Nestle S.A

Good afternoon and good morning to everyone. Welcome to the Nestle First Half 2022 results webcast. I am Luca Borlini, head of Nestle's investor relation. Today, I'm joined by our chief executive officer, Mark Schneider, and our chief financial officer, Francois Roger. As usual, Mark will begin with key messages and discuss the full year 2022 guidance. Francois will follow with a review of the First Half 2022 sales and profit figures. 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. I am pleased to report that our growth momentum increased during the second quarter, and that we reached 8.1% organic sales growth in the first half. Pricing continued to increase, reflecting higher inflation levels for our commodities, energy, and labor. As before, we made a point of acting responsibly in our price increases. Real internal growth remained resilient, and I'm glad to confirm that all three components of organic growth, volume, mix, and price, were positive in the first half. Continued supply chain issues and tough comparables from the second quarter last year brought our real internal growth slightly down from first quarter levels. Demand elasticity is still quite limited and moderate in light of the pricing action we had to take. If you like building stacks to measure growth consistency over time, Our two-year compound annual organic sales growth rate for H1 was 8.1 percent, and the three-year CAGR was 6.3 percent. No small feat. This has been a year of extraordinary supply chain challenges and input cost inflation. The situation was difficult before, but the war in Ukraine brought this to a whole new and unforeseen level, in particular for the food industry. The development of our underlying trading operating profit margin, both at group and at zone or business level, clearly shows that the food industry is not the cause of soaring food prices. It is much rather impacted by geopolitical and macroeconomic circumstances that are outside of our control. That said, we do everything to address these challenges in a responsible manner, always keeping consumers in mind. Francois will show you later in his presentation that we worked hard from all angles to mitigate the unavoidable impact on our underlying trading operating profit margin. I believe we handled the situation well under the circumstances and found a reasonable balance between maintaining growth and protecting the bottom line. Our high single-digit underlying EPS development in the first half bears this out. That balanced approach between growth and profitability will also be our guiding light when it comes to the second half of the year. In a fast-moving environment like this, operating management certainly takes center stage. Having said that, I'm all the more proud that we also saw continued progress with our strategic goals. Regarding portfolio management, we progressed with the acquisition of a majority stake in Orgain and the recently announced transactions to buy Pura Vida in Brazil and the Better Health Company in New Zealand. These transactions help Nestlé Health Science to round out its global presence in the consumer health and vitamins, minerals, and supplements space. Portfolio management for us goes beyond M&A. It includes the effective management of our existing portfolio, in particular through meaningful and relevant innovation, and the prompt fixing of any underperformers. In this context, I'm proud to report that we have stabilized our infant nutrition business in China. Growth in the first half turned positive, and we're starting to see improving market share trends. Outside of portfolio management, we also continue to make progress on other key strategic initiatives, including our sustainability and affordability projects. This brings me to a key challenge at this time of increasing food insecurity, and that is improving access to affordable, high-quality nutrition. The combination of the pandemic and the war in Ukraine has wiped out much of the progress over the past decade in this important area. This is a time when help is needed, and with our longstanding presence in developing countries, we see many opportunities to do good and to do well at the same time. As stressed before, we acted responsibly when it comes to the pricing of our products, but we go beyond responsible pricing alone. We lead the way when it comes to micronutrient fortification and in the important task of establishing and scaling up local and more resilient food supply chains, in particular in sub-Saharan Africa. Our press release provides specific examples of our recent projects. Next, I would like to comment on our updated guidance for the year. As indicated in our Q1 conference call, our start to the year was stronger than expected, and we have only accelerated from there. Based on the strong first half sales performance, we now expect organic sales growth for the full year in the range of 7% to 8%. This points to a strong second half with similar or only slightly lower performance than in H1. Any caution here is due to the geopolitical and macroeconomic concerns, while we are confident of how our products and brands will continue to perform. Our views on the expected underlying trading operating profit margin have not changed materially from the time of our Q1 call. Being cautious about the global macro environment we now expect a full year margin around 17%, which is the low end of our previously guided range. All other expectations for the year remain unchanged. While it is way too early today to discuss 2023 expectations and beyond, I would like to assure everyone that we're not expecting a longer-term reset when it comes to our underlying trading operating profit margin. We still see the margin pressure as transitory, while pricing has to catch up with input cost inflation. As a food company and being committed to responsible pricing, the price adjustment did not work quite as fast as in other consumer goods categories such as personal and household care. Before handing it over to Francois, I would like to make a particular point in recognizing and thanking our associates around the world. As we go through the third year in a row under external crisis conditions, your drive, energy, and perseverance in coping with the situation and making the best of it is a source of pride and inspiration. It is a pleasure and a privilege to lead such a committed team. Thank you. This concludes my prepared remarks. I would now like to hand it over to Francois and look forward to answering your questions later.

Thank you, Mark, and good morning, good afternoon to all. Let me start with the highlights for the first half of 2022. Organic growth was 8.1%, pricing increased to 6.5%, reflecting significant and unprecedented cost inflation. RIG was resilient at 1.7%. The slowdown versus the prior year reflects a high base of comparison in 2021 and supply chain constraints. Net acquisition increased sales by 1%, largely related to the acquisition of the core brands of the bountiful company as well as Orgain. Foreign exchange had a positive impact on sales growth in the first half. Total reported sales for the six months were 45.6 billion Swiss francs, a 9.2% increase versus last year. This is the highest level seen for more than 15 years. Turning to the distribution of growth between developed and emerging markets, organic growth in developed markets was 6.9% based on increased pricing and positive rig. Growth in emerging markets reached 10% with strong pricing and solid rig. Growth was supported by continued momentum for affordable offerings, particularly in AOA. Turning next to the breakdown of sales by channel, organic growth for retail sales remained robust at 6.7% for the first half. Within retail, e-commerce sales grew by 8.3%, building on 19.2% growth in the first half of 2021. Organic growth in out-of-home channels reached 29.6%, with sales now exceeding 2019 levels. We have continued to address inflationary pressures proactively and responsibly. Pricing has stepped up further and reached 7.7% in the second quarter. We aim at striking the right balance between margin protection and volume growth. The strength of our brands, product differentiation, and leading market position enhances our ability to pass through this pricing. In addition to pricing, we are making full use of other levers such as strategic revenue management, efficiencies, discipline cost management, product mix, as well as portfolio management. For example, in terms of efficiencies, we expect to generate significant savings in 2022 through SKU optimization, recipe and packaging harmonization, as well as the development of new technologies. So far, RIG has remained resilient and we have seen limited evidence of negative elasticity linked to price increases. The two-year RIG average, which has just for COVID-19-related volatility, was 4.1% in the second quarter. This is broadly in line with trends seen over the last several quarters and higher than pre-COVID levels. Volume growth, a key component of RIG, continued to be positive in the first half of 2022 at a level consistent with pre-pandemic times. This volume growth is coming over a high base of comparison last year. Indeed, in the first half of 2021, volume growth was almost four times higher than in previous years at around 5%. We have not seen any material downtrading yet, as mixed as remained positive. Going forward, we may see some negative rig elasticity. Let's now look at the results of our seven operating segments, beginning with zone North America, where we saw 9.6% organic growth. Rig was minus 0.2%, impacted by a high base of comparison in 2021 and supply chain constraints, particularly for Purina pet care and frozen food. Growth was supported by increased pricing, strong momentum in e-commerce, as well as a further recovery of out-of-home channels. The zone saw continued broadband market share gains. By-product category, sales in Purina Pet Care, Nestle Professional, Starbucks out-of-home products, and water grew at a strong double-digit rate. Infant formula recorded double-digit growth, reflecting supply shortages in the market. Baby food also posted strong growth, fueled by new products launches for Gerber, including Soos and Choo, the first edible teasing stick. Frozen food reported low single-digit growth. The zone's underlying trading operating profit margin increased by 30 basis points, excluding the impact of the divestments of Nestle Water's North America brands. The zone's margin development was negative, as pricing did not fully offset significant cost inflation. Shifting to zone Europe, organic growth was 7.1%, driven by increased pricing across most geographies and categories. RIG remained solid at 2.1%, despite a high base of comparison in 2021 and supply chain constraints. Growth was supported by further recovery of out-of-home channels and innovation. The zone continued to see market share gains, particularly in pet food, coffee, and infant nutrition. By product category, the key growth drivers were Purina Pet Care and Nestlé Professional. Sales in water and infant nutrition grew at a double-digit rate. Coffee posted low single-digit growth following a high base of comparison in 2021. Garden gourmet plant-based products saw continued strong double-digit growth, fueled by new product launches. The zone's underlying trading operating profit margin decreased by 140 basis points, impacted by significant inflation, which was not fully offset by pricing and growth leverage. We also remained disciplined on cost control and efficiencies to mitigate the impact of inflation on consumers. Moving now to zone AOA, the zone reported high single-digit organic growth with contribution from all geographies and categories. Growth was driven by increased pricing, further recovery of out-of-home channels, and strong supply chain execution. The zone saw market share gains across categories, particularly in culinary, portion, and ready-to-drink coffee, as well as dairy. By geography, All regions posted positive growth with particular strengths in South Asia, Africa, and Malaysia. By product category, culinary was the largest growth contributor. Coffee and Purina Petcare posted high single-digit growth. Sales in Nestle Professional as well as cocoa and malt beverages grew at a double-digit rate. Infant Nutrition posted mid-single-digit growth with a strong recovery in the second quarter. The zone underlying trading operating profit margin decreased by 90 basis points. Significant cost inflation was not fully offset by pricing and growth leverage. Discipline, cost control, and efficiencies were instrumental in ensuring price competitiveness, particularly for our affordable offerings. Next is zone Latin America, which reported double-digit organic growth. RIG remained strong at 4.2%, building on a high base of comparison in 2021. Growth was broad-based and supported by increased pricing, further recovery of out-of-home channels, and sustained momentum for retail sales. The zone saw market share gains in infant nutrition, pet food, and coffee creamers. By geography, Brazil reported double-digit growth, Mexico grew at a high single-digit rate, Chile, Colombia, and the Plata region also saw strong growth. By product category, confectionery was a key growth contributor, Purina Pet Care, coffee, and Nestle Professional all reported strong double-digit growth. Infant nutrition saw high single-digit growth. Dairy posted mid-single-digit growth, led by fortified meals and dairy culinary solutions. The zone's underlying trading operating profit margin increased by 10 basis points as a result of gross leverage and disciplined cost control and efficiencies. Significant cost inflation was not fully offset by pricing. Turning next to Zone Greater China, organic growth was 2.3%, with a rig of 1.6% impacted by COVID-19-related movement restrictions. Pricing reached 0.7%, turning positive in the second quarter. As a reminder, inflation remains relatively limited in the region. Growth was supported by robust demand in e-commerce channels and continued innovation. infant nutrition returned to positive growth with improving market share trends and was led by a strong recovery in the second quarter for NAN and ILUMA. Categories with high exposure to out-of-home channels and on-the-go conceptions, particularly Nestlé Professional and Ready to Drink Coffee, were impacted by movement restrictions. The zones underlying trading operating profit margin increased by 100 basis points, favorable mix and disciplined cost control more than offset cost inflation. Next is Nespresso, which reported low single-digit growth following 14.6% growth in the first half of 2021. Volume and mix combined are now around 15% ahead of 2019 levels. Growth was supported by continued momentum for the virtual system, a recovery for out-of-home channels and boutiques, as well as innovation. Online sales decreased, following a high base of comparison in 2021, but remained well above pre-pandemic levels. By geography, North America posted double-digit growth with continued market share gains. Europe reported a sales decrease following double-digit growth in 2021. Other regions combined reported high single-digit growth. The underlying trading operating profit margin of Nespresso decreased by 170 basis points, impacted by gross investments behind the rollout of the virtual system and cost inflation. We continue to invest behind virtual, given strong levels of consumer adoptions and the system's differentiation. Finally, let's turn to Nestlé Health Science, The business posted high single-digit growth, building on two consecutive years of double-digit growth. Growth was supported by innovation, geographic expansion, and market share gains. Consumer care posted mid-single-digit growth, with strong contributions from healthy aging products. Vitamins, minerals, and supplements reported low single-digit growth, reflecting a high base of comparison and supply chain constraints. Medical nutrition reported double-digit growth, with strong sales development for pediatric products. Sales for Zenpep grew at a double-digit rate with market share gains. Palforzia saw further patient adoption. By geography, sales in North America grew at a high single-digit rate. Europe saw positive growth, while other regions combined posted double-digit growth. The underlying trading operating profit margin of Nestlé Health Science increased by 20 basis points. Growth leverage and acquisition synergies more than offset cost inflation and growth investments. Let's now look at product categories. Growth was broad-based, supported by increased pricing across all categories and market share gains, particularly in pet food, coffee, and Nestlé Health Science. As a reminder, when looking at growth for the first half, we see consumer demand somewhat normalizing by channel. Categories with greater at-home consumption, such as culinary and dairy, saw softer growth over a high base of comparisons, but sales remained ahead of pre-pandemic levels. By contrast, categories with greater exposure to out-of-home channels and on-the-go consumptions, such as confectionery and water, saw a strong recovery over a low base of comparison. Within powdered and liquid beverages, coffee saw high single-digit growth over a high base of comparison in 2021. All brands contributed positively to growth, with sales of Starbucks and Nescafe ready-to-drink products growing at a double-digit rate. Cocoa and malt beverages reported high single-digit growth, driven by strong demand for Milo in Asia and Africa, Nesquik in North America, and Nescau in Brazil. Pet care reported strong double-digit growth, driven by continued demand for premium and veterinary products. Growth was also supported by sustained e-commerce momentum, innovation, and further market share gains. Nutrition and health science posted 7.8% growth. Infant nutrition saw 8.6% organic growth, with a strong recovery across all geographies, a return to positive growth in China, and improving market share trends. Growth was supported by continued robust demand for HMO products in infant formula, with sales reaching 670 million Swiss francs, as well as by healthy snacking products in baby food. We have already discussed Nestlé Health Science. Prepared dishes and cooking aids saw 2.9% growth, based on strong sales development for ambient culinary in zone AOA and robust demand for DigiOrNo and Hot Pockets in North America. Vegetarian and plant-based food products delivered double-digit growth with particular strengths for garden gourmet. Milk products and ice cream recorded 3.5% growth, building on a high base of comparison in 2021. The key growth drivers were coffee creamers and affordable nutrition offerings, particularly bear brand. Growth in confectionery reached 10.8%, reflecting strong growth for KitKat and seasonal products. Sales in water grew by 17.2%, supported by double-digit growth for international premium brands and a strong recovery in out-of-home channels. Moving now to profit margin by product category. Powdered and liquid beverages saw a margin decrease, reflecting significant cost inflation and gross investment for Nespresso, partially offset by increased pricing and gross leverage. Purina Pet Care posted a margin decrease at significantly higher commodity and distribution costs, more than offset pricing and gross leverage. Nutrition and health science saw a margin increase in both infant nutrition and Nestlé health science. We have already discussed Nestlé health science. In infant nutrition, the margin increased by 380 basis points to 23.5% as a result of pricing, gross leverage, favorable product mix, and improved performance in China. Prepared dishes and culinary products saw a slight margin decrease as pricing did not fully cover significant cost inflation. Margins in milk products and ice cream decreased, impacted by higher cost inflation for ambient dairy. Confectionery and water saw margin improvements as pricing and gross leverage more than offset cost inflation. Next is underlying trading operating profit margin. Overall, our underlying trading operating profit margin for the first half decreased by 50 basis points to 16.9%. Gross margin decreased by 280 basis points to 46%, reflecting time delays between cost inflation and pricing actions similar to what we saw in the second half of 2021. Inflation continued to be significant and broad-based across commodity, packaging, freight, and energy costs. Overall, the impact of cost inflation was around 14% of cost of goods sold in the first half of 2022. Going forward, we will continue to offset increased inflation through pricing, strategic revenue management, efficiencies, and portfolio management. Distribution cost as a percentage of sales decreased by 10 basis points, mainly as a result of the disposal of the Nestle Waters bronze in North America. Marketing, administration, and R&D expenses decreased as a percentage of sales by 220 basis points. we saw a significant benefit from sales growth leverage and disciplined cost control with sales growing by 9.2% and structural costs slightly increasing. Marketing spend decreased temporarily as we limited promotion and marketing activities in the context of supply chain constraints, particularly in Europe and North America. We expect to increase our investment in consumer-facing marketing spend in H2 2022 versus H1 2022. At the same time, we continue to optimize our marketing spend by increasing the share of digital media investment, which now accounts for 54% of total media spend. Moving on to the P&L items from underlying trading operating profit down to net profit, Restructuring expenses and net other trading items increased by 150 basis points, mainly due to impairments. Trading operating profit margin was 14.7%, a decrease of 200 basis points on a reported basis. We recorded lower gains on disposals and higher taxes due to one-off items in the first half of 2021. As a result of these movements, the net profit margin decreased by 270 basis points to 11.5%. Moving to underlying earnings per share, which increased by 8.1% in constant currency and 7.3% on a reported basis to 2.33 Swiss francs. The largest contributor to the improvement was stronger organic growths. Nestlé's share-buy-back program also contributed 1.7% net of finance costs. The line Others, mainly related to income from joint ventures and associates, contributed 2.1%, driven by increased contribution from L'Oréal and Froneri. The negative impact from foreign exchange reflects the currency depreciation of the Euro-denominated L'Oréal income. Pre-cash flow decreased from 2.8 billion Swiss francs to 1.5 billion Swiss francs. Adjusted EBITDA increased by 0.5 billion Swiss francs, or 5.8% reflecting higher sales growth. The group increased inventory levels temporarily due to significant supply chain constraints. In order to meet strong volume demand, particularly for Purina Pet Care and coffee, the group increased capital expenditure. The level of capex should start to normalize from 2023 onwards. Excluding the increase in working capital, cash generated from operations increased from 7.9 billion Swiss francs to 8.8 billion Swiss francs, driven by strong organic growth. Let me now hand over to Luca, who will monitor the Q&A.