Nestle Outlook for Weakest Sales in 20 Years Gives Loeb Ammo

(Bloomberg) - Nestle SA warned that sales growth this year will be the weakest in at least two decades, giving activist investor Dan Loeb ammunition for his campaign to overhaul the world’s largest food company.

 

Organic revenue growth will be at the lower half of its 2 percent to 4 percent forecast, the maker of Nespresso capsules and Perrier bottled water said Thursday. Chief Executive Officer Mark Schneider said Nestle may expand restructuring plans and aims to sell its U.S. chocolate business this year.

It was “a semester to forget,” wrote Jean-Philippe Bertschy, an analyst at Bank Vontobel AG who added that all the key numbers worsened. “Nestle will have to convince investors at the investor day in September that it will be able to accelerate growth and deliver on profitability.”

Schneider is under pressure to turn around the company, whose brands include Gerber baby food and Purina dog chow, after Loeb revealed a $3.5 billion stake last month, demanding asset sales and higher shareholder returns. First-half revenue growth missed Nestle’s expectations and pricing has been soft, said Schneider, who is in his first year on the job and is set to unveil his strategy in two months.

The food industry has suffered recently as consumers shun packaged food they perceive as unhealthy. French yogurt maker Danone also reported that sales barely grew in the second quarter as a revamp of the Activia brand flopped. Last week Unilever reported it had no volume growth in the second quarter. The approach by Loeb’s Third Point plus Kraft Heinz Co.’s abandoned bid for Unilever highlight the difficulties big food has had in reigniting their businesses.

“Food companies will need to reinvent themselves, and a lot will have to change in the sector, especially in the developed markets like Japan, Europe and North America,” said Patrik Lang, head of equity research at Julius Baer Group Ltd. “That’s what we’re starting to see: Nestle wants to invest more in the health trend, Unilever is developing more and more into a company that commits to personal hygiene and Danone is searching for its own identity.”

In response, some of these companies plan to focus on areas where they see stronger growth prospects. Schneider started an overhaul by reviewing Nestle’s U.S. confectionery unit for a possible sale, as well as announcing a buyback of as much as 20 billion francs ($21 billion) in shares.

Chocolate Interest

The Swiss company has seen “significant” interest for the U.S. chocolate business from both strategic and financial investors, according to its CEO. Speaking on a conference call, Schneider also said Nestle may expand restructuring beyond its original plan. In February he forecast reorganization costs will surge to 500 million francs this year.

The company’s sales increased 2.3 percent in the first six months of 2017, missing analysts’ estimates. Schneider said he expects improvement in the second half. Nestle shares were little changed at 3 p.m. in Zurich, having erased most of a 2.5 percent intraday decline.

Both Nestle and Danone reported Thursday that they’re facing commodity cost headwinds, which may crimp profitability. Danone said it expects a steep rise in milk prices in the second half, along with increases in costs of plastic packaging and other materials. Nestle said it expects its raw material costs to increase by about 1 billion francs in 2017, increasing for the first time in two years.

Nestle suffered from sluggish demand in western Europe as consumers shirked higher prices for products such as Nescafe soluble coffee. The company also had a drop in infant nutrition shipments, while its skin health unit faced increasing competition from generic prescription brands.

“The pricing weakness clearly shows the need to ditch the complacent approach that has stemmed from oligopolistic positions,” Pierre Tegner, an analyst at Natixis, wrote.

Among other highlights: 

Nestle will go into second half with a “cautious” stance on pricing, Chief Financial Officer Francois-Xavier Roger said on a call with reporters Trading operating profit was flat at 6.8 billion francs Co. reiterated forecast that higher restructuring costs will lead to stable trading operating margin in constant currency this year Organic growth in Europe, Middle East and North Africa was 1 percent. Hot weather weighed on demand for coffee and pizza Nutrition unit increased sales by 0.9 percent on an organic basis, missing the 1.8 percent analysts expected as price increases in Brazil and Mexico weighed on volume. CFO Roger said he expects the business to improve in the second half Asia, Oceania and Africa had organic sales growth of 4.8 percent, beating analysts’ estimates, with China turning positive in the second quarter

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