By Silke Koltrowitz
VEVEY, Switzerland (Reuters) – Nestle Chief Executive Mark Schneider will fine-tune his transformation plans with more acquisitions, he said after the Swiss food group lowered growth expectations on Thursday.
The company had earlier said it will take longer than expected to hit its 2020 organic growth target despite posting its highest annual growth in four years and improved profitability.
Like rivals such as Unilever, Nescafe coffee and KitKat maker Nestle has been working hard to streamline its diverse portfolio in line with changing consumer tastes and growing demand for healthier and more environmentally friendly produce and packaging.
Under Schneider’s leadership, the group has sought to focus on premium products in fast-growing market segments such as coffee and plant-based foods while retreating from slower-growth areas such as chocolate and processed meat.
But the German-American CEO, who has conducted more than 50 transactions and reviews affecting 12% of group sales since taking charge in 2017, said portfolio management had been “a bit heavy on disposals and a bit light on acquisitions” recently.
This will change in 2020, he said, with small to mid-sized deals the sweet spot.
“We’re a year early on the margin, but have to push back the organic growth target by a year or so,” he told reporters at Nestle’s Vevey headquarters after the company reported 2019 results that showed organic growth of 3.5%.
Unilever last month reported underlying sales growth of 1.5% in the final quarter of 2019, its slowest in a decade. Danone reports results on Feb. 26..
“At this point, in February, I cannot promise to deliver 4% growth this year, I prefer to be cautious,” Schneider said, adding that growth rates would slow a little from the past two years.
Jefferies analyst Martin Deboo said the new guidance implied modest consensus downgrades.
“We continue to prefer Unilever, where – despite more evident challenges – the headline metrics aren’t that different and the valuation is supportive.”
Nestle shares, which are trading at relatively high multiples after climbing more than 30% last year on Schneider’s progress, were down 2.8% at 1455 GMT.
Schneider said he remains “bullish” on 2020 and expects acquisitions and trendier products, such as its Starbucks coffee range and plant-based burgers and sausages, to drive growth.
The company has already set up new structures to turn innovative ideas from outside and inside the group into new products, its technology boss said on Wednesday ahead of the results.
Some areas remain challenging, however, with price pressures in Europe, subdued growth in China – where its Yinlu peanut milk business is struggling – and a weak performance in bottled water, for which a new strategy will be revealed in the first half.
In his first year on the job, Schneider had initially targeted mid-single-digit organic sales growth and an operating margin of 17.5-18.5% in 2020. Cost cuts helped Nestle to reach a 17.6% operating margin last year.
“The guidance is probably not a surprise given what is happening in China – its second-biggest market, accounting for 8% of group sales – and the coronavirus,” said Kepler Cheuvreux analyst Jon Cox.
Schneider said it was too early to quantify the financial impact on Nestle from the coronavirus outbreak. He said operations in China had resumed at the beginning of the week, albeit at a reduced rate because some staff had been unable to return to work.
Full-year net profit rose 24% to 12.6 billion Swiss francs ($12.89 billion), against a consensus forecast of 12.36 billion francs in a company-supplied analyst poll. Nestle proposed an increased dividend of 2.70 Swiss francs per share.
Reporting by Silke Koltrowitz, additional reporting by Siddharth Cavale; Editing by David Goodman.