Nestle S.A

Good morning and welcome to Nestlé's half-year 2025 results conference call. I'm David Hancock, Head of Investor Relations, and I'm joined today by Laurent Frex, CEO, and Anna Manns, CFO. Before we begin, please take careful note of the disclaimer on page two of our presentation. So for the agenda today, after Laurent shares the key messages, Anna will take us through the results in detail, then Laurent will provide an update on our strategic progress. We will then open up for Q&A. And with that, I'll hand over to Laurent.

Thank you, David, and good morning to all. We delivered a good performance in the first half of 2025 in a difficult environment. Thanks to the focus of our teams, we are continuing to execute our strategy and transform our business. Our growth foundations are improving and we are beginning to see the results. Looking ahead, we have maintained our guidance for 2025 despite increased headwinds and we remain confident in delivering our medium-term guidance. In the first half, organic growth reached 2.9%. This reflects broad-based sales growth across geographies and categories with a slight improvement in Q2 compared to Q1. We delivered a solid UTOP margin as we increased investment and faced Cox and Forex headwinds. These results demonstrate our ability to manage short-term dynamics while staying focused on long-term value creation. I will hand over to Anna to take you through the results in detail.

Thanks, Laurent, and good morning. Here are the key takeaways. We delivered broad-based organic growth. As expected, pricing accelerated and rigs slowed. UTOP margin was slightly better than our expectations, even though we stepped up gross investments and faced some headwinds from tariffs and FX. In the second half, our margins will be significantly lower due to these headwinds and the delayed impact of higher input costs. For the full year, we're maintaining our guidance on organic growth and UTOP margin. We delivered 2.9% organic sales growth in the first half, with RIG of 0.2% and pricing of 2.7%. Sales were negatively impacted by foreign exchange movements, especially in Q2, when the Swiss franc strengthened by 10% against the dollar and similar amounts against other currencies. Turning to sales growth. As expected, pricing accelerated and RIG has slowed during the half. Pricing improved across all of our categories in the quarter. The largest increases were in confectionery and coffee in response to input cost inflation. Most of our price increases took place during Q1, so Q2 saw the full benefit. On RIG, there were two main drivers of the deceleration in Q2. Firstly, Greater China. which had a positive impact of 20 bps on group rig in the first quarter, but a negative impact of 40 bps in the second quarter. At Q1, we said our growth in China had been driven by sell-in ahead of underlying consumption, and that we expected that to reverse. And in Q2, we've seen that reversal. Secondly, we saw an impact from elasticities in response to pricing, particularly in confectionery. In coffee, we saw a different trend with a lower elasticity and positive rig in the first and second quarters, despite more pricing. Going forward, we expect group rig to improve over time as consumer behaviour and the competitive environment adapts to higher prices. Turning next to profitability, we delivered a 16.5% UTOP margin in the first half, down 90 basis points. Gross margin decreased by 60 basis points, and we stepped up advertising and marketing spend by 50 basis points. Distribution and admin costs were a small positive. Let me get into a bit more detail. Generally, input cost inflation has a negative impact on our margins in the short term, as price negotiation cycles mean we can't price immediately, and we can't always price to fully cover margins. However, over time, consumer-led innovation and further pricing sees our margins recover. And you can see that on this slide. The spike in inflation in 2022 impacted all categories. Since then, we recovered margins across our categories, illustrated here by pet care and food. But coffee and confectionery are below, and that's as we manage a new wave of input cost inflation. The margins of coffee and confectionery will get worse before they get better, as commodity cost increases impact the P&L in the second half. Looking further forward, we expect gross margins in these categories to recover over time, and that's as a result of the actions that we're taking. The pace of that recovery will depend on what happens with commodity prices. Turning back to this year. Gross margins declined 60 basis points in the first half against the same period last year. Forward cover partially delayed the increase in commodity costs hitting the P&L, and the impact of tariffs was small due to short-term mitigation efforts. In the second half, we'll see a larger reduction in gross margin as the impact of commodity costs and tariffs increases. We said we would step up investment in our brands. Good progress in our brand value proposition has meant we've done this faster, and A&P reached 8.6% of sales in the first half. Our Fuel for Growth programme is delivering efficiencies. That's allowing us to achieve more consumer impact from our spend. We're on track to reach our planned increase in marketing intensity earlier than expected, and at a lower cost. So given the efficiencies, we expect second half AMP as a percentage of sales to be similar to the first half. At the full year results, we said that we'd secured over 300 million Swiss francs of fuel for growth savings for the year. In the first half, 150 million of those savings were recognised in the P&L. The balance, plus additional savings secured since our last update, means that we now have over 350 million benefiting the P&L in the second half. So we're firmly on track to deliver our 700 million target for the full year. Putting all of those pieces together, UTOP margin was 16.5%. Despite an acceleration of investment in A&P and some headwinds from FX and tariffs, this was slightly better than our expectations. We landed pricing actions early and mixed effects partially delayed the impact of cost inflation in the P&L. As we progress into H2, pricing will be more than offset by the increase in input costs. We'll see an increased tariff impact, and at current exchange rates, FX will be a further headwind. So we expect the second half margin to be significantly below the first half. For the full year, we still expect our UTOP margin to be at or above 16%, and I'll come back to this when I talk about guidance. Now let's look quickly at the performance of our segments in the quarter. In zone AMS, I'll focus on North America. Here the consumer remains weak. Despite this, we delivered positive organic growth and rig in both quarters, and we're making continued progress on market share. Turning to AOA, growth was broad-based with the exception of Greater China. In the weak economic environment in China, we need to shift our model from driving distribution to driving consumer demand. This transition will be a headwind for up to a year, but it will strengthen our business for the medium term. And in Europe, we saw both broad-based growth and market share improvement. The margin dynamic I just described can be seen playing out within each of the zones, with some differences due to category exposure. Turning to the globally managed businesses. In Nestle Health Science, performance was mixed. Our VMS business was impacted by the discontinuation of some private label business and weaker performance in our mainstream brands. This was a drag on organic growth, but contributed to an improvement in UTOP margin. Nespresso delivered another quarter of solid growth, led by broad-based pricing, while still maintaining positive rig. Margin development was positive in the first half, thanks to pricing ahead of commodity increases, which impact later in Nespresso due to the longer supply chain. Turning to our categories. Powdered and liquid beverages, which is mainly coffee, grew strongly, led by positive price and rig. The growth of the pet care category has come down from a year ago, but is now stabilising. A return to a more normal promotional environment contributed to the slowdown. Despite this, we've maintained or grown market share. I've talked about health science already. In nutrition, performance was particularly impacted by Gerber in the US. Gerber is a brand with great heritage, but it's been losing some of its relevance with consumers. We're working to address this. Prepared dishes and cooking aids was impacted by challenges within the frozen category. Despite this, we're seeing improved market share trends, particularly in frozen meals. Milk products and ice cream organic growth was positive, with price-led growth in ambient dairy and positive rig in coffee creamers. In confectionery, we took double-digit pricing to offset commodity inflation. We're now seeing an elasticity impact, which appears in rig. We expect this to settle as consumers and competitors adapt. And finally, in water, we saw broad-based growth, particularly with Maison Perrier and San Pellegrino brands. Now let's look at what sits below UTOP. On most lines, the change year on year is very limited, but I'll call out two factors. Net financing costs were slightly higher this period, reflecting a higher level of average net debt. The underlying tax rate was slightly lower than last year at 22%. This is consistent with our full year guidance. On the drivers of EPS, I've already talked about operating profit, interest and tax. On share buyback, we completed the programme in December, so there's still some benefit to EPS in H1 from the lower share count versus last year. However, this was more than offset by the significant adverse FX movement. On free cash flow, just a reminder that this is typically seasonally weaker in the first half, with much stronger cash generation in H2. On top of this normal seasonality, there were three main elements impacting cash flow this year. EBITDA was lower, reflecting the margin reduction as we invest for growth, and the FX headwind. On working capital, we had a higher negative impact in the first half of this year, mainly reflecting a higher cost of inventory. And these were partially offset by a reduction in capex. As normal, net debt increased in the first half due to the payment of the dividend in April. Partially offsetting this, our net debt balance benefited by 2.5 billion from the strengthening of the Swiss franc. Turning finally to guidance. We're maintaining our full year guidance despite increased headwinds since the beginning of this year. Organic sales growth is expected to improve compared to 2024, strengthening as we continue to deliver on our growth plans. The UTOP margin is expected to be at or above 16% as we invest for growth. And this includes the increased negative impact from tariffs currently in place and today's foreign exchange rates. While we're continuing to execute with focus, there is obviously macroeconomic and consumer uncertainty. As we navigate these headwinds, I want to be clear that we won't compromise on investing for the medium term. And with that, I'll hand back to Laurent to discuss our strategic progress.