Nestlé Cedes Ground to Loeb but Won't Budge on L'Oreal -- 3rd 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 measures to improve its performance, including 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%.

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.

Shares in the company were up nearly 2% in afternoon trading.

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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.

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 Blue Bottle coffee, food-delivery startup Freshly and plant-protein-based foods brand Sweet Earth.

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 the high-growth areas of 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.

"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.

Nestlé plans to cut costs in manufacturing, procurement and general and administrative areas, saying it will spend 2.5 billion francs on restructuring between 2016 and 2020 to achieve annual cost savings of between 2 billion and 2.5 billion francs by 2020. To do this, the company will consolidate offices, increase its global buying, close factories and outsource management of its pension fund, among other measures.

The company outlined plans to raise sales growth by fixing underperforming businesses, like its Yinlu peanut milk brand in China.

RBC analyst James Edwardes Jones said Nestlé's new margin target was already baked into his estimates, leaving his target price unchanged.

UBS analyst Pinar Ergun was more bullish, saying the new targets could prompt analysts to raise consensus expectations for 2020 per-share earnings. "More importantly it is likely to reassure the skeptics that change is under way at Nestlé," she said.

Nestlé 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. A global review of the skin-health business is under way.

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

(END) Dow Jones Newswires

September 26, 2017 11:15 ET (15:15 GMT)