as he presents. We didn’t hear everything we wanted to, but we liked what we did hear." Bloomberg