Nestle (NSRGY.US) cuts mid-term profit target, splits bottled water business into separate unit

Nestle (NSRGY.US) has lowered its mid-term profit target and announced plans to spin off its bottled water business as a standalone entity, as new CEO Laurent Freixe seeks to revive sluggish sales growth. The global food giant said on Tuesday that it expects its full-year operating margin to be 17%, lower than the 17.5% to 18.5% target set by former CEO Mark Schneider. In the mid-term, sales are expected to grow by 4% or more, compared to Schneider's previous estimate of mid-single-digit growth by 2025. The report stated that total sales for the first 9 months of 2024 decreased by 2.4% year-on-year; sales for the first 9 months were 67.1 billion Swiss francs, compared to 68.8 billion Swiss francs in the same period last year. Organic sales grew by 2.0% in the first 9 months, with positive real internal growth (RIG). RIG declined by 0.5% due to weak consumer demand and consumer hesitation towards global brands, which is related to the political tensions involving GEO Group Inc. Nestle has revised its full-year performance guidance. The company now expects organic sales growth to be around 2% in 2024 (previously expected to be at least 3%), in line with the first 9 months; potential earnings per share, calculated at fixed exchange rates, are expected to be roughly flat (previously expected to grow in mid-single-digit percentage). Freixe said, "With the momentum of real internal growth, we achieved organic sales growth. Consumer demand has weakened in recent months and we expect the demand environment to remain soft. Given this outlook, and our actions to further reduce customer inventory in the fourth quarter, we have updated our full-year guidance." The group will spin off water brands like Maison Perrier and Acqua Panna as a standalone business from January 1, 2025, led by Muriel Lienau, head of Nestle's European water business. The bottled water business accounts for less than 4% of revenue and has been plagued by pollution issues and supply constraints. Management will evaluate corporate strategy, including partnership opportunities. Nestle also announced plans to cut costs by 2.5 billion Swiss francs (2.8 billion US dollars) by 2027, despite plans to increase advertising and marketing expenses to enhance brand effectiveness. Freixe has been with Nestle for 38 years, taking over as CEO in September this year after Schneider stepped down. Schneider led Nestle for almost 8 years. Freixe's first move was to lower the company's organic sales growth target for this year to around 2%, the lowest annual growth rate since at least the turn of the century. Nestle expects sales growth to improve by 2025, while the underlying operating margin will decline. The CEO is increasing marketing expenses in an attempt to restore investor confidence, having previously lowered sales targets in July. Under Schneider's leadership, Nestle relied on higher prices to drive sales in the post-pandemic inflation period, prompting shoppers to switch to cheaper items. Since then, it has struggled to attract consumers back.