NESTLÉ S.A. 2005 9 MONTHS SALES CONFERENCE CALL SPEECH Conference Date: 20 October 2005 Chairperson: Mr Roddy Child-Villiers Head of Investor Relations Nestlé S.A. Disclaimer This speech might not reflect absolutely all exact words of the audio version. This speech contains forward looking statements which reflect Management s current views and estimates. The forward looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements. Potential risks and uncertainties include such factors as general economic conditions, foreign exchange fluctuations, competitive product and pricing pressures and regulatory developments.
Roddy Child-Villiers - Nestlé S.A. Head of Investor Relations Slide 1 Good morning, ladies and gentlemen, and welcome to the Nestlé 9 months sales conference call. As usual, I will discuss the key numbers only, leaving more time for questions. Slide 2... and I will take this first slide covering the safe harbour statement, as read, and will move directly to the highlights. Slide 3 The key message is that, even in a tough environment, our strategy is delivering, as demonstrated by an organic growth of 5.8%, and RIG, or real internal growth, of 3.8%. And this is not just due to our Pharmaceutical activities:- the Food and Beverage business achieved organic growth of 5.6% and RIG of 3.5%. These numbers, which are the result of a broad based, robust performance across the different regions and product categories, demonstrate the strong growth characteristics of our core food and beverage business. That strength is underlined by positive organic growth from each of our four food and beverage reporting areas:- Europe maintained its positive organic growth, whilst the Americas continued to be strong at 7.3%, Zone Asia Oceania and Africa improved to 7% and Nestlé Waters improved to 8.4%. Other activities achieved an organic growth of 10.7%. Pricing was 2%, as we attempted to recover increased input costs in certain categories. It was particularly strong in Milk products, Soluble coffee, Nutrition, and Roast and Ground Coffee We continued to see pricing pressure in Nestlé Waters and Japan, as well as in Brazil due to the tax change there. These three businesses together represent over 10 billion of our 68 billion Swiss francs of sales at the 9 month stage, so it is fair to say that the 2% group pricing number understates the level of pricing taken elsewhere. Slide 4 This next slide gives you the breakdown of the sales evolution. Reported sales increased 4.8% to 67.7 billion Swiss Francs. I've already touched on the strong organic growth and RIG. We had a negative impact from disposals, net of acquisitions, of 0.8%, that number made up of a positive 0.8% contribution from acquisitions, mainly Wagner, and a negative 1.6% contribution from disposals, primarily Eismann. We are almost able to report a flat impact from foreign exchange, that number coming in at minus 0.2%, an improvement from minus 1.8% at the half year. Slide 5 On the next slide are the key currencies. A mixed picture compared to the same period of last year, although the good news is that the Euro and US dollar are not so far away from their average rates for the full year 2004. Page 2
Slide 6 Moving now to a bit more detail on the Zones. Zone Europe had organic growth of 1.6%, a slight improvement over the 1.5% at the half year. There is no change in the market trends in Europe. That is to say, conditions have remained tough. Overall, we have maintained our market shares, and I include the impacts of private label and hard discounters in that comment. We did best in PetCare and Soluble coffee, as well as Frozen Food, and worst in Chilled Dairy, due to France and Spain, and in Chocolate, due to Russia. In the Americas the US continued strong, and there was an acceleration in Brazil. Zone Asia, Oceania, Africa, or AOA, achieved the strongest performance of the Zones in the third quarter, with an improvement in the cumulative organic growth from 6% to 7%. I am pleased to be able to report that our predictions at the half year for Zone AOA have proven to be accurate:- the Middle East and South Asia continued to perform well, as we had forecast, whilst South Africa, the Philippines and Japan all achieved an improved performance, as promised. There were some expressions of disappointment at the Half Year about the growth rates in Nestlé's emerging markets. I hope that the performance in the third quarter in AOA and Brazil will put people's minds at rest. The Nestlé emerging market story is as strong and as rich in potential as ever it was. Slide 7 Now I will go into the detail of the organic growth performance by market, starting in Europe, with Germany. My comments on the performance of the categories within the markets are all based on RIG numbers for those categories. Germany was slightly lower at 0.5% organic growth. There was a mixed performance by category, with Culinary and Frozen Food improving, but Ice cream a bit weaker. Soluble coffee continued to be the best performing category cumulatively. In France also, there were some improvements and some that were slower, leading to an overall acceleration from 0.2% negative organic growth to 1.2% positive. Among those that accelerated were Frozen Food, Soluble coffee and Ice cream. There was also a good performance from our Foodservice business. Great Britain was the strongest cumulative performer in Western Europe, with 5.9% organic growth. Chocolate was a bit weaker but Soluble coffee accelerated a little. We do expect to see a slight slowdown in coffee to the year end. For our British-based listeners, the exciting news in Frozen Food is that Hot Pockets will be launched there this quarter, following successful introductions in France, Germany and Spain. PetCare Europe achieved a strong acceleration since the half year to 4.3% organic growth. Page 3
In the East, Russia has continued to be weak. That said, things are looking up and I expect that we will return to historic growth rates next year. There are a number of reasons to support this belief: first of all, the market shares tell a good story: our coffee shares have been showing consistent gains through 2005, whilst we have halted the decline in Chocolate. We have cleaned out chocolate stocks in the trade and discontinued relationships with about 40% of our distributors. This means that we will be selling to consumer demand, rather than to distributor orders. Also, key measures such as credit days and working capital have improved significantly, whilst profitability continues above Group average. Slide 8 In the Americas, the US was unchanged from the half year, Frozen food, including Stouffer's, Lean Cuisine and Hot Pockets, Shelf stable dairy, particularly CoffeeMate, and Ready-to-Drink beverages continued strong. Nesquik is doing particularly well in schools, as the carbonated soft drink manufacturers pull out. We have put about 5,000 vending machines into schools for Nesquik. Petcare North America remains strong at 6.9% organic growth. Dreyer's accelerated somewhat to 9.5% organic growth. Canada also accelerated slightly, with Chocolate particularly strong in the third quarter, benefiting from a good sell-in ahead of Halloween. In Latin America, Brazil accelerated sharply to 5.2% organic growth, with good performances from the three biggest categories, Shelf stable dairy, particularly Ninho, Powdered beverages, particularly Nescau, and Chocolate. This acceleration by Chocolate confirms our comment at the half year that the 2nd quarter slowdown in Chocolate was simply due to the timing of Easter. Mexico went in the opposite direction from Brazil, being weaker across most categories as input cost-driven pricing slowed the RIG. That said, organic growth of 9.1% is an impressive performance. The smaller regions in Latin America performed well. Slide 9 Moving to Zone AOA, Japan's RIG is now positive 1%, although organic growth remains at minus 1.1%. We achieved positive cumulative RIG and share gains in Soluble coffee, with new pouch packaging and the launch of a Mild Excella the catalysts. There was also continued strong growth in Chocolate. In the Philippines the organic growth increased from under 5% to 7.4%, with a good improvement in Soluble coffee, but I should remind you that this market is up against a very strong final quarter comparison. Africa's organic growth increased to 6.5%, from 2% in June. Both the Central/West and South/East regions contributed to the improvement. The Middle East continued to perform well, with 13% organic growth. Page 4
That said, I expect that all eyes were on China following the product exchange earlier in the year. The organic growth in China halved from 7.5% at the half year to 3.7%. The good news, however, is that we achieved nearly 8% growth in September, so the signs are that we are over the worst, as our investment in communication starts to pay growth dividends. Shelf stable dairy actually had a higher cumulative 9 month RIG than it did at the 6 month stage. The situation is rather different in Infant Formula which is recommended by doctors and is not therefore supported by consumer communication: the recovery in this category may therefore be slower. I will repeat our half year forecast that we hope to be back to normal levels of growth in China in the second half of next year. Slide 10 Nestlé Waters achieved a strong acceleration from the half year to 9% RIG. Organic growth, at 8.4%, reflected negative pricing. Europe was about flat but both North America and the rest of the world were particularly strong, growing at about 17%. Slide 11 In the Other Activities, there were once again strong performances from Alcon, at 9.8% organic growth, and Nespresso, at around 30%. If Nespresso continues at this pace, it will be a one billion Swiss Franc brand by the end of 2006. Just for your information, the sales of Other activities are about 75% Pharmaceutical and 25% Food and Beverage. Slide 12 Turning now to the product groups and starting with Beverages. I have just discussed Waters, which contributed to an improved organic growth for Beverages of 7.8%. Soluble coffee's organic growth accelerated from 5.7% to 6.7%, reflecting strong pricing, as well as improved RIG in Japan. You have probably heard the main news in this segment, which is the launch of Partners Blend in the UK. This has had a good reception from the retailers. The other Beverage categories, Powdered beverages and Ready to drink beverages, have also performed well over the 9 months. In the powdered segment, Nesquik is doing well in Europe following its relaunch with added vitamins and minerals. Ready to drink beverages was particularly strong in the US. There was also a good performance from Beverages Partners Worldwide with 10% organic growth. Nestea is performing particularly well. In Milk products, Nutrition and Ice Cream, there was a slight increase in organic growth to 5.5%, driven by pricing. Milk products improved its organic growth to 5.7%, with Shelf stable near double digit, which tells you that growth in Chilled Dairy continued to be negative. In Shelf Stable, Mexico was weaker but in line with the market, and this was more than compensated by improvements in Brazil, the US, the Philippines and elsewhere. Page 5
Nutrition reached 4.9% organic growth, clearly impacted by the situation in China. Infant nutrition slipped back despite good performances in many markets, demonstrated by RIG of 9.4% in the Americas. Healthcare nutrition was over 10% organic, whilst Performance nutrition continued to be held back, primarily by tough comps with 2004. Ice cream dipped to 5.5%, due to a slowdown in Europe. The Americas continued strong, with Dreyer's delivering over 10% RIG. There was good growth also in Zone AOA. Nestlé is now the leader in the majority of the markets around the world were it is present, including the US. Cereal Partners Worldwide was unchanged from the half year. Next is Prepared dishes and cooking aids, where there was an acceleration to 4.2% organic growth. Both sub-categories accelerated during the third quarter. Chocolate, confectionery and biscuits accelerated slightly to 2.7% organic growth. Chocolate improved due to Brazil, France and Germany. It continued strong in AOA, with 8% RIG. Sugar was less negative due to the US, whilst Biscuits improved significantly due to Brazil. PetCare was practically unchanged at 5.2% organic growth, with Europe a bit faster and North America a bit slower, as discussed on the zone slides. As usual, there is a strong finish to the product groups with Pharmaceutical products slightly higher than in June, at 9.4% organic growth. Slide 13 I am not intending to get drawn into a margin debate on this sales call, but I thought it would be useful to update you on the raw material environment. Inflationary pressure has continued in the second half of 2005, and the cost pressure remains significant for Nestlé. Our response has been continued pricing activity, demonstrated by the 2% group number, as well as a continued focus on our savings initiatives. You saw that in the first half we were able to compensate for most of this cost pressure. Turning to our prospects for the rest of 2005, I can confirm that the Nestlé Model of strong organic growth combined with sustainable margin improvement remains secure for the year. For 2005, we will deliver our target of organic growth of between 5 and 6% combined with an improvement in constant currency margins. The other good news is that the 2005 share buy-back is 80% complete. This means that a second programme can be proposed to the Board of Directors. Thank you for your attention. I would be happy now to take your questions. Slide 14 Q&A Session A transcript of this session will be available in few days. Page 6
Closing words Thank you for your questions. That concludes the call. As I said before, Nestlé is on track to meet its forecast for the year made back in February, of achieving organic growth of between 5 and 6% combined with an improvement in constant currency margins. Thank you. END OF SPEECH Page 7