Nestlé boss Mark Schneider got a stamp of approval from investors on Thursday (14 February) as he announced another business disposal as part of a new focus on health brands. And the strategy appears to be paying off as the world’s biggest food company halted six years of slowing organic growth. Simon Harvey takes a look.
Nestlé investors digested the latest set of annual results with enthusiasm on Thursday as the consumer goods giant made progress across all of its key financial metrics.
Top-line sales were the best in four years, while the Zurich-listed company succeeded in halting a six-year trend of slowing organic growth and affirmed it remains on course to meet its margin targets. And more importantly, from an investor standpoint, net profit was the highest since 2014.
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The results are perhaps testament to chief executive Mark Schneider’s ability to increase shareholder value and are the first full-year set of figures to be announced under his tutorship since he joined the Häagen-Dazs ice cream and Buitoni Italian sauces maker in February of 2017. And he has stamped his mark by embarking on a new strategy focusing on the on-trend nutrition, health and wellness categories at the expense of ditching ill-fitting assets, albeit under pressure from activist investor Third Point to do just that.
To that end, he surprised market watchers somewhat on Thursday by revealing he is potentially putting the cold meats brand Herta up for sale, which, based on the most recent top-line earnings, could reap around CHF600m (US$595.7m) for Nestlé that could be funnelled into further acquisitions.
But challenges still remain. While “revived growth” in Nestlé’s two-largest markets of the US and China was partly credited as being behind the improvement in the latest annual results, along with gains in infant nutrition, the frozen foods business (Lean Cuisine, Hotpocket) remains in the doldrums, suggesting another category target that might come up for disposal.
And while Schneider said this week the company is “on its way” to meet its 2020 target in achieving an underlying trading operating profit margin (UTOP) of 17.5%-18.5% by 2020, having seen a 50-basis-point improvement in each of the past two years, a lurking global economic slowdown might stand in his way.
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By GlobalDataNevertheless, Nestlé’s stock price rallied on Thursday and was up more than 3% around midday UK time just as the world’s largest food company hosted a follow-up conference call with investors.
Schneider said the company had made “good progress in its portfolio development” during the year, and is “exactly in line” with its guidance in terms of UTOP.
“We are pursuing balanced development between organic growth on the one hand, and then a positive development of the underlying trading operating profit margin on the other, and when these two things come together I think you have the elements of a sustainable and successful profit growth cycle,” he said.
“I think our overall strategic picture of where we want to head and why has become so much clearer and what we mean in particular by our food and beverage and nutritional health products focus that has become so much clearer compared to the beginning of 2018.”
Business disposals last year included Nestlé’s US confectionery operations – sold to Italy’s Ferrero – its dairy and cold sauces assets in Malaysia, and the Serbian chocolate brand Cipiripi. Outside of food, the company sold its Gerber Life Insurance business and is also exploring “strategic options” for its skin health division, a review of which is expected to be completed in the summer.
On the acquisition front, it bought Ecuador-based Terrafertil, which makes organic and plant-based foods, building on the purchase of Sweet Earth the previous year, a similar business based in the US.
And showing its intentions on plant-based innovation, Nestlé revealed plans to join the meat-free ranks with the launch of the Incredible Burger via its Garden Gourmet brand in Europe.
Nestlé said the transaction value for acquisitions and divestments amounted to around CHF14bn in 2018, which included a license to distribute products from retail coffee chain Starbucks and its deal for Atrium Innovations.
Herta charcuterie is now also under strategic review, a step that Nestlé said “underscores [an] increased focus on high-growth plant-based offerings”.
Andrew Wood, a Singapore-based senior research analyst at Sanford Bernstein, said: “We were pleased to see that Nestlé has decided to explore strategic options for Herta, the cold-cuts and meat products brand. This ongoing portfolio restructuring is a positive development at Nestlé.”
The business generated sales of CHF680m in 2018 and encompasses operations in France, Germany, Belgium, Luxembourg, the UK and Ireland, although Nestlé said it will retain the dough and vegetarian businesses.
“We made significant progress with our portfolio transformation and sharpened our group’s strategic focus, strengthening key growth categories and geographies in the process,” Nestlé’s earnings statement read. “Our unique nutrition, health and wellness strategy, with food, beverage and nutritional health products at its core, has become much clearer as we completed a sizeable number of transactions and announced strategic reviews for Nestlé Skin Health and Herta.”
Alain Oberhuber, a consumer goods analyst at Zurich-based MainFirst Schweiz, said: “We think that the brand could be divested for around CHF700m. This would be around 1 times sales and, at a 9% EBIT margin, around 15x EBIT.”
Schneider’s redefined business focus is so far paying off, at least in the short term, and it remains to be seen what impact it will have on Nestlé’s results in a year’s time, and what other acquisitions and asset disposals he might have in his kitbag to drive growth going forward.
He acknowledged the frozen food business is not performing at its best – “it did not have a good year”, Schneider said, although the company is “working intensely to address it”, with the pizza category at least “doing better”. Nestlé is endeavouring to improve its range of frozen food products, he added.
MainFirst’s Oberhuber added: “US frozen meals was weaker than expected, and this was self-inflicted as the pipeline was not strong enough. However, the CEO is very bullish on this case.”
Still, the new business strategy was not enough to sway the chief executive away from the inferred guidance of mid- to single-digit growth in the organic metric by 2020.
Organic growth accelerated to 3% in 2018, from 2.4% the previous year, when it continued the slowing trajectory seen since the start of the decade. Growth stood at 7.5% in 2011.
And there was also a big improvement in the real internal growth (RIG) metric, which strips out pricing. RIG quickened to a 2.5% pace last year, from 1.6% in the prior 12 months, but was still lagging behind the 3.9% momentum in 2011.
That said and noted, the trading environment and market dynamics have changed considerably over the past ten years, so it was commendable to see top-line sales reach CHF91.4bn in 2018, breaching the CHF90bn threshold for the first time since 2014.
Net profit also climbed, reaching CHF10.1bn versus the previous year’s CHF7.2bn, and once again the best performance since 2014.
Wood at Sanford Bernstein said: “Overall, this was a solid and generally positive reporting.”
But again one wonders what assets might be next to hit the chopping block. Third Point’s activist investor Daniel Loeb has long pressed for the disposal of ill-fitting businesses from Nestlé’s portfolio, such as ice cream, confectionery and frozen foods. In early 2018, before Loeb’s vocal criticisms were published, Nestlé offloaded its US confectionery business. KitKat, however, remains a brand Nestlé wants to keep.
Nestlé’s frozen-food business in the US has also long been put forward by some in the market as another asset that could be sold but, so far, the company appears more keen to fix the asset than flog it.
MainFirst’s Oberhuber added: “Although there was no further mention of this, we think that there is more than 10% of sales to be transformed, with a bit more to be divested.”
It was also Loeb that had pushed for the implementation of margin targets, which were duly incorporated with the aim of achieving a 17.5% to 18.5% print by the end of the current decade. That metric has since risen steadily, from 16% in 2016 to 16.5% the following year, and now 17%.
Oberhuber continued: “For other potential divestments, the jury is now out for the US ice cream business, as well as for the US pizza and Hotpocket business.
“For FY-19 and FY-20, the company is more positive on being able to improve margins even further, as the procurement process will result in higher group gross as well as operating margins. We expect that the UTOP margin in FY-19 will increase by 60 basis points.”
But Schneider is not resting his laurels on business disposals and investments alone as a means to continue to drive operational performance and keep both the investment community and shareholders content. As he seeks a bigger input from health and wellness brands, particularly plant-based products, innovation too remains paramount.
“Innovation is a key driver of future success in the market place and organic growth,” he told the conference call participants. “We cannot talk about long-term sustained organic growth success without significant long-term sustained success in innovation. I feel so much better now about our innovation pipeline that has been created and one that’s building up right now, and I think that positions us well for the future.”
