Nestle prepares Health Sciences business for growth

BOSTON – Nestle SA’s Nestle Health Science business unit is an amalgamation of acquisitions. Since 2011, the company has invested heavily in such food brands as Nature’s Bounty, Nuun and Vital Proteins, the medical nutrition and pharmaceutical category. Now the company is setting the stage for higher margin growth from the business unit.

In a Sept. 7 presentation at the Barclays Consumer Staples Conference in Boston, Francois-Xavier Roger, Nestle’s chief financial officer, said Nestle Health Science has an operating margin of about 12% to 13%. The company’s ambition is for the business unit to reach a level where it will not be dilutive to Nestle’s total business, he said.

Nestle Health Science’s sales are “north” of 6 billion Swiss francs ($6.24 billion), Roger said, and all three segments are growing at mid-single digits.

“… We need to bring consistency between these different businesses,” he said. “We have to make sure that they complement each other both in terms of brand architecture, in terms of price points (and) in terms of distribution.”

He added that he sees Nestle Health Science having a similar portfolio structure to Nestle’s coffee business, with super premium, premier and mainstream options.

Aligning internal cost synergies will also be a priority. The company currently uses several co-packers for production and will look for options to improve efficiency.

Using Atrium Innovation, a supplement supplier with rubber manufacturing capabilities that the company acquired in 2017, as an example, Mr. Roger said these capabilities could be used for other products in Nestle Health Science’s portfolio that may be less cost-competitive.

CapEx costs remain high

Historically, Nestle’s overall capital expenditures have been 4% to 5% of sales. Last year they were approximately 6% and will be around 7% this year.

“It will remain high again next year and then it will start to decrease in late 23, early 24, then it will normalize,” said Mr. Roger. “I see this as good news because it means there is increased demand.

“It is putting short-term pressure on cash flow generation. But this is a deliberate decision…”

The increase has been necessary to ease supply chain constraints, mainly in Nestle’s coffee and pet food businesses.

“We are starting to commission some of these plants,” said Mr. Roger. “We just commissioned a new factory in Thailand a few weeks ago, and we have new industrial units coming into operation in Europe and the US early next year.”

Preparing for the worst in Europe

Concern over European natural gas supplies this winter has prompted Nestle to put contingency plans in place.

“We are not heavy users of gas to begin with,” said Mr. Roger. “But we started working on the case a few months ago and have identified about 5% of our global industrial footprint (that) is potentially at risk.”

The company has identified 15 to 16 factories in Europe, mainly in Germany and Switzerland, that may be at risk.

“There are two main things we can do,” said Mr. Roger. “The first is the conversion of any energy source from gas to oil. And oil is widely available today, so it’s not a problem.

“Whenever that’s not possible, we’ll stock up before winter. So we can start building inventory now to make sure we can supply our customers.”

He compared possible supply chain disruptions that could occur in the early days of the COVID-19 pandemic and added, “Some of our suppliers may also be affected. So in that case, we’re really working on adding a little bit more inventory or looking for alternative suppliers, mostly outside of Europe, because I mean, outside of Europe, the situation should be fine.”

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