Nestle sets margin goal to speed up buy-backs

ZURICH/LONDON: Nestle set out on Tuesday its 2020 underlying operating margin target under pressure from activist shareholder Third Point though came up short of one set by rival Unilever.

Investors are looking for proof that the world's largest packaged food company under new chief executive Mark Schneider can improve performance, as the food sector faces a slew of upstart brands and changing consumer tastes and habits.

The Swiss maker of KitKat chocolate bars and Nespresso coffee said it will explain how it will reach mid-single digit organic growth and an underlying trading operating profit margin of 17.5-18.5 percent by 2020 at an investor event in London on Tuesday.

"Market pressure for a margin target was huge, with the shadow of Third Point looming. The target does not look impressive, but it sets the trend for the company," Vontobel analyst Jean-Philippe Bertschy said, adding the 2020 margin would depend on M&A and portfolio management.

Unilever, which this year rebuffed a $143 billion takeover bid from Kraft Heinz, has set a goal of 20 percent for its underlying operating profit margin by 2020.

Nestle said strong cash generation would allow it to accelerate its share buyback programme of up to 20 billion Swiss francs ($20.67 billion) by spreading it evenly over three years, instead of backloading it in 2019 and 2020 as initially announced in June.

Nestle shares were indicated to open 0.5 percent higher in an overall lower Swiss market, pre-market indications showed .

Schneider took over in January as the first outside CEO at Nestle in nearly a century. In June activist hedge fund Third Point unveiled a $3.5 billion Nestle stake and asked for a series of actions including a formal margin target of 18-20 percent.

Last week's death of French billionaire Liliane Bettencourt, heiress of L'Oreal, in which Nestle has a 23 percent stake, also stirred speculation on potential changes in the cosmetics firm's ownership.

Nestle will "pursue external growth opportunities that fit within targeted categories and geographies, deliver attractive returns, and build on the company's leadership positions", the company said on Tuesday.

It confirmed it would focus capital spending on high-growth categories coffee, petcare, infant nutrition, and bottled water and said it also wanted to pursue opportunities in consumer healthcare.

"The comment of consumer healthcare as an 'additional platform for growth' will set tongues wagging," Berenberg analyst Fintan Ryan said in a research note.

"The direction Nestle will go -- and how much they are willing to pay -- will be a big focus today."