2011 hy results_confcall_transcript

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Transcript of Investor roadshow presentation of Nestlé SA 2011 H1 results on August 10 2011 by CFO James Singh and IR head Roddy Child-Villiers

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2011 hy results_confcall_transcript

  1. 1. NESTLÉ S.A.2011 HALF-YEAR RESULTS ROADSHOW TRANSCRIPTConference Date: 10 August 2011Chairperson: Mr James Singh Chief Financial Officer Nestlé S.A. Mr Roddy Child-Villiers Head of Investor Relations Nestlé S.A.DisclaimerThis transcript might not reflect absolutely all exact words of the audio version.This transcript contains forward looking statements which reflect Management’s current views andestimates. The forward looking statements involve certain risks and uncertainties that could causeactual results to differ materially from those contained in the forward looking statements. Potentialrisks and uncertainties include such factors as general economic conditions, foreign exchangefluctuations, competitive product and pricing pressures and regulatory developments.
  2. 2. Nestlé S.A. Half Year Results 2011 Presentation SpeechSlide: LogoGood morning everyone, and welcome to our results presentation. For those of you inLondon, I am sorry that we changed our plans at the last minute and are not with you today,but we thought the most important thing was to be sure that we were in touch this morningeven if only by webcast, rather than to risk the event being disrupted either due to transportor other issues.As usual, we will take you through our performance and key events of the year beforeopening things up for discussion.Slide: safe harbourAs ever, I will start by taking the “safe harbour” statement as read.Slide: Performance highlightsNestlé continues to make progress in an environment characterised by volatility and subduedconsumer confidence, particularly in the developed world.And, at the same time as delivering in the short term, we have again demonstrated ourcommitment to building the business over the long term, in line with the strategies that wehave previously discussed: - Our consumer facing marketing spend is up in constant currencies;- we have continued to build the innovation pipeline, while launching many new products andsystems;- we are on our way to a record year for capital investment, with a lot going into emergingmarkets;- and we have been able to announce some exciting partnerships and acquisitions, againoften in emerging markets.- Nestlé Health Science has become operational and new and exciting pillars of growth havebeen established including the soon to be inaugurated, Nestlé Institute of Health Sciences.We have increased or held market shares in over 70% of measured cells; maintained realinternal growth momentum and are seeing increasing pricing.2011 has certainly been an extraordinary year for our company, with activities in every cornerof the world. We have people managing our operations and making progress in thosecountries that have been making the headlines, whether Egypt, the Côte’D’Ivoire, and theMiddle East or, for rather different reasons, the Eurozone and North America. Equally, wehave been confronted by record prices for raw materials, extreme volatility in currencies, anda seemingly unending increase in the strength of the Swiss franc.Many of you came to our seminar in June, or listened to the webcast. You heard that wehave processes in place that enable us to manage through turbulent times, and that we havefurther increased our procurement capabilities since the last period of high input costpressure.The result is that we can report today, a performance that demonstrates our ability to deliveron our key objectives even in the toughest of times. 1
  3. 3. Nestlé S.A. Half Year Results 2011 Presentation SpeechAs I go through the different business areas, there are some that have had a strong start tothe year and some less so, but of importance is that we have delivered at the Group level.Accordingly, we are well set to achieve the Nestlé Model again in 2011, being animprovement in the margin in constant currencies, and organic growth at the top end of our 5to 6% range.Finally, we have unprecedented opportunities to invest in future growth particularly inemerging markets, both organically with cap-ex, and through bolt-ons. With that in mind, andwith an eye on the uncertain economic environment, we will retain financial flexibility to driveour strategic priorities with confidence.Now, let’s have a look at the headline performance.Slide: 2011: solid half year performanceOrganic growth for the half was 7.5%, a meaningful acceleration from the first quarter with anoutstanding second quarter of 8.5%. In line with what we said at the time, growth frompricing is up from 1.5% at Q1 to 3.8% in Q2, giving 2.7% for the first half. The real internalgrowth continues to be strong at 4.8% in the first half.The trading operating profit is up by 20 basis points to 15.1%, and by 40 basis points inconstant currencies. Trading operating profit before other net trading operating expenses andincome (EBIT as previously reported) is flat in constant currencies and down 20 basis pointsas reported; please note that as this margin level last year we had a +60BPS improvement.The consumer facing marketing spend is up by 6.2% in constant currencies. As a reminder,this was up 14% in constant currencies in the first half of 2010, so this is a further increaseon top of a big increase last year.The net profit was CHF 4.7 billion, and the margin was 11.5%. In constant currencies, thenet profit margin was virtually unchanged compared to the first half 2010, which includedAlcon.The underlying earnings per share for the group are up 5.2% in constant currencies.Slide: Operating profit margin improvementOn this next slide, we have created our usual margin bridge for the trading operating profit.  The benefits from Nestlé Continuous Excellence and other actions by the organisation, helped to address the significant impact of escalating input costs on cost of goods sold. In particular, the positive evolution of pricing has also contributed, as well as growth leverage and the benefits from restructuring in prior periods.  On input costs, I reiterate our June guidance that we expect an impact at the upper end of a CHF 2.5 to 3 billion range.  Distribution costs were up ten basis points. Efficiencies played a part again, but also mix in mitigating the effects of increasing energy costs.  Marketing was down 20 basis points. This follows a meaningful increase in the first half of 2010. As I said, our consumer facing marketing spend increased in constant currencies even after we achieved efficiencies through a more global alignment of campaign messaging, as well as through our use of the media mix. 2
  4. 4. Nestlé S.A. Half Year Results 2011 Presentation Speech  Administrative costs were down 150 basis points. There are a number of factors at play here: first, we are rolling out Nestlé Continuous Excellence beyond our operations and, as part of this, we have targeted for Admin costs to grow much slower than organic growth - this creates leverage from growth. We were already achieving significant savings in the second half of last year and consequently would not expect the second half evolution to be as dramatic.  R&D costs increased by 10 basis points.  Next are the net other trading income and expenses. These improved by 40 basis points due to lower restructuring costs, as well as a lower level of costs for litigation and other expenses. You can expect the full year restructuring costs to be 30 to 40 basis points.This then gives you the trading operating profit improvement of 20 basis points reported, or40 basis points in constant currencies.Slide: strengthening Swiss francI have already mentioned the phrase “constant currencies” several times, so let’s have a lookat the currency situation.Half year on half year, we have a 17% decline in the US dollar against the Swiss franc and a12% decline in the Euro. All the other currencies are also weaker against the Swiss franc.The impact of the strong Swiss franc is clearly significant on translation of our financials forreporting purposes:13.8% on sales,20 basis points on the trading operating profit margin,15% on underlying earnings per share,between CHF 600 and CHF 700 million on operating cash flowsand CHF5 billion on the balance sheet.But, importantly, there is no meaningful impact on our underlying operating performancewhich, as you have seen, has remained strong in the first half.Slide: key elements of salesLet’s now look at our sales performance, starting with our traditional sales evolution chart.  I’ve already discussed foreign exchange.  Divestures, net of acquisitions, was - 6.6%, due to the August 2010 sale of Alcon, which had an impact of over 8%.  But the sale of Alcon and the exchange rates shouldn’t over-shadow a very strong operating performance, reflected in organic growth of 7.5%.  RIG for the half was 4.8%. This maintains our momentum from Q1 and is a truly differentiating level of performance.  There was also a step-up in pricing in Q2 to 3.8% giving 2.7% for the first half. I believe this half year number will gradually increase during the rest of the year.I’d like now to pass over to Roddy to do our usual run through the business segments. 3
  5. 5. Nestlé S.A. Half Year Results 2011 Presentation SpeechSlide: All regions contribute good growthThanks, Jim. Good morning everyone.I’ll start with the total Group sales by region. In each region, the numbers include the relevantzone and the globally managed businesses, which are Nutrition, Waters, Professional,Nespresso and our joint ventures.We show this to give you a good read-across with our peers. It is once again a picture ofbroad based growth, strong relative to the various markets.  Europe has accelerated from 3.9% organic growth in Q1 to 5.8% for the half, with RIG up 120 basis points to 4.6%, and pricing up 70 to 1.2%. And this is growth on growth, coming on top of 3.6% organic growth in the first half of 2010.  The Americas achieved 5.7% organic growth, with RIG of 2.2%. Pricing has accelerated, but RIG was lapping a tough second quarter in 2010.  Asia, Oceania and Africa achieved 13.3% organic growth, The RIG remained double- digit. Pricing was up to 3.2%.Slide: All regions contribute good growthA key reason for our broad-based growth is that we have been able to deliver growth bothwhere you would expect strong growth and where you might not:  Where you might expect strong growth: The emerging markets, and the BRIC countries, both growing at 13.3%.  And where you might not: The developed markets growing at 4.4%, and Portugal, Italy, Greece and Spain growing as a group at 3.9%.Let’s now look at the operating segments and, first, here is the currency impact by reportingarea.Slide: FX impact on all businessesNormally this slide would be in the appendix, but I think it merits being shown up front thistime. The currency impact on sales will most likely remain double-digit, but it could lessen abit due to the relative comparison versus 2010, as you can see on the two graphs.Slide: strong broad based operating performanceAs Jim said, the currency impact should not take away from our strong operatingperformance. On this slide you can see how broad-based our RIG has been, and ourorganic growth, which ranges from over 4% in Zone Europe to over 11% in Zone AOA. Therewas increased pricing in the second quarter in all reporting areas. The RIG evolution remainsrobust, and I will go through this in more detail, starting with the Americas.Slide Zone AmericasThe RIG in Zone Americas improved marginally from Q1, but there has been a strongacceleration in pricing, up 360 basis points in the second quarter from the Q1 level. 4
  6. 6. Nestlé S.A. Half Year Results 2011 Presentation SpeechWith weak consumer sentiment in the USA, the North American business continued toexperience tough trading conditions, as demonstrated by moderate growth, but a reasonablemarket share performance.  The Frozen aisle continues to be under pressure generally. The Lean Cuisine and Hot Pockets segments are slightly down, whilst the Stouffer’s regular meals segment is flat. We have success in Frozen with launches under the Market Creations and Farmers’ Harvest banners, as well as range extensions in Lean Cuisine, such as spring rolls and dips.  The Frozen Pizza category is growing. Our Pizza Plus launch, being pizza packed with another product such as Nestlé Toll House cookies or chicken Wyngz, is performing well. Overall in frozen, DiGiorno, Stouffer’s and Lean Cuisine have gained share.  The PetCare business is flat, but showing increased market shares. New products, such as Purina One Beyond, Fancy Feast Delights and Friskies Tasty Treasures are performing well.  Confectionery is lapping the tough comps caused by last year’s Wonka launch, but shares are stable in a market that is up by a high single-digit percentage. This year we have launched the successful ice cream brand, Skinny Cow, into confectionery. The early take-up is promising.  In chilled, Toll House is performing well.  The ice cream business is continuing to face pressure from private label in premium take-home, and has seen volume impacted by pricing. Our strongest performance is in the snacks segment, and then super-premium. Innovation has included launches of shakes and smoothies, as well as Haagen Dazs cones and the Skinny Cow “More to Love” pack.  Nescafé and CoffeeMate had a positive first half. The Nescafé Dolce Gusto launch is building momentum with, importantly, high capsule consumption per machine. The Café Collection and Natural Bliss variants of CoffeeMate have been well received.Latin America has had a strong first half, both for RIG and pricing, and continues to deliverdouble-digit organic growth.  Mexico and most of the regions are growing double-digit, whilst Nestlé Brazil is celebrating its 90th anniversary with high single-digit growth. The big three categories in Brazil, (Dairy, Chocolate and Biscuits), all accelerated in the second quarter, partly due to Easter.  Looking now at the Latin America categories, the big five, being Ambient dairy, Chocolate, Soluble coffee, Ambient culinary and PetCare, are all growing double-digit. The rest are all positive, ranging from mid-single-digit to over 20%. PPPs are growing in the teens, with particularly strong performances in dairy, powdered beverages and soluble coffee.The Zone’s trading operating margin fell 10 basis points. This reflects a significant increasein raw material costs, as well as some relative weakness in volumes in North America, allmitigated by Nestlé Continuous Excellence. The Zone did, however, increase its brandinvestment in the first half and is continuing to invest to build its brands over the longer term. 5
  7. 7. Nestlé S.A. Half Year Results 2011 Presentation SpeechSlide Zone EuropeNext is Zone Europe. The Zone had a strong second quarter as the uneven quarterly tradingpattern created by Easter rebalanced itself. RIG accelerated from 1.9% at the first quarter to2.7% for the half.Pricing also picked up by 100 basis points to 1.4%, to give organic growth of 4.1%. This firsthalf performance is a good reflection of the underlying growth in the Zone.Perhaps most impressive in Western Europe is the continued positive growth in Portugal,Spain, Greece and Italy, despite the tough economic environments in those countries. As agroup, these countries achieved about 4% organic growth. Maggi Juicy Roasting isperforming well in these markets, as are Nescafé and ice cream.PPPs grew in the high single-digits in Europe. Their growth was about 20% in Spain, forexample, demonstrating the benefit of our strategy of rolling PPPs into the developed world.It also confirms our belief that is possible to generate growth with the right innovation even inthe most difficult markets.Germany saw a meaningful acceleration in Q2, where 80% of cells are holding or growingshare. Most categories are performing well. Growth in the GB region was flat but shares were up overall. The Confectionery businesshad a strong Easter and has gained share. In soluble coffee, there was a good performancefrom Nescafé Dolce Gusto and the mixes variants. Dolce Gusto is now the market leader inthe UK, both in machine and capsule sales. Maggi Juicy Roasting has had a successfullaunch even despite Maggi not being a particularly well-established brand in Britain: thisdemonstrates the strength of the Juicy Roasting concept.France continued to perform well, with mid-single-digit growth and share gains in allcategories. Ice cream, soluble coffee and frozen food were particularly strong.In Eastern Europe we are continuing to see subdued sales growth in Russia, particularly inthe big Chocolate category, but we are enjoying good growth in a number of other countries,including the Ukraine and the Baltic region.Looking at the categories for the Zone as a whole, all the big categories were positive, aperformance reflected both in our strong market share performance by country, and in theachievement of above-category growth for the zone as a whole.As you would expect, the category story is one of continued momentum from Q1, with strongperformances from Ambient culinary, Frozen pizza, Chilled culinary, Soluble coffee andPetCare. Equally, the key innovations continue to perform well.  Nescafé Dolce Gusto has gained over 400 share basis points in the machine market, further expanding its sales base. Its growth continues above 50%.  The other Nescafé launches, Green Blend and Crema also continued to perform well.  Maggi Juicy Chicken has evolved into Maggi Juicy Roasting, and the range has expanded into other meat and fish dishes, as well as into new geographic markets. It is one of our fastest growing innovations. 6
  8. 8. Nestlé S.A. Half Year Results 2011 Presentation SpeechInnovation is a core aspect of our strategy and we are accelerating our efforts here, and theyare making a real difference in driving growth and creating value for our consumers.The Zone has delivered a strong trading operating margin performance in a particularlydifficult operating environment, characterised by weak consumer sentiment in some marketsand by an exceedingly tough competitive environment.A key driver of this operating performance was a strong delivery of savings through NestléContinuous Excellence, in addition to the benefits from previous restructuring of facilities, ofbusinesses and of employee post-retirement programmes.Slide: Zone AOANext is Zone AOA . The Zone had a very strong first half, especially when one thinks of thenews headlines from the region that dominated the first few months of the year. Thisperformance is broad-based, as we have seen good growth in Africa, the Middle East and ina number of Asian markets.  In Japan, we were the first Food and Beverage company to get back to full supply to the retailers, a great effort by our people, and we are now seeing our performance at normal levels, and we are gaining share in soluble coffee, chocolate and ready-to- drink.  The Greater China Region is accelerating, with over 20% growth. Our milk business is now back to previous levels, and building strong momentum. Our ice cream business is also growing well, following its relaunch last year, including a strong PPP portfolio, and growth is over 30%. The ambient culinary business had a strong second quarter after a slow start to the year and is growing in the teens. Nescafé is also performing well, both in its soluble and ready-to-drink variants.  The Central West Africa Region is another highlight, even though it includes Cote d’Ivoire where we are re-establishing supply chain networks. Growth in the region is being led by Ambient dairy and powdered beverages.  The South Asia region, which includes India, is growing over 20%. All the region’s categories are growing double-digit, with Ambient culinary and chocolate both up 30%. These growth rates explain our increased investment in the region.  PPPs were accretive to the Zone at 18% organic growth.The Zone’s trading operating profit was up 50 basis points. The increased raw materialprices have been offset by savings, growth leverage and pricing. The worst of the rawmaterial pressure for the Zone is in H2, but there is also a greater benefit to come from theZone’s pricing actions.Slide: Nestlé NutritionNext is Nestlé Nutrition. Nutrition has had a strong first half growth performance, driven bythe Infant Nutrition business, which is achieving double-digit organic growth and has gained60 basis points of share on a global basis.The Infant Nutrition performance is well balanced across all divisions, baby food, infantcereals and infant formula, and all regions, including some markets where we have seemed 7
  9. 9. Nestlé S.A. Half Year Results 2011 Presentation Speechto be having a tough time more recently. For example, France is achieving double-digitgrowth, and we are growing share in every category and channel there.  The emerging markets are growing dynamically, whether in Europe, Asia, Africa or Latin America. Infant cereals continue to perform very well.  The North American business is also performing well, relative to its market. Our formula market share in the USA is now 17%, up from below 15% three years ago.  The Infant Nutrition performance is built on a number of pillars which have come together over the last couple of years, including successful innovation in formula and cereals, improved communication where rules allow, expanded distribution, rigorous 60/40 testing, increased competitive intensity, and closer working relationships to leverage the scale of other Nestlé businesses in the markets.  I’m also pleased to say that our BabyNes launch has got off to a good start in Switzerland.The French and British launches of Jenny Craig and the business in Oceania are doing fine,but we have some issues in the US, our biggest market. It is clear that the weak economyhas played a role in impacting the business. We are making some changes, including to ourmarketing strategy, and we should start to see an improvement in the coming months,particularly in rebuilding new client leads, which are key to the longer-term growth of thebusiness.Nestlé Nutrition’s operating margin is down 90 basis points versus a tough comparison lastyear. This partly reflects the raw material environment, in particular the contrast with a lowcost H1 2010, but also the performance of Jenny Craig. We expect to see an improvementin the Zone’s operating margin in H2 as pricing taken already this year works its way into thenumbers.Slide: Nestlé WatersNestlé Waters is next. The organic growth of 5.8% reflects continued strong performances inmany markets, with appropriate brand support. It is also notable that the pricing has turnedpositive in the second quarter, after over a year of reducing price.Highlights included double-digit growth and share gains in France and Belgium, strongperformances globally from Perrier (up 14%) and S. Pellegrino (up 9%), as well as Vittel,Acqua Panna and Nestlé Pure Life, and double-digit growth in the emerging markets, both inAsia and in Latin America.The North American market has been challenging. Pricing taken earlier in the year hasimpacted volumes as others have been slow to follow. We have maintained shares in NorthAmerica on a year-to-date basis, but have slipped in recent months.In Europe there was positive growth in many markets, including France, Germany, Italy andthe UK.The trading operating margin fell 140 basis points. This was due to increased oil-related andPET costs, not offset by a good delivery of efficiencies and gradual price realisation. 8
  10. 10. Nestlé S.A. Half Year Results 2011 Presentation SpeechSlide: OtherNestlé Professional is continuing to build positive momentum, notwithstanding the fact thateconomic conditions remain subdued. Growth was double-digit in emerging markets, asmuch as 20% in China. There was positive growth too in North America, where beveragesare performing well, and in Europe. The 2010 launches of premium and super-premiumNescafé machines have been well-received by customers, and sales momentum isincreasing.Nespresso has continued to grow at a high rate, slightly above the Q1 level. This is aninvestment year for Nespresso, and the first half has seen a very high level of marketingspend, supporting the successful launch of the Pixie machine in 50 markets simultaneously.This was the first machine launch by Nespresso to be done globally. They have also openednew boutiques, including in St Petersburg and Stockholm. A further development atNespresso is the launch of new machines for the out-of-home channel.Nestlé Health Science achieved double-digit RIG. The company, only created on the 1stJanuary, is now fully operational and has already been active in M&A, as you will have seen,building future growth platforms in strategic areas.The decline in the trading operating profit for the whole segment is down mainly due to theinvestments at Nespresso and Nestlé Health Science.Slide: Product Groups overviewNext is the product group review. I have already touched on most key messages, so I will gothrough this quickly, only making a comment if I have any additional value to add.On this slide you can see that all are delivering positive growth. Let’s now go through themindividually.Slide: Powdered and Liquid BeveragesFirst is Powdered & Liquid Beverages.Soluble coffee has had a strong first half, both in terms of growth, which was double-digit,and in terms of operating margin. The performance was good in all three zones and in NestléProfessional.  The markets have been very focused on their key innovations, aligned with our growth drivers, with good execution and appropriate brand support.  For example, in Europe, these include Nescafé Dolce Gusto and Nescafé Senzazione, both examples of premiumisation; Nescafé Green Blend, an example of Nutrition, Health and Wellness, and Nescafé 3-in-1 , an example of a PPP that we are rolling out in Western Europe.  We are seeing growth well into double-digits in all of these products, as we are globally in PPPs and with our foaming mixes, such as Cappuccinos.  Pricing is increasing as the year goes on. 9
  11. 11. Nestlé S.A. Half Year Results 2011 Presentation SpeechPowdered beverages also has had strong growth in the first half, particularly Milo.  Milo is performing well in Asia and is building its presence in parts of Latin America, such as Colombia and Chile.  Nesquik also achieved positive growth, and highlights included Russia and Italy.  The Powdered category has experienced significant cost pressure, sugar and cocoa in particular. Accordingly, we are also seeing pricing increasing period on period. Marketing spend was up for the category.Liquid beverages performed well, with high single-digit organic growth and improvedmargins. I would highlight excellent progress by Nescafé and Milo in a number of markets.The trading operating margin is down due to innovation and launch costs, both at Nespressoand in other segments of the product group.Slide: Dairy including Ice creamThe Milk business has again delivered double-digit top-line growth in all zones, and hasaccelerated from Q1 both in RIG and price. It has also been able to leverage this growth intoan improved operating margin performance.  The business is heavily weighted to emerging markets, and has continued to perform at a high level, driven by aligned global product priorities, aligned communication themes and a focus also on increased leverage of our marketing spend. It has achieved market share gains in many countries. Among our growth drivers, Nutrition, Health and Wellness, for example in growing up milks, and PPPs, which are also nutritionally enhanced, are key drivers.I have already touched on Coffee-Mate in my Zone America comments.The Ice Cream business has had a good start to the year in all three zones.  Particular successes include China, France, Germany, Switzerland, Egypt, Latin America, Indochina, amongst others. The growth drivers and innovation are key contributors here, whether out-of-home - our impulse business; the PPPs, including our peelable ice creams which are now in 11 countries and doing well in all of them, and also now available in new variants; Nutrition, Health and Wellness, such as slow churn; or Premiumisation, such as Haagen Dazs and Nescafé Frappé Latte in Spain..Slide: Prepared dishes and cooking aidsNext is Prepared dishes and cooking aids  The Frozen Food business in Europe continues to be driven by the strong performance of Pizza, both under the Buitoni and Wagner brands. I’ve already discussed frozen in North America.  Culinary chilled, particularly Herta, continues to perform well in Europe, especially in France and Germany, even if part of its business, exported from Switzerland, is suffering due to the Franc/Euro exchange rate.  The Ambient Culinary, business, primarily Maggi, has had a strong first half, both in emerging markets and in Europe. The recent acquisitions in Eastern Europe and 10
  12. 12. Nestlé S.A. Half Year Results 2011 Presentation Speech Latin America are performing well, and we have new capacity coming on-stream in India and China. Out biggest markets are all increasing market shares.  The product group’s margin increased 30 basis points. There were good performances in most businesses which compensated the integration costs for the pizza business, and high input costs such as cheese, whey and meat in US Frozen. There were also lower restructuring charges than in 2010.Slide: ConfectioneryNext is confectionery. I will start by reminding you that we had over 8% organic growth in thefirst half last year, so 4.2% in the first half of 2011 demonstrates good momentum over atough comparative.  The business is performing well, with over 70% of cells gaining share, including key markets such as the UK. We had a successful Easter season around the world, demonstrated by a strong pick-up in growth in the second quarter in each Zone.  Both China and India are growing over 20%. The growth would be even higher but for capacity constraints that we are addressing in both countries.  I’ve already discussed the US.  Pricing has increased during the year, driven by increases in milk and sugar costs. This pricing is a contributing factor to the improved margin performance but, equally, there are higher contributions from some of the faster growing markets, as well as benefits from the European restructuring in recent years.Slide: PetCareNext is PetCare.Overall we have seen a building of momentum from the Q1 growth numbers, with growth inQ2 at twice the level of Q1.  Europe has continued to grow at a good level, driven by the success of innovations for cats such as Purina ONE Actilea, the expansion of the Felix brand into Central and Eastern Europe, and the launches of Felix Sensations and Gourmet à la Carte. For dogs, we have enhanced our leadership in older pets with the successful launch of Pro Plan Senior 7 Plus. We have also launched Beneful Little Enjoyers, taking Beneful into the small dog market for the first time in Europe.  I’ve already discussed the strong competitive performance by the North American business, which achieved share gains in most segments. Growth was double-digit in Latin America and in the emerging markets as a whole.  Globally Purina outpaced the growth in its category by 184 basis points.  The trading operating profit was impacted by commodity prices. This is not just because of the 2011 impact, but also because we were very successful in 2010 with our commodity hedges. You might remember that the H1 2010 margin was up 190 basis points. Effectively, therefore, it made for a difficult comparative. We will see an improved margin performance in the second half, helped by a more normal comparative and by the benefit of pricing taken in April.That concludes my run-through the business performance. I’ll now hand back to Jim. 11
  13. 13. Nestlé S.A. Half Year Results 2011 Presentation SpeechSlide: P&L (continued)Thanks, Roddy.On the next slide is the rest of the P&L. I have shown both the 2010 comparison against theContinuing operations, and the Group performance. The reduction in net financing cost andlower tax expenses contribute to a 60 basis points improvement in net profit for thecontinuing operations.The comparison with the 2010 Group numbers, including Alcon, shows a marginal decline of10 basis points in net profit as reported: the Group’s underlying EPS are up 5.2% in constantcurrencies.Slide: Cash flow and net debtTurning to cash flow and net debt.The operating cash flow is CHF 1.7 billion. This is a good performance, albeit lower than inthe first half of 2010 recognising the impacts of the sale of Alcon, currency weakness andworking capital:  First Alcon: Alcon’s cash flow was about CHF1.4 billion in the first half of 2010  Second, currencies: You may assume a conversion impact on our cash flow broadly similar to the impact on our sales. On top of this, we made an investment in 2010 to protect foreign currency assets; this was already reflected in the full year 2010 cash flow. These impacts created a negative comparison from H1 2010 to H1 2011 of about CHF 1 billion.  Third, working capital, which increased by about CHF1.2 billion, but improved slightly as a percentage of sales. We made a tactical decision to increase inventories in order to manage capacity constraints in some of our fast growing emerging markets, and the disruption in our supply chain caused by external events. As a whole, working capital has improved as a percentage of sales.Turning now to our Net Debt position. Our half year net debt was CHF 14.5 billion,compared to CHF 29.6 billion in the first half of 2010. The big impacts include the sale ofAlcon, the dividend payment in 2011, the share buyback, the medium to longer-terminvestments and treasury shares:  The 2010 dividend payment, which was up 15.6% per share in Swiss francs, resulted in a pay out of CHF 5.9 billion.  We bought about CHF4 billion of shares in the first half, and continued in July to nearly complete our CHF 10 billion share buyback programme.  We have increased our medium-to-long term investments from CHF 2 billion to about CHF 4 billion. These investments are blue-chip. We have them because we needed to manage the proceeds from Alcon beyond those which we used either to restructure our debt or for the share buy-back.  The benefit of the treasury shares and the mid-to-long term investments, beyond their inherent investment characteristics, is that they enable us to maintain an appropriate degree of financial flexibility. 12
  14. 14. Nestlé S.A. Half Year Results 2011 Presentation SpeechWith CHF 14.5 billion of net debt, we are approaching the level that we had at the end of2009, which we told you was an appropriate level for the Group at this time. If our medium-to-long-term investments are included, then net debt would be CHF10.5 billionSlide: Use of cashNow let’s have a look at our priorities for our use of cash.  As you know, our clear priority is to invest in our business, either internally or externally. We have stepped up our level of capital investment. You can assume it will be about CHF 5 billion in 2011. We have also stepped up our M&A activity, though we remain focused on bolt-ons. I will come back to both these areas on the next slides.  After investment in our business, the next priority is to return cash to our shareholders through our dividend. The priority for us is the actual Swiss franc amount of the dividend, not necessarily a ratio. We would expect, all things being equal, to continue to enhance the dividend we pay to our shareholders.  Buying our own shares, whether as part of a buyback or to hold as treasury shares, is optional. We see this as a tool for managing excess cash, assuming that the share price is at an appropriate level. Therefore our announcements of share buy-backs have been part of a disciplined approach to managing our balance sheet whilst retaining financial flexibility.  On completion of the current programme, Nestlé will have returned CHF39 billion to shareholders since 2005 through share buybacks at an average price of about CHF48 per share. At the same time we have paid over CHF31 billion in dividends.  In the first half of 2011, we have committed about CHF10 billion to the dividend and share buyback. This had to be paid in Swiss francs from cash flows generated in significantly weaker currencies. We have also committed about CHF 10 billion in total to capital investment and acquisitions.  - Given the current economic environment and the consequent need for financial flexibility; - given the fact that we use foreign currency cash flows to buy our shares in Swiss francs; - and importantly, given the fact that there are potential alternative uses for our cash, such as investments in capabilities and bolt-ons, that provide greater long term strategic value for our shareholders, we believe that today is not the right time to be launching a new share buyback. However, buybacks will stay under Board review on an on-going basis as an option to address excess cash built up by our company.Slide: Capital investmentOn the slide you can see some of the capital investments that we have announced recently.It is not exhaustive, however, and projects include:  Confectionery and Culinary in India and China, PetCare in Hungary; powdered beverages, cereals and milk in Indonesia; cereals in Malaysia and Turkey; Infant formula in Germany, Milk in Brazil, Culinary in Nigeria and South Africa; and so on. 13
  15. 15. Nestlé S.A. Half Year Results 2011 Presentation SpeechSlide M&AOn this next slide, you can see some of the recently announced and/or completedacquisitions. These include:  Our two proposed acquisitions in China, now under consideration by the authorities, as well as three deals for Nestlé Health Science, culinary in Eastern Europe, beverages in USA, dermatology in Sweden, amongst others.Slide: roadmapBy now you know our strategic roadmap well.Our performance in the first half has been coherent with our strategic priorities. I would justlike to touch briefly on brands and on innovation – which are key areas of investment for us.Slide: The billionaire brandsFirst, a quick look at our billionaire brands. As you’ve heard during Roddy’s presentation,these brands have contributed greatly to our first half performance. In total they achievedover 8% organic growth, compared to 7.5% for the group as a whole. Their growth is alsoreflected in strong market share performances.  All the brands in Beverages, Nutrition, Waters and Confectionery are achieving positive organic growth.  In Frozen, Lean Cuisine has returned to positive growth in a declining frozen food category; Stouffer’s is marginally in negative territory but it has gained share over last year.  PetCare continues to be a generally good picture despite the slower growth of the category as a whole; Friskies, ONE and Purina positive, and growth of more than 10% for Dog Chow.  In Ice cream, the Dreyer’s brand, which is heavily present in the US premium take- home segment, has been under pressure from private label, but is only marginally down, less than 1%.  One of the reasons for the strong performance of the billionaire brand is our continued high level of innovation.Slide: innovation as a growth driver  Innovation is a value added growth driver for all our categories. The great benefit is that, as we enhance value for consumers at each consumption moment, we also enhance value for our shareholders. Making this more tangible, here are a few of the innovations from last year that have contributed to our strong first half performance. 1. Nescafé with a clear segmentation strategy for its innovation: - super-premium with Dolce Gusto - premium and Nutrition, Health and Wellness, with Nescafé Green Blend - and PPPS, such as Nescafé 3-in-1 launching successfully in Europe. 14
  16. 16. Nestlé S.A. Half Year Results 2011 Presentation Speech - We are seeing strong growth in all these segments, from well over 50% for Dolce Gusto to about 15% for our premium range. 2. In Ice cream, we also have a range of PPPS. The peelable PPP ice cream has been one of our most successful launches in this category.Innovation in 2011  On this slide we have captured just some of the innovations launched in the first half. 1. In Ice cream, we have launched a new shake concept in developed markets, as well as Haagen Dazs smoothies in the US. 2. The Dairy business has extended Coffee-Mate out of the non-dairy creamer market into dairy creamers. It also has a raft of launches and extensions in the emerging markets, including value-added liquid milks such as Nido Protectus. 3. In prepared dishes and cooking aids, the Maggi Juicy Chicken range, the leader in its segment, has evolved into Juicy Roasting, now for beef, pork or fish, for example, and its international roll-out continues. 4. In the US Frozen category we have responded to the tough environment with new lines and extensions such as Lean Cuisine snacks. 5. In PetCare, where I mentioned our improving market share performance on a global basis, there is a strong roll-call of innovations, a few of which are listed on this slide. 6. In Chocolate, we are building on the Wonka extension into chocolate and now extending Skinny Cow into the category. We launched Aero biscuit in the UK, we took KitKat into Brazil and launched a KitKat Black in Japan, with a special type of wafer.These were just some examples of recent launches and extensions, and our pipeline hasmuch more to come. The future will not just bring new products, but also new routes tomarket, new technologies, new system capabilities, as well as a range of innovations inNutrition and Nestlé Health Science.Slide: 2011; another set of challengesNext, a slide that I showed at the full year conference call.Slide: 2011; another set of challengesWe said then that we understood the challenges that we faced in 2011, and that we would betaking a holistic approach to managing them. I think these first half numbers demonstratethat we have done that. We have compensated input cost pressures, not just throughsavings in those areas that have been directly impacted, but also through savings inadministrative costs for example.We also talked about a rich pipeline of innovation and about growth momentum. We areseeing the benefit of both in our continued strong level of real internal growth. This is growthon top of growth, year after year. But we also have momentum in extending NestléContinuous Excellence, and with our growth drivers, such as Nutrition, Health and Wellness, 15
  17. 17. Nestlé S.A. Half Year Results 2011 Presentation Speechthe PPPs, Premiumisation and our out-of home activities. Our growth momentum iscontributing a positive mix effect due to the faster growth of our emerging markets, which arebenefiting from increased capacity investment.We also said then that we would deliver the Nestlé Model again in 2011. We are confirmingthis guidance, with organic growth at the top end of our 5 to 6% range.We continue to run the business with a mix of long-term inspiration and short-term delivery.And we believe that in today’s environment, these qualities will really help us outperform.Slide: conclusionSo, to conclude: It has been a challenging first half, but we need to separate the foreignexchange impact on the reported numbers, from the underlying solid operationalperformance.The foreign exchange movements on our numbers are a big impact on translation, noquestion. But they have only a small impact on our underlying operations. We arefundamentally a conglomeration of local-currency or regional-currency businesses that areleveraging our global scale to compete successfully.And I believe we have demonstrated our operational strength in the first half by delivering astrong performance in all the KPIs – organic growth is strong, the operating margin is up andour underlying earnings per share are improved in constant currencies. And we havecontinued to invest for the future.The real differentiating highlight of the first half of 2011, is that Nestlé has not only deliveredwhere you would expect us to deliver, but we have also delivered against the odds, as ourbusinesses have demonstrated their ability to perform in the toughest of times: whether it isCentral West Africa achieving double-digit growth despite the unrest in the region; or theJapanese business disrupted by natural disasters; or whether it is our businesses in thetroubled economies of southern and western Europe that continue to deliver positive growth.These achievements not only differentiate our performance in the first half of 2011; they alsogive us confidence in our ability to deliver, not just for the rest of the year, but beyond.Finally, as I said, we have unprecedented opportunities to invest in future growth particularlyin emerging markets, both organically with cap-ex, and through bolt-ons. With that in mind,and with an eye on the uncertain economic environment, we are retaining financial flexibilityto drive our strategic priorities with confidence.Thank you. Let’s now open up for discussion. 16
  18. 18. Nestlé S.A. Half Year Results 2011 Presentation SpeechQ & A SESSIONQuestions on: Background decisions on not extending the buyback Movement in cash flowDavid Hayes, Nomura:Morning, gentlemen, thank you. Just firstly quickly on the buyback, I wonder if you can giveus any background as to whether that decision on the policy was changed or taken in the lastfew weeks with obviously the market and the economic uncertainty that weve seen. Andwhether also with the Swiss franc move the last few weeks that youve delayed effectivelysome dividend pay through from the subsidiaries, which is part of that decision process aswell as you watched that play out?And then I guess still just focusing on cash flow again, you kind of alluded to maybe some ofthe points in the presentation, but Im just noticing that the variation in other operating assetsand liabilities is an additional outflow of about a billion in the first half versus last year andthen other investing cash flows about an additional 1.5 billion. I just wonder if you can giveus any more colour as to what those outflows actually relate to and why theyre quite a bigdifference to the first half of last year? Thanks very much.James Singh:Okay, lets come back to the share buyback programme, you know David we have alwayssaid the share buyback programme is optional given the priorities we have laid out. Thepriorities have always been to invest in building our business. I believe that this year, as wehave communicated to you, that we have several opportunities to invest in capex for organicgrowth, in areas where - especially in areas today where we are constrained because of verydemanding utilisation of existing capacities and you have seen what we have announced interms of possible M&A transactions this year.In addition our commitment to the dividend, you see the dividend increasing year after year,those are really our priorities. I think youre right, given the economic environment in whichwe operate, combined with the opportunities we have to invest - the cash flows, we believe itis a point in time where we have to focus on driving the business with confidence.We are not saying that share buybacks will never occur, as we said share buybacks willcontinue to be under the watchful eye of the board and they will make a decision on that fromtime to time. But I think at this moment as we have communicated, our focus is really drivingour internal priorities.Just on the cash flow David, I think generally - I dont want to get into the specific lines, if youlook at our cash flow, CHF 1.7 billion in cash in operating cash flow and about 300 million infree cash flow, which is about just under three billion down from what we reported last year.First of all we said Alcon, the impact and the disposal of Alcon in our free cash flow is about1.4 billion, working capital increased about a billion, the carrier of the foreign currency onfinancial assets, the impact and our funding, the negative impact was about one billion andminority and associates was positive about half a billion. When you add those up youbasically explain where we were half year versus half year. 17
  19. 19. Nestlé S.A. Half Year Results 2011 Presentation SpeechNow you also realise that the impact on the cash investments, etc, from the Alcon proceedsmost of those occurred in the second half of last year. So they are more or less in this halfyear versus last half year. So the comparisons are a bit different. The base is slightlydifferent. However, I would say those three or four items explain the movement in cash flow.David Hayes, Nomura:Just quickly coming back on the buyback, from what youre saying the decision on thebuyback policy today which as you say may be reviewed, but that could have well been thesame decision three months ago rather than today effectively? It was kind of a long termplan rather than a reaction to the marketplace, is that fair?James Singh:Yes, it is and as we said David when we announced our first half year results we said that wewill not make any decision on the share buyback while were continuing to execute theexisting programme.Questions on: Contributing factors to working capital increase PPP and Dolce Gusto growth updateAlain Oberhuber, MainFirst:Good morning, Roddy, good morning, Jim. I have two questions. First is about the workingcapital increase in H1, is this a strategic one just for this year or is it also for 2012 given thatthe economic environment is delayed. If you could maybe elaborate a little bit on thatbecause it looks to be interesting?Secondly could you also give us and update please on Dolce Gusto and PPP revenue.James Singh:Just on working capital Alain, thanks for the question. The 1.2 billion was significantlyinfluenced by inventories. And the inventory bill in the first half, compared to the first half lastyear as I said, related to some specific circumstances. There are markets, especially in theEmerging Markets, particularly in Asia, where we have had to build inventories to overcomecertain capacity issues that exist at that point in time. We are addressing those, as younotice on the chart by accelerating our investments in several factories to address theseissues.And the other issue is that we have had severe disruption in certain parts of the worldbecause of high impact events that have been announced from time to time. So I think ourobjective over time is to manage our working capital relative to the evolution of our sales.And in spite of this increase in working capital, working capital as a percentage of our salesis trending down. So I think that trend will continue, at least that is our objective.Roddy Child-Villiers: 18
  20. 20. Nestlé S.A. Half Year Results 2011 Presentation SpeechAlain on your second question, PPPs we gave you the number it grew 13.3%. Dolce Gustowas well over 50%. The PPPs are around 5 billion; I havent got the Dolce Gusto number atthis stage in the year.James Singh:Just to let you know that Dolce Gusto is trending to exceed half a billion CHF, more than halfa billion CHF this year.Questions on: Enhancement of dividend in Swiss Franc terms Margin stability in local currency in H2Patrik Schwendimann, ZKW:Hi Jim, Hi Roddy. First regarding the statement about the dividend, you were mentioningthat you continue to enhance it. So does this mean that you also increase dividends for thecurrent financial year despite probably a negative EPS in the Swiss franc?And secondly regarding the margin improvement which was really good in the first half,increased 40 basis points in local currencies, in the second half you were already mentioningthat the second half of 2010 had already this admin cost improvement in it, so does it meanthat in H2 the margin could more or less be stable in local currency? Thats my secondquestion. Thank you.James Singh:Thanks Patrik. The dividend as we said, assuming everything else being equal that it is theintention to enhance the dividend in CHF, thats the intention. And that is how weveapproached the dividends in the last four or five years, every year youve seen a substantialincrease in the dividend, but you know it is our intention that we will improve the dividendpayout in CHF to our shareholders. How much will depend on the particular circumstances.The margin improvement - we said also that our margin including the old EBIT margin, themodel is that we will improve in constant currencies. You notice that at the EBIT level wewere flat in constant currencies, so we are expecting that margins will improve also in thesecond half.Roddy Child-Villiers:You remember for 2010 we had the sort of reverse of 2011 with a very tough H1 comp andan easier H2 comp. So its a reverse this year, thats opportunity for the margin to improveas Jim says. 19
  21. 21. Nestlé S.A. Half Year Results 2011 Presentation SpeechQuestion on: Decline in litigation and onerous lease costs in H1 and steer for FYJamie Isenwater, Deutsche Bank:Good morning. Just one question actually. Theres a big decline in your litigation andonerous lease costs in the first half, about a 100 million CHF swing. Im just wondering whatthe driver of that was and whether you can give us any help on what we should expect forthe full year? Thank you.James Singh:Morning Jamie and thanks, yes there is a decline in what we call other trading operatingexpenses and income. You know the litigation expenses are triggered depending ondifferent circumstances. This year so far it has been very low and you know Id love to giveyou guidance but I really dont know because I dont want to tell you were going to spendmore on litigation when in fact so far we have spent very little. And so I really cant give youguidance. We have given you guidance more or less on restructuring which we said will be30 to 40 basis points. You know we will have to make decisions with respect to makingprovisions for litigations depending on whats there today.We dont see any particular material litigation currently, but you know we have to managethat from time to time.Jamie Isenwater, Deutsche Bank:And just sorry on the onerous leases, presumably you can see for the full year. Is that a bignumber? Is that a big swing factor?James Singh:Not so far this year, last year we had some arrangements with respect to sorting contractualarrangements and the supply chain that we have had to sort out. This year we don’t haveany of those so far. There are always going to be - you know litigations and onerouscontracts, etc, but I really cant give you any guidance on that. But as I say we do our best tomanage our business in a way that we avoid those costs.Questions on: Pension cost benefit contribution to Europe margin in H1 Pricing to offset input cost inflation in Coffee and effect on volumesJeremy Fialko, Redburn:A couple of questions. The first question is on your Zone Europe margin. You mentionedyou had a pension cost benefit within the half. Can you quantify how much of a contributorthat was to the regions margins and what youd be looking for that to be in the full year? 20
  22. 22. Nestlé S.A. Half Year Results 2011 Presentation SpeechAnd the second question is on your Coffee business. Clearly thats one which has had somevery significant input cost inflation in it. Can you say how much of that you have hopefullypriced through and how the volume reaction to that has been so far and what youd expect itto be in the second half of the year? Thanks.Roddy Child-Villiers:Ill start by taking the coffee question. As we said the Soluble Coffee business had a goodyear, both in terms of price and in terms of margin so weve clearly been successful inrecovering the cost pressure that weve faced. The same is true in the Nespresso business,their weaker H1 related to 2010 is simply the result of the launch of their first ever globallaunch of a coffee machine, the Pixie machine. So we have been successful in protectingthe margin.We have priced up, clearly, and we have not necessarily always been followed as quickly aswe would have hoped by the competition and soluble has had some share pressure as aresult, but competition has since followed and were seeing the share coming back. So Ithink the soluble business is in good shape, the strength of the Nescafé brand helping us toget the necessary pricing.James Singh:Jeremy, on the pension question first of all I think the first half we have seen some goodresults from our pension plans, especially in Europe, the pension - the funding ratios havebeen up. We have some benefit of course by virtue of foreign exchange translation. Butover the last two years we have done a lot of work in trying to restructure benefit plans forpost retirement benefits. And we have started and weve made some good progress lastyear in some markets and this year we continue to do that.Last year we had about 125 million for the whole year, this year we would like to get closer -slightly above that. But what I must caution is that most of the benefits that we got last yearwas in the second half, whereas this year the benefits are in the first half. So that will sort ofaverage itself during the course of the year but we expect around that as a benefit from therestructuring of our post retirement benefit plans, with a big focus in Europe, where we havenot done that for many years, but now were doing this. So I hope that answers yourquestion.Questions on: Weighting of input cost increases Expected Consumer facing A&P in H2 What is Nestlé looking for in terms of M&A opportunities?Robert Waldschmidt, Merrill Lynch: 21
  23. 23. Nestlé S.A. Half Year Results 2011 Presentation SpeechGood morning, gentlemen. Two questions if I may. In terms of the margin bridge and howwe think about second half, I remember guidance was for margin to be stronger deliverysecond half weighted. Can you remind us in terms of input costs, that would be first halfweighted from memory, what do you expect the impact to be second half?And then two, in terms of A&P consumer facing, it was up in first half, can you illuminate forus how it will be in the second half? And then second question, youve mentionedunprecedented opportunities to invest in the business both organic and inorganic, can youremind us in terms of what opportunities youll be looking for in terms of deals, sizes,categories and regions perhaps? Thank you.James Singh:Just let me deal with the input costs, yes we did say that for the input costs this year, theimpact would be somewhere to the upper end of the range we had given which is CHF 2.5 to3 billion in terms of price and mix. We have seen slightly more than half of that impact in thefirst half of the year. So we do expect that there will be a marginal decline on impact on thesecond half of the year.On A&P we continue to spend to support our brands. You have seen in constant currencies,our consumer facing marketing was up 6.2% in constant currencies. And this was on top ofwhat we spent the same time in 2010 which was up 14% in constant currencies. So it is aninvestment priority for us and you have seen the benefits of that, primarily through theimprovement in market shares on a global basis and a strong real internal growth of 4.8% forthe first half.Just coming back on the input cost guidance, I want to maintain, I want to reiterate ourguidance on input cost this year for price and mix to be somewhere at the upper end of the2.5 to 3 billion CHF range.On capital expenditure, we have announced and thats portrayed on the slide, we haveannounced several major capital expenditure programmes around the world, primarily in theEmerging Markets, where we are experiencing very good growth. So that of course hasalways been a priority for us. And this year we will spend about close to 5 billion CHF - Imean that recognising that there is also an impact on the exchange. So we had said 5 to 5.5billion, given the exchange impact well be closer to 5 billion this year.On M&A we also have included that on the slide. Those are deals that have been completedand announced - not yet completed. And those are the projects were working on to makesure we bring them to a successful completion. I unfortunately will not give you any specifictargets, but I would say that we are looking for M&A opportunities all over the world, in thedeveloped world, in the Emerging Markets, and in categories that are of strategic importanceto our future. So we are focused on bolt-on acquisitions and that’s what we will continue todo.Robert Waldschmidt, Merrill Lynch:And on those deals, do you see more opportunities now than say a year ago, should weexpect the activity to increase?James Singh: 22
  24. 24. Nestlé S.A. Half Year Results 2011 Presentation SpeechYes, I would say in our industry I have seen a little more activity this year than last year andits not only in the Emerging Markets, its all over the world. But you know were going to bevery discriminate in terms of what is strategically compelling and with good financial logic andthats how we are pursuing these deals. Some maybe we will win, others we wont. Butthats how we have always conducted our M&A, executed the M&A strategy for the Group.Questions on: Raw material guidance Explanations on long-term financial investmentsJeff Stent, Exane:Good morning, Jim, good morning, Roddy. Two questions if I may. The first one, just on theraw material guidance, the 2.5 to 3 billion, given the strength of the Swiss franc thateffectively is an underlying increment. And Im just a little bit surprised at that given whatweve seen in a number of commodities. I know theres a lot of hedging, etc. but we still haveseen a number of your material inputs come down quite significantly over the last quarter.So Im just a little puzzled as to how on a sort of underlying basis youre effectively increasingthe commodities guidance further. So if you could shed any colour on that, that would begreat.And secondly on the long-term financial investments, could you give any colour as to whatsactually in there and also the rationale? So are you effectively using your favourable short-term borrowing cost to buy longer-term investments on the asset side? Or if you could justclarify a little bit the thinking behind it? Thanks.James Singh:Okay on raw materials in the guidance towards the 3 billion impact does include the benefitsof transaction exchange costs in the markets. So yes there is - the question is if everythingwas okay in the world would this number increase or go down? But unfortunately it is notand there continues to be significant volatility in the markets. So given where we are, and wehave spent slightly more than half that number already, I dont think its advisable to changebecause of volatility in currency and commodities. We have more or less seen someoffsetting impacts and we are confident the guidance to the upper end of the 2.5 to 3 billion iswhat we would likely experience this year.Roddy Child-Villiers:Also Jeff its worth remembering that our guidance was not based on prices at the time it wasbased on our expectation for how prices were going to evolve over the course of the year.So the guidance incorporated a view on the various commodities as well as on the currencyimpacts.James Singh:On the long term investments, its really the overflow of the income from Alcon dispositionand the timing horizons of our debt obligations. Some of the excess cash was invested inequities, in Asian equities where we are making a lot of investments in capital and also someof our M&A deals and in bonds. 23
  25. 25. Nestlé S.A. Half Year Results 2011 Presentation SpeechAnd then of course we also have some treasury shares which were holding. So as I said inthe discussion the nature of these investments are good from a return point of view but alsogive us the flexibility in the event we need cash in those parts of the world.Jeff Stent, Exane:Sorry Jim, just one point of clarification. Did you say some of this money has been investedinto European equities?James Singh:No, Asian equities.Jeff Stent, Exane:Right. But this is plain vanilla quoted equities is it?James Singh:Yeah, more or less, well, when you say plain vanilla, you know, these are blue chipcompanies in these markets and we have investment managers, this is being managed byour investment management company. So we have a target return for the Group assets andthat’s what we expect to get.Questions on: Organic growth guidance in H2 Net debt after end of buybackJon Cox, Kepler:Good morning guys, congratulations on the good strong sales figures there. I have a coupleof questions for you. First on the guidance, your 5% to 6% would be towards the top end thisyear and obviously you did 8.5% in Q2 and youre saying that pricing will actually increase aswe go through the year. You seem to be guiding that youre only going to be somewherearound 4%, 4.5% in the second half of the year, its all going to be volume - sorry, its allgoing to be pricing and actually volume will go negative. Is that a correct extrapolation ofwhat youre saying or are you just being slightly cautious as we still have some way to go forthe year? Thats the first question.The second question, Jim, previously you said you dont want Nestlé to go back to a AAAcredit rating. You said that you need probably 25 billion net debt on your balance sheet toavoid that. On my calculations at least, including your investments, youll be probably around7 billion at the end of this year because youve stopped the buyback programme. Is it stillyour aim - you know I can understand what youre saying about the M&A and you probablyhave a bit of a pipeline but can you still see you going back to the 25 billion net debt just onthe M&A? Im just wanting a bit more guidance on that if possible. Thank you.James Singh: 24
  26. 26. Nestlé S.A. Half Year Results 2011 Presentation SpeechOkay, Jon thanks and good morning. First of all on the organic growth guidance I think -yeah we are cautious because of the environment in which we are operating. And by theway to get even to 6% we have to do more than 5% for the rest of the year, were not sayingthat is what were going to do, but our guidance yes you can say we are being cautious. Ithink at this time this is what we believe is prudent to do. We are not letting up in theorganisation to do less. We will do and we will be competitive as we have done in the pastand as we need to be to make sure we get fair share of growth and continue to drive ourmarket shares.But at this time yes we are guiding towards the top end of our 5 to 6% range. You know welllook at it in the third quarter again, but we feel comfortable with this and we think thats agood challenge to the rest of the organisation to keep driving our competitive performance inthe marketplace.Roddy Child-Villiers:Jon, I think also the Q2 is perhaps not the right start point for which to base your expectationfor the full year, because the Q2 RIG was clearly inflated by the late Easter, so probably thehalf one is a better start point then the Q2 number if youre thinking about your full year. Wetold you back in Q1 that Q1 was impacted negatively and that Q2 would be impactedpositively on the RIG side, it clearly has been. So I think the H1 number is a better start pointthan the Q2 number.James Singh:Yes, and the other thing Jon is that the first half price was 2.7% and that’s what we said, thataverage will increase as the year progresses.Now coming back on the AAA and the debt level. We had said in London and during oursubsequent discussions that we were targeting by the end of 2012 that we will be back to anet debt position as to where we were at the end of 2009. And at the end of 2009 with Alconwe were about slightly over 15 billion, without Alcon we were about 18 billion. Sosomewhere between those two numbers is where we think we will be at the end of 2012,2013.So we have never mentioned a 25 billion CHF number, there must have been somemiscommunication. But that is what we said at the time and thats still our objective.With respect to AAA we said we believe that our current credit quality of AA, AA+ is a goldstandard that we strive for. We know as a company we are a AAA quality company, but weare very happy with where we are from a credit quality and a credit rating point of view. AAAis not an objective for our organisation.Jon Cox, Kepler:Okay. I wanted just some clarification on the pricing. I understood when you were talkingthat the Q2 pricing of 3.8% would actually rise as we went through the year. Youre basicallysaying now actually its a 2.7% average, we saw in April will rise as we go through into thesecond half of the year? 25
  27. 27. Nestlé S.A. Half Year Results 2011 Presentation SpeechJames Singh:Yes, because were talking cumulative Jon.Jon Cox, Kepler:Okay, but even sort of taking all that into account and obviously you had 4% odd pricing inQ2 and I presume H2 will be similar to that. You seem to be implying that there will be aserious deceleration in volume, or you guys are already working on the assumption that thevolume will decline close to zero by the end of the year. Am I being slightly too pessimisticwith what youre saying there?James Singh:Well I dont necessarily agree with you, you know we believe that a performance guiding atthe top end of a range is a prudent one. We have no expectation that our volumes are goingto be negative, because as I said we will continue to compete and we will drive acombination of RIG and price, albeit maybe price is going to be a slightly bigger part of themix going forward. But we are not expecting to have any kind of negative real internalgrowth numbers for the balance of this year.Questions on: Expectations for the currency impact for FY Treasury StockJulian Hardwick, RBS:Morning, two questions from me. One, Jim, on currency impact for the year I thought I heardyou say that for the full year you didnt think the currency impact would be as bad as the 13%odd decline in the first half. Is that correct? My numbers look as though it will still get worseby the time you get to the full year.And secondly just back on this long-term investment. Can you tell us how much of the 4billion is invested in your treasury stock? And presumably the right way to think about this isyour net debt is really 10.8 rather than 14.5 at the moment if were trying to sort of look atwhere youre - how youre going to get to your 15 to 18 eventual target?James Singh:Yes, I think on the currency Julian I think you may be right. If you look at the US dollar in thefirst six months this year compared to the first six months last year we moved from anaverage of about I dont know, 1.08 to about 90 cent, so it was 16, 17% as we said and thesame thing for the Euro.You know its difficult to predict, it could be slightly better, it could be slightly worse. But atthe end of the day we have to find a way to manage through this, as you see we have donein the first half. So its really difficult to give a guidance on currency impact given what wehave seen over the last two or three days, especially Swiss franc relative to other currencies. 26
  28. 28. Nestlé S.A. Half Year Results 2011 Presentation SpeechNow the last time I looked the Swiss franc relative to the Euro was about 1.05, 1.06 and 72,73 cents to the dollar. But it is a reality of our world and we have to manage that.Now the impact in terms of the margin was 20 basis points and thats also something wehave to manage and thats why we give our guidance in constant currencies, while alsomaking some important underlying improvements in our performance.Now the long term - as I said our net debt at the end of the first half was 14.5 billion and ifyou did deduct the long term investments, etc, it would have been 10.8, I think thats thenumber we use. So youre absolutely right there Julian.Julian Hardwick, RBS:And how much of that is treasury stock?James Singh:Two billion.Roddy Child-Villiers:The two billion is in addition to the four billion; we have four billion in long term investmentsand two billion in treasury shares.James Singh:Yes so the two billion is not part of - in other words if we were to convert - the two billion isnot part of the net debt, whether its 14.5 or 10.8.Roddy Child-Villiers:Just coming back on the currency comment since I made it in my speech. What I said wasthat it could lessen a bit due to the relative comparison versus 2010. In other words the - youknow the deterioration in the currencies was already happening the second half of last year,so the comparison is easier. Clearly if the currencies continue to deteriorate then you knowthe situation will get worse. But simply the point was that the relative start point is easier inH2 than it was in H1.Julian Hardwick, RBS:Sure. Based on where spot rates are sitting today, we would expect to see a negative for thefull year than you reported for the first half?Roddy Child-Villiers:Sure. 27
  29. 29. Nestlé S.A. Half Year Results 2011 Presentation SpeechQuestions on: Investments in securities Confectionery marginsDavid Hayes, Nomura:Hi, gentlemen, sorry, just a couple of follow ups. Just going back to that point earlier aboutthe investments youre making in other securities, I guess two things. Just in terms of wherethat comes through, is that included in the 2 billion of other investing cash flows? Im justtrying to reconcile that with the fact that short-term investments was an inflow of 3.9 billion inthe first half of the year.And then I guess also just in terms of mark to market of those investments, do you mark tomarket those investments at the end of each period and is that appearing as a profit or lossitem on the P&L and where does that appear? And then I guess related to that as well, if aninvestor said to us why are you investing in Asian blue chip securities rather than Nestléequities does that not mean you think Nestlé offers more upside? I just wondered what youwould respond to that. Thanks very much.James Singh:Okay, David thanks for the question, as you said - as you note we said before that we arealso investing in Nestlé equities. We have about just under a billion in Asian equities and wehave about two billion in Nestlé shares. And yes, wed likely continue to do some moreNestlé shares, depending of course on the price.Now, and sorry what was the other question David?David Hayes, Nomura:Just in terms of where you see those - that investment going through the P&L - through thecash flow and whether you mark to market the investment - the return on those investments?Roddy Child-Villiers:Yes, it is mark to market at the period end as you say and it goes into the comprehensiveincome statement, which is equity basically.David Hayes, Nomura:Okay, but not through financial income or any other, not through the main …James Singh:No, not through the operating - no.David Hayes, Nomura:And then sorry, one other operational question as well just in terms of the Confectionerymargin, obviously a big movement there. You explained some of the moving parts. Is thatthe new norm margin wise for Confectionery or is that a higher level than you would expect it 28
  30. 30. Nestlé S.A. Half Year Results 2011 Presentation Speechto hold or is that now what we should be looking for Confectionery to be able to sustain as amargin point? Thank you.James Singh:I think Confectionery as we said has got some benefits primarily in the administrative costreduction. And that will sort of normalise during the course of the year. So its not a target, Iexpect the margins will sort of flatten out for the balance of the year.David Hayes, Nomura:Okay, so more in line with last year or flatten in terms of the first half is just …James Singh:No we don’t give guidance on the margin, but just to say that it did get a benefit as we talkedfor this important reduction in administrative costs in the first half, which will sort of normaliseitself - not normalise but it will be less impactful in the second half, or the full yearcomparison.David Hayes, Nomura:Okay thank you.Roddy Child-Villiers:Also there are a lot of moving pieces going on in Confectionery, both the seasonality issue;also were seeing very strong growth in some of the Emerging Markets where we have verygood margins. So there is a - as youve seen over now I think three, four, five years eventhere has been a continuing trend of improvement and returns in that business. So there isalso an underlying clear improvement going on over time.Questions on: Infant formula in China Nespresso and Dolce Gusto outside Europe Dolce Gusto tie-in with Green MountainPablo Zuanic, JP Morgan:Good morning, everyone. I really dont have questions about the quarter but maybe two juststructural questions. Roddy, can you talk about your baby formula business in China. Youknow from outside we hear that Mead Johnson compete mostly in the premium segmentthan on, apparently, across the board in all the segments. Obviously the value, the low endof the market is not growing, so they seem to be losing share. Just talk about your businessin baby formula and remind us of what your market shares are in China, in baby formulaversus Mead Johnson, Wyeth and Danone?And then just a final one on Nespresso and Dolce Gusto, just give us some more colourthere. In the case of Nespresso, I think you said sales - likely growth as in the first quarter. Iguess that means more than 20%. Just how much of the business of Nespresso at the 29
  31. 31. Nestlé S.A. Half Year Results 2011 Presentation Speechmoment is coming outside of Western Europe? Whats the progress youre making in the US,particularly with Nespresso? And related to Dolce Gusto, whats the progress of thatbusiness in the US and other European markets say versus Tassimo or versus Senseoparticularly in Western Europe? That type of colour would help, thank youRoddy Child-Villiers:Thanks Pablo, just on China, its a relatively small business, its only a few hundred million,so its not exactly material to the results discussion so I havent got a lot of information on it.But the Nielson market shares are around mid single digit, they probably understate our truemarket share because were very present in rural areas where Nielson isnt. But thebusiness is growing very meaningfully in double digits, performing very well. Weve seen avery material acceleration in traction across infant formula, all the way through to the growingup milk business as well in China. That whole business is absolutely flying at the moment.So its doing really, really well.The market share as I say is not particularly accurate and also the reason that we would alsosay that the market share is not accurate is that weve been growing that business doubledigit, over 20% for a couple of years and the market share data point hasnt moved and therearent that many babies being born in China. So were clearly doing well, coming back from adifficult period three or four years ago, and were very excited about it. But its not a materialpart of the Nestlé Group.Pablo Zuanic, JP Morgan:But its still a material market right? Its one of the largest markets in baby formula in theworld. I mean youre big in Latin America in baby formula, not in China thats my point Iguess.Roddy Child-Villiers:Yeah and thats why its so fantastic that were doing so well in that business at the momentin China. Its absolutely a key market for us and were growing, as I say, way over 20% andits going really well.On Nespresso the performance is as you say it is. I havent got the percentage split forEurope relative to the rest of the world. It wont have changed very much from the lastnumber we gave you because Europe is as you know over 80%, growing double digit. So itsnot going to have changed materially from the last number that we gave you.The business is continuing to deliver double digit growth in its big markets, its growing muchfaster in the US as youd expect off a smaller base, again similar levels of growth that we sawin the first quarter and we quoted you a number then of around 50%.Dolce Gusto as we said its growing at over 50% globally, again, its a predominantlyEuropean business so the growth in Europe continues to be very, very strong. We quotedyou 400 and - I forget the number now, 420, 480 basis points of market share gain in systemsales in Europe. So that business clearly has real traction. In the US with the US launchwhich was primarily in Wal-Mart, that launch is going fine and the really good news about thelaunch is that where we have sold the machines the capsule consumption is higher thenwere seeing in most other markets. So the take up once the machines are sold is very, very 30
  32. 32. Nestlé S.A. Half Year Results 2011 Presentation Speechstrong and that is the reason why we are very bullish about that project going forwards in theUS.Pablo Zuanic, JP Morgan:Can I just have a follow on, obviously its very early days and you are doing well in the USwith Dolce Gusto, but given the explosive growth of Green Mountain coffee roasters and theirhuge size in single-serve coffee, would it make sense for Nestlé to actually make DolceGusto take cups for Green Mountain or - that would be action that would not make sense foryou?James Singh:Our strategy on Dolce Gusto is clearly one that is focused on our total control and executionand were doing - you know thats the strategy, thats the strategy were executing around theworld. And thats the model we have in the US and elsewhere, were not going to changethat.Roddy Child-Villiers:Also important to remember that the US market is growing well, indeed the global market isgrowing, but also the US market is growing very rapidly in systems. So its not about havingall to be in one system, theres room for a number of players in that market and we clearlyintend to be one of the leaders. Well we are the leader at the moment globally.Questions on: Investments in Nestlé shares International launch for BabyNesJon Cox, Kepler:The investments you have in your own shares and running parallel to the buybackprogramme. Im just wondering when youre actually investing in your own shares I guessyoure not using that second trading line, youre just coming into the market when you feelthere is an opportune moment. Or are you saying basically you wont cancel the 5 billionworth of shares that youll be completing in the next couple of weeks, you wont cancel themnext year? Thats the first question.Just secondly, just on the BabyNes you said its gone very well in Switzerland, just wonderingdoes that mean you will do a sort of a more of an international launch. Should we expectthat over the next couple of months and quarters? ThanksJames Singh:Okay Jon thanks, the shares - yes the treasury shares are bought in the normal market,whereas the share buyback is done on the second trading line. And yes the intention is whatwe do on share buybacks will be cancelled. So I hope that deals with your first question.I think BabyNes; we had a very successful launch, based on our criteria for the project. Andmaybe as we progress later on in the year we would likely give you an update Jon. But right 31
  33. 33. Nestlé S.A. Half Year Results 2011 Presentation Speechnow the focus is trying to get the launch right and all the dynamics that are included in takingsuch an important innovation to the marketplace. So were very focused in getting the Swiss,which is the first market, right, and building and using the learnings there to build aprogramme for the other markets.Jon Cox, Kepler:Okay, just to come back to this, you investing in your own shares. How should we thinkabout that going forward then? Will you just act opportunistically, if you think the share islooking interesting from however you might want to value it, and youd just come in and buythe stock and then wed hear about it every half year when you announce, or would youannounce it to the Stock Exchange in the normal way that - depending if key ratios are hitunder the Swiss Stock Exchange regulations?James Singh:Yes, you know I dont think we will get to a level where we have to make any disclosure. It isan activity we engage in from time to time but as I said its not a priority for us, its one way ofmanaging the cash flows in the short term.Roddy Child-Villiers:Before we did our share buybacks, the share buybacks for cancellation, I think if I rememberwell back in 2004 and before we only ever announced the treasury share amount annually,not bi-annually. So I dont think you can expect to have regular updates on whether werebuying or selling our treasury shares.Questions on: Special T Update Patent protection for capsule in 2012 Development trend in business in Poland, Russia andUkraineSimon Marshall-Lockyer, Jefferies:Yes. Good morning Roddy, good morning, Jim. Just a question one with the machine-basedsystems, can you just update us on Special T and the Viaggi machine? And could you giveus some indication as to the approaching deadline in respect to the IP losses around thecapsule in 2012; I think Im correct in saying?And the second question is could you give us some more granularity in perspectives inEastern Europe including Russia, but particularly on Poland, Russia and Ukraine, how thedevelopment of the business trended in the first half and what youre expecting there? Thankyou.Roddy Child-Villiers:Special T to start, Special T is continuing to perform very well, its to expectations. Were notgoing to give you any numbers because its so clearly not material at this stage. The clearfocus now obviously is to have a very successful Christmas season, as with the other 32
  34. 34. Nestlé S.A. Half Year Results 2011 Presentation Speechsystems machines, the big selling for the machines is during the Christmas season withgifting. But so far were very pleased with how Special T is going.On what you call the capsule 2012 issue, fundamentally we have a whole series ofprotections around the Nespresso systems; there isnt one issue thats going to be material tous. Ive got no update to give you because theres nothing new that happens its just asituation that we will have some patents come off protection in 2012 but all the other patentswill continue to be on protection and theres no material business risk to Nespresso.Russia is a bit of a mixed picture, if you start with the Zone, the impulse business, primarilyChocolate which is our big Zone business continues to suffer from poor consumer sentiment.The other less impulse more fundamental businesses like the Soluble Coffee business, theSoup business, are doing very well and Ice Cream is also doing okay.If you go out of the Zone into Nutrition, the Nutrition business is doing terrifically well, doubledigit growth now for a number of years and no let up there, going very well. And also Imentioned in my presentation PetCare also performing very well in Russia. The Ukraineespecially performing very well indeed across the business.Weve been quite active, as you know in recent years in acquisitions in the Ukraine, we havea super business in the Ukraine, weve also recently opened our Shared Service Centre forEurope in the Ukraine and that business is performing very, very well indeed.James Singh:And Poland, I think were having reasonable progress for the first half. So were quite happywith the markets that you mentioned. Russia continues to improve, albeit a bit slowly.Roddy Child-Villiers:And the other exciting news in Russia is that were opening a Nescafé factory imminently, itmay even have just opened. So thats a big benefit to us in terms of levelling the playing field,having local manufacturing of Nescafé in Russia.End of Q&A SessionJames Singh:Well thank you for your attention this morning, your time and attention. Youve seen we havedelivered a very solid performance in the first half, which really gives us the confidence thatour strategies are working, even in these difficult times as we look at the business and theeconomic environment in which we operate around the world.The performance in the first half gives us confidence that we can once again recommitourselves to achieving the Nestlé model in 2011, which as you know - and this time wereiterate the organic growth at the top end of our 5 to 6% range and an improvement in ourmargins in constant currencies. Thank you.End of call. 33

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