2011 HALF-YEAR RESULTS ROADSHOW TRANSCRIPT. Mr James Singh Chief Financial Officer Nestlé S.A.

Transcription

1 NESTLÉ S.A HALF-YEAR RESULTS ROADSHOW TRANSCRIPT Conference Date: 10 August 2011 Chairperson: Mr James Singh Chief Financial Officer Nestlé S.A. Mr Roddy Child-Villiers Head of Investor Relations Nestlé S.A. Disclaimer This transcript might not reflect absolutely all exact words of the audio version. This transcript contains forward looking statements which reflect Management s current views and estimates. The forward looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements. Potential risks and uncertainties include such factors as general economic conditions, foreign exchange fluctuations, competitive product and pricing pressures and regulatory developments.

2 Slide: Logo Good morning everyone, and welcome to our results presentation. For those of you in London, I am sorry that we changed our plans at the last minute and are not with you today, but we thought the most important thing was to be sure that we were in touch this morning even if only by webcast, rather than to risk the event being disrupted either due to transport or other issues. As usual, we will take you through our performance and key events of the year before opening things up for discussion. Slide: safe harbour As ever, I will start by taking the safe harbour statement as read. Slide: Performance highlights Nestlé continues to make progress in an environment characterised by volatility and subdued consumer confidence, particularly in the developed world. And, at the same time as delivering in the short term, we have again demonstrated our commitment to building the business over the long term, in line with the strategies that we have previously discussed: - Our consumer facing marketing spend is up in constant currencies; - we have continued to build the innovation pipeline, while launching many new products and systems; - we are on our way to a record year for capital investment, with a lot going into emerging markets; - and we have been able to announce some exciting partnerships and acquisitions, again often in emerging markets. - Nestlé Health Science has become operational and new and exciting pillars of growth have been established including the soon to be inaugurated, Nestlé Institute of Health Sciences. We have increased or held market shares in over 70% of measured cells; maintained real internal growth momentum and are seeing increasing pricing has certainly been an extraordinary year for our company, with activities in every corner of the world. We have people managing our operations and making progress in those countries that have been making the headlines, whether Egypt, the Côte D Ivoire, and the Middle East or, for rather different reasons, the Eurozone and North America. Equally, we have been confronted by record prices for raw materials, extreme volatility in currencies, and a seemingly unending increase in the strength of the Swiss franc. Many of you came to our seminar in June, or listened to the webcast. You heard that we have processes in place that enable us to manage through turbulent times, and that we have further increased our procurement capabilities since the last period of high input cost pressure. The result is that we can report today, a performance that demonstrates our ability to deliver on our key objectives even in the toughest of times. 1

3 As I go through the different business areas, there are some that have had a strong start to the year and some less so, but of importance is that we have delivered at the Group level. Accordingly, we are well set to achieve the Nestlé Model again in 2011, being an improvement in the margin in constant currencies, and organic growth at the top end of our 5 to 6% range. Finally, we have unprecedented opportunities to invest in future growth particularly in emerging markets, both organically with cap-ex, and through bolt-ons. With that in mind, and with an eye on the uncertain economic environment, we will retain financial flexibility to drive our strategic priorities with confidence. Now, let s have a look at the headline performance. Slide: 2011: solid half year performance Organic growth for the half was 7.5%, a meaningful acceleration from the first quarter with an outstanding second quarter of 8.5%. In line with what we said at the time, growth from pricing is up from 1.5% at Q1 to 3.8% in Q2, giving 2.7% for the first half. The real internal growth continues to be strong at 4.8% in the first half. The trading operating profit is up by 20 basis points to 15.1%, and by 40 basis points in constant currencies. Trading operating profit before other net trading operating expenses and income (EBIT as previously reported) is flat in constant currencies and down 20 basis points as reported; please note that as this margin level last year we had a +60BPS improvement. The consumer facing marketing spend is up by 6.2% in constant currencies. As a reminder, this was up 14% in constant currencies in the first half of 2010, so this is a further increase on top of a big increase last year. The net profit was CHF 4.7 billion, and the margin was 11.5%. In constant currencies, the net profit margin was virtually unchanged compared to the first half 2010, which included Alcon. The underlying earnings per share for the group are up 5.2% in constant currencies. Slide: Operating profit margin improvement On this next slide, we have created our usual margin bridge for the trading operating profit. The benefits from Nestlé Continuous Excellence and other actions by the organisation, helped to address the significant impact of escalating input costs on cost of goods sold. In particular, the positive evolution of pricing has also contributed, as well as growth leverage and the benefits from restructuring in prior periods. On input costs, I reiterate our June guidance that we expect an impact at the upper end of a CHF 2.5 to 3 billion range. Distribution costs were up ten basis points. Efficiencies played a part again, but also mix in mitigating the effects of increasing energy costs. Marketing was down 20 basis points. This follows a meaningful increase in the first half of As I said, our consumer facing marketing spend increased in constant currencies even after we achieved efficiencies through a more global alignment of campaign messaging, as well as through our use of the media mix. 2

4 Administrative costs were down 150 basis points. There are a number of factors at play here: first, we are rolling out Nestlé Continuous Excellence beyond our operations and, as part of this, we have targeted for Admin costs to grow much slower than organic growth - this creates leverage from growth. We were already achieving significant savings in the second half of last year and consequently would not expect the second half evolution to be as dramatic. R&D costs increased by 10 basis points. Next are the net other trading income and expenses. These improved by 40 basis points due to lower restructuring costs, as well as a lower level of costs for litigation and other expenses. You can expect the full year restructuring costs to be 30 to 40 basis points. This then gives you the trading operating profit improvement of 20 basis points reported, or 40 basis points in constant currencies. Slide: strengthening Swiss franc I have already mentioned the phrase constant currencies several times, so let s have a look at the currency situation. Half year on half year, we have a 17% decline in the US dollar against the Swiss franc and a 12% decline in the Euro. All the other currencies are also weaker against the Swiss franc. The impact of the strong Swiss franc is clearly significant on translation of our financials for reporting purposes: 13.8% on sales, 20 basis points on the trading operating profit margin, 15% on underlying earnings per share, between CHF 600 and CHF 700 million on operating cash flows and CHF5 billion on the balance sheet. But, importantly, there is no meaningful impact on our underlying operating performance which, as you have seen, has remained strong in the first half. Slide: key elements of sales Let s now look at our sales performance, starting with our traditional sales evolution chart. I ve already discussed foreign exchange. Divestures, net of acquisitions, was - 6.6%, due to the August 2010 sale of Alcon, which had an impact of over 8%. But the sale of Alcon and the exchange rates shouldn t over-shadow a very strong operating performance, reflected in organic growth of 7.5%. RIG for the half was 4.8%. This maintains our momentum from Q1 and is a truly differentiating level of performance. There was also a step-up in pricing in Q2 to 3.8% giving 2.7% for the first half. I believe this half year number will gradually increase during the rest of the year. I d like now to pass over to Roddy to do our usual run through the business segments. 3

5 Slide: All regions contribute good growth Thanks, Jim. Good morning everyone. I ll start with the total Group sales by region. In each region, the numbers include the relevant zone and the globally managed businesses, which are Nutrition, Waters, Professional, Nespresso and our joint ventures. We show this to give you a good read-across with our peers. It is once again a picture of broad based growth, strong relative to the various markets. Europe has accelerated from 3.9% organic growth in Q1 to 5.8% for the half, with RIG up 120 basis points to 4.6%, and pricing up 70 to 1.2%. And this is growth on growth, coming on top of 3.6% organic growth in the first half of The Americas achieved 5.7% organic growth, with RIG of 2.2%. Pricing has accelerated, but RIG was lapping a tough second quarter in Asia, Oceania and Africa achieved 13.3% organic growth, The RIG remained doubledigit. Pricing was up to 3.2%. Slide: All regions contribute good growth A key reason for our broad-based growth is that we have been able to deliver growth both where you would expect strong growth and where you might not: Where you might expect strong growth: The emerging markets, and the BRIC countries, both growing at 13.3%. And where you might not: The developed markets growing at 4.4%, and Portugal, Italy, Greece and Spain growing as a group at 3.9%. Let s now look at the operating segments and, first, here is the currency impact by reporting area. Slide: FX impact on all businesses Normally this slide would be in the appendix, but I think it merits being shown up front this time. The currency impact on sales will most likely remain double-digit, but it could lessen a bit due to the relative comparison versus 2010, as you can see on the two graphs. Slide: strong broad based operating performance As Jim said, the currency impact should not take away from our strong operating performance. On this slide you can see how broad-based our RIG has been, and our organic growth, which ranges from over 4% in Zone Europe to over 11% in Zone AOA. There was increased pricing in the second quarter in all reporting areas. The RIG evolution remains robust, and I will go through this in more detail, starting with the Americas. Slide Zone Americas The RIG in Zone Americas improved marginally from Q1, but there has been a strong acceleration in pricing, up 360 basis points in the second quarter from the Q1 level. 4

6 With weak consumer sentiment in the USA, the North American business continued to experience tough trading conditions, as demonstrated by moderate growth, but a reasonable market share performance. The Frozen aisle continues to be under pressure generally. The Lean Cuisine and Hot Pockets segments are slightly down, whilst the Stouffer s regular meals segment is flat. We have success in Frozen with launches under the Market Creations and Farmers Harvest banners, as well as range extensions in Lean Cuisine, such as spring rolls and dips. The Frozen Pizza category is growing. Our Pizza Plus launch, being pizza packed with another product such as Nestlé Toll House cookies or chicken Wyngz, is performing well. Overall in frozen, DiGiorno, Stouffer s and Lean Cuisine have gained share. The PetCare business is flat, but showing increased market shares. New products, such as Purina One Beyond, Fancy Feast Delights and Friskies Tasty Treasures are performing well. Confectionery is lapping the tough comps caused by last year s Wonka launch, but shares are stable in a market that is up by a high single-digit percentage. This year we have launched the successful ice cream brand, Skinny Cow, into confectionery. The early take-up is promising. In chilled, Toll House is performing well. The ice cream business is continuing to face pressure from private label in premium take-home, and has seen volume impacted by pricing. Our strongest performance is in the snacks segment, and then super-premium. Innovation has included launches of shakes and smoothies, as well as Haagen Dazs cones and the Skinny Cow More to Love pack. Nescafé and CoffeeMate had a positive first half. The Nescafé Dolce Gusto launch is building momentum with, importantly, high capsule consumption per machine. The Café Collection and Natural Bliss variants of CoffeeMate have been well received. Latin America has had a strong first half, both for RIG and pricing, and continues to deliver double-digit organic growth. Mexico and most of the regions are growing double-digit, whilst Nestlé Brazil is celebrating its 90th anniversary with high single-digit growth. The big three categories in Brazil, (Dairy, Chocolate and Biscuits), all accelerated in the second quarter, partly due to Easter. Looking now at the Latin America categories, the big five, being Ambient dairy, Chocolate, Soluble coffee, Ambient culinary and PetCare, are all growing double-digit. The rest are all positive, ranging from mid-single-digit to over 20%. PPPs are growing in the teens, with particularly strong performances in dairy, powdered beverages and soluble coffee. The Zone s trading operating margin fell 10 basis points. This reflects a significant increase in raw material costs, as well as some relative weakness in volumes in North America, all mitigated by Nestlé Continuous Excellence. The Zone did, however, increase its brand investment in the first half and is continuing to invest to build its brands over the longer term. 5

7 Slide Zone Europe Next is Zone Europe. The Zone had a strong second quarter as the uneven quarterly trading pattern created by Easter rebalanced itself. RIG accelerated from 1.9% at the first quarter to 2.7% for the half. Pricing also picked up by 100 basis points to 1.4%, to give organic growth of 4.1%. This first half performance is a good reflection of the underlying growth in the Zone. Perhaps most impressive in Western Europe is the continued positive growth in Portugal, Spain, Greece and Italy, despite the tough economic environments in those countries. As a group, these countries achieved about 4% organic growth. Maggi Juicy Roasting is performing well in these markets, as are Nescafé and ice cream. PPPs grew in the high single-digits in Europe. Their growth was about 20% in Spain, for example, demonstrating the benefit of our strategy of rolling PPPs into the developed world. It also confirms our belief that is possible to generate growth with the right innovation even in the most difficult markets. Germany saw a meaningful acceleration in Q2, where 80% of cells are holding or growing share. Most categories are performing well. Growth in the GB region was flat but shares were up overall. The Confectionery business had a strong Easter and has gained share. In soluble coffee, there was a good performance from Nescafé Dolce Gusto and the mixes variants. Dolce Gusto is now the market leader in the UK, both in machine and capsule sales. Maggi Juicy Roasting has had a successful launch even despite Maggi not being a particularly well-established brand in Britain: this demonstrates the strength of the Juicy Roasting concept. France continued to perform well, with mid-single-digit growth and share gains in all categories. Ice cream, soluble coffee and frozen food were particularly strong. In Eastern Europe we are continuing to see subdued sales growth in Russia, particularly in the big Chocolate category, but we are enjoying good growth in a number of other countries, including the Ukraine and the Baltic region. Looking at the categories for the Zone as a whole, all the big categories were positive, a performance reflected both in our strong market share performance by country, and in the achievement of above-category growth for the zone as a whole. As you would expect, the category story is one of continued momentum from Q1, with strong performances from Ambient culinary, Frozen pizza, Chilled culinary, Soluble coffee and PetCare. Equally, the key innovations continue to perform well. Nescafé Dolce Gusto has gained over 400 share basis points in the machine market, further expanding its sales base. Its growth continues above 50%. The other Nescafé launches, Green Blend and Crema also continued to perform well. Maggi Juicy Chicken has evolved into Maggi Juicy Roasting, and the range has expanded into other meat and fish dishes, as well as into new geographic markets. It is one of our fastest growing innovations. 6

8 Innovation is a core aspect of our strategy and we are accelerating our efforts here, and they are making a real difference in driving growth and creating value for our consumers. The Zone has delivered a strong trading operating margin performance in a particularly difficult operating environment, characterised by weak consumer sentiment in some markets and by an exceedingly tough competitive environment. A key driver of this operating performance was a strong delivery of savings through Nestlé Continuous Excellence, in addition to the benefits from previous restructuring of facilities, of businesses and of employee post-retirement programmes. Slide: Zone AOA Next is Zone AOA. The Zone had a very strong first half, especially when one thinks of the news headlines from the region that dominated the first few months of the year. This performance is broad-based, as we have seen good growth in Africa, the Middle East and in a number of Asian markets. In Japan, we were the first Food and Beverage company to get back to full supply to the retailers, a great effort by our people, and we are now seeing our performance at normal levels, and we are gaining share in soluble coffee, chocolate and ready-todrink. The Greater China Region is accelerating, with over 20% growth. Our milk business is now back to previous levels, and building strong momentum. Our ice cream business is also growing well, following its relaunch last year, including a strong PPP portfolio, and growth is over 30%. The ambient culinary business had a strong second quarter after a slow start to the year and is growing in the teens. Nescafé is also performing well, both in its soluble and ready-to-drink variants. The Central West Africa Region is another highlight, even though it includes Cote d Ivoire where we are re-establishing supply chain networks. Growth in the region is being led by Ambient dairy and powdered beverages. The South Asia region, which includes India, is growing over 20%. All the region s categories are growing double-digit, with Ambient culinary and chocolate both up 30%. These growth rates explain our increased investment in the region. PPPs were accretive to the Zone at 18% organic growth. The Zone s trading operating profit was up 50 basis points. The increased raw material prices have been offset by savings, growth leverage and pricing. The worst of the raw material pressure for the Zone is in H2, but there is also a greater benefit to come from the Zone s pricing actions. Slide: Nestlé Nutrition Next is Nestlé Nutrition. Nutrition has had a strong first half growth performance, driven by the Infant Nutrition business, which is achieving double-digit organic growth and has gained 60 basis points of share on a global basis. The Infant Nutrition performance is well balanced across all divisions, baby food, infant cereals and infant formula, and all regions, including some markets where we have seemed 7

9 to be having a tough time more recently. For example, France is achieving double-digit growth, and we are growing share in every category and channel there. The emerging markets are growing dynamically, whether in Europe, Asia, Africa or Latin America. Infant cereals continue to perform very well. The North American business is also performing well, relative to its market. Our formula market share in the USA is now 17%, up from below 15% three years ago. The Infant Nutrition performance is built on a number of pillars which have come together over the last couple of years, including successful innovation in formula and cereals, improved communication where rules allow, expanded distribution, rigorous 60/40 testing, increased competitive intensity, and closer working relationships to leverage the scale of other Nestlé businesses in the markets. I m also pleased to say that our BabyNes launch has got off to a good start in Switzerland. The French and British launches of Jenny Craig and the business in Oceania are doing fine, but we have some issues in the US, our biggest market. It is clear that the weak economy has played a role in impacting the business. We are making some changes, including to our marketing strategy, and we should start to see an improvement in the coming months, particularly in rebuilding new client leads, which are key to the longer-term growth of the business. Nestlé Nutrition s operating margin is down 90 basis points versus a tough comparison last year. This partly reflects the raw material environment, in particular the contrast with a low cost H1 2010, but also the performance of Jenny Craig. We expect to see an improvement in the Zone s operating margin in H2 as pricing taken already this year works its way into the numbers. Slide: Nestlé Waters Nestlé Waters is next. The organic growth of 5.8% reflects continued strong performances in many markets, with appropriate brand support. It is also notable that the pricing has turned positive in the second quarter, after over a year of reducing price. Highlights included double-digit growth and share gains in France and Belgium, strong performances globally from Perrier (up 14%) and S. Pellegrino (up 9%), as well as Vittel, Acqua Panna and Nestlé Pure Life, and double-digit growth in the emerging markets, both in Asia and in Latin America. The North American market has been challenging. Pricing taken earlier in the year has impacted volumes as others have been slow to follow. We have maintained shares in North America on a year-to-date basis, but have slipped in recent months. In Europe there was positive growth in many markets, including France, Germany, Italy and the UK. The trading operating margin fell 140 basis points. This was due to increased oil-related and PET costs, not offset by a good delivery of efficiencies and gradual price realisation. 8

10 Slide: Other Nestlé Professional is continuing to build positive momentum, notwithstanding the fact that economic conditions remain subdued. Growth was double-digit in emerging markets, as much as 20% in China. There was positive growth too in North America, where beverages are performing well, and in Europe. The 2010 launches of premium and super-premium Nescafé machines have been well-received by customers, and sales momentum is increasing. Nespresso has continued to grow at a high rate, slightly above the Q1 level. This is an investment year for Nespresso, and the first half has seen a very high level of marketing spend, supporting the successful launch of the Pixie machine in 50 markets simultaneously. This was the first machine launch by Nespresso to be done globally. They have also opened new boutiques, including in St Petersburg and Stockholm. A further development at Nespresso is the launch of new machines for the out-of-home channel. Nestlé Health Science achieved double-digit RIG. The company, only created on the 1 st January, is now fully operational and has already been active in M&A, as you will have seen, building future growth platforms in strategic areas. The decline in the trading operating profit for the whole segment is down mainly due to the investments at Nespresso and Nestlé Health Science. Slide: Product Groups overview Next is the product group review. I have already touched on most key messages, so I will go through this quickly, only making a comment if I have any additional value to add. On this slide you can see that all are delivering positive growth. Let s now go through them individually. Slide: Powdered and Liquid Beverages First is Powdered & Liquid Beverages. Soluble coffee has had a strong first half, both in terms of growth, which was double-digit, and in terms of operating margin. The performance was good in all three zones and in Nestlé Professional. The markets have been very focused on their key innovations, aligned with our growth drivers, with good execution and appropriate brand support. For example, in Europe, these include Nescafé Dolce Gusto and Nescafé Senzazione, both examples of premiumisation; Nescafé Green Blend, an example of Nutrition, Health and Wellness, and Nescafé 3-in-1, an example of a PPP that we are rolling out in Western Europe. We are seeing growth well into double-digits in all of these products, as we are globally in PPPs and with our foaming mixes, such as Cappuccinos. Pricing is increasing as the year goes on. 9

11 Powdered beverages also has had strong growth in the first half, particularly Milo. Milo is performing well in Asia and is building its presence in parts of Latin America, such as Colombia and Chile. Nesquik also achieved positive growth, and highlights included Russia and Italy. The Powdered category has experienced significant cost pressure, sugar and cocoa in particular. Accordingly, we are also seeing pricing increasing period on period. Marketing spend was up for the category. Liquid beverages performed well, with high single-digit organic growth and improved margins. I would highlight excellent progress by Nescafé and Milo in a number of markets. The trading operating margin is down due to innovation and launch costs, both at Nespresso and in other segments of the product group. Slide: Dairy including Ice cream The Milk business has again delivered double-digit top-line growth in all zones, and has accelerated from Q1 both in RIG and price. It has also been able to leverage this growth into an improved operating margin performance. The business is heavily weighted to emerging markets, and has continued to perform at a high level, driven by aligned global product priorities, aligned communication themes and a focus also on increased leverage of our marketing spend. It has achieved market share gains in many countries. Among our growth drivers, Nutrition, Health and Wellness, for example in growing up milks, and PPPs, which are also nutritionally enhanced, are key drivers. I have already touched on Coffee-Mate in my Zone America comments. The Ice Cream business has had a good start to the year in all three zones. Particular successes include China, France, Germany, Switzerland, Egypt, Latin America, Indochina, amongst others. The growth drivers and innovation are key contributors here, whether out-of-home - our impulse business; the PPPs, including our peelable ice creams which are now in 11 countries and doing well in all of them, and also now available in new variants; Nutrition, Health and Wellness, such as slow churn; or Premiumisation, such as Haagen Dazs and Nescafé Frappé Latte in Spain.. Slide: Prepared dishes and cooking aids Next is Prepared dishes and cooking aids The Frozen Food business in Europe continues to be driven by the strong performance of Pizza, both under the Buitoni and Wagner brands. I ve already discussed frozen in North America. Culinary chilled, particularly Herta, continues to perform well in Europe, especially in France and Germany, even if part of its business, exported from Switzerland, is suffering due to the Franc/Euro exchange rate. The Ambient Culinary, business, primarily Maggi, has had a strong first half, both in emerging markets and in Europe. The recent acquisitions in Eastern Europe and 10

12 Latin America are performing well, and we have new capacity coming on-stream in India and China. Out biggest markets are all increasing market shares. The product group s margin increased 30 basis points. There were good performances in most businesses which compensated the integration costs for the pizza business, and high input costs such as cheese, whey and meat in US Frozen. There were also lower restructuring charges than in Slide: Confectionery Next is confectionery. I will start by reminding you that we had over 8% organic growth in the first half last year, so 4.2% in the first half of 2011 demonstrates good momentum over a tough comparative. The business is performing well, with over 70% of cells gaining share, including key markets such as the UK. We had a successful Easter season around the world, demonstrated by a strong pick-up in growth in the second quarter in each Zone. Both China and India are growing over 20%. The growth would be even higher but for capacity constraints that we are addressing in both countries. I ve already discussed the US. Pricing has increased during the year, driven by increases in milk and sugar costs. This pricing is a contributing factor to the improved margin performance but, equally, there are higher contributions from some of the faster growing markets, as well as benefits from the European restructuring in recent years. Slide: PetCare Next is PetCare. Overall we have seen a building of momentum from the Q1 growth numbers, with growth in Q2 at twice the level of Q1. Europe has continued to grow at a good level, driven by the success of innovations for cats such as Purina ONE Actilea, the expansion of the Felix brand into Central and Eastern Europe, and the launches of Felix Sensations and Gourmet à la Carte. For dogs, we have enhanced our leadership in older pets with the successful launch of Pro Plan Senior 7 Plus. We have also launched Beneful Little Enjoyers, taking Beneful into the small dog market for the first time in Europe. I ve already discussed the strong competitive performance by the North American business, which achieved share gains in most segments. Growth was double-digit in Latin America and in the emerging markets as a whole. Globally Purina outpaced the growth in its category by 184 basis points. The trading operating profit was impacted by commodity prices. This is not just because of the 2011 impact, but also because we were very successful in 2010 with our commodity hedges. You might remember that the H margin was up 190 basis points. Effectively, therefore, it made for a difficult comparative. We will see an improved margin performance in the second half, helped by a more normal comparative and by the benefit of pricing taken in April. That concludes my run-through the business performance. I ll now hand back to Jim. 11

13 Slide: P&L (continued) Thanks, Roddy. On the next slide is the rest of the P&L. I have shown both the 2010 comparison against the Continuing operations, and the Group performance. The reduction in net financing cost and lower tax expenses contribute to a 60 basis points improvement in net profit for the continuing operations. The comparison with the 2010 Group numbers, including Alcon, shows a marginal decline of 10 basis points in net profit as reported: the Group s underlying EPS are up 5.2% in constant currencies. Slide: Cash flow and net debt Turning to cash flow and net debt. The operating cash flow is CHF 1.7 billion. This is a good performance, albeit lower than in the first half of 2010 recognising the impacts of the sale of Alcon, currency weakness and working capital: First Alcon: Alcon s cash flow was about CHF1.4 billion in the first half of 2010 Second, currencies: You may assume a conversion impact on our cash flow broadly similar to the impact on our sales. On top of this, we made an investment in 2010 to protect foreign currency assets; this was already reflected in the full year 2010 cash flow. These impacts created a negative comparison from H to H of about CHF 1 billion. Third, working capital, which increased by about CHF1.2 billion, but improved slightly as a percentage of sales. We made a tactical decision to increase inventories in order to manage capacity constraints in some of our fast growing emerging markets, and the disruption in our supply chain caused by external events. As a whole, working capital has improved as a percentage of sales. Turning now to our Net Debt position. Our half year net debt was CHF 14.5 billion, compared to CHF 29.6 billion in the first half of The big impacts include the sale of Alcon, the dividend payment in 2011, the share buyback, the medium to longer-term investments and treasury shares: The 2010 dividend payment, which was up 15.6% per share in Swiss francs, resulted in a pay out of CHF 5.9 billion. We bought about CHF4 billion of shares in the first half, and continued in July to nearly complete our CHF 10 billion share buyback programme. We have increased our medium-to-long term investments from CHF 2 billion to about CHF 4 billion. These investments are blue-chip. We have them because we needed to manage the proceeds from Alcon beyond those which we used either to restructure our debt or for the share buy-back. The benefit of the treasury shares and the mid-to-long term investments, beyond their inherent investment characteristics, is that they enable us to maintain an appropriate degree of financial flexibility. 12

14 With CHF 14.5 billion of net debt, we are approaching the level that we had at the end of 2009, which we told you was an appropriate level for the Group at this time. If our mediumto-long-term investments are included, then net debt would be CHF10.5 billion Slide: Use of cash Now let s have a look at our priorities for our use of cash. As you know, our clear priority is to invest in our business, either internally or externally. We have stepped up our level of capital investment. You can assume it will be about CHF 5 billion in We have also stepped up our M&A activity, though we remain focused on bolt-ons. I will come back to both these areas on the next slides. After investment in our business, the next priority is to return cash to our shareholders through our dividend. The priority for us is the actual Swiss franc amount of the dividend, not necessarily a ratio. We would expect, all things being equal, to continue to enhance the dividend we pay to our shareholders. Buying our own shares, whether as part of a buyback or to hold as treasury shares, is optional. We see this as a tool for managing excess cash, assuming that the share price is at an appropriate level. Therefore our announcements of share buy-backs have been part of a disciplined approach to managing our balance sheet whilst retaining financial flexibility. On completion of the current programme, Nestlé will have returned CHF39 billion to shareholders since 2005 through share buybacks at an average price of about CHF48 per share. At the same time we have paid over CHF31 billion in dividends. In the first half of 2011, we have committed about CHF10 billion to the dividend and share buyback. This had to be paid in Swiss francs from cash flows generated in significantly weaker currencies. We have also committed about CHF 10 billion in total to capital investment and acquisitions. - Given the current economic environment and the consequent need for financial flexibility; - given the fact that we use foreign currency cash flows to buy our shares in Swiss francs; - and importantly, given the fact that there are potential alternative uses for our cash, such as investments in capabilities and bolt-ons, that provide greater long term strategic value for our shareholders, we believe that today is not the right time to be launching a new share buyback. However, buybacks will stay under Board review on an on-going basis as an option to address excess cash built up by our company. Slide: Capital investment On the slide you can see some of the capital investments that we have announced recently. It is not exhaustive, however, and projects include: Confectionery and Culinary in India and China, PetCare in Hungary; powdered beverages, cereals and milk in Indonesia; cereals in Malaysia and Turkey; Infant formula in Germany, Milk in Brazil, Culinary in Nigeria and South Africa; and so on. 13

15 Slide M&A On this next slide, you can see some of the recently announced and/or completed acquisitions. These include: Our two proposed acquisitions in China, now under consideration by the authorities, as well as three deals for Nestlé Health Science, culinary in Eastern Europe, beverages in USA, dermatology in Sweden, amongst others. Slide: roadmap By now you know our strategic roadmap well. Our performance in the first half has been coherent with our strategic priorities. I would just like to touch briefly on brands and on innovation which are key areas of investment for us. Slide: The billionaire brands First, a quick look at our billionaire brands. As you ve heard during Roddy s presentation, these brands have contributed greatly to our first half performance. In total they achieved over 8% organic growth, compared to 7.5% for the group as a whole. Their growth is also reflected in strong market share performances. All the brands in Beverages, Nutrition, Waters and Confectionery are achieving positive organic growth. In Frozen, Lean Cuisine has returned to positive growth in a declining frozen food category; Stouffer s is marginally in negative territory but it has gained share over last year. PetCare continues to be a generally good picture despite the slower growth of the category as a whole; Friskies, ONE and Purina positive, and growth of more than 10% for Dog Chow. In Ice cream, the Dreyer s brand, which is heavily present in the US premium takehome segment, has been under pressure from private label, but is only marginally down, less than 1%. One of the reasons for the strong performance of the billionaire brand is our continued high level of innovation. Slide: innovation as a growth driver Innovation is a value added growth driver for all our categories. The great benefit is that, as we enhance value for consumers at each consumption moment, we also enhance value for our shareholders. Making this more tangible, here are a few of the innovations from last year that have contributed to our strong first half performance. 1. Nescafé with a clear segmentation strategy for its innovation: - super-premium with Dolce Gusto - premium and Nutrition, Health and Wellness, with Nescafé Green Blend - and PPPS, such as Nescafé 3-in-1 launching successfully in Europe. 14

16 - We are seeing strong growth in all these segments, from well over 50% for Dolce Gusto to about 15% for our premium range. 2. In Ice cream, we also have a range of PPPS. The peelable PPP ice cream has been one of our most successful launches in this category. Innovation in 2011 On this slide we have captured just some of the innovations launched in the first half. 1. In Ice cream, we have launched a new shake concept in developed markets, as well as Haagen Dazs smoothies in the US. 2. The Dairy business has extended Coffee-Mate out of the non-dairy creamer market into dairy creamers. It also has a raft of launches and extensions in the emerging markets, including value-added liquid milks such as Nido Protectus. 3. In prepared dishes and cooking aids, the Maggi Juicy Chicken range, the leader in its segment, has evolved into Juicy Roasting, now for beef, pork or fish, for example, and its international roll-out continues. 4. In the US Frozen category we have responded to the tough environment with new lines and extensions such as Lean Cuisine snacks. 5. In PetCare, where I mentioned our improving market share performance on a global basis, there is a strong roll-call of innovations, a few of which are listed on this slide. 6. In Chocolate, we are building on the Wonka extension into chocolate and now extending Skinny Cow into the category. We launched Aero biscuit in the UK, we took KitKat into Brazil and launched a KitKat Black in Japan, with a special type of wafer. These were just some examples of recent launches and extensions, and our pipeline has much more to come. The future will not just bring new products, but also new routes to market, new technologies, new system capabilities, as well as a range of innovations in Nutrition and Nestlé Health Science. Slide: 2011; another set of challenges Next, a slide that I showed at the full year conference call. Slide: 2011; another set of challenges We said then that we understood the challenges that we faced in 2011, and that we would be taking a holistic approach to managing them. I think these first half numbers demonstrate that we have done that. We have compensated input cost pressures, not just through savings in those areas that have been directly impacted, but also through savings in administrative costs for example. We also talked about a rich pipeline of innovation and about growth momentum. We are seeing the benefit of both in our continued strong level of real internal growth. This is growth on top of growth, year after year. But we also have momentum in extending Nestlé Continuous Excellence, and with our growth drivers, such as Nutrition, Health and Wellness, 15

17 the PPPs, Premiumisation and our out-of home activities. Our growth momentum is contributing a positive mix effect due to the faster growth of our emerging markets, which are benefiting from increased capacity investment. We also said then that we would deliver the Nestlé Model again in We are confirming this guidance, with organic growth at the top end of our 5 to 6% range. We continue to run the business with a mix of long-term inspiration and short-term delivery. And we believe that in today s environment, these qualities will really help us outperform. Slide: conclusion So, to conclude: It has been a challenging first half, but we need to separate the foreign exchange impact on the reported numbers, from the underlying solid operational performance. The foreign exchange movements on our numbers are a big impact on translation, no question. But they have only a small impact on our underlying operations. We are fundamentally a conglomeration of local-currency or regional-currency businesses that are leveraging our global scale to compete successfully. And I believe we have demonstrated our operational strength in the first half by delivering a strong performance in all the KPIs organic growth is strong, the operating margin is up and our underlying earnings per share are improved in constant currencies. And we have continued to invest for the future. The real differentiating highlight of the first half of 2011, is that Nestlé has not only delivered where you would expect us to deliver, but we have also delivered against the odds, as our businesses have demonstrated their ability to perform in the toughest of times: whether it is Central West Africa achieving double-digit growth despite the unrest in the region; or the Japanese business disrupted by natural disasters; or whether it is our businesses in the troubled economies of southern and western Europe that continue to deliver positive growth. These achievements not only differentiate our performance in the first half of 2011; they also give us confidence in our ability to deliver, not just for the rest of the year, but beyond. Finally, as I said, we have unprecedented opportunities to invest in future growth particularly in emerging markets, both organically with cap-ex, and through bolt-ons. With that in mind, and with an eye on the uncertain economic environment, we are retaining financial flexibility to drive our strategic priorities with confidence. Thank you. Let s now open up for discussion. 16

18 Q & A SESSION Questions on: Background decisions on not extending the buyback Movement in cash flow David Hayes, Nomura: Morning, gentlemen, thank you. Just firstly quickly on the buyback, I wonder if you can give us any background as to whether that decision on the policy was changed or taken in the last few weeks with obviously the market and the economic uncertainty that we've seen. And whether also with the Swiss franc move the last few weeks that you've delayed effectively some dividend pay through from the subsidiaries, which is part of that decision process as well as you watched that play out? And then I guess still just focusing on cash flow again, you kind of alluded to maybe some of the points in the presentation, but I'm just noticing that the variation in other operating assets and liabilities is an additional outflow of about a billion in the first half versus last year and then other investing cash flows about an additional 1.5 billion. I just wonder if you can give us any more colour as to what those outflows actually relate to and why they're quite a big difference to the first half of last year? Thanks very much. Okay, let's come back to the share buyback programme, you know David we have always said the share buyback programme is optional given the priorities we have laid out. The priorities have always been to invest in building our business. I believe that this year, as we have communicated to you, that we have several opportunities to invest in capex for organic growth, in areas where - especially in areas today where we are constrained because of very demanding utilisation of existing capacities and you have seen what we have announced in terms of possible M&A transactions this year. In addition our commitment to the dividend, you see the dividend increasing year after year, those are really our priorities. I think you're right, given the economic environment in which we operate, combined with the opportunities we have to invest - the cash flows, we believe it is a point in time where we have to focus on driving the business with confidence. We are not saying that share buybacks will never occur, as we said share buybacks will continue to be under the watchful eye of the board and they will make a decision on that from time to time. But I think at this moment as we have communicated, our focus is really driving our internal priorities. Just on the cash flow David, I think generally - I don't want to get into the specific lines, if you look at our cash flow, CHF 1.7 billion in cash in operating cash flow and about 300 million in free cash flow, which is about just under three billion down from what we reported last year. First of all we said Alcon, the impact and the disposal of Alcon in our free cash flow is about 1.4 billion, working capital increased about a billion, the carrier of the foreign currency on financial assets, the impact and our funding, the negative impact was about one billion and minority and associates was positive about half a billion. When you add those up you basically explain where we were half year versus half year. 17

19 Now you also realise that the impact on the cash investments, etc, from the Alcon proceeds most of those occurred in the second half of last year. So they are more or less in this half year versus last half year. So the comparisons are a bit different. The base is slightly different. However, I would say those three or four items explain the movement in cash flow. David Hayes, Nomura: Just quickly coming back on the buyback, from what you're saying the decision on the buyback policy today which as you say may be reviewed, but that could have well been the same decision three months ago rather than today effectively? It was kind of a long term plan rather than a reaction to the marketplace, is that fair? Yes, it is and as we said David when we announced our first half year results we said that we will not make any decision on the share buyback while we're continuing to execute the existing programme. Questions on: Contributing factors to working capital increase PPP and Dolce Gusto growth update Alain Oberhuber, MainFirst: Good morning, Roddy, good morning, Jim. I have two questions. First is about the working capital increase in H1, is this a strategic one just for this year or is it also for 2012 given that the economic environment is delayed. If you could maybe elaborate a little bit on that because it looks to be interesting? Secondly could you also give us and update please on Dolce Gusto and PPP revenue. Just on working capital Alain, thanks for the question. The 1.2 billion was significantly influenced by inventories. And the inventory bill in the first half, compared to the first half last year as I said, related to some specific circumstances. There are markets, especially in the Emerging Markets, particularly in Asia, where we have had to build inventories to overcome certain capacity issues that exist at that point in time. We are addressing those, as you notice on the chart by accelerating our investments in several factories to address these issues. And the other issue is that we have had severe disruption in certain parts of the world because of high impact events that have been announced from time to time. So I think our objective over time is to manage our working capital relative to the evolution of our sales. And in spite of this increase in working capital, working capital as a percentage of our sales is trending down. So I think that trend will continue, at least that is our objective. Roddy Child-Villiers: 18

20 Alain on your second question, PPPs we gave you the number it grew 13.3%. Dolce Gusto was well over 50%. The PPPs are around 5 billion; I haven't got the Dolce Gusto number at this stage in the year. Just to let you know that Dolce Gusto is trending to exceed half a billion CHF, more than half a billion CHF this year. Questions on: Enhancement of dividend in Swiss Franc terms Margin stability in local currency in H2 Patrik Schwendimann, ZKW: Hi Jim, Hi Roddy. First regarding the statement about the dividend, you were mentioning that you continue to enhance it. So does this mean that you also increase dividends for the current financial year despite probably a negative EPS in the Swiss franc? And secondly regarding the margin improvement which was really good in the first half, increased 40 basis points in local currencies, in the second half you were already mentioning that the second half of 2010 had already this admin cost improvement in it, so does it mean that in H2 the margin could more or less be stable in local currency? That's my second question. Thank you. Thanks Patrik. The dividend as we said, assuming everything else being equal that it is the intention to enhance the dividend in CHF, that's the intention. And that is how we've approached the dividends in the last four or five years, every year you've seen a substantial increase in the dividend, but you know it is our intention that we will improve the dividend payout in CHF to our shareholders. How much will depend on the particular circumstances. The margin improvement - we said also that our margin including the old EBIT margin, the model is that we will improve in constant currencies. You notice that at the EBIT level we were flat in constant currencies, so we are expecting that margins will improve also in the second half. Roddy Child-Villiers: You remember for 2010 we had the sort of reverse of 2011 with a very tough H1 comp and an easier H2 comp. So it's a reverse this year, that's opportunity for the margin to improve as Jim says. 19