“Performance is okay but I think it could be better. We need to raise our game there.”
At 08:00 CEST today (23 August), incoming Nestlé CEO Laurent Freixe faced analysts surprised by yesterday’s announcement of a change at the top of the world’s largest food maker and keen to hear the reasons why – and what the priorities of the new man at the helm might be.
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Gaining market share and improvements in “execution” were highlighted by Freixe, a near 40-year Nestlé veteran, who will replace Mark Schneider next month.
“Engaging with people and mobilising the entire organization top to bottom, I see as absolutely critical,” Freixe said when asked what his priorities would be from 1 September. “You know that we are probably the most global and the most local company at the same time, so it’s absolutely critical to energise the front line. And invest in the business, raise our game when it comes to quality of execution and live up to our values and principles, so that will be [the] top priorities on my agenda.”
Last month, when Nestlé reported its half-year financial results, the company trimmed its forecast for organic growth in 2024 from “around” 4% to “at least” 3% despite a recovery in underlying volumes in the second quarter. The Purina pet-food maker also cut its EPS guidance from growth of 6-10% year on year to a mid-single-digit range.
When Schneider discussed those results with analysts, he spoke of “improved market shares across our portfolio” but, from this morning’s call, it was clear further progress is of prime concern for his successor.
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By GlobalData“Our top priority – my top priority – is to drive sustainable top-line growth through market share gains,” Freixe said, adding later: “Hopefully we are gaining in many of the core areas, but we are not necessarily gaining everywhere and in every geography. I want to make sure that we raise our game and everywhere that it matters we are in a winning position.”
The change at the top raised eyebrows – one analyst told Nestlé’s management the move was “abrupt” – and the company’s shares quickly opened down on yesterday’s close (although at the time of writing, they have regained some of the lost ground).
When Schneider was appointed in the summer of 2016, the move to hire an outsider to succeed Paul Bulcke (who still remains Nestlé’s chairman) was something of a surprise. Schneider joined from Germany-based healthcare company Fresenius to follow on from Bulcke, who had spent eight years as CEO after a series of increasingly senior roles since joining the company in 1979.
Schneider’s tenure was marked by moves to reshape Nestlé’s portfolio, in part through asset disposals. These included the major disposal of its US confectionery business, including brands such as Butterfinger and Raisinets, to Ferrero for a deal worth Sfr2.8bn (then $2.91bn) in 2018.
In 2021, Nestlé sold its waters business in North America to One Rock Capital Partners and Metropoulos & Co.
However, there has, according to analysts, been concern among some investors about Nestlé’s recent sales performance and its share price. Before the second-quarter rebound, the KitKat maker’s “real internal growth” – which strips out the effect of pricing from organic growth to reflect changes in volume – had been in negative territory for six of the previous seven quarters.
There has also been disquiet at, for example, the failed acquisition of peanut-allergy business Palforzia, sold off last September three years after buying the asset for $2.6bn.
“We see the CEO change as a clear opportunity for Nestlé to get back on a better growth path and regain confidence,” Zürcher Kantonalbank senior equity analyst Patrik Schwendimann wrote in a note to clients today.
On this morning’s call, Bulcke said Schneider had “decided to explore new opportunities outside of Nestlé”, adding: “I would like to thank Mark for his contributions. Over the past eight years, he has done an excellent job, and we wish him all the best in his future endeavours.”
However, during the course of the call, it became clear the Nestlé chair thought a new CEO could benefit the business even as he underlined that he felt “Mark did a good job”.
“Our strengths in our company are – and you know them – is this in-market expertise worldwide. It is this innovation pipeline that is translated straight into more, I would say, scaled-up rollouts. It is flawless execution,” he said.
And it is how Nestlé “executes” that seems central to the decision to change CEO. Bernstein analyst Bruno Monteyne – who yesterday wrote the bank “struggles with the short-termism” of a “sudden” change in CEO – told Bulcke “everybody would have argued Nestlé was the best at execution” and asked for an indication of what had changed in recent quarters.
“I must say, different situations, different answers, different resources, different qualities that are needed. Nowadays I see that we are suffering a bit of not really privileging our basic strengths, which is basically marketing-driven, fuelling our brands, investing in them, rolling out innovation and knowing the preferences of the changing consumer,” Bulcke said. “It is pricing and doing the price dynamics in the markets, and not just pricing per se, understanding the, I would say, geopolitical differences in the world, and acting to that.
“That doesn’t take away what has been done in portfolio management. We have done and taken up many, many things that had to be put in order. Now is the time for this permanent execution in the markets, mobilising our people, aligning them behind specific actions with discipline and right direction, all in the framing of the nutrition, health and wellness strategy and fuel that further.”
He added: “It’s not that we turn a page. There is continuum but there is emphasis that has shifted towards, I would say, in a nutshell, in-market execution and marketing as the classical dimension of marketing and fuelling brands, etc.”
Freixe told analysts Nestlé would make “increased investments behind innovation” as the company seeks to “relentlessly focus on meeting consumers’ and customers’ needs”, drive sales and make those market-share gains.
“To achieve this, we will need to be very strong on productivity, cost efficiencies, to create the space again and generate the funds and the resources to invest incrementally behind the brands and the growth platforms,” he said.
Asked by Monteyne if Nestlé would “trade-off” improvements in margin for gains in market share, Freixe said: “I don’t see any contradiction between gaining market shares and supporting the margins. On the reverse, we all know the correlation between the higher the market share, generally, the higher the margins. If you look at the equation, market shares drive the top line, the top line drives the margins.”
Nevertheless, the incoming Nestlé CEO recognised analysts would be asking where the investment for the brands would come from.
“And the answer – and I come back to the model I want to follow – is this strategic, virtuous, circle of value creation. It starts with a big emphasis on productivity and cost efficiency to generate the margins to invest in the business incrementally. That’s the idea. I want to create the space; I want to generate efficiency and resources to invest in the business. That’s exactly what we will do.”
Given Nestlé’s cuts to its organic growth and EPS forecasts in July, Bulcke, Freixe and CFO Anna Manz were asked on today’s call if the market could expect the company to maintain its guidance for the current year of organic sales growth of at least 3% and “a moderate increase” in the group’s “underlying trading operating profit margin”. They were also asked to discuss if they thought Nestlé could return to a growth trajectory of 4-6% next year.
Bulcke gave the questions short shrift, arguing discussing the subjects was “not the purpose” of the call. On this year, Manz added: “If we were changing guidance at this current time, we would have announced that.”
Nestlé still plans to hold its capital markets day in November.
“The CMD later this year remains part of the calendar and we do not expect any material strategy change to be announced then,” Monteyne wrote in his note yesterday. “Investors may worry about the likelihood of guidance being changed, particularly margin guidance for future years. From our call with the company, we don’t think this is a contributor to the transition and we don’t think it is particularly likely.”
Nonetheless, the CMD in mid-November will be closely watched for any further flavour of Freixe’s plans for Nestlé, as the Swiss giant embarks on a new chapter.
