Nestle S A : Transcript 355KB

NESTLÉ S.A.

2023 NINE-MONTH SALES CONFERENCE CALL TRANSCRIPT

19th October, 2023, 14.00 CEST

Speakers:

Mark Schneider, Chief Executive Officer, Nestlé S.A. François-Xavier Roger, Chief Financial Officer, Nestlé S.A. Luca Borlini, Head of Investor Relations, 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

Nestlé Nine-month Sales Conference Call

Thursday, 19th October 2023

Luca Borlini, Nestlé S.A, Head of Investor Relations:

Slide: Title slide

Good afternoon, and good morning to everyone, welcome to the Nestlé nine-months 2023 sales webcast. I'm Luca Borlini head of Nestlé Investor Relations. Today I'm joined by our CEO, Mark Schneider and our CFO, François Roger. Mark will begin as usual with the key messages and discuss the full year 2023 guidance; François will follow with a review of the nine-month 2023 sales figures. We will then open up lines for your questions.

Slide: Disclaimer

Before we begin, please take note of our disclaimer. And now I hand over to Mark.

Mark Schneider, Nestlé S.A. Chief Executive Officer:

Slide: Title Slide

Thank you, Luca, and a warm welcome to our conference call participants today. As always, we appreciate your interest in our company.

Slide: Key messages

Let's turn straight to the key messages on Slide 4.

For the nine-month period, we are pleased to report strong and broad-based organic sales growth of 7.8%. Pricing was 8.4%, reflecting significant input cost inflation over the last two years, but also starting to moderate, which is in line with our expectations.

In the third quarter, we have started to see the expected recovery in our volume and mix development. Progress in this area was masked by the temporary supply chain constraints in our Nestlé Health Science business. But we have started to turn the corner and are on our way towards positive real internal growth in Q4 and for the second half of 2023.

Across the board, we continue to increase our marketing investments, and we see the benefits of our portfolio optimization program kick in. François will cover both items in more detail.

While the third quarter trading update does not include margin and earnings information, I would like to confirm that our gross margin continues to recover from the inflation induced reductions in 2022. We also continue to make good progress regarding free cash flow generation.

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Nestlé Nine-month Sales Conference Call

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Next, I would like to talk about our measures to help people enjoy a balanced diet. In the third quarter, we issued new targets regarding the expected sales development of more nutritious foods and responsible consumption framework regarding our enjoyment related food categories. Both are part of our long-standing nutrition, health and awareness strategy and build on Nestlé's foundational work in this area over the past 25 years.

The recent interest in a new class of drugs called GLP-1 agonists, has underlined the public's desire to combat obesity rates around the world. I believe we have important contributions to make. Please note that while these drugs offer new therapy options for obese patients and for patients with Type 2 diabetes, they are not a permanent solution and are no replacement for an appropriate diet coupled with the right amount of exercise.

For the time that patients spend on these drugs and after, we are already developing a number of companion products. The goal will be to address the risk of malnutrition and the loss of lean muscle mass while on the GLP-1 therapy and to avoid or limit weight rebound after the therapy. These innovations are right in our wheelhouse, where we can bring our deep understanding of nutritional science and appropriate supplementation to the table. While I expect our food and nutrition categories to benefit from this as well, the main upside will be seen in our Nestlé Health Science business perimeter.

With only 15% of our global revenue and 20% of our North American revenue coming from either center-of-the-plate or snacking products, we consider any potential revenue exposure to be very limited. In my judgment, it gets fully compensated by the innovation opportunities I just outlined.

Slide: Nestlé Health Science confirming mid-term objectives

This brings me to Nestlé Health Science on slide 5. While we regret the short-term supply constraint in our North American Vitamins, Minerals and Supplements business, which surfaced in August, we don't think that it takes away from the strength of the underlying business model. Following a 4-6 quarter period of post-covid compression, the Vitamins, Minerals and Supplements market shows solid growth, very much in line with our expectations.

The international expansion of our globally known and globally desired North American vitamin brands, such as Pure Encapsulations, Garden of Life and Solgar is making great progress.

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Nestlé Nine-month Sales Conference Call

Thursday, 19th October 2023

And our Medical Nutrition and Active Nutrition businesses continue to grow very successfully. We expect the supply chain issues to be resolved by early 2024, and we confirm our 2025 financial objectives for Nestlé Health Science, albeit with a delay of about 6 months.

The strategy of Nestlé Health Science is a lot more straightforward following the divestment of our peanut allergy treatment Palforzia. It focuses on proven winners such as Medical Nutrition and new consumer-centric health solutions such as Vitamins, Minerals and Supplements as well as Active Nutrition. High-stakes prescription drug developments with a high degree of scientific and regulatory risk will not be our focus area going forward.

Slide: Creating economic opportunities for the world's youth

This brings me to slide 6 and our Business as a Force for Good section. This summer, we celebrated the 10th anniversary of our Nestlé Needs Youth initiative. Founded and led by my Executive Board colleague Laurent Freixe, it helps to create economic opportunities around the world, whether it is in education, farming, or entrepreneurship. It has become a key part of our contribution to local communities where we are present and it makes a noticeable societal difference, in particular in regions with a high degree of youth unemployment. Clearly a hallmark of our social commitment and something to be proud of.

Slide: 2023 guidance confirmed

Before handing it over to François, I would like to cover our 2023 guidance on page 7. We fully confirm our expectations for organic sales growth, the underlying trading operating profit margin and underlying earnings per share in constant currency.

Regarding organic sales growth, I had shared with you in our half-year conference call my expectation that we would reach the upper half, if not the upper end of our guided range. Based on the new situation regarding Nestlé Health Science's supply chain constraint, which I was not aware of at the time, I owe you an update and now expect our growth to be firmly in the guided range but with a more cautious view.

With this I would like to hand over to François.

I look forward to answering your questions later.

François-Xavier Roger, Nestlé SA, Chief Financial Officer:

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Nestlé Nine-month Sales Conference Call

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Slide: Title Slide

Thank you, Mark, and good morning / afternoon to all.

Slide: Nine-month sales growth

Let me start with the highlights for the nine months of 2023. Organic growth reached 7.8% with pricing of 8.4%, reflecting the impact of cost inflation received over the last two years. RIG was -0.6%, impacted by portfolio optimization and capacity constraints.

Net divestitures decreased sales by 0.8%, largely related to the divestiture of a majority stake in Freshly as well as the disposal of the Gerber Good Start infant formula brand in the United States.

Foreign exchange had a negative impact of 7.4% on sales growth, following the appreciation of the Swiss franc versus our basket of currencies.

Total reported sales for the nine months were CHF 68.8 bn.

Slide: Strong growth across developed and emerging markets

Turning to the distribution of growth between developed and emerging markets.

Organic growth in developed markets was 6.9%, driven by pricing with negative RIG.

Growth in emerging markets was 9.0%, based on pricing and slightly positive RIG.

Slide: RIG trending to positive territory

RIG for the nine months was negative, impacted by portfolio optimization and capacity constraints. In the third quarter, RIG improved to -0.3%, despite the impact of temporary capacity constraints for Perrier and short-term supply constraints for Nestlé Health Science.

RIG is clearly trending toward positive territory. As you can see on the slide, when adjusted for the number of trading days, RIG was already positive in the third quarter.

This step-up in RIG is being driven by the moderation of new pricing, the benefits of portfolio optimization and increased marketing investments.

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Nestlé Nine-month Sales Conference Call

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We expect RIG to be positive in the fourth quarter and in the second half of 2023. Going forward, we expect it to be again the main driver of growth.

Slide: Seeing benefits of portfolio optimization

We are now seeing the benefits of portfolio optimization. As we have previously commented, this initiative includes two components. First, freeing up resources through the discontinuation of low growth and low-margin businesses. This part is nearing completion, having discontinued annualized sales of around CHF 700 million. The negative impact on RIG of this portfolio optimization actions was around 60 basis points for the first nine months. The largest example of this pruning exercise is Frozen food Canada, which we are winding down faster than originally planned.

The second component is the more interesting part, as we are redirecting resources toward high-growth and high-margin products. We are now seeing the positive benefits of this resource allocation. One example is the material and progressive step-up in customer service levels, withan almost 600 basis points improvement over the last nine months. There is further room for improvement, and we expect to return to above 99% where we were pre-COVID, which will support a recovery in RIG.

Slide: Pricing moderating

Turning to pricing, which was 6.3% in the third quarter. We expect the sequential moderation to continue over the course of the year, as we are lapping a high base of comparison in 2022 and as we are implementing a lower level of new pricing since the second quarter.

We will continue to price where needed but not to the same extent as we have done lately. Pricing that happens now will be more targeted by category, brand and country, particularly for those commodities which have increased recently, such as Robusta, sugar and cocoa. Some pricing will also be triggered by currency depreciation, for example in Nigeria, Argentina and Pakistan.

Allow me to make a short comment on gross margin. Given the progress we have seen in the third quarter. I would like to confirm that we expect a material improvement in gross margin for the second half of 2023.

Slide: Zone North America

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Nestlé Nine-month Sales Conference Call

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Let's switch focus to the results of our seven operating segments, beginning with Zone North America, where we saw 8.0% organic growth, with pricing of 8.9%. RIG was -0.9% reflecting portfolio optimization actions and capacity constraints. The impact of portfolio optimization on RIG, particularly the rapid winding down of the Frozen food business in Canada, was around 70 basis points for the nine months.

The Zone saw sustained broad-based growth across most brands and categories, driven by mix and out-of-home channels. E-commerce continued to be a key growth driver with double- digit growth for most categories. The Zone saw market share gains in Pet food, Soluble and portioned coffee as well as Frozen meals.

By product category, the largest growth contributors were Purina PetCare, Nestlé Professional and Starbucks out-of-home products, which all grew at a double-digit rate. Within PetCare, growth was broad-based across brands, led by Purina One, ProPlan and Veterinary Diets.

Frozen food reported negative growth, impacted by portfolio optimization in Canada. In the U.S., growth in Frozen food was positive, supported by Stouffers as well as Jack's and Tombstone pizzas.

Slide: Zone Europe

Next, we have Zone Europe. Organic growth was 8.8%, driven by pricing. RIG was -2.3%, following capacity constraints, portfolio optimization and some limited elasticity.

Growth was supported by strong sales development for e-commerce and continued momentum for out-of-home channels. The Zone saw market share gains in Pet food and Infant Nutrition.

By geography, the U.K., Türkiye and Central & Eastern Europe were the lead contributors to growth.

By product category, the key growth driver was Purina PetCare, fuelled by premium brands Felix, Gourmet and One. Coffee saw mid single-digit growth, with particular strength for Nescafé. Confectionery reported high single-digit growth with strong demand for KitKat. Growth in Water was flat, impacted by temporary capacity constraints for Perrier.

Slide: Zone Asia, Oceania and Africa

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Nestlé Nine-month Sales Conference Call

Thursday, 19th October 2023

Moving to Zone AOA. The Zone reported high single-digit organic growth. Pricing was 8.6%, reflecting the impact of input cost inflation and currency depreciation. RIG was flat.

Growth was driven by continued momentum for e-commerce and out-of-home channels. The Zone saw market share gains in Coffee, Cocoa and malt beverages as well as Chocolate.

By geography, all regions posted positive sales developments. Growth in South-East Asia was driven by Coffee, Culinary and Infant nutrition. South Asia recorded double-digit growth across all categories, led by Maggi and Nescafé. The Middle East and Africa also saw double digit growth, with particular strength for affordable offerings.

By product category, Infant nutrition was the largest growth contributor. Sales in Culinary grew at a double-digit rate, led by Maggi. Coffee posted high single-digit growth, with continued robust demand for Nescafé and Starbucks products.

Slide: Zone Latin America

Next is Zone Latin America, which reported double-digit organic growth, with pricing of 10.5%. RIG was -0.6%, turning slightly positive in the third quarter.

The Zone recorded strong growth across all geographies and product categories, supported by operational execution and continued momentum of out-of-home channels. The Zone saw market share gains in Pet food, Infant nutrition and Culinary.

By geography, growth was led by Brazil and Mexico.

By product category, Confectionery was the largest growth contributor, fueled by strong demand for KitKat, key local brands and new product launches, including Choco Trio in Brazil. Infant Nutrition posted double-digit growth, based on solid momentum for Nan and Mucilon infant cereals. Coffee reported broad-baseddouble-digit growth, supported by Nescafé soluble coffee.

Slide: Zone Greater China

Turning to Zone Greater China. Organic growth was 4.9%, with pricing of 2.6% and RIG of 2.3%.

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Nestlé Nine-month Sales Conference Call

Thursday, 19th October 2023

Growth was supported by strong sales developments for out-of-home businesses and e- commerce momentum. The Zone saw market share gains in Pet food and Confectionery.

By product category, Nestlé Professional was the largest growth contributor. Confectionery reported high single-digit growth, led by Hsu Fu Chi and Shark wafer. Culinary posted high single-digit growth, with increased demand for Totole in out-of-home channels and innovations. Infant Nutrition saw low single-digit growth, led by NAN specialty offerings.

Slide: Nestlé Health Science

Turning next to Nestlé Health Science. The business posted low-single-digit growth with pricing of 4.4% and RIG of -1.9%.

Vitamins, minerals and supplements saw negative growth. Sales in the third quarter decreased following an IT integration issue when implementing highly automated systems during the consolidation of U.S. packaging sites.

The resulting short-term supply constraints reduced organic growth in the third quarter by around 700 basis points for Nestlé Health Science, which translated to around 50 basis points for the Group. We expect the impact on Q4 growth to be slightly lower. These short-term supply constraints are expected to be resolved by early 2024.

Pure Encapsulations, which was not impacted, saw strong double-digit growth in the U.S. More generally, market growth in the Vitamins, Minerals and Supplements category has returned to positive territory, reaching a mid single-digit level in the third quarter.

Our Active and Medical Nutrition brands have been unaffected by the supply constraints. Active nutrition saw mid single-digit growth, with market share gains and robust sales development for Orgain and Vital Proteins.

Medical Nutrition recorded strong double-digit growth, with market share gains across all segments.

The 2025 objectives for Nestlé Health Science are confirmed with a 6-month delay.

Slide: Nespresso

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Nestlé Nine-month Sales Conference Call

Thursday, 19th October 2023

Finally, Nespresso, which reported mid single-digit organic growth with pricing of 3.5%. RIG was 1.6%, with a continued sequential improvement in 2023 to reach 3.5% in the third quarter.

The key growth contributor was the Vertuo system. Growth for out-of-home channels was also strong, supported by the Momento system.

Innovation continued to resonate with consumers. The launch of home compostable paper capsules in France in May, and in Switzerland in September has been well received.

By geography, North America continued to post double-digit growth, with market share gains. Europe saw positive growth. Other regions combined recorded low single-digit growth.

Slide: Broad-based growth across categories

Let's now look at product categories. Organic growth was broad-based, supported by pricing across all categories.

Within Powdered and liquid beverages, coffee sales grew at a high single-digit rate. Growth was broad-based across segments, brands and geographies and led by continued momentum for the out-of-home business, which grew at a strong double-digit rate. Cocoa and malt beverages reported low single-digit growth, based on a strong contribution from Milo.

PetCare posted continued strong double-digit growth despite capacity constraints. Science- based, premium and veterinary products saw strong sales developments. Growth was also supported by continued e-commerce momentum and innovation.

Nutrition and Health Science posted 6.3% growth. Infant nutrition reported 9.2% organic growth, with broad-based contributions across geographies, segments and key brands. Sales of human milk oligosaccharide products grew at a mid-teen rate, reaching almost CHF 1 bn for the nine months. We have already discussed Nestlé Health Science.

Prepared dishes and cooking aids saw 5.3% growth, driven by Maggi which reported double- digit growth. Plant-based food posted flat growth, following the impact of portfolio optimization.

Milk products and Ice cream recorded 6.6% growth. The key contributors to growth were coffee creamers, affordable fortified milks and dairy culinary solutions. Sales in Ice cream grew at a

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