Nestle S A : Full-year results

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Nestlé reports full-year results for 2020

• • Organic growth reached 3.6%, with real internal growth (RIG) of 3.2% and pricing of 0.4%. Growth was supported by strong momentum in the Americas, Purina PetCare and Nestlé Health Science.

• • Foreign exchange reduced sales by 7.9% due to the continued appreciation of the Swiss franc against most currencies. Divestitures had a negative impact of 4.6%. As a result, total reported sales decreased by 8.9% to CHF 84.3 billion (2019: CHF 92.6 billion).

• • The underlying trading operating profit (UTOP) margin reached 17.7%, up 10 basis points on a reported basis and 20 basis points in constant currency. The trading operating profit (TOP) margin increased by 210 basis points to 16.9% on a reported basis.

• • Underlying earnings per share increased by 3.5% in constant currency and decreased by 4.5% on a reported basis to CHF 4.21. Earnings per share stayed unchanged at CHF 4.30 on a reported basis.

• • Free cash flow was CHF 10.2 billion.

• • Return on invested capital increased by 240 basis points to 14.7%.

• • Board proposes a dividend increase of 5 centimes to CHF 2.75 per share, marking 26 consecutive years of dividend growth. In total, CHF 14.5 billion were returned to shareholders in 2020 through a combination of dividend and share buybacks.

• • Continued progress in portfolio management. Nestlé divested the Yinlu peanut milk and canned rice porridge businesses in China and agreed to sell its regional spring water brands, purified water business and beverage delivery service in the U.S. and Canada. Portfolio rotation since 2017 now amounts to around 18% of total 2017 sales.

• • 2021 outlook: continued increase in organic sales growth towards a mid single-digit rate. Underlying trading operating profit margin with continued moderate improvement. Underlying earnings per share in constant currency and capital efficiency expected to increase.

• • Mid-term outlook: sustained mid single-digit organic sales growth. Continued moderate underlying trading operating profit margin improvement. Continued prudent capital allocation and capital efficiency improvement.

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Mark Schneider, Nestlé CEO, commented: "2020 was a year of hardship for so many, yet I am inspired by the way it has brought all of us closer together. I want to thank our employees and our partners - from farmers to retailers - who worked with us to ensure the supply of food and beverages to communities globally.

In this unprecedented environment, we achieved our third consecutive year of improvement in organic growth, profitability and return on invested capital.

The global pandemic did not slow us down. Our nutrition expertise, digital capabilities, decentralized structure and innovation engine allowed us to adapt quickly to changing consumer behaviors and trends. We advanced our portfolio transformation, continued to build Nestlé Health Science into a nutrition powerhouse and expanded our presence in direct-to-consumer businesses.

At the same time, we remained focused on sustainability and set out our path to achieve net zero greenhouse gas emissions by 2050. This journey is expected to support future growth and be earnings neutral - it will generate value for society and our shareholders.

Looking to 2021, we expect continued improvement in organic growth, profitability and capital efficiency in line with our value creation model."

Group Results

Total Group	Zone AMS	Zone EMENA	Zone AOA	Other Businesses
Sales FY-2020 (CHF m) Sales FY-2019 (CHF m)*	84 343	34 010	20 226	20 730	9 377
92 568	37 828	21 464	22 119	11 157
Real internal growth (RIG) Pricing Organic growth Net M&A Foreign exchange Reported sales growth	3.2%	4.1%	3.3%	0.0%	7.3%
0.4%	0.7%	-0.4%	0.5%	0.6%
3.6%	4.8%	2.9%	0.5%	7.9%
-4.6%	-5.0%	-2.1%	-0.1%	-17.6%
-7.9%	-9.9%	-6.6%	-6.7%	-6.3%
-8.9%	-10.1%	-5.8%	-6.3%	-16.0%
FY-2020 Underlying TOP margin FY-2019 Underlying TOP margin*	17.7%	20.5%	18.6%	22.2%	19.6%
17.6%	20.1%	18.1%	22.5%	18.7%

* 2019 figures restated following the decision to integrate the Nestlé Waters business into the Group's three geographical Zones, effective January 1, 2020.

Group sales

Organic growth reached 3.6% in 2020, the highest level in the last five years. RIG accelerated to 3.2%. Pricing contributed 0.4% and improved during the year, particularly in emerging markets.

Growth was based on strong momentum in the Americas and robust sales development in EMENA. AOA saw positive growth. Organic growth in developed markets was strong at 3.8%. Growth in emerging markets improved during the year and reached 3.4%.

By product category, the largest contributor to growth was Purina PetCare and its premium brands Purina Pro Plan, Purina ONE and Felix. Dairy saw high single-digit growth, based on increased demand for home-baking products and fortified affordable milks. Coffee reported mid single-digit growth, boosted by strong consumer demand for Starbucks products, Nespresso and Nescafé. Sales of Starbucks products reached CHF 2.7 billion, generating incremental sales of over CHF 400 million in 2020. Prepared dishes and cooking aids posted mid single-digit growth, with robust momentum across most categories during lockdowns. Vegetarian and plant-based food offerings continued to see strong double-digit growth, despite reduced demand in out-of-home channels due to the pandemic. Sales in Nestlé Health Science grew at a double-digit rate, reflecting higher demand for products that support health and the immune system. Growth in confectionery was slightly negative, with reduced demand for impulse and gifting products. Water reported a decrease in sales due to its high exposure to out-of-home channels.

Divestitures decreased sales by 4.6%, largely related to the divestment of Nestlé Skin Health, the U.S. ice cream business and the Herta charcuterie business. Foreign exchange reduced sales by 7.9%, reflecting the continued appreciation of the Swiss franc versus most currencies. Total reported sales decreased by 8.9% to CHF 84.3 billion.

Business impact of COVID-19

The effects of COVID-19 on the Group's organic growth varied by product category and sales channel:

• • Product categories: Demand for at-home consumption, trusted brands and products with nutritional benefits was strong. Purina PetCare, dairy, coffee at-home and Nestlé Health Science reported robust growth. Sales in confectionery and water decreased, reflecting their high exposure to out-of-home channels and on-the-go consumption.

• • Sales channels: Retail sales posted high single-digit organic growth, reflecting elevated demand for at-home consumption. Sales in out-of-home channels declined significantly.

  E-commerce sales grew by 48.4%, reaching 12.8% of total Group sales. Coffee, Purina PetCare and Nutrition & Health Science were the main growth contributors, with strong momentum in all other categories.

In 2020, COVID-19-related incremental costs were CHF 420 million, including expenses for bonuses paid to frontline workers, employee safety protocols, donations and other staff and customer allowances. Around CHF 260 million of these costs impacted underlying trading operating profit, partially offset by savings such as travel expenses. In addition, the Group absorbed costs of CHF 170 million related to staff and facilities made idle due to lockdown measures. Overall COVID-19-related costs decreased in the second half of the year, as movement restrictions eased.

Underlying Trading Operating Profit

Underlying trading operating profit decreased by 8.3% to CHF 14.9 billion. The underlying trading operating profit margin reached 17.7%, an increase of 20 basis points in constant currency and 10 basis points on a reported basis.

Margin expansion was supported by structural cost reductions, portfolio management and slightly lower consumer-facing marketing expenses1 which more than offset commodity inflation and COVID-19-related costs. In the second half of the year, consumer-facing marketing expenses1 returned to a normalized level and increased versus the same period of 2019.

Restructuring expenses and net other trading items decreased by CHF 1 916 million to CHF 670 million, reflecting lower asset impairments and COVID-19-related delays to restructuring programs. As a result, trading operating profit increased by 4.1% to CHF 14.2 billion. The trading operating profit margin reached 16.9%, an increase of 220 basis points in constant currency and 210 basis points on a reported basis.

Net Financial Expenses and Income Tax

Net financial expenses decreased by 14.0% to CHF 874 million, reflecting a reduction in average net debt and a lower cost of debt.

The Group reported tax rate increased by 320 basis points to 24.2%, due to exceptional items in 2019, including the divestiture of Nestlé Skin Health. The underlying tax rate decreased by 50 basis points to 21.1%, mainly due to the evolution of the geographic and business mix.

Net Profit and Earnings Per Share

Net profit decreased by 3.0% to CHF 12.2 billion. The net profit margin increased by 90 basis points to 14.5%, due to one-off items related to gains on disposals, asset impairments, restructuring costs and revaluation of equity investments.

Underlying earnings per share increased by 3.5% in constant currency and decreased by 4.5% on a reported basis to CHF 4.21. Earnings per share was unchanged at CHF 4.30 on a reported basis. Divestitures had a negative impact of 3.5%. Nestlé's share buyback program contributed 1.4% to the underlying earnings per share increase, net of finance costs.

Cash Flow

Free cash flow decreased from CHF 11.9 billion to CHF 10.2 billion. The reduction was mainly due to the appreciation of the Swiss franc against most currencies and the impact of divestitures. Free cash flow margin decreased by 80 basis points to 12.1%. Free cash flow is expected to remain at around 12% of sales.

Working capital2 decreased by 60 basis points to 0.0% of sales, marking 9 consecutive years of improvement. This reduction came even as the company increased inventory levels materially to meet COVID-19-related demand.

• 1 Excluding the divestiture of Nestlé Skin Health

• 2 Calculated on a 5-quarter rolling average