Nestle S A : 2022 NESTLÉ INVESTORS SEMINAR BARCELONA, SPAIN ENHANCING FINANCIAL PERFORMANCE

NESTLÉ S.A.

2022 NESTLÉ INVESTORS SEMINAR BARCELONA, SPAIN

ENHANCING FINANCIAL PERFORMANCE

29th November 2022

Speakers:

François-Xavier Roger, Chief Financial Officer, Nestlé S.A.

This transcript may have been edited for clarity, and the spoken version is the valid record. This document is subject to the same terms and conditions found at http://www.nestle.com/info/tc

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François-Xavier Roger, Chief Financial Officer, Nestlé S.A.:

Slide: Title Slide

Good afternoon.

Slide: Significant transformation of Nestlé

Before discussing our value-creating journey toward 2025 I will start with a short reminder of the significant transformation that Nestlé went through over the last ten years. Today Nestlé is much more focused category-wise than we were ten years ago.

If you look at Coffee, PetCare and Nestlé Health Science, they do account now for more than 50% of our sales, while it was only a third ten years ago. And we start seeing the impact as well of new categories like plant-based, which is already contributing to 1% of our sales. We are much more premiumized than we were ten years ago, with one-third of our sales today which are in premium products. So, we have largely walked away from commoditization.

We are also much more digital today than we were ten years ago, with 15% of our sales in e- commerce, while it was a very strong percentage ten years ago. I could mention there as well that we are much more digital, with almost 55% of our marketing spend in the digital space today.

We are also much more exposed to high-growth geographies like emerging markets, like the US. Today, the US we are much more American than we were actually ten years ago, with 35% of our sales in North America. It was 28% ten years ago.

And I could continue the list. We are far less capital intensive, far less labor intensive than we were, as illustrated by the fact that our sales per employee today in Swiss Francs are almost 25% higher than they were ten years ago. And this resulted in a strong financial performance.

Slide: Resulting in strong financial performance

You may remember that the three building blocks of our value creation models were the acceleration of our growth. We have met that with an organic growth over the last five years, which is on average at 4%.

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The second driver was to improve our margin. There we have delivered as well, with the underlying trading operating profit margin which is up 140 basis points over the last five years, an underlying EPS growth which has been on average in the high-single digits.

And the third driver of our value creation model was the prudent capital allocation strategy. And there we have improved our return on invested capital by 300 basis points over the last five years.

Slide: Utilizing multiple levers to create value

We are not going to stop there, and we intend to continue creating value in the future. And I will cover, during my presentation, the four main levers of value creation going forward, starting with freeing up resources, which is absolutely critical. Starting with the restoration of our gross margin. This will allow us to invest for future growth, and we will continue to allocate capital prudently and to manage our portfolio in an active way.

Slide: Restoring gross margin is key to enabling growth investments

Starting with freeing up resources, we absolutely need to restore gross margins. This year, in 2022, we expect to have a gross margin which will be around 300 basis points lower than where it was two years ago. As you know, this is largely the consequence of the timing difference between input cost inflation on the one hand and pricing. Even if we have done a lot of pricing, we have not been able to compensate fully for whatever we have received, which is massive.

So, we are very confident on the fact that we will be able to restore our gross margin to where it was before. But the speed of recovery may be impacted by external factors. If we go into recession, commodity cycle and many other factors as well. But, once again, the confidence that we have to get there is very, very strong.

The drivers in order to get there, we know what we have to do. Manage our portfolio actively, continue to premiumize our products, go for pricing. Do expect, for example, to see a significant level of pricing again in 2023.

Slide: Stepping up savings and efficiencies to 2025

And we need, as well, to drive savings and efficiencies. We have a good track record there in terms of delivering savings and efficiencies.

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If we look at the period 2016 to 2021, we delivered on average CHF 700 million of recurring savings, recurring, so they are accumulating year after year. The main, the key drivers there were production efficiencies, where we closed around 30 plants, in addition to the businesses that we sold.

We consolidated our procurement activities above market in three centers globally, really leveraging on scale and delivering hundreds of millions of synergies there. We have increased significantly our shared service penetration, with now 6,500 people working in our shared services.

And we have consolidated, for example, our real estate assets. Just as an example, in the Vevey region where we work in Switzerland, we had 14 main buildings; today we operate with only four that we entirely own. In France, for example, in Paris, we had seven different buildings, we work only from one today. And in the US, we have reduced the number of head offices that we have by half, and we are going to go even further in the US.

Most of these drivers will continue in the future, but we are clearly raising the bar in terms of recurring savings going forward from '22 to '25, with an ambition to generate more than CHF 1.2 billion of recurring savings per annum, which means for the four years close to 5 billion.

Once again, the one that we executed from 2016 to 2021 will continue, but we have new ones as well. Laurent touched this morning on the project TASTY with SKU optimization and new recipes. Laurent touched as well on the last one, on project AGILITY. And, in addition to that, we saw with Bernard and Aude this morning, digitalization. By the way, digitalization goes beyond marketing. It applies to my functions. It applies to HR. It applies to operations as well, with connected operation and my colleague, Magdi Batato will cover part of it in one of the workshops tomorrow.

So, clearly we have raised the bar in terms of savings going forward. Most of these savings have to do with variable costs and we need to go even further than that by tackling as well fixed costs, or what we call internally structural costs, which is a sizeable bucket. It is about CHF 14 billion of value, which is around 15% of our net sales.

Slide: Securing growth leverage through strict structural cost control

We have a good track record there as well, given for the sixth consecutive year, we have been

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able to tightly control these costs that have increased at a significantly lower rate than our sales, generating between 60 and 70 basis points of margin improvement over the last couple of years.

In the years 2017 to 2020, we let that flow to the bottom line, which largely explains the margin improvement that I talked about earlier. And since 2021, we have used it to compensate for inflation. We use it as well to invest in sustainability, for example. in 2022, just as an example, our sales will grow between 8% and 8.5% and our fixed costs will grow by around 3%. So, we have a very strong track record.

Slide: Investing selectively and efficiently to support future growth

Generating resources, delivering savings and efficiencies is absolutely critical so that we invest selectively and efficiently to support future growth. This is really one of the pillars of the growth strategy for Nestlé, starting with R&D.

So, Stefan talked about it this morning. We spent about CHF 1.7 billion a year in R&D. We are the largest spender by far in our industry. The objective there is not necessarily, as Stefan explained, to spend more. It is about getting more out of it, and this is what we have been doing with a lot of success over the last couple of years.

The largest bucket of investment that we have is marketing and trade spend. We should not look only at marketing, by the way. We look at marketing and trade spend jointly because we arbitrate very often between these two lines of the P&L.

Trade spend is obviously above net sales, and it has to do with customer discounts and allowances as well as promotional rebates. But this is even more important in today's world where consumers are more and more looking for value for money. So, we look at both items together. There clearly, we have a strategy to raise the investment because it is really driving growth, even if, in the case of 2022, we had to reduce a little bit our marketing spend exceptionally this year, much more as a consequence of the fact that we were short of products for some categories like PetCare, due to increased demand over the last couple of years.

We invest a lot in CAPEX as well, 5.1 billion CHF last year. I will cover that item later on.

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