By Martinne Geller and Silke Koltrowitz
LONDON/ZURICH (Reuters) - Nestle (S:NESN) set a profit margin target for the first time on Tuesday, responding to an industry slowdown and pressure from activist investor Third Point for near-term returns from the world's largest packaged food company.
Shares in Nestle were up 1.8 percent to 82.55 Swiss francs by 1317 GMT, reflecting subdued support for the target, which is less ambitious than some shareholders had hoped for.
Investors want Nestle's new chief executive Mark Schneider to demonstrate it has a strong strategy to improve performance as the food sector cools due to changing consumer tastes and habits and upstart rivals.
While many multinationals turned to cost-cutting, inspired by industry-leading margins at Kraft-Heinz (O:KHC), Nestle and rival Unilever (L:ULVR) had argued that cutting too deep to deliver margin growth is a short-term solution.
But Unilever altered its stance after February's unexpected takeover bid from Kraft-Heinz, adopting a margin target of 20 percent by 2020 and Nestle moved in that direction on Tuesday, setting a margin target of 17.5 to 18.5 percent by 2020, up from 16 percent in 2016.
U.S. activist hedge fund Third Point, which in June revealed it had a $3.5 billion Nestle stake, had urged the Swiss company to target 18-20 percent. It declined to comment on the new goal.
"The pace of change has picked up. We need to execute faster than before," Schneider said at his first investor seminar since becoming CEO in January. "Things will change but the way we approach business will not change."
"This company got, for a reason, to the leadership position it has today, and it is hell-bent on not losing it," said the German and American dual citizen, who was brought in as Nestle was ending its fourth year of disappointing sales growth.
Schneider repeated Nestle's goal to reach mid-single digit organic sales growth by 2020, adding that pursuing sales and margin growth at the same time was hard work, likening it to "going for a run and a diet at the same time".
It was unlikely this new margin target, which is in line with what some analysts already had in their models, would be followed by another higher one at a later stage, he said.
RBC Capital Markets analysts, who said they were already factoring in a margin of 17.6 percent by 2020, said the new targets "do not mark any great evolution in expectations" and stuck to their Outperform rating and 83 Swiss francs target.
Thomas Russo, a Nestle shareholder for more than 30 years whose firm has a stake worth more than $1 billion, said the target was enough to quieten calls for change.
"It gives them the ability to stay at work without having the distraction of whether they'll concede a margin guidance, but at the same time not burden themselves from making the kind of bold investments that are required to deliver long-term value," Russo, of Gardner Russo & Gardner, said.
CABINET RESHUFFLE
Strong cash generation would let Nestle spread its share buyback program of up to 20 billion Swiss francs ($21 billion) evenly over three years, it said. It had earlier said it would be backloaded to 2019 and 2020 to preserve cash for M&A.
In recent months Nestle has bought into U.S. food delivery business Freshly, Sweet Earth meatless food and Blue Bottle Coffee and Schneider said it would continue to identify opportunities as well making divestments.
"We will need to trade out of some product areas and into others," Schneider said. He noted that 10 percent of Nestle's group sales could be ripe for portfolio adjustment, while confirming Nestle remains committed to frozen food.
Schneider said Nestle's view on its 23 percent stake in L'Oreal (PA:OREP), worth more than 23 billion euros, had not changed. Third Point called for the company to sell its stake and last week's death of the L'Oreal heiress, French billionaire Liliane Bettencourt, rekindled speculation of changes.
Nestle has identified four areas which already account for 53 percent of sales - coffee, pet care, infant nutrition and bottled water - as key areas for investment.
It will also pursue consumer healthcare, in an effort to expand in pharmacies and drug stores and boost margins.