9 mnth sales investor call transcript


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This is the transcript of the investor call presentation given by Roddy Child-Villiers, head of Nestlé IR, followed by the Q+A session with analysts, on October 20 2011, and broadcast live via ir.nestle.com

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9 mnth sales investor call transcript

  1. 1. NESTLÉ S.A.2011 NINE MONTHS SALES CONFERENCE CALL TRANSCRIPTSPEECHConference Date: 20 October 2011Chairperson: Mr Roddy Child-Villiers Head of Investor Relations Nestlé S.A.DisclaimerThis speech might not reflect absolutely all exact words of the audio version.This speech contains forward looking statements which reflect Management’s current viewsand estimates. The forward looking statements involve certain risks and uncertainties thatcould cause actual results to differ materially from those contained in the forward lookingstatements. Potential risks and uncertainties include such factors as general economicconditions, foreign exchange fluctuations, competitive product and pricing pressures andregulatory developments. 1
  2. 2. Title SlideGood morning everyone. Welcome to the Nestlé nine-month sales call. My presentation willbe short as I think you are all aware of the trends in our business.Slide 1 - DisclaimerI will start by taking the safe harbour as read.Slide 2 – Performance Highlights: 9 MonthsAs you have seen from our press release, our top line growth remained solid. Weve seen acontinued pick-up in pricing and an easing in our real internal growth or volume as weexpected. This Group dynamic between pricing and RIG is repeated in our primaryreporting segments and will continue to deliver positive growth. This dynamic is the samealso in most product categories, exceptions being Confectionery and PetCare. The RIG forConfectionery was unchanged from H1 and the pricing increased, whilst PetCare deliveredboth increased RIG and increased pricing. Currencies have remained a major headwind onour reported numbers.Our outlook is that we now expect to slightly outperform our long term 5% to 6% organicgrowth range and we continue to strive for margin improvement in constant currencies.Slide 3 – Key elements of SalesNext the key elements of sales. Organic growth was 7.3% with RIG of 4.1%. Currencieshad a negative impact of 15.1% due to the continued strength of the Swiss franc. Also ourreported numbers include an impact from the sale of Alcon, resulting in a 5.7% reductionfrom divestitures net of acquisitions.Slide 4 – Regional Performance: Growth EverywhereLooking briefly at the sales development by region, we achieved 5% organic growth inEurope, 5.8% in Americas and 13.1% in Asia, Oceania and Africa. This demonstrates howbroad spread is our growth and it demonstrates our ability to deliver growth even in themost difficult, more constrained markets.Slide 5 – Growth in all EnvironmentsOn this next slide you can see a bit more granularity. As I was just saying, we are deliveringgrowth in more growth-constrained markets, such as the PIGS with 3.7% organic growthand in the more dynamic markets such as the BRICs with 12.3%. Emerging markets as awhole grew by 13.1% and the developed by 4%.Slide 6 – Operating Segments: All GrowingLets now have a look at the Zones and globally managed businesses. Heres the overviewchart and you can see that we have continued to grow in all our operating segments. I willnow go into the detail of our performance, starting with the Americas. 2
  3. 3. Slide 7 – Zone Americas: Growth in North & SouthOrganic growth was unchanged at 5.6% with increased pricing. Growth in North Americapicked up. In Latin America it remains above 10%.Looking at North America first, the biggest category, PetCare, had a good third quarter aspromised though its categories remained subdued. Market shares have improved.Innovations are driving this outperformance. The recently launched One Beyond inparticular is going well.In Ice Cream the pricing accelerated in the quarter due to super premium and snacks.Market shares were about flat. Growth in Frozen Food was unchanged although thecategory has if anything slowed further. That said, our innovations such as snacks for LeanCuisine have been well received.Pizza continues to perform well and gain market share. It is worth noting that the homedelivery pizza segment has slowed somewhat so the players there have increased theirpromotional activity. In Chocolate the Skinny Cow launch is doing well with early indicatorsvery positive. In CoffeeMate, the Natural Bliss launch is exceeding our expectations. This isan important launch, as it takes CoffeeMate into Dairy creaming rather than beingexclusively a non-Dairy creamer. Dairy creaming is about 30% of the coffee cup market,which was previously not open to CoffeeMate. The other recently launched CoffeeMaterange Cafe Collections is also performing well.Turning to Latin America, we are continuing to achieve double-digit growth in thosemarkets. Categories and brands going double digit include Nescafé, Chocolate, Maggi,PetCare and Powdered Beverages. The biggest category in the region is Dairy, which isgrowing high single digit. Among brands, I would highlight the rollout of Nestlé Ninho liquidmilk with probiotics, Nescau Powdered Beverage in Brazil, Nestea and Nescafé in Mexico,and Maggi in Venezuela.Slide 8 – Zone Europe: Growth in East & WestNext is Zone Europe. As you would expect, with organic growth of 3.8% for the Zone andpositive RIG in all Western European markets, our market share performance has beengood. The Zone achieved another quarter of positive growth and this was even with a poorIce Cream season. Ice Creams most important month is July, which had its worst weatherin 30 years. Our ability to deliver growth in the Zone as a whole, regardless of the impactfrom Ice Cream, demonstrates the strength and the sustainability of our growth in Europe.I think you know well by now the Nestlé theme in Europe, compelling innovation targeted atspecific consumer segments. For example, look at the success of Juicy Roasting in the UK.Maggi is not an established brand in the UK. So, Juicy Roastings success theredemonstrates the integrity of the concept. Equally in France we are selling one JuicyRoasting every second. Juicy Roasting is now rolled out across much of Europe as well asin other markets around the world. It is interesting to note that Juicy Roasting is the startpoint for innovation in this category. I look forward to briefing you on the coming innovationin the months and years ahead.Equally Nescafé continues to benefit from a range of innovations, from super-premiumNescafé Dolce Gusto to renovation on the premium Nescafé Gold Blend to the continuedrollout of Nescafé Green Blend with its Health and Wellness messaging around antioxidant, 3
  4. 4. to PPPs such as Nescafé 3-in-1 in sachets launched successfully in a number of WesternEuropean countries.Turning now to the Zones markets, France has continued to perform at a high level. TheUK has accelerated from the first half. Its competitors have increased pricing, particularly inSoluble coffee. Eastern Europe remains a mixed picture with Russia and Polandexperiencing subdued trading but Ukraine and Asiatic region enjoying double-digit growth.Culinary and Powdered Beverages as well as PetCare are performing well in the east.Among the Zones categories, I would highlight the growth of Soluble coffee, Culinary,Pizza, Sugared Confectionery and Chilled culinary, particularly Herta in chilled. Also thepan-European PetCare business has accelerated in the third quarter with rollouts of Felix,One and Pro Plan amongst highlights. Our drive for growth and market share in EasternEurope is going particularly well.Slide 9 – Zone AOANext is Zone AOA. Organic growth was unchanged from the previous quarter at 11.7%,though with higher pricing. RIG remains an impressive 8.2% for the nine months.The Japan and Oceania region has continued to deliver positive growth. Japan has had avery resilient year. Coffee is performing well. Innovations include the two Nescafé systems,Dolce Gusto and Barista, as well as new variants in Soluble coffee. In Chocolate KitKat isperforming well. A new launch is KitKat Black. This is a KitKat with a very dark, slightlypowdery textured coating. It tastes fantastic. It is aimed at a more mature consumer thanthe standard KitKat, which is perhaps why I like it. In Oceania, the retail environment withbasically just two players is very price competitive, making for tough trading conditions.The Zones emerging markets have continued to perform well with most double digit.Greater China, the Middle East, Africa, Indo-China, South Asia and the Philippines are allperforming well. Growth in the categories is consistent with trends earlier in the year. Thebiggest are achieving double-digit organic growth and have high levels of RIG. Dairy,soluble coffee, culinary are all contributing well, and our smaller categories, such as Ready-to-drink Beverages and Ice Cream. Brands to highlight include Nido, Nescafé, Milo andMaggi. Finally, on the Zone, I have no news to now on the closing of the two transactions inChina.Slide 10 – Nestlé Nutrition – Growth in all ZonesNext is Nestlé Nutrition. Infant nutrition is the biggest division. The division achieved highsingle-digit growth for the nine months, 9% plus, with a slight slowdown in Q3, which wasup against a very strong comparative quarter in 2010. In the US we were lapping thestocking of a new WIC contract from the third quarter of 2010 as well as a competitor recall.Also the Baby Food category there was under pressure due to the weak economicenvironment. Europe continued to grow with France particularly strong. Growth continueddouble digit in the emerging markets in all three Zones.All the subdivisions, being formula, cereals, and baby food, contributed well. Highlights forthe nine months included Russia, China, Africa, South Asia, as well as a number of LatinAmerican markets. Recent innovations, be those colic (prevention) in infant formula orprobiotics in infant cereals, for example, are performing well. Just a word on BabyNes, the 4
  5. 5. launch has had a good first few months and 92% of customers would recommend it tofriends and family, so a good start.Both the other divisions, Jenny Craig and Performance Nutrition, enjoyed strong growthinternationally, Jenny in France in particular and Performance in AOA, but were held backby continued subdued trading in the US. Both are impacted by the poor economic situationthere..Slide 11 – Nestlé Waters – Growth in all ZonesNext is Nestlé Waters. Organic growth was 4.7% for the nine months. The North Americanbusiness continued to be price disadvantaged following its price increases in Q2, whichimpacted volumes and shares. We continue to see good growth, however, for Perrier andSan Pellegrino in the US. Weve also now seen a few quarters of improving momentum inthe US home and office delivery business, which is benefiting from an improved valueproposition with Nestlé Pure Life. The European water business performed well in asubdued market, gaining share in all key markets. The emerging market business continuedto deliver double-digit growth.The international brands were the key drivers of growth with Nestlé Pure Life, SanPellegrino, Perrier, Acqua Panna, and Vittel all performing well.Slide 12 – Other: Growth in all ConstituentsNext is our Other segment, which includes Nestlé Professional, Nespresso, Nestlé HealthScience and our joint ventures.Nestlé Professional is having a good year with high single-digit growth. The emergingmarkets are growing double digit, whilst growth is positive also in the developed markets.The Beverage division is the key growth driver, as we would expect, with double-digitgrowth. The new premium machines, such as Milano and the new super-premium machineViaggi, had a good reception with customers and are building their presence. As anexample, we have placed about 3,000 Milano machines with a QSR in North America. TheFood division is performing well relative to its industry with mid-single-digit growth and isgrowing in all parts of the world. In common with Beverages, pricing actions have someimpact on RIG, but these are necessary to ensure we start 2012 at the right price points.One thing to highlight is our work with hospitals. We are now able to demonstrateconcretely that in hospitals where Nestlé Professional is providing customized foodsolutions for patients, the improved nutritional content is contributing to shorter recoveryperiods. This is a measurable benefit for hospitals as it demonstrates that we dont justimprove supply chain management, but we also contribute to beds being freed up fasterthan previously. Beds or so-called hotel costs are amongst the highest costs for hospitals.Nespresso continues to grow around 20% and is on track to have around 250 boutiquesopened by the year end. Nestlé Health Science is integrating its recent acquisitions. It isseeing good growth in its existing healthcare nutrition business and is gaining market share.The Food and Beverage joint ventures, Cereal Partners Worldwide and Beverage PartnersWorldwide, contributed mid-single-digit growth.Slide 13 – Product Categories: All Growing 5
  6. 6. I wont spend long on the product groups. The key message on this slide is the continuedbroad-spread growth with all categories contributing.Powdered and liquid beverages saw a slight acceleration in the third quarter and delivered12.6% organic growth for the nine months. The product groups constituents, SolubleCoffee, Powdered Beverages, Liquid Beverages and Nespresso, all contributed to thestrong performance. Growth was double digit in Zone AOA and Zone Americas and highsingle digit in Zone Europe and Nestlé Professional. Just a word on Nescafé Dolce Gusto. Ithas sold 4 billion capsules since launch, is achieving above 50% organic growth, is in 41countries and is already market leader in 20 countries.In Milk Products and Ice Cream I would highlight the continued strong performance of Dairy,which is growing double digit, even if increased pricing has had some impacts on RIG.Highlights include the strong performances of our PPPs, of our higher value-add growing-up milks, and of the launch in Latin America of liquid milk with probiotics. To mention just afew countries and regions, China, Pakistan, Africa and Mexico are among the highlights. IceCream Ive already covered; it was a reasonable performance in a weak season.Moving to prepared dishes and cooking aids, ambient culinary, which is predominantlyMaggi, continues to deliver strong growth and good market share performance generally. Imentioned Juicy Roasting earlier. Some KPIs for you, we will sell 200 million packs in 2011globally with organic growth of above 50%, we are the leader in 32 out of 34 markets andhave 88% share overall of the category. Ive already discussed Frozen and Pizza in the US.Confectionery is next. I just remind you that Q2 is positively impacted by the late Easter sothe right comparative for Q3 is the first half number. With that in mind, 4.4% organic growthfor the nine months reflects a slight increase in pricing and unchanged RIG. The emergingmarkets continue to perform well with double-digit growth in Asia and Latin America andhigh single digit in Africa. In Europe, France and Germany are performing well, whilst wegain share in the subdued UK market.Finally in Confectionery, we today announced the launch of Maison Cailler. This is a directconsumer online model, offering the highest quality chocolates tailored to customersindividual tastes. There will be more on this at our press conference after my call.Ive already discussed PetCares improved performance. We grew market share in allregions and all major segments. Growth in emerging markets continued strong with, forexample, double-digit growth in Latin America and Central and Eastern Europe. The Q3acceleration was in line with the promise we made you on our first half call.Slide 14 – ConclusionThat concludes my presentation. To summarize, we continue to grow at a good level with7.3% organic growth. The environment is tough, particularly in the developed markets. Thatsaid, we expect to slightly outperform our 5% to 6% long term run rate at the full year.Equally we are striving for an improvement in the margin in constant currencies.Thanks very much for listening and lets go to the questions. 6
  7. 7. Question and Answer SessionQuestions on; Detail on outlook and margin Trends in cash flowDavid Hayes, Nomura:Morning Roddy. Just two things. Firstly just some detail on the outlook. Obviously usingthis word slightly above 5% to 6% and I dont want to get too specific about how you definethings, but I just want to see whether you feel that youre comfortable with consensus,which is around 7%. What you would define by slightly above that 6% level?And then similarly on the margin, youve moved to saying youre striving for margin uplift.And you talk about A&P uplift to support innovations in the release. Again I just wonderwhether youre as confident now as you were at the first half on the margin side andwhether thats at both the trading profit level and the old definition of operating profit level.And on the second question is, slightly off the sales numbers, on the cash flow. As wetalked about the first half, obviously inventory was up substantially in the first half. Therewas other cash outflows. I just wonder whether you can give us any indications in trends oncash flow in the second half and whether some of that inventory has been unwinding.Roddy Child-Villiers:On the outlook, Im not going to get into a discussion about how many basis points slightlymeans. Weve given you our guidance on the top line. You know where we are at themoment with our organic growth. We believe were going to slightly exceed our long rangerun rate.Now on the question about the striving to achieve, I think its also a good question. The keymessage here is that we are committed to the Nestlé model. And Ive already discussed onmy call some of Nestlé’s specific issues in the third quarter. The other things that havechanged since the first-half results, no question that consumer sentiment has turned downin Europe, has turned down in the US. Equally the Emerging Market currencies are weakeragainst the US dollar and Swiss franc. So I think our guidance about striving is simply beingsensitive to the environment that were in. But, as I say, we are still committed to deliveringthe Nestlé model.Now you asked on which margin we are guiding. Our press release guidance has alwaysbeen on the old EBIT, underlying EBIT margin. So thats where were guiding.On cash flow, Im not going to go into any detail on cash flow on a sales call. I will reiteratewhat we said at the half year, which is that one of the reasons for our cash flowperformance, setting aside the currency impact and the impact of selling Alcon, was that wewere using our cash flows as a way to hedge input costs, hence, as you say, the highinventories. We did say to you at the half year that our cash flow performance wouldimprove in the second half of the year and what we are seeing year to date underlines ourconfidence that that will indeed be the case. 7
  8. 8. Questions on; Regional split of PPPs HOD water business in USAlain Oberhuber, MainFirst Bank;A question about PPP, strong growth rate again. Could you break up in which areas yourecurrently now in, how much is proportion of PPP when we look at Asia, Latin America andEurope?On the other side, Im interested in the US home and office delivery water business. Couldyou elaborate a little bit, what did you exactly do in order to get traction again and if themarket environment for HOD has clearly improved as well?Roddy Child-Villiers:Thanks Alain. Ill just repeat the questions in case people didnt hear as I could hardly hearthem. The first one was on PPPs and I think it was the regional split between the PPPs.We havent given the regional split. Weve said that we had around CHF11b of sales inPPPs last year. As I showed you on the chart, theyre growing low single digit. The bulk ofthe PPPs are clearly in AOA and the Americas. Its a growing part of the Europeanbusiness. Our PPPs in Europe are growing meaningfully faster than the European average,but Im not going to go into a split of PPPs by region.On the HOD business, as you I think are all aware, the US home and office delivery waterbusiness suffered quite severely following the downturn in 2008. And what weve done iswe have moved the mix of the product in the lorries so that we now have Nestlé Pure Life inthe lorries. We have bottles, smaller bottles as well as the five-gallon tanks. Theyve reallychanged the offer to consumers and weve made it a more affordable proposition forconsumers, and that has been a catalyst for getting growth back into that segment for us. Icant tell you, Alain, I dont know Im afraid whether the segment as a whole is enjoying abetter trading environment, but certainly our business in the segment is.Question on; Impact of economic situation on business performanceJames Edwards Jones, RBS:Just picking up on your comment about declining consumer sentiment in Europe and theUS, can you say anything about the trajectory of your performance through the quarter?And as the economic news got worse did that have any discernible impact on your businessmomentum?Roddy Child-Villiers:Its hard to say. In Europe our weakest month was clearly July because of the Ice Creambusiness. And in fact if you take Ice Cream out of the European numbers, then there wasno slowdown at all in Europe in Q3 from H1. But consumer sentiment doesnt just impactthe top line. It impacts the business as a whole. But I think its important that we should besensitive to the environment were operating in, in giving you our guidance and thats whyweve slightly adjusted the guidance. In North America theres no particular variation monthon month in terms of performance. 8
  9. 9. Question on; Nutrition performanceSusanne Seibel, Barclays Capital:Can you talk us a little bit more in detail through the Nutrition business? On a quarterlybasis the RIG is down to 2.5% in Q3. I assume that wasnt all down to Jenny Craig. Couldyou give a little bit more detail on that performance please?Roddy Child-Villiers:I think the starting point is the tough comparative. In Q3 2010 Nutrition had 8% RIG. So wewere always going to be up against that as a tough comparative. The slowdown hasactually got nothing to do with Jenny Craig. Jenny Craigs performance isnt good, but its noworse in Q3 than H1. So Jenny Craig is a net no impact on the quarter.So the slowdown is really due to Infant Nutrition. It is weaker in the US. The issues in theUS are we had, obviously part of the tough comp relates to the competitor recall last year.Last year we also won a WIC contract, which we were stocking in Q3 of last year. We donthave the same benefit this year. There is a slowdown in Baby food, which we think is a bitrelated to the economy as well. So those are the main reasons. We think that Q4 will be abetter quarter than Q3 because of the comp issue in Q3.Question on; Factors behind Coffee business performance Emerging market growthPatrik Schwendimann, Zürcher Kantonalbank:First question regarding the coffee beverages business, which still had outstandingperformance, plus 12.6% after nine months. Was there any extraordinary in here or can weexpect a similar performance in the near future? Thats my first question.And secondly regarding the emerging markets still growing very, very nicely. Here again notany slowdown here, even not in Brazil?.Roddy Child-Villiers:Yes, there are no extraordinaries in the Coffee business apart from the extraordinarilystrong performance of Nescafé, of the Dolce Gusto and of Nespresso, but theyre notunusual. Nescafé, total soluble coffee Nescafé is growing double digit off a near CHF11bbase. It was doing so in the first half of the year. Its doing so for the nine months and thenactually its slightly accelerated. Nespresso continues to perform at the same level as it didin the first half of the year. And within that Nescafé number you have Dolce Gusto doingover 50% organic growth. So the whole coffee business is really performing extremely well.And if you go back to our growth drivers and you think about what those are, Nutrition,Health and Wellness, youve got good argumentation around Green Blend. The PPPbusiness is going terrifically well in the emerging markets. We also had a lot of successlaunching these 3-in-1 sachets in Western Europe. Thinking about the out-of-homebusiness, I mentioned the Milano machines in my presentation, Viaggi. The out-of-homebusiness is going very well and thats growing double digit in soluble coffee. Andpremiumisation of course is Dolce Gusto and even more so Nespresso, and again growingdouble digits. 9
  10. 10. So I think what is interesting about Soluble Coffee is that its the poster child of how to drivethe growth drivers that we talk about in our presentations at the Group level. So nothingunusual in the quarter, just consistent, good strong performance.On the Emerging markets, no, theres nothing, theres no consistent theme. We looked atAfrica. Youre seeing higher RIG and higher pricing. You look at the rest of the Asianemerging markets, there is pricing, pricings up in almost all of them. Some have got higherRIGs, some havent. Latin America, good performances across the regions. And then thetwo big markets, Brazil and Mexico, also pulling their weight. So theres no sign of aslowdown really in the business.Questions on; Pricing reductions towards the end of the year Outlook for RIG in North AmericaJeremy Fialko, Redburn Partners:A couple of questions. Firstly on pricing, clearly weve seen quite a lot of commodities comeoff. Are there any areas where you do have more spot-related stuff, particularly in Dairy,where you could see some sort of pricing reductions towards the end of the year?And secondly, on the Americas, it looks like the RIG, if you were looking at just NorthAmerica, would have been negative in the quarter. And whats the outlook there? When doyou think that might start to turn positive again?Roddy Child-Villiers:Pricing, fundamentally on raw materials were done for the year in terms of our cost baseand were also effectively done for the year in terms of pricing. And I dont think youre goingto see any impacts in our numbers in terms of pricing coming off and were not expecting tosee pricing coming off in any of these categories. I think bearing in mind that its, that thepricing number you see is based on the 2011 quarter against the comparable 2010 quarter,were still going to see increased pricing in the final quarter of this year rather than areduction in pricing. So I dont think youre going to see any reduced pricing.The North American RIG actually improved slightly in the third quarter, which was primarilydue to the very strong performance of PetCare. So there wasnt a slowdown in the NorthAmerican RIG.Jeremy Fialko, Redburn Partners:But it was still negative in the quarter?Roddy Child-Villiers:American RIG was, for the business in the Zone it was negative, yes.Jeremy Fialko, Redburn Partners:And I just was wondering do you think that will become positive towards the end of the year,next year, any comments there? 10
  11. 11. Roddy Child-Villiers:We would certainly like them to make it positive, but I think its a tough call in one quarter toturn that RIG into a positive RIG. So hopefully it will be next year rather than at the end ofthis year.Questions on; Input costs guidance Retailer promotion activity in UKRobert Waldschmidt , Bank of America Merrill Lynch:Just to come back on the input costs, can you just remind us where you are with respect tothe absolute increases? Is it still at the top end of the range?And then in light of what Jeremy said in terms of input costs coming down, do you have anearly read on where we might be heading into 2012?And in terms of US and Europe, can you update us in terms of the retailer promotionalsituation in the UK? Tescos clearly been trying to be more aggressive on pricing and whatif any impact is that having on your business?.Roddy Child-Villiers:On the input cost guidance, we guided to CHF2.5b to CHF3b of incremental cost. We saidwed be at the higher end of that range and thats good guidance. Theres no change in theguidance.2012, I think when the environment is as volatile as it is the best way to give good guidanceis to give late guidance and Im not planning to give any guidance for 2012 in October 2011.Assuming that raw materials are an issue in 2012, then well obviously give you someguidance in February next year, but not until then.On the retail promotional side, yes, youre right. Its clear that theres an increased level ofprice promotional activity in the retailers in the UK. The question is really just who will endup paying for that, whether itll be them or their customers. Equally, its not necessarilyacross all categories, not necessarily across all brands, but obviously that goes to myearlier comment about weakening consumer sentiment in Europe and North America. Andthats one of the ways that our customers are responding to that sentiment. So its part ofwhat I said earlier on about us responding to the environment in which were operatingRobert Waldschmidt , Bank of America Merrill Lynch:Okay. And just to build on that, weve seen the promotional activity increase in UK. Youveseen that in, also in concrete form in other places like France and Germany.Roddy Child-Villiers:The French business, we are having a fantastic year in France. Were gaining share inevery category. All our categories are positive in France. Even Ice Cream is positive inFrance despite the summer. Germany certainly is tough. The cClinary category was tough,but when wasnt the Culinary category tough in Germany? Ice Cream business is, I thinkthe Ice Cream business is the weakest business in Germany, but then again that relates to 11
  12. 12. July. So I havent got a specific comment on Germany beyond my earlier comment that theconsumer sentiment is weaker.And actually you guys must follow the VIX Index, sometimes known as the fear index. If youlook at that back at the end of June it was at 16 and now in this week its at 32. So the VIXIndex has doubled, which tells you a lot about how the markets are thinking about risks interms of macro risks. And thats the environment that were in so not surprisingly that theresa bit more promotional activity.Question on; Pricing and RIG in Q4Warren Ackerman, Societé Générale:Can I go back to an earlier question? I think it was a question from Jeremy. Can you justclarify your comment about pricing? Did you say that pricing will be higher in Q4 than Q3?Now I think Q3 pricing was around 4.2% so are you saying that Q4 pricing is going to behigher than 4.2%? And how does that tally with your comments that most of your pricinghas actually been done?And does it therefore follow that you that RIG will continue to decelerate in the final quarter,especially given I think quite a tough RIG comp youve got? I think it was 5% for the finalquarter. I think Europe also had a very strong final quarter. Can I just clarify that please?Thanks.Roddy Child-Villiers:Sure. I wasnt making a specific Q4 comment, but Q4 2010 is the benchmark for the Q42011, not Q3. Its pricing on pricing from the prior year. So we are clearly going to seepositive pricing relative to where we were last year because of the raw material situation.We have said all along that we expected pricing to increase over the course of the year.Now frankly whether it increases by more or less in Q4 than it did in Q3, I dont know. But itwill continue to increase, we expect, over the course of the year, but it may be at a lowerrate than in Q3.We dont measure pricing quarterly, as you know, on a backward-looking basis. Wemeasure it cumulatively. Equally we dont do the pricing at the centre; its done in themarkets. And equally its based off the prior-year quarter. So trying to work out in advancewhat the quarterly pricings going to be to a few basis points is not really worth the effort.Roddy Child-Villiers:The trend is clearly for improved pricing and youve seen already this year that as wevetaken improved pricing the RIG has come down a bit. So thats all taken into our guidanceof slightly outperforming our 6% long term run rate.Warren Ackerman, Societé Générale:And would you expect the RIG to continue to decelerate in the final quarter, that trend tocontinue that youve seen through the year, given the comp?Roddy Child-Villiers: 12
  13. 13. Theres always a risk, Warren, that your RIG comes down when your pricing goes up. Onthe other hand Q3 was a weak quarter for RIG because of the Ice Cream season. So againits not necessarily saying its going to be weaker than it was in Q3, but there is a risk thatpricing will impact RIG.Warren Ackerman, Societé Générale:Okay. And are there any special factors you would highlight for Q4? I think Europe had avery strong end to the year. Their RIG was up almost 3%. Are there any other factors youwould point to?Roddy Child-Villiers:I dont think so, no. I dont think there are any particular Q4 issues. No.Question on; Direction of pricesJeff Stent, Exane BNP Paribas:Just thinking about pricing again, if you think sequentially, are there any areas of thebusiness where sequential prices have actually been slipping downwards as opposed toupwards? Thanks.Roddy Child-Villiers:No.Jeff Stent, Exane BNP Paribas:Okay, clear. Thanks.Questions on; Frozen integration Capital investments Maison Cailler market rolloutThomas Russo, Gardner Russo & Gardner:Numbers worth getting up for. Congratulations. Roddy, a couple of quick questions. First,North America, the frozen integration, hows that coming along, the frozen integration?Roddy Child-Villiers:Were still in the midst of it. Tom, there isnt -- I dont really have an update. In terms of thehead office integration, thats done, but in terms of the nitty-gritty of integrating the Pizzadirect-store delivery with the Ice Cream store delivery, its still pretty early days. I think weregoing to be well into next year before we have concrete evidence of benefits comingthrough from there.Thomas Russo, Gardner Russo & Gardner:Okay. Thanks very much. And then just an update on the ability to commit the extra fundsto the capital spending and development of emerging markets. I think at midyear you said 13
  14. 14. that the numbers would go from CHF1b to CHF2.5b in 2011. Im curious how that spendingincrease has been effective thus far.Roddy Child-Villiers:Yes. We have been -- if youve been following us on the website, no doubt you saw, forexample, a couple of days ago, the announcement of the new soluble (coffee) factory inRussia, another one about a Dairy factory in Algeria. So the investments are going throughas planned and as quickly as one can effectively manage the capital process in terms ofactually building the facilities. Clear though that the way that the currencies have moved,our original CHF5.5b number is a high number. Were still committing to the same amountof, if you like, incremental volume capacity, but obviously in Swiss francs its costing usless. But yes, were going to be somewhere around the CHF5b number, I would guess, bythe year end for the Group as a whole.Thomas Russo, Gardner Russo & Gardner:Thank you. And then the Maison Cailler was quite interesting. You said it was homedelivery direct, customized to consumer. What markets would that roll out to and what areyour thoughts on that?Roddy Child-Villiers:My thoughts are obviously very excited as a Chocolate lover. The concept is that youll besent or you will send your loved one a selection of particular flavoured Chocolates fromwhich she will then be able to design her preferred -- well, Maison Cailler will be able todesign her taste preference and then tailor Chocolates to her particular desires, which tome sounds like a pretty exciting concept. Im not fully up to speed on which markets itsgoing to be launched in. We tend to do these online launches in the domestic markets firstand then go from there. So I guess therell be a European launch and then expandthereafter.Questions on; Categories most impacted by consumer sentiment in N. America Trend in Q3 for Water in EuropePierre Tegner, Natixis:I have just a question coming back on North America. We understood that probablyNutrition business and pet foods are quite sensitive or are short sensitivity to the toughconsumer environment. Are you seeing other categories where you are surprised bypositive or negative sensitivity regarding the decrease in consumer confidence? And Imreferring to what you were seeing two years ago when the environment in terms ofconsumer was quite tough. Are there some big changes in relative to years ago? And whatare the key categories which are particularly sensitive apart from the Nutrition business andthe pet food? ThanksRoddy Child-Villiers:Thanks, Pierre. I think the -- it was quite a bad line, but I think the question was about thecategories most impacted by consumer sentiment in North America. I think if one starts with 14
  15. 15. Nutrition, clear that Jenny Craig has been very heavily impacted. And the reasons for thatare really around the fact that it is a relatively high-cost approach to weight managementbecause its based off a one-on-one consultative service. Another area, also PerformanceNutritions been somewhat impacted. Its clearly a discretionary category.Going into Frozen, the Lean Cuisine and the higher value or the higher-priced more superpremium, premium, single-serve dishes have been impacted. Lean Cuisine is a bit thesame dynamic as Jenny Craig in that its generally bought by housewives who are tendingto prioritize their other family members over themselves in their shopping. So Jenny Craig,Lean Cuisine, Performance Nutrition.The premium segment of Ice Cream, and premium in the US is the same as mass inEurope, but the premium segment of the US ice-cream market is clearly being impacted byprivate label gains. And then PetCare, the PetCare category has certainly slowed. The petreplacement rate has come down. That said, weve had a very strong third quarter and again in share in the category.I think those are the main categories that are impacted. And of course, HOD water wetalked about already, although we seem to have found a relatively good response to thechallenges there. So I think those are the main categories that are impacted.Pierre Tegner, Natixis:Okay, thank you. And a second question on the water business in Europe. Could you giveus an indication of the trend you had in Q3 for the water business in Europe?Roddy Child-Villiers:The reason that the total water business was down was more than 100% because ofEurope because we had a good performance in North America and AOA in the thirdquarter. So basically Europe is the reason for the slowdown. And I think the key thing for usis that we gain share in all of our key markets. So even if because of the poor July weatherthe water market as a whole was down, our performance relative to the market was verygood.Questions on; Performance in China Consolidation of aquistions in China BabyNes launch and Viaggi machine updatesSimon Marshall-Lockyer, Jefferies & Co:Just a couple of follow-ups in terms of geographies. Can you give us maybe a little bit moredetail on China and particularly whether youve seen any slowdown? You mentioned slightlyslower performance overall in baby within Nutrition. Was that anything to do with the Chinabusiness? Have you seen any indication of a slowdown maybe in the exiting months of thequarter there?Can you also remind us of the status on Yinlu and Hsu Fu Chi in terms of the consolidationprospects, what the dates are or estimates? 15
  16. 16. Also could you give us some data points or are there any valuable data points to give eitheron the launch of BabyNes -- I know its a very small product and launched in Switzerland,but any update on that and how thats going? Same thing on the Viaggi machine.Roddy Child-Villiers:BabyNes, as I said on my call, BabyNes is going very well. It is only in Switzerland. Its avery narrow distribution so the numbers are not meaningful, apart from the number that Iquoted, which is that 92% of customers would recommend the system to their friends andfamily. So clearly the reception its received from parents has been fantastic. So BabyNes isgoing very well.Viaggi, the thing to remember about Viaggi is that its super premium so whereas weve got3,000 Milano machines into one quick-service restaurant in North America in one hit, thatsnot going to happen with Viaggi. Viaggi is going to be built machine by machine as we get itinto upscale bars and cafes and hotels. But, that said, the progress were making withViaggi is very good.Yinlu, Hsu Fu Chi, I havent got an update. Were still waiting for the final clearances forthose transactions. And Id rather not give you an idea of a timeline because, frankly, doingthese transactions in China is a new experience for us and we just need to go through theprocess and hopefully get closure.Trading in China, theres not really much to say since -- in Q3 relative to H1. The businesshas continued to perform at a high level. Its growing double digit. The Ready-to-drinkbusiness, which, by the way, Yinlu is the co-packer on, ready-to-drink business is goingvery well. Ice Cream is going very well, Soluble coffee is going well and Dairy is doing well.Culinary is a little bit slower, but nothing to worry about. Business is performing well. In theNutrition business in China we are well into double digits on infant and are performing well.So I wouldnt say theres any sign of a slowdown in China. And were going to be around --were certainly over 20% organic growth in China for the total business, including the ZoneNutrition and the other businesses that we have in China. So good performance in China athink.Simon Marshall-Lockyer, Jefferies & Co:Thanks Roddy.Roddy Child-Villiers:Okay. Id like just on Maison Cailler, just to say that Im a little bit ahead of the game. Itsgoing to be launched in Switzerland initially, not Switzerland and France, Switzerlandinitially, just to clarify.Question on; Margin guidanceJon Cox, Kepler Capital Markets:Congratulations. A good set of figures. You guys certainly know how to deliver. Butobviously just on the concerns about this guidance on the margin, is it still right to say its 16
  17. 17. not so much input costs, its youre basically just bracing yourself for a further weakening ofconsumer sentiment and potentially a bloody pitch battle in terms of A&P? Is that whatyoure basically signalling there?And then just on the environment generally, and obviously we, none of us have a crystalball, but do you think theres any danger next year that youd actually maybe miss the 5% to6% target as you did in 2009 or would you say conditions now are totally different? Thankyou.Roddy Child-Villiers:Thanks Jon. Okay, coming back to the 2011 guidance, yes, I think, as I keep saying, I thinkwere just being sensitive to the environment in which were operating and we cant ignorethe fact that things have changed since the first half of the year. But we are not givingourselves a holiday from delivering margin improvement. We are still out there, 280,000people around the world, working in all countries in the world to deliver marginimprovement. We are striving to do so. But it would be I think naive of us to pretend that theworld hasnt changed a bit; it has.And youre right. Were not saying theres been a big change in the input environment. Sowhat has changed? Clearly the level of promotional, of competitive intensity has increased.And we had examples of that in one of the previous questions. So thats simply the basis ofour comment. Were not talking about a miss. Were just saying that were going to strive toachieve it. Its, the environments a bit tougher than it was.And for 2012, Im not going to give guidance for 2012, but we will be committing to theNestlé model as we always do. But Im not going to start giving guidance on what the actualnumbers going to be. It will be our intention, as it always is, to deliver the Nestlé model.End of Question and Answer SessionRoddy Child-Villiers:Thanks very much everybody for your questions. We will be doing our press conference at10 oclock Swiss time, nine oclock UK time. Webcast details are on our website. PaulBulcke and Jim Singh will host it and therell also be a presentation from Laurent Freixe,whos our Head of Zone Europe. Dont read anything to it being in Paris. You mightremember that last year it was held in New York. This year its being held in Paris. Thanksvery much indeed for your interest in Nestlé and your attention today. Good morning. Thankyou.END OF TRANSCRIPT 17