Nes­tle's lower sales out­look puts pres­sure on CEO

The Pak Banker - - COMPANIES/BOSS -

Nes­tle SA fore­cast 2016 sales will miss the Nescafe maker's long-term tar­get for a fourth year, in­creas­ing pres­sure on Chief Ex­ec­u­tive Of­fi­cer Paul Bul­cke to find new ar­eas of growth as he en­ters the home stretch of his ten­ure.

Rev­enue will in­crease at a sim­i­lar rate to last year's 4.2 per­cent on an or­ganic ba­sis as it be­comes harder to raise prices, the maker of Nespresso coffee and Ger­ber baby meals said Thurs­day. The world's largest food com­pany also re­ported full-year profit that missed es­ti­mates and let down in­vestors who had been ex­pect­ing a share buy­back. The stock fell as much as 4.5 per­cent.

"A dis­ap­point­ing end to the year for Nes­tle," wrote Jeff Stent, an an­a­lyst at Ex­ane BNP Paribas. "Guid­ance is un­der­whelm­ing al­beit re­al­is­tic." Bul­cke has been seek­ing ex­pan­sion and ac­qui­si­tions in skin health and med­i­cal nutri­tion to re­duce the com­pany's re­liance on the growth-chal­lenged pack­aged-food in­dus­try. Nes­tle is un­der pres­sure to drop its goal for long-term av­er­age sales growth of 5 per­cent to 6 per­cent, which is a relic of a more in­fla­tion­ary econ­omy, an­a­lysts at Jef­feries said.

"We are not ac­cus­tomed to Nes­tle be­ing av­er­age," said San­ford C. Bern­stein an­a­lyst An­drew Wood, "but it is be­com­ing more fre­quent." The KitKat maker missed the goal in half of the eight years Bul­cke has led the com­pany. Nes­tle isn't "clos­ing the book" on the long- term tar­gets be­cause strat­egy shouldn't be de­ter­mined by short- term con­di­tions, the CEO told an­a­lysts and jour­nal­ists at the com­pany's Vevey, Switzer­land head­quar­ters.

Slow­ing economies are mak­ing it harder to charge more for prod­ucts. Pric­ing boosted 2015 sales by 2 per­cent­age points, com­pared with 2.2 per­cent­age points in 2014.

This year's re­sults will be more un­even than usual quar­ter-by-quar­ter due to a dif­fi­cult com­par­i­son with the first three months of 2015, Chief Fi­nan­cial Of­fi­cer Fran­coisXavier Roger said. That's mainly be­cause Nes­tle is catch­ing up af­ter a re­call of Maggi noo­dles in In­dia, and baby food is also weaker in the U.S., he said in an in­ter­view. In­fla­tion in emerg­ing mar­kets may boost pric­ing power in the se­cond half of 2016, Roger also said. "No panic if you see a bit of a weaker first quar­ter," the CFO said. "We know it's likely to hap­pen." Trad­ing op­er­at­ing profit fell to 13.4 bil­lion francs, miss­ing an­a­lysts' es­ti­mates for 13.8 bil­lion francs. An­a­lysts have fore­cast 4.7 per­cent or­ganic sales growth in 2016, ac­cord­ing to Pierre Teg­ner, an an­a­lyst at Natixis.

Bul­cke listed share buy­backs as the last of four pri­or­i­ties for the use of cash. Rein­vest­ing for fu­ture growth is the top one, fol­lowed by div­i­dends, which he called the best way to re­ward share­hold­ers, and then ac­qui­si­tions. He said Nes­tle ex­pects to con­clude an agree­ment on a planned ice cream joint ven­ture this year, and it will con­sider mak­ing ac­qui­si­tions to help fill gaps.

"That's where we go out and have th­ese bolt-on ac­qui­si­tions, but there's so much to be done with what we have," he said in a Bloomberg TV in­ter­view. "We do have a siz­able port­fo­lio, and that's where our prime at­ten­tion goes to."

Re­cent pur­chases in­clude Mer­rick Pet Care Inc., a maker of or­ganic dog and cat food that Nes­tle agreed to buy in July. Europe's largest com­pany by mar­ket value is also buy­ing out mi­nor­ity share­hold­ers of Osem In­vest­ments Ltd., Is­rael's largest pub­licly traded food­maker, for about 3.3 bil­lion shekels ($845 mil­lion).

Bul­cke is cling­ing to Nes­tle's long-term guid­ance ahead of a pos­si­ble move into the chair­man's role next year, suc­ceed­ing Peter Brabeck­Let­mathe. Alain Ober­hu­ber, an an­a­lyst at MainFirst Bank AG, has men­tioned three po­ten­tial can­di­dates to take the CEO job: Chris John­son, who runs the com­pany's cost-ef­fi­ciency pro­gram, Lau­rent Freixe, who heads the Amer­i­cas busi­ness, and Wan Ling Martello, who took over Nes­tle's strug­gling Asia, Ocea­nia and Africa re­gion last year. Nes­tle's board will name a new chair­man at a later date, Bul­cke said, de­clin­ing fur­ther com­ment.

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