- Nestlé reported a 19% rise in profit to $5.8 billion for its second financial quarter, an improvement that suggests the company's investments in coffee and better-for-you products are paying off, according to a company release. The company's growth rate for the period came below the 5% to 6% rate Nestlé had aimed for early last year, but still topped analyst estimates.
- This performance could buy CEO Mark Schneider some space from U.S. activist investor Daniel Loeb, whose hedge fund Third Point owns 1.25% of company shares — worth about $3 billion — and has pressured Nestlé to sell its stake in L'Oreal USA and other underperforming segments. Nestlé has implemented many of Loeb's proposed changes, including launching a $20 billion share buyback program in 2017 and selling off its U.S. candy business in January. The company has also doubled-down in high-growth segments by acquiring plant-based frozen foods maker Sweet Earth Foods and buying the rights to sell Starbucks coffee and tea in supermarkets for more than $7 billion.
- Schneider said in the company's earnings release Thursday that Nestlé is "creating value by pursuing growth and profitability in a balanced manner," checking Loeb's calls for more aggressive measures to improve its financial performance.
After taking over Nestlé just 18 months ago, Schneider has been entangled in a battle of wills with Loeb. But the company's half-year results have given the CEO some much-needed leverage over the activist investor, and could suggest that the company has already found lucrative paths to growth.
Nestlé's frozen foods, water, pet care and coffee segments saw notable gains during the period. Still, its overall U.S. sales were fairly weak.
“The year-to-date results show some of our progress,” Schneider said in a webcast Thursday. “We’re pleased but not satisfied. We’re far from done. There’s a lot more to come.”
Nestlé affirmed its full-year growth target of 3% organic gains, a pace that's expected to pick up over the second half of the year as the company introduces a pipeline of new products. The company also expects to continue boosting profitability through cost-cutting programs, and said its growth in 2018 will keep it on pace to meet its long-term goal of 18% operating margin by 2020.
It will be interesting to see if this earnings success appeases Loeb, and for how long. In a letter to Nestlé earlier this month, the activist investor suggested that the company split into three divisions: beverages, nutrition and groceries, and bring on an outsider to its board with insight on the food and beverage industry. He also criticized the company's strategic approach, arguing that it hasn't done enough to adapt to evolving consumer behavior.
"This is a call for urgency — rather than incrementalism — to capitalize on fleeting opportunities and innovations that competitors will capture if Nestlé does not energize itself," he wrote.
The challenges that have been plaguing Nestlé aren't unique. As consumers reject processed foods in favor of fresh, clean label fare, major food and beverage manufacturers are struggling to keep up. The company's investments in trendy, premium offerings like Sweet Earth frozen foods and Starbucks' retail products are certainly a move in the right direction, but it's unclear if further acquisitions will be necessary to right the ship.
Nestlé's thorny relationship with activist investors is becoming the norm for the broader food space as well. Conagra's recent purchase of Pinnacle Foods for about $11 billion was also made in response to activist pressure.
Time will tell if Nestlé is able to grow this earnings bump into more meaningful change, or if the company will eventually be pressured into splitting into three divisions, like Loeb wants. This move could help the company focus on its core strengths, but Schneider seems determined to continue making more moderate adjustments to get back on track.