This article first appeared in The Edge Malaysia Weekly on May 20, 2019 - May 26, 2019

COMING off a fresh record first-quarter earnings announcement last month, Juan Aranols has had a lot on his plate since becoming CEO of Nestlé (Malaysia) Bhd on Dec 1 last year.

The 50-year-old Spaniard shows no sign of slowing down, with a number of key projects already lined up for the year, including the expansion of Nestlé’s plant in Chembong, Negeri Sembilan, which when completed, will be the world’s largest Milo factory.

Aranols took over from long-time chief Alois Hofbauer, who led Nestlé Malaysia for more than five years and helped establish the Swiss food and beverage giant as one of the best performers on Bursa Malaysia.

“From day one, work has been intense. One of my bosses used to tell me performance is what you enjoy today, but you need to work very hard to build [new] capabilities to ensure [continued] performance. So, we are not at all taking it easy. I don’t think that [to be complacent] is healthy, either,” Aranols tells The Edge in his first media interview since being appointed CEO.

“It would also be arrogant for me to say it is an easy job because it is not. Believe me, we have long days but we are passionate about the brands and the opportunities here.”

Nestlé Malaysia’s net profit for the financial year ended Dec 31, 2018 (FY2018), marked its fourth consecutive year of record earnings as it benefitted from internal efficiencies and favourable material prices. A one-off RM9.4 million gain on disposal of its chilled dairy business also boosted earnings.

Net profit rose 2.5% year on year to RM659 million in FY2018, while revenue increased 4.9% y-o-y to RM5.5 billion. Nestlé Malaysia also maintained its lead in the local F&B market with a 15.7% market share last year, up from 15.5% in 2017.

Aranols says the group is “quite convinced that we can continue growing” this year. For FY2019, it has set aside capital expenditure of RM220 million — its highest in five years — of which RM100 million is for the Chembong plant and the rest for its six other manufacturing facilities across Malaysia.

Still, because of the high base effect, the group’s profit growth has tapered off from double-digit rates seen prior to FY2012.

Aranols does not discount the possibility of returning to double-digit growth rates this year, but points out that given current market conditions, Nestlé Malaysia faces challenging times, made worse by local and global economic uncertainties because of the ongoing US-China trade war.

“All I can say is that in the current context, we are committed to delivering growth at similar levels that we have seen in the past.

“Personally, I think the best way to create value for any company is to ensure sustainable growth. Today, we are almost thrice as big as our next competitor in the F&B space, thus, even a single-digit growth rate for us is equal to several companies’ [growth],” he adds.

So far, his hard work in the past five months has been paying off. The group posted its highest ever quarterly net profit of RM235.22 million for the three months ended March 31, 2019 (1QFY2019), a marginal 1.7% rise from a year earlier, while revenue was up 1.6% y-o-y to RM1.45 billion.

Meanwhile, the group will move from its FIT strategy, a three-pillar strategy adopted by Aranols’ predecessor Hofbauer since 2013, to a new strategy called “the virtuous circle”.

“The FIT strategy talks about driving innovation, not missing out on any opportunities to grow and boosting efficiencies. That remains. With the virtuous circle, we look to obtain savings by investing in our brands. When we do that, it will improve our market share [as well as] growth and generate additional profits. We may reinvest the profits back into our brands and the circle continues, or we may choose to pay our shareholders,” Aranols says, adding that the strategy is already in place in many markets across the Nestlé global network.

Nevertheless, he acknowledges that his predecessor has done a good job of laying the foundation for Nestlé Malaysia given the hedging policies it has put in place to offset the ringgit’s volatility and higher prices of raw materials this year.

While consumer sentiment has softened from last year, the group is also confident of mitigating the impact through its wide portfolio of brands that touch all the sociodemographic groups.

“This gives us the flexibility in terms of managing the economic cycle. We have affordable products that respond well to the needs of the B40 (Bottom 40% households), while at the same time we have products that cater to the needs of the middle class with higher purchasing power,” he says.

Globally, Nestlé sells some 80,000 products and about 500 to 600 in Malaysia.

Aranols also expects minimal impact on group earnings from the implementation of a new tax on soft drinks and juices come July 1, noting that only “a few” products in its portfolio will be impacted by this. It is trying to cut sugar from its products to make sure it is within the threshold that the government has defined for the sugar tax application.

Asked whether Nestlé Malaysia plans to fight higher costs by charging more for its products this year,  Aranols says: “We don’t see significant price increases coming through. We are very mindful that it is probably not easy for many consumers [to tackle rising costs] and we are also aware that our products very often go to the B40.”

Like previous years, the group will launch new products this year that will account for around 10% of its sales.

Today, Nestlé Malaysia remains the most expensive stock on Bursa. At last Wednesday’s closing price of RM145, the stock is trading at a price-earnings multiple of 51.29 times 2018 earnings, higher than the broader market. The FBM KLCI is trading at 20.07 times 2018.

Its market valuation has gained RM1.29 billion over the past year and RM18.08 billion in five years.

Nevertheless, Aranols says there are no plans for Nestlé Malaysia to implement a stock split.

“Honestly, we cannot leave it out in the future but in the short to medium term, we have no such plans. I believe the way to drive value is by delivering sustainable growth and margins on the back of capital efficiency, with a healthy policy of dividends. There is an element of solid reliability in our performance that I think many shareholders appreciate,” he adds.

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