Nestle S.A

Good morning and welcome to Nestlé's full year 2024 results conference call. I'm David Hancock, Head of Investor Relations, and I'm joined today by Laurent Fricks, CEO, and Anna Manns, CFO. Before we get started, please take a moment to review the disclaimer. Let me quickly take you through the agenda. After the key messages, we will review the 2024 financials, share details of our strategic progress and look at 2025 guidance before summarizing and then moving to Q&A. With that, I will hand over to you, Laurent.

Many thanks, David, and good morning to all. Let me start with four key messages regarding 2024 and our outlook. First, we delivered 2024 results in line with or slightly better than our guidance provided in October, both on top line and on profitability, and cash flow was strong. Second, we have given formal 2025 guidance this morning. This is unchanged versus the previous outlook, despite the recent commodity price moves. Third, we are stepping up investment to accelerate category growth and improve market share performance. This is funded by our 2.5 billion Swiss francs cost savings program called Fuel for Growth. And we'll provide some more details on progress today. And finally, we have moved quickly to put the organization in place and align our teams to deliver our plans. We had a solid finish to 2024 and this gives us a good base as we move into 2025. It is important to keep in mind that we are on a journey and that it will take time until we are firing on all cylinders. But things are changing and changing fast. With that, I will hand over to Anna to take you through the 2024 results.

Thanks Laurel and good morning. I'm going to cover our performance in 2024 and the implications for 2025. We delivered 2.2% organic sales growth with rig of 0.8% and pricing of 1.5%. Sales were also negatively impacted by foreign exchange movements due to the strengthening of the Swiss franc. Several factors shaped our sales delivery for the year. Consumer demand softened in 2024. Sentiment has stabilized but remains fragile. Consumer hesitancy towards global brands in zone AOA had a negative impact of 40 basis points on the group's organic growth. and the actions taken to reduce customer inventories in the second half of the year had an additional 20 basis point impact on growth. And pricing was lower in 2024, reflecting a reduction in input cost inflation across most categories and a return to a more normal promotional environment. If we look at the quarterly movement of sales, you can see how these factors impacted growth by quarter. The sharp reduction in Q1 rig was largely due to the US where growth in frozen food was strongly negative. And in addition, we had temporary supply constraints in our VMS business. All quarters were impacted by soft consumer demand and consumer hesitancy towards global brands in zone AOA. Inventory reduction actions impacted Q3 and to a lesser extent Q4. As cocoa and coffee prices increased, we took incremental pricing in the third and fourth quarters. We delivered 17.2% UTOP margin, down 10 basis points versus 2023 and flat in constant currency terms. Gross profit margin increased 80 basis points and we stepped up advertising and marketing investments by 40 basis points. I'll explain this in a minute. We saw a 50 basis point increase in administration expenses. This is due to higher labor costs, the appreciation of the Swiss franc and increased growth investments, particularly in digitization. To put that labor cost increase in context, our salary inflation was about 3% in 2024, which benchmarks well against a global weighted average for the markets where Nestle operates. The 80 basis point improvement in gross profit margin was driven by pricing, portfolio optimization, and net input cost reduction. That net input cost reduction is the combination of commodity price increases offset by existing efficiency programs. In 2024, we delivered over 1.2 billion Swiss francs of efficiencies, predominantly benefiting gross profit margin. with 500 million coming from recipe reformulation and the remainder from enhanced technology programs in our plants and logistic network redesign. As you can see, gross profit margin declined sequentially in the second half, as we saw higher commodity costs, primarily in cocoa and coffee, and that's continuing into 2025. Pricing efficiencies and strategic revenue management actions will allow us to offset most of that absolute increase in cost of goods sold. Nevertheless, we expect gross profit margin in percentage terms to be lower for 2025. As we told you at our Capital Markets Day, going forward, we'll invest more in growth. This includes taste, quality and innovation, price, distribution, and advertising and marketing, depending on our diagnosis of where we need to win with the consumer. Investment will be focused behind the most attractive opportunities and where we have robust execution plans. Specifically on advertising and marketing, we expect to reach 9% of sales by the end of the year as we previously guided. That means for the full year 2025, the increase should be at a similar level to the 40 basis points increase you've seen in 2024. This slide shows how gross profit margin dynamics and the growth investments flowed through to UTOP, with margin down sequentially in the second half. Looking forward, given what I've told you on gross profit margins and the timing of investments and efficiencies, for 2025, we expect a further decrease. Let me give you a brief summary of the key factors shaping the performance of our segments this year. In zone North America, our growth was disappointing. Consumer demand was weak, particularly at the lower end of the income spectrum. We lost share in frozen food and we were held back in coffee creamers by capacity constraints for most of the year. Our actions to improve competitiveness in these underperforming cells have not yet translated to a meaningfully improved growth trajectory. Despite this negative growth, the zone improved its UTOP margin through mixed management and disciplined cost control while stepping up investments for future growth. Zone Europe delivered solid growth with improving market share trends. As we shared on our nine-month call, Q3 was impacted by delistings linked to temporary customer challenges to price increases, as well as a slowdown in Turkey. In Q4, growth improved as we got back on shelf. We're taking more price in 2025, so this may give rise to more customer challenges. Margin improvement in Europe was strong, supported by portfolio management. Zone AOA delivered positive RIG despite multiple macro headwinds. Consumer hesitancy towards global brands in some markets remained a drag through the year, but it's now in the basis of comparison as of Q1. The fourth quarter slowdown in RIG was partially linked to actions to reduce customer inventory. In LATAM, growth was driven by price. The actions taken to manage customer inventory reduced growth in the third quarter, but the fourth quarter bounced back, driven by additional pricing in confectionery and coffee across most markets. In China, a deflationary environment meant pricing opportunities were limited. Despite that, the zone delivered solid, rig-led growth, thanks to continued innovation with strong performance in RTD coffee and e-commerce. Nesse Health Science did exactly what we said it would, with the second half of this year seeing growth accelerate. We've started to see an improvement in market share trends in VMS and are growing slightly ahead of the category. And that's a category which is growing in high single digits. The growth leverage delivered a step up in margin. Nespresso's solid rig-led growth was largely driven by the US. Europe posted close to flat growth and remains an area of focus. The broader Nespresso ecosystem, that's including Starbucks by Nespresso, adds another 100 basis points to growth. By category, the group's growth was driven by coffee, confectionery, pet care and health science. Coffee delivered mid single digit growth, led by soluble and RTD. Growth in pet was driven by RIG. As expected, pricing reduced, but it started to stabilize a little more in the fourth quarter. And I've already commented on health science, but nutrition posted positive growth with continued momentum for NAN. Prepared dishes and cooking aids was held back by the performance of frozen food in the US. Milk products and ice cream was impacted by the weakness in dairy and coffee creamers in the US. Confectionery growth was driven by pricing. Kit Kat globally and Gerato in Brazil were the key drivers here. Turning to profit, just a few things to note. Margins in coffee and confectionery were particularly impacted by higher input costs. In prepared dishes and cooking aids, the increase was supported by higher gross profit margin driven by portfolio optimization and efficiencies. Milk products and ice cream posted lower margins following higher advertising and marketing investments and reduced growth leverage. Water saw a margin reduction impacted by supply constraints. Now let's talk about what sits below UTOP. The first item to highlight is restructuring. This came in significantly lower than the 700 million Swiss francs we'd expected at the half year, as the implementation of several projects was delayed. The second item is net financing costs, which increased with higher average net debt and an increase in interest rates. And finally, our reported tax rate increased, mainly due to a write-off in deferred tax assets in the current year and the absence of favourable one-offs impacting last year. To note, our underlying tax rate increased by 70 basis points to 21.9%, driven by higher tax rates in a couple of jurisdictions, as well as changes in geographical and business mix of profits. Next to underlying EPS, I've already talked to the drivers of our operating profit and interest and tax. The lower share count helped EPS growth, contributing 1.1% to the underlying EPS, but this was more than offset by an adverse FX movement. Working capital continues to trend downwards as we work to optimize our supply chain. We will further optimize our working capital, but the improvement in 2025 won't be of the same magnitude as 2024. CapEx as a percentage of sales decreased slightly in 2024 and is expected to trend down from here as we're coming out of a period of elevated investment in new capacity in pet care and coffee. And we're now shifting our focus to efficiencies and getting more out of our asset base. When you adjust for the sale of Prometheus stake in 2023, free cash flow improved by 0.9 billion to 10.7 billion Swiss francs. The key drivers of this improvement were a reduction in working capital, lower tax and lower cash restructuring costs. For 2025, we expect free cash flow to be below the level of 2024. While we will benefit from lower capex, we expect a smaller improvement in working capital and higher restructuring costs as we step up our cost savings programme. Net debt increased largely due to the 12.2 billion returned to shareholders through the share buyback and dividend payment. In addition, there was a 2.1 billion adverse impact from changes in FX rates. Our net debt to EBITDA ratio is towards the top end of our range. Return on invested capital increased, reflecting improvements in working capital, as well as lower restructuring costs. And with that, I hand back to Laurent.