Nestle S A : Transcript

NESTLÉ S.A.

2023 BARCLAYS GLOBAL CONSUMER STAPLES CONFERENCE

FIRESIDE CHAT TRANSCRIPT

6th September, 2023, 08.00 EDT

Speakers:

François Xavier Roger, CFO, Nestlé S.A.

Steven Presley, Chief Executive Officer, Zone North America Warren Ackerman, Barclays

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 https://www.nestle.com/info/tc

Nestlé 2023 Barclays Consumer Staples Conference

Wednesday, 6th September 2023

Warren Ackerman, Barclays;

Hello everybody. I am delighted to welcome Nestlé to the Barclays Consumer Staples Conference. François Xavier Roger, Group CFO of Nestlé and Steve Presley heading up North America. It's going to be a fireside chat format.

Question on:	Real Internal Growth

Warren Ackerman, Barclays;

Welcome gentlemen. I think we're going to start with you, François, on the topic of real internal growth. We've seen volume/mix, negative for the last few quarters. You sounded confident about it turning positive in the second half. Will that be more Q3 or Q4 weighted? And can you maybe explain the building blocks behind your confidence about the back half? And then, looking forward, can we get back to the 3%, 4% real internal growth into next year, what needs to happen to get back into that kind of zone?

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

A good point to start, Warren. Clearly, in H2 2023, we are at an inflection point after two semesters of negative RIG developments. Part of it, last year, was the high comp in the previous year, and part of it is linked to this portfolio optimization program that we have embarked upon about a year ago. And we expect to be back to positive territories as far as RIG is concerned for H2. I'm not saying for Q3 because Q3 has one less trading day. So, it could have, obviously, some minimal impact on the downside.

So positive RIG development expected in H2 this year, driven by four main reasons. One of the reasons, obviously, is the fact that we have easier comps last year. Then, we have not done a lot of pricing since April, actually, and we don't expect to do much pricing going forward. Maybe on a selective basis for some categories where we still see some input cost inflation like for cocoa, for sugar, for robusta, for coffee, for example.

We are raising our investments for A&P in H2, about 100 basis points more than in the same period of last year. And we are starting to get the benefit of this portfolio optimization program. The idea is really to redirect the resources that we have spent on low-margin,low-rotation items and to refocus them on high-margin,high-rotation items, and we have seen really a very interesting increase of our service levels since the beginning of the year, which should translate in H2 into more positive RIG development as well. So we are confident in getting there in H2 this year.

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Nestlé 2023 Barclays Consumer Staples Conference

Wednesday, 6th September 2023

And this is a transition period towards going back to our model -- the model that we had before with mid-single-digit growth, which we will get in the future, I can't tell you if it is '24, '25, we'll see, with a little bit of pricing and where we don't value pricing per se because pricing is a mere passing through of whatever we receive. But positive volume development that we need to get over time. We are not there yet. In order to get there, we need to get to where we were before COVID, which is around 1% to 1.5%. And then the largest component of our growth should come from mix. By the way, mix has been very positive lately and has even increased during COVID and during these inflationary times.

Question on:

SKU rationalization and growing the head

Warren Ackerman, Barclays;

Back in your CMD in Barcelona last November, you said that on the SKUs, it will be 20 basis points accretive to group organic growth in 2023. Is that still the case? Or because you're exiting Canadian Frozen food quicker, that might not happen? And then the other element is then growing the head or the billionaire brands, which I guess is just as important. Where are we on that Project Tasty, I think, that is the code name you call it internally? But where are you on the whole picture compared to what you said in Barcelona?

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

So we are really executing and delivering as per the plan so there is no issue. So we are accelerating some of these programs, and Steve is accelerating the exit of Canada Frozen. So we do expect to deliver this 20 basis point. I don't know if it will be exactly 20 basis points. As part of this positive benefit that we get from this portfolio pruning exercise, as I said, we have seen a significant increase of our service level, which is very good news. But it's coming as a consequence of some other factors as well. So there is an improvement, for example, in transportation, shipping, availability of raw material, packaging material, which may help a little bit and contribute a bit as well in that.

As far as the saving program is concerned, this Tasty program where we have taken out of our P&L about CHF 1 billion of cost last year, it will be the same this year. So we are really progressing extremely well with this program. It will continue for a few more years, maybe not to the same extent, but we continue to be very active in that space.

I would not focus too much on this program Tasty on the SKU rationalization, the cutting the tail, as we say. We have done that anyway for years. I'm less interested in that. I'm much more interested in growing the head, where we redirect these resources, to improve our service

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Nestlé 2023 Barclays Consumer Staples Conference

Wednesday, 6th September 2023

level, to really support high-volume,high-margin products. This is really where we will generate much more value than cutting the tail, which always happens anyway.

Question on:

Increased advertising spend and expected returns

Warren Ackerman, Barclays;

Okay. Maybe moving to advertising spend because you now disclose it separately, obviously, it's a focus for us. You've said that you're going to increase spend by more than 100 basis points in the second half. That's a pretty big jump. Can you tell us a little bit about where that spend is going to go? What innovations you're looking at to really get behind? And what kind of returns do you expect on that uplift in terms of RIG?

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

So we value A&P anyway as a good growth factor for the future. We were at a very low level last year, 6.9%. By the way, we have started to disclose the amount of A&P since the beginning of this year. So 6.9% was clearly a low level, given that anyway we had some supply chain constraints last year. So there was no point in advertising for some categories like PetCare in the U.S. and Europe, like Coffee-mate, like Perrier. Since we have capacity constraint, there was no point in advertising for products we could not sell.

So clearly, 6.9% was too low a level. So we started to really ramp up our investment in Q2, and we expect to increase our investment by about 100 basis points. Certainly behind innovation but a lot has to do as well with brand building, really working on the brand personality, brand attributes. Some benefit that we will get in the short term, but since a lot of it has to do with brand building, we will see the benefit as well over the medium term. So we will continue to increase our marketing investment further than the second half of this year. We expect to go back to where we were a few years back, which means that we will need to ramp up even further the investments in 2024 as well.

Just one thing, as well is that we should not look only at A&P on its own. So we look at A&P and trade spend, and I'm talking of performance trade spend, which is everything that goes to the consumer, excluding rebates and discounts that go to retailers. So the total amount -- the total consideration for A&P and trade spend is close to CHF 30 billion. So it's a huge amount.

By the way, last year, we did increase that amount in absolute value. We decreased marketing, but we refocused a little bit more on trade spend at the time when we did an

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Nestlé 2023 Barclays Consumer Staples Conference

Wednesday, 6th September 2023

exceptionally high level of pricing, 8%. After basically 15 to 20 years of no pricing or deflation, we thought it was very important to make our products more affordable and more accessible. And as a consequence, we focused more on trade spend than on the marketing. This year, in terms of trade spend, we have increased again, a little bit less, but a bit in absolute value still in H1. We will increase our trade spend for the full year 2023.

Question on:

Expected gross margin increase

Warren Ackerman, Barclays;

I just want to move on to gross margins because you're out there saying the gross margin at some point will return to 50%. In the second half of last year, it was 44.5%. That's 550 bps, which is a massive increase in gross margin. I think there's a bit of confusion out there about your cost base, although it's coming down a bit, it's still quite elevated. But you're still saying there's a big jump in gross margins. Some people are having some issues triangulating that. Are there other items outside of COGS, which are helping? I'm just trying to get a sense of your big cost buckets on dairy, coffee, cocoa, wage inflation. How do we actually get back to that 50% and how quickly? I know you don't have to give a year, but some sort of sense would be helpful.

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

Let me try to help you. Let me give you a little bit of picture of the situation last year, actually. Last year, we did receive about CHF 8 billion of additional cost in terms of raw material, packaging material, transportation, energy, salaries and wages. It's big even for a company the size of Nestlé, CHF 8 billion is a lot. By the way, we passed on to consumers CHF 8 billion of pricing. But that led to 160 basis points of gross margin decline last year and 400 basis points over the last 2 years.

This year, in '23, we are still receiving a few billions of input cost inflation. This is less than what we had last year, but still a few billion, largely front loaded in H1, which means we will have less in H2. But already in H1 you could see that because we had still a reasonable amount of pricing, partly that we see from last year as well. But we will have more pricing than input cost inflation this year, which means that our gross margin will start to increase, which has already been a reality in the first half of the year, where we have increased in H1 2023 our gross margin by about 120 basis points over of the second half of last year, and it will continue increasing in the latter part of the year.

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