Flat US sales drag down Nestle's 2017 earnings
Nestle announced 2017 sales on Thursday of nearly $97 billion, an increase of 0.4% from the previous year, while net profit was $7.76 billion, a drop of almost 16% from 2016. The Swiss-based company said weak demand in the U.S. had led to stagnant food and beverage category growth. It posted 2.4% organic growth last year, its lowest level in two decades, driven in part by U.S. declines in confectionery and ice cream.
Nestle said organic sales growth in 2018 was expected to increase between 2% and 4%, and that it was "firmly on track" for its 2020 margin improvement target. Nestle realized $850 million from the U.S. corporate tax cut enacted in December, and the company expects to save $300 million in taxes per year.
Mark Schneider, Nestle's CEO, told CNBC that Nestle Waters and the company's nutrition businesses had turned in particularly weak performances at the end of the year. "We were somewhat surprised with the fourth quarter, that came in a little softer than anticipated, mainly due to North America and the market in Brazil, geographically speaking," he said.
Last year was the slowest growth in decades for Nestle, driven in part by weak North American demand for its candy and ice cream products, but also from ongoing pressure to realign its overall portfolio and respond to a changing marketplace.
As The Wall Street Journal noted on Thursday, the staid Swiss company is seen as less nimble than its competitors in the ice cream market, for example. Its Dreyer's and Haagen-Dazs products have been playing catch-up to popular low-fat, low-calorie startups like Halo Top. Unilever, meanwhile, announced last summer that its Breyers brand was introducing a new ice cream variety prominently featuring calories per pint on the container and packaging strikingly similar to Halo Top.
Schneider, who joined Nestle in January 2017, has responded to these challenges and pressure from activist investor Daniel Loeb by selling its U.S. confectionary unit to Ferraro and focusing on high-growth food and beverage categories such as coffee, pet care, infant nutrition and bottled water. Loeb's Third Point hedge fund, which acquired about 1.25% of Nestle for $3.5 billion in June 2017, has pushed Nestle is to improve margins, innovate its core business and sell non-core assets. The U.S. is the largest market for Nestle, the world's biggest food company.
Nestle has been actively pursuing M&A opportunities since Schneider came on board, including taking a majority stake in the Blue Bottle coffee chain and recently announcing a partnership with Know Brainer Foods, a manufacturer of coffee creamers. However, Loeb appears to want larger and faster changes than what has occurred so far.
While vowing a disciplined approach to dealmaking, Bloomberg reported that Schneider has signaled he’s on the lookout for more, potentially larger deals. “The sweet spot is in small to mid-sized deals, but we don’t want to rule out anything,” Schneider told reporters in Vevey, Switzerland.
It's hard to tell what could work in the food space unless Nestle were to acquire Halo Top — along with potentially other fast-growing companies — to help jump-start its lagging North America profit picture. Nestle has been rumored to be interested in an acquisition of Hain Celestial, which would bring even more diverse brands into its already bulging portfolio.
Schneider's assignment is to streamline Nestle and enhance profitability in the face of rapidly changing consumer trends. He seems to knows what needs to be done, but it's going to take time — assuming Loeb and other investors can wait that long.