Nestle S.A

Good afternoon and good morning to everyone. Thank you for joining Nestlé's first half results 2020 conference calls and webcast. I am Luca Borlini, head of Nestlé's investor relations. We hope everyone is doing well and staying safe. The conference call will start with some prepared remarks from our chief executive officer, Mark Schneider. Mark will also cover the 2020 outlook. Our chief financial officer, Francois Roger, will follow with a review of the first half results. We will then open the lines for your questions. Before we begin, please take note of our disclaimer, and now I hand over to Mark.

Thank you, Luca, and a warm welcome to our conference call participants today. As always, we appreciate your interest in our company. We're witnessing extraordinary times with extraordinary challenges. In this context, I'm glad to report that Nestlé has truly risen to the challenge. We have proven the resilience of our business model and have acted in a dependable, consistent, and responsible manner as we dealt with the consequences of the pandemic. We were able to live up to our three key objectives in this crisis. First, assuming the health and safety, assuring the health and safety of our associates and business partners around the world. Second, assuring business continuity, so that critically needed food and beverage products were on shelf even in the darkest moments of this crisis. And third, acting as a caring citizen and neighbor in the communities where we operate and providing a helping hand. Safety, action, and solidarity would be a good way to summarize these three objectives. My sincere thanks go out to the 290,000 Nestle associates around the world. Your flexibility, hard work, dedication, and also your grace under pressure has truly made this one of our finest hours. As you can see from slide four, we have not only been responding to the COVID crisis, we have also continued to drive forward key initiatives from portfolio transformation to sustainability and diversity and inclusion. As shown on slide five, we continue to reposition our portfolio towards businesses that offer more profitable growth. Compared to 2019, significant divestments and strategic reviews are now increasingly balanced by acquisitions in high growth areas, namely Nestle Health Science and Petcare. Page six provides more detail on one particular review that we announced in June. We had promised you a new strategy for Nestle Waters in the first half of this year. The COVID crisis did not stop us from delivering it on time. The new strategy focuses on premium mineral water brands and functional water products. Our new focus will lead over time to an increasingly differentiated product lineup with improved growth and profitability. Short term, the water business is impacted by the COVID crisis, but we remain committed to this category and the concept of healthy hydration, which we pioneered. For our North America waters business under review, we have seen very strong interest from potential buyers. We anticipate that we can complete this review in early 2021. In our Q1 conference call, I told you that the entire company had a very strong short-term and operational focus in the early stages of this pandemic to ensure safety and business continuity. While this remains a priority, we have wasted no time in thinking through the strategic implications of the pandemic. As you can see from slide 7, most of the long-term trends we have been working on still very much apply. Some of them have even been accelerated, in particular e-commerce and digital engagements, as well as health and nutrition, with particular focus on plant-based nutrition and the immune system. One major short-term change has been the rapid shift towards at-home consumption. This shift heavily impacted our out-of-home business, Inesta Professional, waters, confectionery, and ice cream. While the recovery will take some time, we remain fully committed to our out-of-home business. Now is the time to reimagine and rethink this part of the business to help our business partners in this area. Our Always Open for You initiative, which we unveiled in April, has been met with enthusiasm from the many small to mid-sized business partners we have in this area. It strengthens our business relationship with them through support, such as extended credit terms and free products. It also helps to stabilize communities and employment where we operate. As such, it is a great example of doing good and doing well. Moving to slide eight, I would like to talk about our new Nestle strategy narrative and the new purpose language. Following our divestiture of Nestle skin health, we focused our purpose and strategy much more on unlocking the unique power of food and beverages. Next to the healthy nutrition theme, which we have patiently pursued for over 20 years and to which we remain fully committed, we also strengthen our sustainability commitment in everything we do. Food that is good for you and good for the planet. These two strategic directions go hand in hand. Over the coming months, we will publish more detail on how this new purpose language translates into the company's strategy narrative. Before handing it over to Francois, I would like to talk about our guidance on page nine. Previous guidance in February and April was prior to any COVID impact, as it was practically impossible at that time to estimate the size and shape of this pandemic and the economic fallout. This crisis is far from over. Under these circumstances is riskier than in normal times. We nonetheless feel that guidance is helpful and important to you to calibrate your expectations and reduce financial uncertainty. We are pleased to confirm that our expectations regarding underlying trading operating profit, underlying earnings per share and constant currency, and capital efficiency can remain unchanged from what we told you in February. Let me say in all modesty, this is no small feat. Regarding organic sales growth, we have to reflect the impact of the crisis on our out-of-home business. This is a reality we cannot escape. We therefore expect organic sales growth for the full year to be in the range of 2-3%. As always, we will work very hard to fully meet or even exceed your guidance commitments. For the sake of good order, let me underline that this guidance is based on our current knowledge of the COVID-19 developments and assumes no material deterioration versus present conditions. With this, let me hand it over to Francois.

Thank you, Marc. Thank you, Marc, and good morning or good afternoon to all. Let me start with the highlight for the first six months. As you can see from these numbers, Neste has proven to be resilient in a rapidly changing environment. Total sales for the first half were 41.2 billion Swiss francs. Organic growth was 2.8%. The underlying trading operating profit margin reached 17.4% of sales, an increase of 30 basis points. Underlying EPS grew by 0.5% on a constant currency basis. Looking in more details at the components of our sales development, organic growth was 2.8% in the half, After a stronger than expected start to the year, organic growth moderated in the second quarter to 1.3%, reflecting the full effect of lockdowns on some consumer destocking. In the first half, RIG was solid at 2.6% and pricing contributed 0.2%, having returned to positive territory across all three zones in the second quarter. Divestitures reduced sales by 5.3%, largely related to the disposal of Nestlé Skin Health and the U.S. ice cream business. Foreign exchange reduced sales by a further 7%, reflecting the appreciation of the Swiss francs against most currencies. Total reported sales decreased by 9.5%. In the first half, the effect of COVID-19 on organic growth varied materially by channel as a result of lockdowns. As this slide shows, organic growth for retail sales accelerated to 6.3%, reflecting the significant shift from out-of-home to at-home consumption. Within retail, e-commerce saw exceptional growth of almost 50%, with a strong acceleration in the second quarter across all geographies and categories. e-commerce now accounts for 12.4% of total sales as compared to 8.5% in 2019. Before COVID-19, the out-of-home channel accounted for around 10% of group sales. If we include on-the-go consumption and products typically bought on impulse, then the total contribution was closer to 15% of sales. Out-of-home sales declined sharply as a consequence of movement restrictions and the closure of many offices, restaurants and hotels, to name just a few. The rate of decline bottomed out in April at around minus 60%. Since then, we have seen a modest sequential improvement, but the full recovery will take time. This slide shows the development of ourselves by geography. It includes both our zones as well as our globally and regionally managed businesses. The first half saw contrasted growth in terms of geographies. The Americas continues to see strong momentum with positive contribution from both North and Latin America. We saw the strongest impact of consumer stockpiling in North America. Emena posted positive growth. After an exceptionally strong first quarter at 6%, growth slowed to 1.7% in the first half, reflecting a significant decline in the out-of-home sales channel. AOA was negative, but returned to positive territory in the second quarter. Turning to the growth dynamic in developed and emerging markets, organic growth in developed markets was 4.1%, based on solid rig for most regions. Pricing improved to almost flat in the second quarter. Emerging markets grew by 1.1%. Organic growth was lower than usual as a result of a sales decline in China. Excluding China, organic growth in emerging markets was in mid-single digits with strong performances in Brazil, the Philippines, Russia and India. We are positive on emerging markets as a key growth platform for the years to come. Let's now look at the results of our four operating segments, starting with Zone EMS, where we saw strong organic growth again. North America grew at a mid-single-digit rate. Most product categories performed very well. Purina Petcare remained a standout. We saw continued strong growth driven by e-commerce and our premium brands. In beverages, Starbucks at Home, Nescafe, and Coffee Met grew at double-digit rates. Starbucks food service saw a sharp sales decline in the second quarter. Frozen food accelerated to double-digit growth, with increased sales for Digiorno, Hot Pockets, and Starfurs. At the end of the second quarter, we launched Life Cuisine, offering on-trend meal solutions ranging from gluten-free to high-protein. Water reported negative growth, impacted by reduced sales in the out-of-home channel, and international premium brands in the United States saw positive growth, led by San Pellegrino. Latin America maintained a mid-single-digit growth rate with positive contributions from most geographies and product categories. The Brazilian market performed well with strong growth in most categories and broad-based market share gains. Sales in Mexico grew at a low single-digit rate supported by coffee and dairy. The zone's underlying trading operating profit margin increased by 60 basis points The increase was driven by a combination of portfolio management, reduced in-store activation during lockdowns, and the direct store delivery transformation, which more than offset COVID-19-related costs and commodity inflation. Next is Zone Emena. After an exceptionally strong start to the year, organic growth turned positive in the second quarter due to a sharp sales decline in the out-of-home channel, particularly for water and Nestlé Professional. The other product categories performed well and posted high single-digit growth. Each region saw positive growth, particularly in Eastern Europe, with strong momentum in Russia. Our four largest markets in Western Europe – France, Germany, the UK and Spain – all delivered solid growth. By product category, coffee, Purina Pet Care and culinary products all grew at a double digit rate with market share gains. In coffee, the improvement was broad-based across brands with Starbucks products and Nescafe Dolce Gusto the highlights. Purina Pet Care reported strong growth for Felix, Purina One, Tales.com and Lily's Kitchen supported by e-commerce. Sales of culinary products were boosted by increased at-home consumption across most segments, particularly Maggi and Garden Gourmet plant-based products. In early July, we upgraded our plant-based sensational burger with a new meatier recipe. Water recorded negative growth but gained market share. The zone's underlying trading operating profit margin increased by 40 basis points as reduced in-store activation during lockdowns and lower commodity spend outweighed COVID-19 related costs. Moving to zone AOA, the zone reported negative organic growth as a double-digit decline in China outweighed mid-single-digit growth in the other regions. The zone returned to positive growth in the second quarter, helped by improved trading conditions in China. In China, precisely, growth was negatively impacted by a significant decline in the out-of-home channel and the timing of Chinese New Year. Sales growth was almost flat in the second quarter. Coffee, dairy, ice cream, culinary and confectionery all returned to positive growth. The contraction in YS infant formula sales moderated. In June, YS launched the locally manufactured infant formula Belsol. The new brand strengthens YS offering in the super premium segment and lower tier cities. Infant cereals grew double digit. Purina Petcare saw continued double digit growth, driven by ProPlan, Purina One and Felix. e-commerce sales gained momentum with broad-based improvements across most categories. Southeast Asia saw mid-single-digit growth. The Philippines grew at a double-digit rate with elevated consumer demand for Bear Brown, Milo, and Maggi. Indonesia delivered high single-digit growth, led by Bear Brown and Dan Cow. Southeast Asia reported mid-single-digit growth. India performed well, supported by NAN, Everyday and Nescafe. Maggi saw solid growth despite temporary supply chain constraints in the second quarter. Sub-Saharan Africa grew at a double-digit rate, led by strong sales development in South Africa. Japan and Oceania saw negative growth. The zone's underlying trading operating profit margin decreased by 20 basis points as commodity inflation and COVID-19 related costs outweighed reduced in-store activation during lockdowns. Finally, turning to other businesses, which includes Nespresso and Nestlé Health Science, Nespresso grew at a mid-single-digit rate as a strong increase in direct-to-consumer sales, more than offset significant declines in the out-of-home channel and the impact of boutique closures for almost two months. E-commerce sales surged by 40%. Growth was also supported by a significant sales acceleration for the virtual system. North America grew strong double-digit growth with continued market share gains, AOA grew at a double-digit rate, with positive contributions from most markets. Sales in Europe decreased, reflecting significantly reduced demand in the out-of-home channel and boutique closures, primarily between March and May. By the end of June, 86% of our boutiques were open. Nestlé Health Science posted double-digit growth, Vitamins, minerals and supplements that support overall health and the immune system continue to see elevated demand. Garden of life and pure encapsulations saw increased growth, particularly in e-commerce. Persona, the subscription-based personalized vitamin business, more than tripled its sales. Medical nutrition experienced strong sales, particularly in pediatric food allergies, adult medical care, and VitaFlow products. The underlying trading operating profit margin increased by 260 basis points, with positive contributions from both Nespresso and Nestlé Health Science. Looking now at growth by product categories, there is a clear contrast between segments. Overall, the first half demonstrates the resilience of our business and shows how our diversified portfolio is well geared for fast-changing trading conditions. Powdered and liquid beverages grew by 1.3%. Despite a sharp sales decline in the out-of-home channel, coffee grew by 2.9% and gained market share, supported by Starbucks products, Nespresso and Nescafé. Powdered formats in cocoa and malt beverages, including Milo and Nesquik, grew in high single digits. On the other hand, across subcategories, ready-to-drink formats reported double-digit sales declines due to reduced on-the-go consumption. Pet care continued to see outstanding growth globally. Most segments grew in double digits with market share gains. Purina's performance was driven by continued strong momentum in e-commerce and increased demand for premium products. Innovation also continued to make a significant contribution, as demonstrated by the recent launch of ProPlan LifeClear, the first allergen-reducing cat food. Nutrition and health science grew at 1.2%. Infant nutrition growth was impacted by a sales contraction in China, but the performance improved during the second quarter. Outside of China, the category saw low single-digit growth. Infant cereals saw strong growth, boosted by increased demand in China, Brazil, and India. We already discussed Nestlé Health Science. In prepared dishes and cooking aid, growth was broad-based by region, brand, and product segment. Frozen grew in high single digits. Chilled grew at a double-digit rate, supported by the expansion of our vegetarian and plant-based food offering, which grew by 40%. Ambient culinary in retail grew in high single digits. Growth was supported by new product launches and increased digital engagement to maintain a strong level of at-home consumption. Milk products and ice cream grew at 7%. Within the category, dairy performed strongly with elevated demand for fortified products such as Nino and Bear Brand. Coffee met also saw solid growth. Waters saw negative growth, reflecting lower demand in the out-of-home channel, and confectionery declined, mainly due to reduced impulse buying and gift giving, which more than offset increased demand for tablets and baking products. Moving now to product margin by product categories. As we saw with growth, the contrast in margin evolution strongly reflects each category's level of exposure to the out-of-home channel, milk products and ice cream, pet care and prepared dishes saw material improvements, reflecting strong sales growth and the benefit of operating leverage. Nutrition and health science also posted improved margins, based on increased contribution from Nestlé Health Science and infant cereals, which benefited from strong sales growth. Powdered and liquid beverages saw a marginal decline in margin, mainly impacted by a decline in out-of-home and ready-to-drink product sales. Both Nescafe and Nespresso saw improved margins. Water and confectionery posted strong declines. This slide shows the progress of our underlying trading operating profit margin on a reported basis and illustrates the impact of the Nestle Skin Health divestiture, which reduces gross margin and improves SG&E. It is actually more relevant to look at the margin expansion on a like-for-like basis, excluding the impact of the Nestle Skin Health divestiture, as shown on the next slide. Excluding Nestlé Skin Health, our underlying trading operating profit margin increased by 40 basis points. In the first half, COVID-19 related costs were 290 million Swiss francs, including expenses for bonuses paid to frontline workers, employee safety protocols, donations, and other staff and customer allowances. In addition, the group absorbed costs of 120 million Swiss francs related to resources made idle during lockdown measures imposed by governments. These retained costs are essentially related to salaries of staff made idle and depreciations of boutiques and other facilities that were temporarily closed. At the same time, consumer-facing marketing expenses decreased by around 60 basis points, as some in-store activation and other promotional activities could not be executed during lockdowns. Examples include in-store demonstrations, sampling, and event sponsoring. On the other hand, we increased media spend, particularly in digital channels, to support brand building and consumer engagement. Digital media spend now accounts for 45% of total media spend. Lower media rates allowed for increased consumer reach. We also saw some cost savings, such as reduced travel spend and conferences. Gross margin was negatively impacted by higher commodity and packaging costs, which are expected to soften going forward. we continued to deliver structural cost reduction across the P&L. Moving on to P&L items from underlying trading operating profit to underlying EPS, just a few items to call out. The group underlying tax rate remained stable at 21.4%. Net profit margin increased by 340 basis points to 14.3%, reflecting the impact of one-off income coming from disposals, as well as improved operating performance. Underlying earnings per share increased by 0.5% in constant currency and by 5.9% on a reported basis to 2.01 Swiss francs. Diverse teachers had a negative impact of 2.4%, while lower contributions from associates and joint venture had a further negative impact of 2%. Nestlé's share buyback program contributed 1.4% to the underlying earning per share increase net of finance cost. Free cash flow was 3.3 billion Swiss francs in the first half. The decrease in adjusted EBITDA reflected the impact of foreign exchange and divestitures. We continued to be disciplined in our capital allocation, with positive contributions from both CAPEX and Working Capital. Our cash flow was reduced by half a billion as one of our associates delayed its dividend payment from April to July. When adjusted for this delayed payment, our free cash flow as a percentage of sales increased by 40 basis points to 9.3%. This improvement reflects our stronger operating performance and improved capital discipline. Before closing my remarks, allow me to give you a brief update on our always open for you initiative. We had planned to make 500 million Swiss francs available to support our customers. By the end of the second quarter, we had used around one-third of this consideration, predominantly through extended payment terms granted to our food service partners. Let me now hand over to Luca, who will monitor the Q&A.