Nestle sets profit target and plans to speed up share buybacks

26 Sep 2017 --- Nestlé has confirmed mid-single digit organic growth target for 2020 and has set underlying trading operating profit margin target of 17.5 percent to 18.5 percent by 2020. The world’s biggest food & beverage company has affirmed its strategic focus on food and beverages, with consumer healthcare as an additional growth platform.

At its investor seminar today in London, Nestlé presented its strategy for sustainable value creation. The company detailed how it will reach its mid-single digit organic growth target by 2020 and will announce an underlying trading operating profit margin target of 17.5 percent to 18.5 percent by 2020, up from 16.0 percent in 2016. 

Nestlé described its plans to accelerate organic sales growth, building on its industry-leading volume growth, by capitalizing on recent key consumer trends in categories and markets around the world. Food and beverages remain core to the company’s strategy, with a continued focus on nutrition, health and wellness enabling the company to meet changing consumer demands. Nestlé’s strategy balances growth with increased cost discipline and margin expansion as well as improved capital efficiency. 

Speaking during a live presentation Mark Schneider, Chief Executive Officer outlined Nestlé's long-term sustainable value creation model.

These included:
• Creating Shared Value (CSV) is the strategic tool to optimize value for shareholders and for society.
• Priorities are those areas of greatest intersection between Nestlé business and society.
• Nutrition: Products with a nutrition, health and wellness dimension perform better, rural development programs for farmers offer commercial differentiation to the consumer, and responsible stewardship of water saves costs and secures supplies for the company's businesses.

The strategic shift is part of an update by Schneider, with food and drinks to “remain core to the company's strategy, with a continued focus on nutrition, health and wellness enabling the company to meet changing consumer demands.”

“Nestlé has a strong foundation, a clear path forward and a bright future. We have a proven track record of delivering sustainable, industry-leading performance.”

Schneider said: “In line with today's accelerating pace of change, we are intensifying our focus on innovation, operational efficiency, and portfolio management. We will grow by remaining at the forefront of consumer trends and offering the brands and products to meet people's changing needs, especially their demand for a better, healthier life.”

In the announcement, Nestlé said it would: “increasingly focus capital spending on advancing the high-growth food and beverage categories of coffee, petcare, infant nutrition and bottled water. It will also build on its strong position in emerging markets and pursue growth opportunities in consumer healthcare.”

Nestlé 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.

The KitKat maker also said that its strategy balances growth with: “increased cost discipline and margin expansion, as well as improved capital efficiency.”

Selective acquisitions and divestments could affect about 10 percent of total revenue, Schneider said as he unveiled his new strategy to investors. Nestlé is already trying to sell its US chocolate business, its first major retreat from sugary snacks, as it embarks on its biggest revamp in at least a decade. “We’ll need to trade out of some product areas and into others,” Schneider says. “We’ll act decisively, and the US confectionery is a good example of that.”

As a business, we have made many meaningful acquisitions,” says Schneider, speaking during a live Q&A session, “And with these joint ventures, it depends on what both sides bring to the tables, they can be great or time-consuming but being pragmatic is the best approach.”

“We don’t know what the world’s circumstances will be in 2020, but we would like to stay in line with organic growth.”

“We have the skills and the know-how to bring healthy products and we want to that as much as possible to engage  with our customers, offer the latest healthy frozen products that over time will enhance consumer confidence.” 

Schneider said Nestlé isn’t immediately changing its stance on its stake in French cosmetics maker L’Oreal SA, which he described as a “fabulous” investment, contributing 9 percent of the Swiss company’s earnings per share over the past decade. The death of L’Oreal heiress Liliane Bettencourt last week prompted speculation about the future of Nestlé’s 23 percent holding in the French cosmetics company.

Last year Nestlé announced plans to improve its margin by at least 2 percentage points by 2019 or 2020 through cost savings. The company's unadjusted trading operating margin has hovered between 15 percent and 15.3 percent during the past six years.

Back in July, Schneider said Nestlé may expand restructuring beyond its original plan. The company, which had 328,000 employees in 2016, has forecast reorganization costs will rise about 67 percent to CHF500 million this year.

“Virtually all of you underestimate the will to win at this company,” Schneider said. “It’s hellbent on not losing its leadership position.”

“I'm excited about the future of the business,” he finalized. 

Nestlé will continue to pursue a value creation model that balances growth in earnings per share, competitive shareholder returns, flexibility for external growth and access to financial markets. The company will increasingly focus capital spending on advancing the high-growth food and beverage categories of coffee, petcare, infant nutrition and bottled water. It will also build on its strong position in emerging markets and pursue growth opportunities in consumer healthcare. 

Nestlé will pursue external growth opportunities that fit within targeted categories and geographies, deliver attractive returns, and build on the company’s leadership positions. Nestlé is actively adjusting its product portfolio in line with this strategy, as shown by the recent investments in Blue Bottle Coffee, Sweet Earth, and Freshly, as well as the decision to explore strategic options for its US confectionery business. 

Nestlé also provided an update to the previously announced capital structure review. In June 2017, the company announced its intention to make an additional CHF20bn (US$21bn) available for M&A and share buybacks over the next three years. In light of its strong cash generation, Nestlé intends to accelerate buybacks by spreading them evenly over three years. The buyback will augment Nestlé’s previous return of over CHF100bn (US$103bn) to its shareholders over the last 10 years, including CHF43bn (US$44bn) as share buybacks.