Nestlé's Quick

GRAHAM TROTT FOR TIME
Brabeck voted the best-looking Swiss manager by Cash magazine readers at his headquarters in Vevey

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Brabeck pooh-poohs the notion that a company should focus tightly on its core competency. Nestlé's big challenge, he says, "is that we have to be able to learn how to get operational efficiency with a relatively complex business structure. This is what I think real management is all about. The other thing is much too easy." Rather than narrow its focus, he believes that a well-managed and flexibly organized consumer-goods company can sell dog food and ice cream as well as coffee, water and candy and gain advantages in marketing, purchasing and distribution over more specialized firms.

Nestlé's complexity, though, comes at a price. While the company's long-term growth has outstripped that of many rivals, its margins are lower; "subpar profitability" is how Morgan Stanley analyst Sylvain Massot describes it. Its stock trades at about 15 times estimated 2002 earnings, less than that of Kraft Foods, Kellogg or Hershey Foods, which all trade at price-earnings multiples of about 20. And Nestlé ranks far behind Unilever, which trades at 35. Brabeck isn't fazed. "If I had run the company based on the opinion of financial analysts, it would already have been bankrupt," he says, half jokingly. He points out that some of the company's current best growth markets, including Russia and China, required a decade of investment before they bore fruit.

Nonetheless, Nestlé thinks it is undervalued and is trying to broadcast that message. Soon after he was appointed chief financial officer last year, Wolfgang Reichenberger solicited analysts and investors for suggestions on what Nestlé could do better, and the company has started publishing more detailed financial information, including sales-growth figures for some individual product categories.

The company invited 150 analysts to a seminar in Miami last October that was the highlight of its investor-relations campaign. But on the evening before the seminar started, Brabeck let slip over drinks that Nestlé had an option to acquire the French cosmetics company L'Oreal in 2004. When the markets opened the next morning, Nestlé stock tumbled on fears about what such an acquisition would do to its already growing debt. Brabeck kicked off the seminar with an angry lecture, complaining that his remarks had been misinterpreted and reading aloud extracts from the option agreement with L'Oreal in French. "He was very emotional," says Andrew Wood, an analyst for Sanford C. Bernstein who was present.

Indeed, Nestlé's stock has been particularly volatile because of concerns among investors that Brabeck's debt-financed acquisition strategy risks overextending the company. Nestlé's net debt has quadrupled since Brabeck took over in 1997, to $13.8 billion in 2001, the latest year for which figures are available. The company has nonetheless managed to hang on to its top-shelf, triple-A rating, and Brabeck still gets some respect from Wall Street. "He's done well so far in keeping the top line bubbling and extracting better margins," Wood says. Wood and other analysts including those at Goldman Sachs, which recently added Nestlé to its list of recommended stocks believe that Nestlé could outperform its rivals in the next few years precisely because the company has so much room to improve its bottom line.

Brabeck didn't set out to be the CEO of Nestlé when he began selling ice cream in his native Austria 35 years ago. He says he didn't even know that the company he worked for, Findus, was owned by Nestlé at the time. "His ambition was to experience Latin America, to have an adventure there," says Gottfried Truppe, his college roommate. Why the fascination with Latin America? "The wide-open spaces and high mountains," Brabeck says. It was also far from home and far from the mountaineering tragedy he had just lived through.

Brabeck was born in Villach, Austria, six months before the end of World War II. His mother Edeltraud Brabeck recalls rushing with her infant son to an air-raid shelter to avoid Allied bombs. In the tough economic times after the war's end, the surrounding Alps became Brabeck's playground. By age 10, he was climbing with ropes. As a teenager, he took off for hiking trips with his friend Hans Thomassen, with little more than a tarp and his mother's sandwiches. She recalls that "he was always an adventurer, just like his father"--a salesman for an oil company. Indeed, along with mountaineering, Brabeck today enjoys glacier hopping in a Piper plane with high wings and retractable skis.

In 1967, during a summer vacation from business school in Vienna, Brabeck traveled to Pakistan with a group of friends to climb Tirich Mir, the highest peak in the Hindu Kush. They drove through Turkey and Afghanistan in a secondhand van and slept in tents their mothers had sewn. The expedition turned into a disaster. In bad weather two of the team, including Thomassen, fell off an ice wall to their deaths. Brabeck survived because he had returned to base camp the day before the tragedy: there had been only enough food for two, and he lost the poker game that had decided which of the three would turn back. The experience changed his life and continues to influence his management. "When you lose your best friends in such an expedition," he says, "it makes you more aware of the relativity of the risks but also of the relativity of the individual."