Nestle S A : Half-Year Report 2021 (pdf, 2Mb)

Half-Year Report

January-June 2021

Nestlé.

We unlock the power of food

to enhance quality of life for everyone, today and for generations to come.

Letter to our shareholders

Dear fellow shareholders,

Foreword

The Half-YearReport contains certain financial performance measures not defined by IFRS, which are used by management to assess the financial and operational performance of

the Group. It includes among others:

• Organic growth, Real internal growth and Pricing;
• Underlying Trading operating profit margin and Trading operating profit margin;
• Net financial debt;
• Free cash flow; and
• Underlying earnings per share as reported and in constant currency.

Management believes that these non‑IFRS financial performance measures provide useful information regarding the Group's financial and operating performance.

The "Alternative Performance Measures" document

published under www.nestle.com/investors/publications defines these non‑IFRS financial performance measures.

Introduction

We would like to thank the Nestlé team for their continued commitment to meeting consumer needs and their relentless focus on execution. Organic growth was strong across most geographies and categories, with robust momentum in retail sales and a return to growth in out-of-home channels. Through fast-paced innovation, strong brand support, increased digitalization and stringent portfolio management we have built the foundation for delivering consistent mid single-digit organic growth for years to come.

Nestlé continues to invest for future profitable growth. We are creating a global leader in vitamins, minerals and supplements with the acquisition of The Bountiful Company's core brands. The expansion of our partnership with Starbucks into ready-to-drink coffee will open new opportunities in

a fast-growing segment. Our portfolio choices, strong execution and decisive actions on sustainability enable us to create value for all stakeholders.

Group results

Group sales

Organic growth reached 8.1%, with RIG of 6.8%. Pricing increased to 1.3%, reflecting input cost inflation.

Growth was broad-based across most geographies. Organic growth was 6.7% in developed markets, based mostly on RIG. Organic growth in emerging markets was 10.0%, with strong RIG and positive pricing.

By product category, the largest contributor to organic growth was coffee, fueled by strong demand for the three main brands Nescafé, Nespresso and Starbucks. Starbucks products posted 16.7% growth, with sales reaching CHF 1.4 billion across 79 markets. Purina PetCare saw double-digit growth led by science-based and premium brands Purina Pro Plan, Purina ONE and Felix, as well as veterinary products. Prepared dishes and cooking aids posted high single-digit growth, based on strong demand for Maggi and Stouffer's. Vegetarian and plant-based food offerings continued to see strong double-digit growth, led by Garden Gourmet. Dairy reported high single-digit growth, led by fortified milks, coffee creamers and ice cream. Confectionery recorded double- digit growth, supported by a strong sales development in impulse products. Sales in Nestlé Health Science grew at

1. double-digitrate, reflecting strong demand for vitamins, minerals and supplements and healthy-aging products. Infant Nutrition saw a sales decrease, impacted by lower birth rates in the context of the pandemic. Water returned to positive growth, led by international premium brands S.Pellegrino and Perrier.
   By channel, organic growth in retail sales was 7.3%, moderating to a mid single-digit rate in the second quarter due to a high base of comparison in 2020. E-commerce sales grew by 19.2%, reaching 14.6% of total Group sales, with strong momentum in most categories particularly coffee, Purina PetCare and culinary. Organic growth in out- of-home channels was 21.3%, helped by the easing of movement restrictions in some geographies.
   Net divestitures decreased sales by 3.1%, largely related to the divestments of Nestlé Waters North America brands, the Herta charcuterie business and the Yinlu peanut milk and canned rice porridge businesses. Foreign exchange reduced sales by 3.5%, reflecting the appreciation of the Swiss franc versus most currencies. Total reported sales increased by 1.5% to CHF 41.8 billion.

Half-Year Report of the Nestlé Group 2021

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Letter to our shareholders

Underlying Trading operating profit

Underlying trading operating profit increased by 1.3%

to CHF 7.3 billion. The underlying trading operating profit margin was 17.4%, unchanged versus the prior year in constant currency and on a reported basis.

Gross margin increased by 20 basis points to 48.8%. Consumer-facing marketing expenses * increased by 80 basis points to above 2019 levels, following reduced in-store activation in 2020. Cost inflation also impacted margin development in the second quarter. Operating leverage, structural cost reductions, increased pricing and lower COVID-19-related costs offset these increases.

Restructuring expenses and net other trading items increased by CHF 78 million to CHF 264 million, reflecting higher asset impairments. Trading operating profit increased by 0.2% to CHF 7.0 billion. The trading operating profit margin was 16.7%, a decrease of 20 basis points in constant currency and on a reported basis.

Net financial expenses and Income tax

Net financial expenses decreased by 6.9% to CHF 416 million, reflecting a lower cost of debt.

The Group reported tax rate decreased by 970 basis points to 17.4%, as a result of one-off items. The underlying tax rate decreased by 120 basis points to 20.2%, mainly due to the geographic and business mix.

Net profit and Earnings per share

Net profit grew by 1.1% to CHF 5.9 billion. Net profit margin decreased by 10 basis points to 14.2%, as a result of one-off income related to divestitures in 2020.

Underlying earnings per share increased by 10.5% in constant currency and increased by 8.3% on a reported basis to CHF 2.17. The increase was mainly the result of improved operating performance. Nestlé's share buyback program contributed 1.4% to the underlying earnings per share increase, net of finance costs. Earnings per share increased by 3.2% to CHF 2.12 on a reported basis.

Cash flow

Cash generated from operations was essentially unchanged at CHF 5.8 billion. Free cash flow decreased from

CHF 3.3 billion to CHF 2.8 billion mainly due to a temporary increase in capital expenditure to meet strong volume demand, particularly for Purina PetCare and coffee.

Share buyback program

In the first half, the Group repurchased CHF 3.1 billion of Nestlé shares as part of the three-year CHF 20 billion share buyback program, which began in January 2020.

Net debt

Net debt increased to CHF 38.5 billion as at June 30, 2021, compared to CHF 31.3 billion at December 31, 2020. The increase reflected the dividend payment of CHF 7.7 billion and share buybacks of CHF 3.1 billion, which more than offset free cash flow generation and a net cash inflow from divestitures and acquisitions.

Portfolio management

Nestlé is transforming its global water business, sharpening its focus on international premium and mineral water brands and healthy hydration products. On March 5, 2021, Nestlé completed the acquisition of Essentia Water, a premium functional water brand in the U.S. On March 31, 2021, Nestlé completed the sale of its regional spring water brands, purified water business and beverage delivery service in the U.S. and Canada for USD 4.3 billion.

Nestlé Health Science continues to focus on building

a nutrition and health powerhouse. On April 30, 2021, Nestlé entered into an agreement to acquire core brands of The Bountiful Company for USD 5.75 billion. The Bountiful Company is the number one pure-play leader in the highly attractive and growing global nutrition and supplement category. The transaction is expected to close in August. On July 1, 2021, Nestlé completed the acquisition of Nuun, a leading company in the fast-growing functional hydration market. On July 1, 2021, Nestlé Health Science entered into an agreement with Seres Therapeutics to jointly commercialize SER-109, an investigational oral microbiome therapeutic in the U.S. and Canada. If approved, SER-109 would become the first-everFDA-approved microbiome therapeutic.

Building on the successful global coffee alliance, Nestlé continues to expand the reach of Starbucks branded coffee and tea products outside Starbucks retail stores. On July 26, 2021, Nestlé and Starbucks announced a new collaboration to bring Starbucks ready-to-drink coffee beverages to select markets across South-East Asia, Oceania and Latin America.

* 2019 figure excludes Nestlé Skin Health

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Letter to our shareholders

Zone Americas (AMS)

Sales			CHF 16.2 billion
Organic growth			+7.6%
Real internal growth			+5.3%
Underlying Trading operating profit	margin	19.3%
Underlying Trading operating profit	margin	+ 40 basis points
Trading operating profit	margin		18.3%
Trading operating profit	margin		- 50 basis points

• 7.6% organic growth: 5.3% RIG; 2.3% pricing.
• North America saw mid single-digit organic growth, with positive RIG and pricing.
• Latin America reached double-digit organic growth, with strong RIG and pricing.
• The underlying trading operating profit margin increased by 40 basis points to 19.3%.

Organic growth was 7.6%, with strong RIG of 5.3% supported by volume and mix. Pricing increased significantly to 2.3%. Net divestitures reduced sales by 4.3%, as the divestments of the Nestlé Waters North America brands and U.S. ice cream business more than offset the acquisitions of Freshly and Essentia Water. Foreign exchange had a negative impact of 6.3%, reflecting broad-based currency depreciations against the Swiss franc. Reported sales in Zone AMS decreased by 3.1% to CHF 16.2 billion.

Zone AMS reported high single-digit organic growth, with a high base of comparison in 2020. Growth was supported by continued innovation, strong momentum in e-commerce and recovery in out-of-home channels. The Zone saw broad- based market share gains, led by coffee, pet food, dairy and Infant Nutrition.

North America posted mid single-digit growth. The largest growth contributor was Purina PetCare, with sustained momentum in e-commerce. Its science-based and premium brands Purina Pro Plan, Purina ONE and Fancy Feast all grew at

1. double-digitrate. Beverages, including Starbucks at-home products, Coffee mate and Nescafé, saw high single-digit growth. Frozen and chilled food recorded mid single-digit growth. Strong sales developments for Stouffer's, Lean Cuisine and Freshly were partially offset by a sales decrease in pizza. Home-baking products, including Toll House and Carnation, saw a sales decline following exceptionally high demand
   in 2020. Sales in ice cream and confectionery in Canada grew at a double-digit rate, driven by Häagen-Dazs and KitKat. Water posted positive growth, with strong demand for international premium brands S.Pellegrino and Perrier, as

well as Essentia. Nestlé Professional returned to positive growth.

Latin America reached double-digit growth, with strong contributions from most geographies and product categories. Brazil posted double-digit growth, reflecting strong demand for KitKat, Nescafé and the newly launched Ninho Forti+. Sales in Mexico grew at a double-digit rate, led by coffee and confectionery. Chile also reported double-digit growth, supported by ice cream and confectionery. By product category, confectionery, Purina PetCare and coffee all grew at a strong double-digit rate. Growth in dairy moderated to

1. high single-digit rate, following exceptionally strong demand in 2020, particularly for home cooking and baking products. Infant Nutrition saw mid single-digit growth, supported by robust demand for new premium and functional products. Nestlé Professional recorded strong double-digit growth, with sales almost recovering to 2019 levels.
   The Zone's underlying trading operating profit margin increased by 40 basis points. Operating leverage, structural cost reductions and product mix more than offset input cost inflation and increased consumer-facing marketing expenses.

Half-Year Report of the Nestlé Group 2021

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