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Nestlé CEO seeks patience as company rebalances product offer

Nestlé SA CEO Mark Schneider on Feb. 15 made a case for investors to be patient as the benefits of a reshuffling of the food giant's product portfolio become clear over time, but his cause was not helped by a weak fourth-quarter performance with 2017 sales at the low end of the company's expectations.

The nutrition, health and wellness company said organic growth in sales in the three months ended Dec. 31, 2017, was 1.9% year over year. For full year 2017 it was 2.4%, at the lower end of its forecast range for the year of between 2% and 4%.

Organic growth in the Americas in 2017 was subdued at 0.9%, partly reflecting softer pricing, the maker of Nescafé coffee and KitKat chocolate bars said.

In the U.S., organic growth was "slightly negative" as weak consumer demand persisted throughout the year, resulting in stagnant growth in the food and beverage category. Coffee creamer and petcare generated growth in North America but was offset by declines in confectionery and ice cream.

Robust U.S. economic growth had not translated into stronger consumption, Schneider said.

Nestlé put its U.S. confectionery business on the block in June 2017, which did not help, he added. The company on Jan. 16 announced the sale of the candy business, which includes brands such as Butterfinger, BabyRuth and Raisinets, to Italy's Ferrero Group for $2.8 billion in cash. Excluding confectionery, growth in the U.S. in 2017 was flat.

Nestlé, based in Vevey, Switzerland, said it continued to refocus its portfolio toward high-growth, high-margin categories, highlighting the $2.3 billion acquisition in December 2017 of privately held Atrium Innovations, a provider of nutritional products including the Garden of Life range of organic supplements.

Accounting rules, however, meant that divestments and acquisitions were not reflected in the company's financial statement until one year after transactions had been completed, Schneider said. Disposing the U.S. confectionery business and acquiring Atrium, both of which are expected to complete during the first quarter of 2018, would have a positive impact of 20 basis points on organic growth, but that will not be recognized until after the first quarter of 2019, Schneider added.

Industry giants such as Nestlé are under pressure from investors to improve their performances. Unilever Plc in 2017 fended off an unsolicited $143 billion bid from Kraft Heinz Intermediate Corp. II, while activist investor Nelson Peltz in December 2017 gained a board seat at Procter & Gamble Co. after a lengthy proxy fight.

Third Point LLC, the hedge fund run by Daniel Loeb, in 2017 accumulated 40 million shares in Nestlé in a $3.5 billion investment. "Third Point intends to play a constructive role to encourage management to pursue change with a greater sense of urgency," it said in a June 25, 2017, letter to investors, a copy of which is posted on its website.

Third Point identified the monetization of Nestlé's 23.2% stake in French cosmetics maker L'Oréal SA as a means to enhance shareholder value. In its statement, Nestlé noted that its stake in L’Oréal was an important investment and that it remained "committed to the company that has given us very good returns over the years."

A shareholder pact between Nestlé and the Bettencourt family is due to expire March 21, six months after the death of Liliane Bettencourt, daughter of L’Oréal founder Eugène Schueller. The Bettencourt family sold a roughly 30% stake in L'Oréal to Nestlé in the early 1970s to shield the business from nationalization by the French state. In 2014, L'Oréal repurchased an 8% holding that it duly canceled.

"In order to maintain all available options for the benefit of Nestlé’s shareholders, the board of directors has decided not to renew this agreement," Nestlé said in its statement. "We do not intend to increase our stake in L’Oréal and are committed to maintaining our constructive relationship with the Bettencourt family."

Schneider declined to discuss the L'Oréal investment further during the conference call.