Nestlé spoke at the Barclays Global Consumer Staples Conference yesterday (9 September), with M&A, frozen foods and sustainability key topics. Simon Harvey looks at what the company had to say.
The thrust of Nestlé’s deal-making in the last couple of years has seen assets go out the door more often than they have come in – but, in recent months, disposals have become more balanced by acquisition activity.
In fact, two purchases have come in the last three months – the rest of California-based allergy-treatment firm Aimmune Therapeutics and a majority stake in collagen-enhanced foods maker Vital Proteins, also in the US – while the Swiss giant bought businesses in medical nutrition and pet food earlier in the year.
The disposals have continued, with the Buitoni pasta brand in North America sold, the bulk of the Herta meats division offloaded and the US ice-cream business placed into Nestlé’s 50:50 Froneri venture with PAI Partners. More disposals could soon come – parts of Nestlé’s North American waters business and Yinlu, its peanut milk and porridge unit in China, are under review.
Divestitures shaved 5.3 percentage points off group sales in the second quarter, mainly related to the disposals of the ice-cream business in the US and of Nestlé’s Skin Health division, the Swiss giant said in August, when it also predicted a slowing in annual organic growth due, in the main, to the pressure Covid-19 has put on the foodservice market.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataSee Also:
Having previously guided to a “continued increase in organic sales growth” for 2020 from 3.5% in the prior 12 months, Nestlé now expects a tail-off to around 2-3%.
Speaking at the online Barclays Global Consumer Staples Conference yesterday (9 September), CFO François-Xavier Roger reiterated Nestlé’s recent commentary of a renewed appetite for acquisitions. “We want to be much more [on the] acquisitive side now, especially so, as, over the last 18 months, we have clearly disposed of more assets than we have bought.”
The deal for Aimmune Therapeutics, which has developed a treatment in the US for peanut allergies, “has the potential to be a blockbuster with more than US$1bn in sales over time”, Roger said. He added Aimmune “expects to get registration for other markets starting with Europe soon”.
Target on investment returns in sight
Roger made the remarks as he provided insight into the Nestlé’s M&A strategy. “We do not want to deleverage the company, and we don’t want to reduce our scale either. That means it’s not just about going shopping because we have a strong balance sheet or we have a credit card or whatever; we want to be disciplined in what we do as well.”
Roger said Nestlé assesses potential acquisitions based on a number of criteria. Their “strategic fit” around nutrition, health and wellness, that they are in high-growth categories and have a “cultured fit”, and at the same time to “make sure that we get a proper financial return”.
However, Roger added Nestlé is not entirely committed to high-growth acquisitions. “We can invest outside of these high-growth categories if we find the right opportunities,” he said.
And through Nestlé’s “disciplined” approach to M&A, the Stouffer’s and Lean Cuisine maker is within two percentage points of achieving its targeted 15% return on invested capital (ROIC) from acquisitions, a feat which normally takes five to seven years on each transaction to realise, Roger said.
“We were around 10% in 2014, and last year it was 13.5% and there will be some further improvement this year, so we are clearly on a journey to 15%,” he said. “We didn’t want to provide a specific timeline for the 15% because it depends precisely on what we do in terms of M&A.
“With any acquisition that we do, it will be dilutive at the beginning because we expect to reach a WACC (weighted average cost of capital) around probably five to seven years, or even before. So, in the meantime, we are using all levers in the base business to really increase the ROIC.”
Frozen foods show resilience
On the line, Roger was joined by Steven Presley, the chairman and CEO of Nestlé’s US division. A key talking point among investors in recent years has been Nestlé’s position in the US frozen-food market amid a chequered performance in the category.
Presley talked about the money Nestlé has reinvested in its frozen-foods business in the US, particularly its Stouffer’s brand, since the company completed the exit from a direct-store-delivery (DSD) model in the US last year, one he described as a “very expensive path to market”.
Nestlé’s fortunes in US frozen food appear, in the main, to have changed for the better. Discussing the category, Presley insisted market watchers “break [frozen food] into pockets”. There is, he said, “no such thing as a monolithic frozen food category” and sought to outline the recent performance of the main parts of the portfolio.
Stouffer’s is delivering strong margins and is also gaining market share, Presley said, adding coming out of DSD was “a critical move to unlock the growth and potential of that business”, a factor he said had also put its pizza business on “a very good path”.
Efforts have also gone in to turnaround Lean Cuisine meals, a brand that has recently been joined by a new better-for-you line in the US, Life Cuisine, and those rebranding and reshaping efforts are starting to pay off, Presley said. “That business shows really good early signs that we’ll be able to turn that business around as well.”
Overall, Presley said US consumers have returned to the frozen-food category during the pandemic and Nestlé expects demand to continue beyond the crisis.
“For us, it is a structurally attractive space,” Presley said. “Consumers actually have come back to the category in a big way, pre-Covid, through Covid and we think post-Covid. It offers a convenience, a taste and a value that can’t be beat in their meal offerings, so, we feel really strong about our frozen portfolio right now – still work to do, we always have work to do in the space and all of our businesses, but it’s an attractive business for us.”
Last year, Nestlé sold its US ice-cream business to Froneri, the joint venture it created in 2016 with private-equity firm PAI Partners, and which absorbed the Swiss firm’s ice-cream operations in Europe, the Middle East, Argentina, Australia, Brazil, the Philippines and South Africa.
Roger said the partnership with PAI has led to positive developments for the category, including increased sales and profits, and market share. Nevertheless, when asked by Barclays’ Ackerman what the future holds for ice cream he said the investment firm may decide to leave at some point, which would create options that would need to be discussed in such an eventuality.
He added: “To work with private equity is not bad at all as these guys bring some scale as well. [But] if we get married with a financial partner, we know that these guys eventually, and most probably, will leave at a given time, which gives us optionality.
“In the meantime, we are very happy to see that we have done well on the top line, we have done very well in market share. In the US, even before we contributed our business, as well as in Europe, we have done much much better than we used to on the bottom line.”
Sustainability at “very top” of Nestlé agenda
Sustainability was also thrown into the conversation as Nestlé, like other food manufacturers, aims to cut the use of plastics in its packaging by 2025, and reduce carbon emissions by a longer-term threshold in 2050.
Presley said, in the US at least, consumer perceptions around that topic have faded somewhat given the more immediate concerns around Covid-19, a recession, and the upcoming elections to chose a new President. But it’s a subject that isn’t going to go away, he said.
“Is it a primary purchase driver? No. Will it be in some categories in the future? Yes, we believe so. That’s why we’ve got to get ahead of it now to achieve those 2025 commitments.”
And Roger said the cost of meeting those obligations won’t be borne by Nestlé’s consumers, investors or shareholders, and “we don’t expect to reduce our margins as a consequence either”.
“Sustainability is on the very top of our agenda,” Roger emphasises. “The best way to finance it is really by performing very well commercially and financially. What we have to do is really to find efficiencies in our supply chain, efficiencies across the organisation in order to be able to finance it.”
Roger used the analogy of cutting the sugar, salt and fat content in Nestlé’s products as an example of how the company’s sustainability targets can be achieved.
“Over the last couple of years we have been able to reduce massively the content of sugar, salt and fat in our products at a cost. We have been able to do that not by passing it to the consumer, not passing it to our shareholders, but through efficiencies in our supply chain.”
Sustainability featured on the list of priorities when Roger was asked to summarise what has changed at Nestlé under Mark Schneider’s tutelage since he became CEO in 2017 and set out targets on organic growth and margins, along with the aim of ridding the portfolio of “under-performers” as well as investing in fast-growing categories.
“We increased our growth with our focus on high-growth categories, we accelerated our portfolio management, the organisation is much more focused on the [geographical business] zones, more emphasis on cost management, and we have accelerated the pace of innovation in reducing time to market,” Roger said.
“The last couple of years have been an evolution … and there has been an acceleration of the pace [under Schneider] because we saw a very fast-changing environment as well.”
