Nestle S.A

Good afternoon and good morning to everyone. A warm welcome to the Nestlé First Half 2023 results webcast, and thanks for joining. I'm Luca Borlini, head of Nestlé Investor Relations. Today, I'm joined by our CEO, Marc Schneider, and our CFO, François Roget. Marc will begin with the key messages and discuss the full year 2023 guidance. François will follow with a review of the First Half 2023 sales and profit figures. We will then open the lines for your questions. Before we begin, as usual, 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 believe that we have a strong and convincing set of results for the first half, delivering on key metrics where we had indicated improvement earlier this year. Based on that, we look towards the second half and the year 2024 with confidence. Very importantly, after several years of day-to-day crisis management, we have seen signs of further normalization in our operating environment in the first half. This allows us to be more strategic and more forward-looking in the way we manage our business. We're getting back to our proven virtuous circle of managing for steady and profitable growth. We are pleased to report strong and broad-based organic growth of 8.7% for the first half of 2023. Pricing was 9.5%, reflecting significant input cost inflation over the last two years. As you know, we had cautioned you about expectations for the development of volume and mix in the second quarter. Against that backdrop, we were quite pleased with the resilient real internal growth, the sum of volume and mix, which came in at minus 0.8%. Given that our own voluntary portfolio optimization efforts reduced this number by 60 basis points, we managed to keep the underlying real internal growth almost flat. Not a small feat in a period with extraordinary inflation-induced pricing and economic uncertainty, and a period that still saw some post-COVID normalization in a few of our categories, which was a slight track on volume growth. In case you are concerned about a sliding global consumer sentiment, I would like to assure you that we did not see a downward trend inside the second quarter. April was rather weak, in line with what some of our peers reported. Sales in May and June were quite firm. I would like to confirm our expectation that real internal growth will swing into positive territory in the second half of the year. Several businesses that showed signs of temporary post-COVID sales growth compression are beginning to turn around. For example, Nespresso, and the vitamins, minerals, and supplements segment of Nesta Health Science. We are also increasing our marketing investments and will increasingly see the benefits of our portfolio optimization program kick in. As our pricing activities moderate, we should also see less of a drag on volumes. Among the other achievements for the first half, I would like to point out the sequential development of our gross margin compared to the second half of last year, and our free cash flow development. The gross margin improvement is expected to continue over future quarters. The free cash flow improvement is in line with our expectations and should accelerate in the second half of the year. More on that from Francois later. So all in all, a solid financial picture, with a strong development in constant currency underlying earnings per share growth of 11.1%. This is above the top end of the midterm 6% to 10% corridor we had laid out to you in Barcelona last year. Our marketing spend as a percentage of sales increased compared to the second half of last year and is roughly unchanged from the first half in 2022. As you know, for most of 2022, our marketing spend levels were quite muted in the face of supply chain and capacity constraints. With a large degree of uncertainty over consumer behavior during the winter, we had started the year on very low spending levels. As for March, the spending levels increased month after month, with Q2 spending levels now significantly above last year's level. We will continue to invest in a very robust manner in the second half of 2023. Moving on to slide five in our business as a force for good section, I would like to highlight our work on sourcing deforestation-free palm oil. Palm oil is a very versatile vegetable oil used in a number of our categories. It is quite efficient with regards to land use per ton produced, but of course it needs to be responsibly farmed. Nestlé is committed to that. We pursue high-tech solutions like the satellite tracking system, which we adopted as the first large-scale user to monitor our palm oil supply chain. At the other end of the spectrum, we're closely involved in on-the-ground measures, working with smallholder farmers to find sustainable and equitable solutions. We leave no stone unturned. We're now nearing 96% deforestation-free sourcing for palm oil, and we'll continue to disclose this number annually. Getting to deforestation free and staying there will be a constant effort, and we're committed to it in the name of avoiding deforestation around the world and protecting our climate. This takes us to slide six and our updated outlook for the year. Based on the stronger than expected organic growth and real internal growth development in the first half, we now increase our organic growth guidance for the full year to a range of 7 to 8%. While it is prudent in volatile times to leave some downside protection, I would like to share my personal expectation that we intend to hit the upper half, if not the upper end, of this new range. We fully confirm all other items of our 2023 guidance, and believe that our strong first-half financials put us in a very good position to meet or exceed those. With this, I would like to hand over to Francois. I look forward to answering your questions later.

Thank you, Marc, and good morning or good afternoon to all. Let me start with the highlights for the first six months of 2023. Organic growth reached 8.7%, with pricing of 9.5%, reflecting the impact of cost inflation received over the last two years. RIG was minus 0.8%, impacted by capacity constraints and the effect of portfolio optimization initiatives. Overall, demand elasticity and consumer downtrading remain limited in the context of pricing actions. Net divestitures decreased sales by 0.4%, largely related to the divestiture of Freshly, as well as the disposal of the Gerber Good Start infant formula brand in the United States. Foreign exchange had a negative impact of 6.7% on sales growth following the broad-based depreciation of currencies versus the Swiss franc. Total reported sales for the first six months were 46.3 billion Swiss francs. Turning to the distribution of growth between developed and emerging markets, organic growth in developed markets was 8% driven by pricing with negative RIG. Growth in emerging markets was 9.6% based on pricing with flat RIG. RIG for the first half of 2023 was slightly negative at minus 0.8% in line with what we previously communicated. RIG was at a similar level in the first and second quarters when adjusted for the number of trading days. RIG continued to be impacted by remaining capacity constraints, particularly for pet care and water. RIG was also impacted by portfolio optimization actions, which had a negative effect of around 60 basis points in the first half. This included the impact of the fast winding down of the frozen meals and pizza business in Canada in the second quarter. At the same time, we are starting to see the benefits of our portfolio optimization actions with a material and progressive improvement in service levels for high rotation products in the first half. This improvement will support RIG development in the second half. We are confident that group rig should turn positive in the second half. Beyond the lower base of comparison, the rig improvement should be driven by the step-up in marketing investment, the net effect of portfolio optimization, and the moderation of new pricing. Just as a reminder, the third quarter will have one less trading day. Let's now shift focus to the results of our seven operating segments, beginning with Zone North America, where we saw 10% organic growth, with inflation-related pricing of 11%. RIG at minus 1% was resilient in the context of portfolio optimization actions and capacity constraints, particularly for Purina Petcare, Perrier Water, and Coffee Creamers. Excluding these impacts, RIG was slightly positive in North America in the first half. The zone delivered broad-based growth across brands and categories, driven by favorable mix and continued momentum in e-commerce. The zone saw market share gains in pet food, frozen meals, as well as soluble and portioned coffee. By product category, The largest growth contributor was Purina Pet Care, which reported growth in the mid-teens with positive rig. The beverages category, including Starbucks products, Coffee Mate and Nescafe, posted high single-digit growth. Sales of Nestlé Professional and Starbucks out-of-home products grew at a strong double-digit rate. Frozen food reported flat growth, partly impacted by portfolio optimization actions in Canada. we are seeing positive market share trends across brands, including gains for staffers, jacks, and California pizza kitchens. The zone underlying trading operating profit margin increased by 280 basis points, mainly as a result of the divestment of a majority stake in Freshly and portfolio optimization initiatives. Pricing and cost efficiencies also helped to offset significant cost inflation received over the last two years. Next is on Europe. Organic growth was 8.9% driven by pricing linked to significant input cost inflation received over the last two years. REG was minus 2.4% following a high base of comparison and portfolio optimization actions. It is worth remembering that over the last two years, rig increased by more than 6% for the first half. Growth in zone Europe was supported by strong sales development for e-commerce and continued momentum for out-of-home channels. The zone saw market share gains in pet food, confectionery, and infant nutrition. By geography, the UK, Turkey, as well as Central and Eastern Europe were the lead contributors to growth. By product category, the key growth drivers was Purina Petcare, fueled by premium brands Felix, Gourmet, and One. Growth for Petcare was strong across all channels, particularly in e-commerce. Confectionery reported high single-digit growth, with strong demand for KitKat. Nestlé Professional recorded double-digit growth. Coffee saw mid-single-digit growth, with particular strength for Nescafe soluble coffee and Starbucks products. The zone's underlying trading operating profit margin decreased by 70 basis points, as significant cost inflation outweighed pricing and cost efficiencies. Moving to zone AOA. The zone reported high single-digit organic growth. Pricing was 9.2% reflecting the impact of input cost inflation and currency depreciation. RIG was slightly positive. Growth was driven by pricing, continued momentum of out-of-home channels, and innovation. The zone saw market share gains in coffee, culinary, and confectionery. By geography, all regions posted positive growth. South Asia was a key growth contributor, supported by distribution expansion and e-commerce momentum. The Middle East and Africa also saw strong growth based on robust demand for affordable offerings. Growth in Southeast Asia was driven by the Philippines and Malaysia-Singapore. By product category, Infant nutrition was the largest growth contributor, led by Lactogen, NAN, and Cerelac. Sales in culinary grew at a double-digit rate, led by Maggi and fueled by new product launches. Coffee posted high single-digit growth, with continued robust demand for Nescafe and Starbucks products. Sales for Nestlé Professional grew at a strong double-digit rate across most categories and geographies, supported by channel penetration and customer acquisition. The zone's underlying trading operating profit margin decreased by 70 basis points. The impact of input cost inflation and currency depreciation more than offset pricing and discipline cost control. Next is Zone Latin America, which reported double-digit growth for the third consecutive year, led by pricing of 12.5%. RIG was minus 0.9%. The zone saw sustained broad-based growth across all geographies and product categories, supported by strong operational execution and continued momentum of out-of-home channels. The zone saw market share gains in pet food, infant nutrition, and culinary. By geography, growth was led by Brazil, Mexico, and the Plata region, which all reported double-digit growth. By product category, confectionery was the largest growth contributor, based on strong demand for Kit Kat and key local brands. Dairy posted double-digit growth, supported by fortified milks and dairy culinary solutions. Infant nutrition saw double-digit growth, based on solid momentum for NAN and NIDO growing-up milks. coffee reported broad-based double-digit growth supported by Nescafe soluble coffee. The zone's underlying trading operating profit margin decreased by 130 basis points as one of items in the prior year and cost inflation more than offset pricing and cost efficiencies. Turning to zone Greater China, organic growth was 4.7% with pricing of 3.4% and rig of 1.3%. Growth was supported by e-commerce momentum and a recovery of out-of-home channels. The zone saw market share gains in pet food and confectionery. By product category, Nestlé Professional was the largest growth contributor, supported by innovation and distribution expansion. Infant nutrition saw mid-single-digit growth, led by NAN specialty offerings and Illuma. Confectionery reported high single-digit growth, led by Tsufuchi and Shark Wafer. The zone's underlying trading operating profit margin increased by 160 basis points, as favorable mix and discipline cost control more than offset cost inflation. Turning next to Nestlé Health Science, the business posted mid-single-digit growth with pricing of 5.3% and rig of minus 1.9% following extraordinary growth over the last three years during the pandemic. Our three-year re-average for the first half was 5.3%. E-commerce momentum, continued geographic expansion and market share gains supported growth. Consumer care reported a sales decrease with a return to positive growth in the second quarter. Active nutrition saw low single-digit growth driven by healthy aging products, vital proteins, and organe. Vitamins, minerals, and supplements saw a sales decrease in the first half, turning positive in the second quarter based on robust growth for Garden of Life and pure encapsulations. The VMS category is showing signs of returning to growth, and we expect it to increase further in the second half. Medical nutrition reported double-digit growth with strong sales developments for acute medical care, pediatric, and allergy products. The underlying trading operating profit margin of Nestlé Health Science decreased by 70 basis points, as cost inflation more than offset pricing and acquisition synergies. Finally, Nespresso, which reported mid-single-digit organic growth driven by pricing. RIG was 0.8%, with a return to positive growth across most segments and geographies in the second quarter. Growth was led by broad-based momentum for the virtual system. Growth in out-of-home channels was also strong, supported by the continued expansion of the Momento system, particularly in the office segment. Innovation continued to resonate with consumers, including the launch of virtual milk machines, new barista iced coffee creations such as juicy watermelon over ice, as well as the launch of home-compostable coffee capsules in France in June. By geography, North America posted double-digit growth with continued market share gains. Europe reported slightly positive growth. Other regions combined reported low single-digit growth. The underlying trading operating profit margin of Nespresso decreased by 260 basis points. Significant coffee cost inflation and the appreciation of the Swiss franc more than offset pricing actions. The business continues to invest in the rollout of the virtual system, as well as in media advertising, including the new campaign featuring George Clooney, Simon Ashley, and Julia Garner. Let's now look at product categories. Organic growth was broad-based, supported by pricing across all categories. At-home consumption post-COVID has now normalized, while out-of-home channels continue to see strong growth momentum, with an organic growth rate twice as fast as the group average at 17.1%. Within powdered and liquid beverages, coffee saw high single-digit growth. Growth was broad-based across brands, segments, and geographies, and led by continued momentum for out-of-home channels, which grew at a strong double-digit rate. Starbucks products grew by 9.4%, supported by a strong recovery of out-of-home channels in the United States. Cocoa and malt beverages reported mid-single-digit growth, with strong contributions from Nescau and Milo. Petcare posted continued strong double-digit growth for the third year in a row despite capacity constraints. Science-based, premium and veterinary products saw strong sales development. Growth was also supported by pricing, continued e-commerce momentum and innovation. Nutrition and health science posted 7.4% growth. Infant nutrition reported 10.4% organic growth, with broad-based contributions across geographies, segments, and key brands. Sales of human milk oligosaccharide products grew at a meet-in rate, reaching around 700 million Swiss francs in the first half. We have already discussed Nestlé health science. Prepared dishes and cooking aids saw 5.8% growth, driven by Maggie, which reported close to double-digit growth. Plant-based food posted low single-digit growth, following the impact of portfolio optimization. While there has been some growth moderation for plant-based products recently, we see that as temporary. We remain positive on long-term category trends and expect the plant-based market to evolve and rebound. Milk products and ice cream recorded 7.5% growth. The key contributors to growth were coffee creamers, affordable fortified milks, and dairy culinary solutions. Ice cream grew at a mid-single-digit rate, led by Agandas in Canada and KitKat ice cream sticks in Southeast Asia. Growth in confectionery was 10.8%, reflecting strong broad-based demand for KitKat and positive sales development for key local brands, including Garoto in Brazil, Munch in South Asia, and Shark Wafer in China. Sales in water grew by 4.2% despite temporary capacity constraints and a high base of comparison in 2022. San Pellegrino and Aquapana saw strong demand, particularly for out-of-home channels. We continue our modernization efforts at our Perrier site and expect a normalization of supply by the end of the year. Moving now to profit margin by product category. Most categories saw a margin improvement as pricing, cost efficiencies, and portfolio optimization helped to offset input cost inflation received over the last two years. Margins within the powdered and liquid beverages category decreased by 250 basis points, mainly due to significant cost inflation in coffee. Pet care margins increased by 190 basis points, driven by gross leverage, lower distribution costs and improved mix, which more than offset increased advertising and marketing expenses. Margin increases in milk products and ice cream, as well as food, were supported by pricing, portfolio optimization, and structural cost reduction. Confectionery saw a margin increase of 70 basis points based on gross leverage, pricing, and structural cost reduction. Within nutrition and health science, infant nutrition saw a margin increase of 70 basis points as a result of gross leverage, structural cost reduction, and lower distribution costs. Next is underlying trading operating profit, which increased by 2.9% to 7.9 billion Swiss francs. The underlying trading operating profit margin reached 17.1%, an increase of 20 basis points on a reported basis and 30 basis points in constant currency. Gross margin decreased by 40 basis points to 45.6% as a result of continued input cost inflation that I will detail on my next slide. Distribution cost as a percentage of sales decreased by 50 basis points to 8.6% of sales, mainly as a result of lower freight and energy costs. Marketing and administration expenses as a percentage of sales were unchanged versus the prior year. Going into more details on gross margin. Our gross margin decreased by 40 basis points year-on-year to 45.6%. When including distribution costs, as some other companies do, our gross margin increased by 10 basis points. Pricing, cost efficiencies, and portfolio optimization only partly offset the impact of cost inflation, which is still significant despite being lower than in the prior year. While costs have decreased versus a peak for some items, many price levels for commodities and labor are still trending materially above their 2022 average, and some items have seen increases. For example, Robusta coffee spot prices are nearly 30% above their 2022 average and almost 50% above their last 10-year average. Similarly, sugar and cocoa are 25% above their 2022 peak and more than 35% higher than their 2022 average. We are starting to rest our gross margin, and when compared to the second half of 2022, we can see a material improvement of 110 basis points. We expect our gross margin to be up materially in the second half versus the corresponding period in 2022. Turning to advertising and marketing expenses, we value consumer-facing marketing investment as a key growth driver supporting our brands and innovation. In the spirit of greater transparency, we are now disclosing the group advertising and marketing expenses. In 2022, we temporarily reduced our investment levels as we limited advertising and marketing activities in the context of supply chain constraints. We look at marketing and trade spend jointly because we often arbitrate between these two lines of the P&L. In the second half of 2022, we increased our trade spend in Swiss francs versus the first half as we focused on increasing accessibility and affordability of our products in the context of unprecedented pricing to compensate for significant inflation. In the first half of 2023, our advertising and marketing spend increased by 7.5% in constant currency versus the same period of the prior year. As a percentage of sales, it was 7.1%, representing a 50 basis points increase over the second half of 2022. In the second half of 2023, we expect to further increase our marketing investments. Moving on to the P&L items from underlying trading operating profit down to net profit, restructuring expenses increased to 262 million CHF in the first half of 2023 from 87 million CHF in the prior year. Impairment of assets decreased by 130 basis points year on year. Trading operating profit margin was 15.9%, an increase of 120 basis points on a reported basis. Net financial expenses increased to 697 million Swiss francs. The average cost of net debt was 2.6% compared to 1.9% in the first half of 2022. As a result of these movements, the net profit margin increased by 70 basis points to 12.2%. In Swiss francs terms, free cash flow increased from 1.5 billion to 3.4 billion, and as a percentage of sales, from 3.2% to 7.4%. The increase was due to working capital movements and the sale of Forstek in Prometheus Biosciences. These two elements more than offset temporarily higher capital expenditure for the period. Even after stripping out the positive inflow of 643 million Swiss francs linked to the Prometheus disposal, the free cash flow increase of 1.3 billion Swiss francs was significant. A key driver of our working capital improvement was a lower level of inventories. At a time of significant inflation, it is relevant to look at the evolution of inventories as a percentage of sales rather than in absolute value terms. Inventory levels are starting to normalize following a temporary increase in the prior year linked to supply chain constraints. We expect this level to decrease at a faster pace in the second half of the year. Moving to underlying earnings per share, which increased by 11.1% in constant currency and by 4.1% on a reported basis to 2.43 Swiss francs. The improvement was driven by strong organic growth and an increase of the underlying trading profit margin. Nestlé's share buyback program also contributed 1.4% net of finance cost. These increases were partly offset by the negative effect of exchange rates and higher financing costs. Let me now hand over to Luca, who will manage the Q&A.