VEVEY, Switzerland (Reuters) - Nestle’s (NESN.S) new chief executive scrapped the food company’s long-standing sales target as it reported disappointing annual results on Thursday, echoing rivals by striking a cautious tone in an uncertain environment.
Nestle is the biggest player in a packaged food industry hit by a slowdown in emerging markets, falling prices in developed markets and consumers demanding fresher, healthier products.
The maker of Kitkat chocolate bars and Nescafe coffee is aiming to increase underlying sales by 2 to 4 percent this year, below its “Nestle Model” that called for growth of 5 to 6 percent. It posted weaker-than-expected 3.2 percent growth for 2016 and a drop in profits.
CEO Mark Schneider, who joined Nestle only last month, forecast a return to “mid-single-digit” growth by 2020, which analysts interpreted as the new boss backing away from a target the company has missed for four successive years.
“In a more turbulent environment, to narrow it specifically to 5 to 6 percent is probably not the right thing, but the underlying message is the same: there’s nothing better than healthy organic growth,” Schneider said at Nestle’s Vevey headquarters.
Analysts estimated that underlying earnings assumptions could be reduced by around 3 percent.
In his first public appearance at Nestle, Schneider, responsible for a string of deals at German healthcare company Fresenius (FREG.DE), also played down the chances of any big acquisitions. Valuations were too high and Nestle planned to keep its credit rating in the near term, he added.
He did, however, say Nestle’s portfolio review was ongoing.
In recent years, the company has sold several underperforming brands and formed a joint venture for its ice cream business. Analysts and bankers often speculate about other businesses that could be sold, such as its confectionery or U.S. frozen meals businesses.
Asked about Nestle’s 23 percent stake in French cosmetics firm L‘Oreal (OREP.PA), Schneider said any moves would have to be done “very prudently”.
Nestle’s shares were down 1.9 percent at 71.75 Swiss francs at 1240 GMT.
Since his surprise appointment last year, analysts and investors have wondered how Schneider would reignite Nestle’s growth and whether he would accelerate the recent push into higher-margin nutrition, health and wellness products.
Schneider said he was fully committed to the health drive and would stick to the two-fold strategy of making Nestle’s core food products healthier, such as by cutting sugar, while building up its health science and skin health businesses.
RBC Capital Markets analysts said Schneider’s initial observations “were carefully thought through and to the point”.
Jefferies analyst Martin Deboo said Nestle capped a subdued earnings season, with average organic growth for the big four food and personal care companies -- Nestle, Unilever (ULVR.L), Danone (DANO.PA) and Reckitt Benckiser (RB.L) - slowing to a weaker-than-expected 2.1 percent.
“We expect ... investors to continue to ask whether ‘the model is broken’ on the back of this,” he said about the sector.
European consumer goods companies face challenges from local rivals in emerging markets, weaker earnings potential and more aggressive cost-cutting from American companies pressurised by the growing presence of private equity firm 3G Capital.
European food and beverage stocks .SX3P fell 12 percent from October to December, underperforming the broader European market by 15 percent. They have not fallen further during the reporting season, suggesting that those challenges are priced in.
Unilever cited problems in Brazil and demonetization in India, while Danone (DANO.PA) pointed the finger at tough conditions in China.
In 2016, Nestle’s net profit fell to 8.5 billion Swiss francs, well below forecasts, and sales rose less than expected to 89.5 billion Swiss francs ($89.3 billion), up 3.2 percent on an organic basis.
Schneider said already accelerating volume growth was encouraging and he also expected pricing to improve this year.
The company forecast a “stable” trading operating profit margin in 2017, due to expectations for increased restructuring costs of around 500 million Swiss francs ($498 million).
It proposed to increase its dividend to 2.30 francs per share, after 2.25 francs last year. ($1 = 1.0038 Swiss francs)
Additional reporting by Martinne Geller, Angelika Gruber; Editing by Michael Shields/Keith Weir