Nestlé Cedes Ground to Loeb but Won't Budge on L'Oreal -- 2nd Update

By Saabira Chaudhuri Features Dow Jones Newswires

Nestlé SA set a new profit-margin target and said it would accelerate share buybacks amid pressure from activist investor Dan Loeb, but remained firm on retaining its stake in cosmetics giant L'Oréal SA.

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The company's strategy has been in the spotlight since Mr. Loeb's Third Point LLC hedge fund built a 1.3% stake in the firm and called for changes to improve its performance and the sale of its stake in L'Oréal among other moves.

Nestlé on Tuesday said it would strive for a trading operating profit-margin target of 17.5% to 18.5% by 2020 on an underlying basis, which strips out restructuring, impairment and other one-time charges. That compares with a first-half margin of 15.8%, flat from the a year earlier on a reported basis and up 0.1 percentage point at constant currency.

The company also said it would tweak the $20.8 billion share-buyback program it announced in June. It will now purchase shares evenly in each of the three years to 2020, rather than back load them in 2019 and 2020.

Nestlé said about 10% of its portfolio by sales was ripe to be shuffled as it looks to divest slow-growth assets and invest in more promising ventures.

The raft of announcements, made alongside a closely watched investor day in London, are the latest moves by the Swiss consumer-goods giant to improve its performance under a new CEO and pressure from Mr. Loeb.

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Since Chief Executive Mark Schneider took the reins in January, Nestlé has already said it would sell its U.S. confectionery arm and announced a string of investments in coffee, food delivery and plant protein based foods.

The new CEO in February also scrapped a key internal sales target, which the company had repeatedly missed.

After Mr. Loeb in June publicly disclosed his $3.5 billion stake in Nestlé and listed his demands, Mr. Schneider announced the share-buyback program and clarified its investment priorities: The company will focus on high-growth areas such as petcare, coffee, infant nutrition and bottled water, while also pursuing growth opportunities in consumer health care.

Mr. Loeb has said Nestlé should sell its L'Oréal stake, set a margin target, launch buybacks and use M&A to drive growth. With Tuesday's announcement, Nestlé has largely met three of Mr. Loeb's four demands.

But Mr. Schneider said Nestlé wasn't planning on making any changes to its 23.29% stake in L'Oréal, which has been in focus following the death last week of Liliane Bettencourt, heiress to the L'Oréal fortune.

Mr. Loeb in June said it was a good time for Nestlé to sell its stake in L'Oréal, giving shareholders the ability to choose if they want to invest in Nestlé or a combination of the two companies.

"The investment is not diluting anything," Mr. Schneider said Tuesday, adding that the L'Oréal stake has delivered an annual 12% return on investment over the 42 years Nestlé has held it. "Our approach to this investment is currently not changing."

Third Point declined to comment.

Nestlé is aiming for mid-single digit organic sales growth by 2020 even as it tries to boost margins, a balancing act Mr. Schneider described as "going for a run and going for a dive at the same time."

He said the company is unlikely to raise its margin target between now and 2020 because of its focus on driving capital efficiency and revenue growth in addition to profitability.

The company will also further invest in frozen foods, noting that 90% of U.S. households have a microwave and a freezer making this a big market. It also plans to focus on ready-to-drink cold coffee and out-of-home coffee, said Mr. Schneider, noting a particular opportunity in raising coffee consumption in China, India and Africa.

Nestlé has also been working to fix problems in its skin-health business, which suffered because of what Mr. Schneider described as "self inflicted issues" after Nestlé invested aggressively in consumer skin-care products and patents on prescription products expired.

Last week the company said it was cutting about 400 of the 550 employees at its Galderma skin-care research and development facility in France as it pivots away from topical prescription creams for skin.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

September 26, 2017 06:51 ET (10:51 GMT)