Nestle updates medium-term guidance, plans to cut costs by $2.8 billion

Investing.com -- Nestle SA (SIX:NESN ) plans to increase its spending on advertising and marketing while cutting costs by at least $2.8 billion by 2027, as it reorganizes its water and premium drinks divisions into a standalone global unit.

The company announced these changes on Tuesday, aiming to accelerate growth under its recently appointed CEO.

Laurent Freixe, who succeeded Mark Schneider in September, steps into the role after decades at the helm of the world’s largest food company.

Schneider, removed after disappointing investors with sluggish sales volume growth, had scaled back on marketing and innovation investments during the pandemic. These cuts have left a lasting impact, with Nestle (NS:NEST ) losing market share as consumers gravitated toward more affordable and innovative alternatives.

Nestle outlined plans to achieve savings of at least 2.5 billion Swiss francs ($2.83 billion) by 2027, in addition to ongoing savings of around 1.2 billion Swiss francs.

For the medium term, it is targeting over 4% organic sales growth in normal operating conditions, with an underlying trading profit margin of 17%. This contrasts with the approximately 2% organic sales growth projected for 2023.

The company also said it will raise its investment in advertising and marketing to 9% of total sales by 2025, a level last seen in 2019, as part of efforts to revitalize growth.

Speaking at the capital markets day (CMD) event in Vevey, Switzerland, Freixe emphasized his focus on improving underperforming businesses, stating he wants to "fix, rather than to sell, the majority of" them.

Chief Financial Officer Anna Manz echoed this sentiment, noting that "we don't have a portfolio problem" and reaffirming the company’s commitment to driving organic growth.

Nestle also revealed its plans to establish a dedicated global unit for its water and premium beverage businesses starting January 1, 2025.

Commenting on the outlook update, RBC Capital Markets analysts said Nestle’s updated fiscal 2025 and medium-term guidance “is reassuring amidst the market’s concerns around its ability to maintain margin.”

“Meanwhile, we view its mid-term revenue growth guidance for at least +4.0% as ambitious. Given that consensus is already below 4%, we would be happier if the company were to guide more conservatively,” they added.

Separately, Barclays (LON:BARC ) analysts said the key for them will be the CMD event on Tuesday, where they expect Nestle to offer details on cost savings and their timeline, along with plans to boost sales and market share.

Analysts also noted it was "good to see clarity on the advertising spend uplift, which is very much in line with what we have modelled.”

Source: Investing.com