Christian Billinger of Billinger Förvaltning presented his investment thesis on Nestle (Switzerland: NESN, US: NSRGY) at Best Ideas 2023.

Thesis overview:

Christian often finds that great businesses “hide in plain sight”. Nestle is an example of this phenomenon. It is a core holding of Billinger Förvaltning, and the more Christian learns about the business, the better it  looks to him. Most investors in European equities are quite familiar with the basics of Nestle, so Christian’s presentation focuses on what has changed in recent years to make this an even  ore attractive  business.

What has changed at Nestle? Like other companies in the FMCG space, e.g. Unilever and P&G, Nestle has for long had a very attractive collection of brands. However, until around five years ago the business saw a long period of declining growth, weak margin progression, and a lack of innovation/portfolio management.

While companies of this size and complexity change slowly and there is always a danger of exaggerating the impact of management changes, something has happened at Nestle since Mark Schneider was appointed CEO in 2017. Since then, the structure and, to some extent, the culture of Nestle have changed, the portfolio has seen meaningful changes, organic growth has reaccelerated, and shareholder returns have improved.

Changes in structure and culture. Going back around five years, there was frustration among many investors at the pace of change and style of communication at Nestle. There was a lot of merit to these claims and the issues resulted in market share losses, etc. The culmination of this was Third Point’s campaign “NestleNOW”, which laid out a number of suggestions to improve operational performance and shareholder returns. While Christian believes some of those suggestions were misguided, e.g. when it came to focusing on margin improvements rather than reinvesting in organic growth and holding up Unilever as an example, it is interesting to see how much the company has changed since then. Christian also agrees with those who criticized Third Point’s approach and Nestle’s response to it.

Mark Schneider joined the group in 2017. According to people who have worked closely with him, he is “getting high marks within the organisation”, he is “willing to listen and change”, is the “first outsider in 80 years which is a positive”, and is “aggressively getting rid of things that don’t fit and adding future growth opportunities”. Overall, very high marks and, importantly, this applies both to operational improvements and capital allocation.

Nestle strikes the right balance between managing “legacy” divisions for cash and having the “capacity to suffer” in higher growth categories like coffee, pet food and health science. This is also the impression Christian gets from people who have worked at senior levels in the company.

Portfolio realignment. A couple of things strike Christian about Nestle’s portfolio. One is the high exposure to food, unlike Unilever, which has diversified more aggressively into beauty and personal care. Despite this and the fact that packaged food is a slow/no growth category in much of the developed world, Nestle has been able to outgrow peers. This is largely due to the fact that they are exposed to the “right” categories within F&B, e.g. coffee, pet food, and health science.

One of the demands from Third Point was that Nestle divest up to 15% of t/o. Mark Schneider has turned over 20% of the portfolio, including disposals of Herta cold meats and U.S. mass waters etc as well as the acquisition of Starbucks retail, which has improved the growth profile of the business.

Growth acceleration. Growth went from 6% a decade ago to ~ 2.5% five years ago. Since 2017 we have seen significant reacceleration (although the data is noisy due to the pandemic). Importantly, expectations for long-term growth have gone from 3/4% to 5%, in line with internal targets. Good opportunities exist to grow faster given the shape of the portfolio. At 6% top-line growth the total return looks attractive indeed.

Coffee is around 25% of revenue, with strong growth dynamics. Pet care is another 20%, with equally strong growth dynamics (accelerated by the pandemic). Together with health science, these fast-growing categories account for more than half of group sales. The portfolio has also premiumized, with higher ASPs. Other important long-term growth drivers are emerging markets (~45% of the business) and e-commerce (~15% of the business, up from 3% a decade ago).

Shareholder returns. The acceleration in growth, combined with continued margin expansion (mix and efficiencies), should enable HSD EPS growth, with further upside from smart decisions around the L’Oreal stake and share buybacks.

Christian believes that investors can achieve 10+% total returns over time at relatively low risk in Nestle given the size and diversity of the business and the financial strength (debt-free, after adjusting for the L’Oreal stake). As a result, Christian considers Nestle a very good fit for the Billinger Förvaltning portfolio.

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About the instructor:

Christian Billinger is an Investor at Billinger Förvaltning, a family-held investment company with no external capital. The simplicity of the setup as well as permanent and patient capital provides Christian with the proper environment to pursue his strategy of identifying long term compounders.

Christian focuses first on the qualities of robustness and resilience which limit downside potential before determining the mix of returns on capital and scope for reinvestment opportunity that accounts for the upside. Often, these factors overlap with family-controlled management teams that more conservatively finance their operations.

Prior to Billinger Förvaltning, Christian worked as a European Equity Analyst for various investments funds. Before that, Christian was an associate at PwC. He holds an MS in Accounting and Finance from The London School of Economics as well as Karlstad University. He is also a CFA charterholder. He splits time between London and Sweden.

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