Bloomberg News

Nestle Plans $8.8 Billion Buyback as Sales Beat Estimates

August 07, 2014

Nestle SA CEO Paul Bulcke

Paul Bulcke, chief executive officer of Nestle SA. Photographer: Gianluca Colla/Bloomberg

Nestle SA (NESN), the world’s largest food company, plans to spend 8 billion Swiss francs ($8.8 billion) in its first share buyback in three years after reporting revenue growth that exceeded analysts’ estimates.

Revenue gained 4.7 percent excluding acquisitions, divestments and currency shifts in the first half, the Vevey, Switzerland-based maker of KitKat bars and Nespresso coffee said today. That compares with the 4.5 percent median of 14 analysts’ estimates compiled by Bloomberg News. Nestle said the stock repurchases will start this year and run into 2015. The shares rose as much as 3.4 percent, the biggest intraday gain in nine months.

Nestle outperformed its main European rivals Unilever and Danone in first-half sales growth and is increasing its distance from them by returning cash to shareholders through repurchases. Nestle is funding the buyback from the sale of part of its stake in French cosmetics company L’Oreal SA, which will boost second-half profit by 7.4 billion francs. That leaves the Gerber baby-food maker with enough resources for acquisitions, said Jean-Philippe Bertschy, an analyst at Bank Vontobel.

“The 8 billion-franc buyback has to be put in the context of M&A activities,” Bertschy wrote in an e-mail. “Nestle would have the ability to do a bigger buyback of 10 billion francs to as much as 20 billion francs.”

Shares Rise

The shares traded 3.2 percent higher at 69.25 francs as of 11:06 a.m. in Zurich. They’ve gained 7 percent in the past year, compared with Unilever’s 3.1 percent advance and Danone’s 8.9 percent decline.

Unilever, the maker of Magnum ice cream and Lipton tea, and French yogurt maker Danone last month reported revenue that missed estimates.

“We’ve had a few disappointments in the food industry lately, but Nestle has managed to report numbers that are slightly better than expected,” Patrik Lang, an analyst at Julius Baer Group Ltd. in Zurich, said by phone. “The quality of the numbers is good. Investors will react positively to the results, but the stock is quite expensive.”

Asset Revamp

The DiGiorno pizza maker has been revamping its portfolio to revive sales growth, which reached a four-year low in 2013. Chief Executive Officer Paul Bulcke spent $5 billion this year to build the dermatology business, acquiring the rest of its Galderma joint venture and rights to drugs from Valeant Pharmaceuticals International Inc.

Nestle said today the buyback is “subject to market conditions and strategic opportunities.” In 2011, the company completed a 10 billion-franc repurchase program that it began in 2010.

Trading operating profit declined 5.4 percent to 6.44 billion francs, held back by the strength of the Swiss currency. Analysts had estimated 6.53 billion francs.

The maker of Perrier bottled water and Coffee-Mate creamer reiterated its outlook for 2014, saying revenue will rise about 5 percent on an organic basis. The average increase over the past decade has been 6.1 percent.

“Earlier this year we spoke of growth being weighted to the second half,” Chief Financial Officer Wan Ling Martello said on a conference call with analysts and reporters. After the acceleration in the second quarter, “we now expect organic growth to be more balanced between the first and second half.”

Wider Margins

Nestle expects profit margins to widen this year on a constant currency basis, though the expansion in the second half will be less than the first-half’s 0.3 percentage point improvement, Martello said.

Sales growth of 9.7 percent in emerging markets in the first half contrasts with the 0.6 percent pace in developed markets, as Nestle’s pricing in Europe was down 1.4 percent.

“Trading in the developed market has been difficult,” Martello said. “Consumer confidence remains low and in many cases the environment continues to be deflationary.”

Frozen food and ice cream in North America “continue to be challenged,” Nestle said. Global sales growth of prepared dishes and cooking aids such as Maggi bouillon was unchanged in the first half.

Food companies are struggling to boost growth as health-conscious consumers increasingly shun processed, packaged foods. Sanford C. Bernstein cited soda, sweet snacks and frozen food as three of the biggest health concerns for moms in the U.S. in a 2013 survey on food.

Mondelez International Inc. (MDLZ:US), the maker of Oreo cookies and Ritz crackers, reduced its full-year sales forecast yesterday, now expecting revenue excluding acquisitions, divestments and currency shifts to rise 2 percent to 2.5 percent. Kellogg Co., the maker of Corn Flakes and Pop-Tarts, has also lowered its 2014 forecasts.

“The old adage -- when the going gets tough, the tough buy Nestle -- is once again playing out,” said Warren Ackerman, an analyst at Societe Generale.

(A previous version of this story was corrected to show the company didn’t reiterate today that sales growth would be stronger in the second half than in the first.)

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Thomas Mulier


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