Steffen Kindler - Head of IR Mark Schneider - CEO François Roger - CFO

Celine Pannuti - JP Morgan Jon Cox - Kepler David Hayes - Bank of America Jeremy Fialko - Redburn Alain Oberhuber - MainFirst Vincent Baron - Oddo Jonathan Feeney - Consumer Edge Research Alex Smith - Barclays

Good morning, good afternoon everyone, and welcome to Nestlé’s Three Months Conference Call for Investors and Analysts. I'm Steffen Kindler, the Head of Investor Relations. Here with me is our CEO, Mark Schneider, and our CFO, François Roger. Before we start our official Q1 webcast, I would like to briefly talk about our press release for Q1. You might have noticed that we evolved the press release towards a simple format and also with some additional information. Our intention was to make it more relevant for you and easier to read. We would be very happy to receive your feedback on the changes and what else we could improve in the future. Now back to the official part of our call, as usual, we’ll first present our numbers and afterwards we'll open up for Q&A. [Operator Instructions] I’ll take the disclaimer and Safe Harbor statement as read and with that and I'll hand over to Mark Schneider.

Thank you Steffen and a warm welcome to our Q1 2017 investor call. As always, we appreciate your interest in our company. First one I will be happy to take you through our Q1 presentation and answer your questions. Before turning over to Francois, a few comments from my side. First, a brief word on our organic sales growth. Given the challenging quarter - the challenging calendar this quarter, it was clear that the start to the year 2017 would be subdued. Another circumstances we were pleased with our OG of 2.3%. Please note that the calendar affected different categories in a different way. Our large confectionery category was impacted stronger than others by the early timing of the Chinese New Year and the late timing of Easter. Second, we were pleased with the quality of our organic sales growth with fairly balanced contributions coming from volume and pricing. And third, let me take a slightly broader perspective. This past quarter saw a significant level of M&A transactions, attempted M&A transactions as well as activist investor activity in our industry. In this context of significant change, we would like to underline our commitment to improving growth and efficiency at the same time. We were encouraged by our investor meetings in February and March, many of you share our view that this balanced approach offers the best path forward to sustainable value creation. Having said that, we do understand from these meetings that you want to see meaningful steps towards improved combinations of growth rates and margins. Bearing this in mind, we are pleased with the progress we're making on our growth and efficiency agenda. While this call focuses on the Q1 sales development, we will be happy to discuss our progress in more detail later this year. With this let me hand it over to François. François Roger: Thank you Mark, good morning or good afternoon to all. Our sales in the first three months increased to CHF21 billion which is equivalent to 0.4% on the reporting basis. Our organic growth was solid at 2.3% and we landed within the range of our full-year guidance. Our OG was made up of 1.3% of real internal growth which is a combination of volume and mix, and 1% of pricing. I will discuss dynamics in details in the next slide. M&A on many disposals resulted in reduction of 1.5% of reported sales, mainly coming from Froneri. Foreign exchange had a mild headwind of 0.4%. Looking at the historical perspective, we can see that calendar effect had a meaningful impact on read in Q1 as you know 2016 was a leap year which means that we had one less day of conception this year and the timing of holidays also impacted our sales. The Chinese New Year fell earlier this year and Easter is falling later, which mean that some pre-season shipments impacted our RIG negatively and this impact has been stronger for some categories like confectionery. Pricing overall increased slightly to 1% with selective price increases. Over the last few quarters, our pricing has increased steadily and we expect this trend to continue for the year in aggregate but not necessarily for each and every single quarter. Looking at the geographic breakdown now. This slide illustrates the combination of our sales for the zones and globally managed businesses, and again the quarter and more specifically RIG has been impacted by the leap year and the other seasonal factor. Consumer demand overall was soft mainly in the US. Consumer confidence weakened in key markets in Latin America. We were encouraged that Europe remained resilient, and AOA improved in both RIG and OG. With the exception of China, our largest operations in AOA gained momentum. OG as you can see remained in positive territory in all three geographies. Looking now at the development between developed and emerging markets, both geographies contributed positively to RIG and OG. Even though both were affected by the calendar effects mentioned earlier. In developed markets, Europe and Japan remained soft, while in emerging markets Asia and Africa drove the growth. Moving to zone AMS, with sales of CHF6.4 billion. Our OG was slow at 0.4% owing to a decline in RIG of 1.4%. Pricing mainly came from LatAm. Also North America also saw slightly positive pricing. North America faced an environment of soft consumer demand and consequently our business had a challenging start of the year with lower organic growth. coffee creamer and frozen food in the US maintained good momentum. Petcare performance was below our expectation mainly in dry dog food, where Beneful did not fully recover up to the plan. In Latin America, we had low-single digit organic growth driven by pricing, RIG was slightly negative. Brazil had a difficult quarter particularly in confectionary, which combined with overall fragile economic condition resulting in both negative RIG and OG. Mexico’s growth remained positive, but decelerated. Petcare in Latin America continued to sustain a good growth across the region. Moving now to zone EMENA, with sales of CHF4 billion. Our OG was solid at 1.7% entirely RIG driven. Pricing in EMENA improved, finishing the three months with a neutral pricing contribution. We took pricing for NESCAFÉ across the zone. We also raised prices across most of our portfolio in the UK. Some of the pricing action that we took during the quarter put moderating pressure on RIG. Looking now at the three sub-geographies, Western Europe grew slightly on an organic basis. Most market had a positive RIG with the exception of the UK and Iberia. Pricing was negative but the trend is showing some improvements. In Central and Eastern Europe, we had overall mid-single digit organic growth with both positive RIG and pricing. Russia had a difficult start of the year affected by the local economic situation. The Middle East and North Africa regions saw mid-single digit organic growth predominantly RIG based. Turkey and North Africa performed well. However the Middle East declined as political instability and deflation persisted. Petcare in EMENA has been the main growth contributor primarily driven by cat food. Moving now to zone AOA, with sales of CHF4 billion during the quarter. Our OG was strong at 4.5% made of 3% of RIG and 1.5% of pricing. AOA had the fourth consecutive quarter of accelerated organic growth. The zone saw a positive momentum despite negative organic growth in China. China has been impacted by the earlier timing of Chinese New Year, particularly for our confectionery franchise at Hsu Fu Chi. Yinlu continued to weigh on growth, but we are encouraged as the pace of decline has reduced materially. Southeast Asia had a good organic growth and has been the largest contributor to the zone’s RIG. The main growth driver in Southeast Asia have been ambient dairy, cocoa and malt beverages with NIDO, MILO and Bear Brand. India continued with a good performance driven by Maggi and we see progressive normalization after the demonetization process. South Asia continued to make sustained progress with high-single digit organic growth. Oceania and Japan had a solid organic growth with good rig, partially offset with negative pricing. And finally Sub-Saharan Africa experienced a strong growth mainly coming from Maggi, cocoa and malt beverages. Moving now to Nestlé Waters, with CHF1.8 billion of sales. Our organic growth stood at 3.1% made of 2.6% of RIG and 0.5% of pricing. The growth that we experienced in water is largely volume based as a competitive intensity limits pricing mainly in developed markets. Nestlé Waters grew in all regions, although with some deceleration partly because of challenging comps last year. In the US, which is our largest market, we delivered low-single digit growth despite negative pricing. In Europe, we had the solid RIG and OG with slightly negative pricing. And in emerging markets, the Middle East, Turkey and China slowed down while Southeast Asia had a double-digit RIG and LatAm a double-digit organic growth. Now moving to nutrition, with sales of CHF2.6 billion. We started the year with 1.1% organic growth, negative RIG by 0.4% and positive pricing by 1.5%. Pricing improved as we put through some increases in some of our key markets, more specifically Brazil, US, and Mexico. It had some impact on volumes, however we do expect that to stabilize later in the year. We saw a moderate improvement in China on strong growth in Southeast Asia, India, and Pakistan. Looking at China in more details. Organic growth in China recovered moderately as a category momentum gradually improved. This stage one formula or starter formula grew nicely probably helped by the second child policy. The relaunch of NAN also showed some good growth and illuma continued its growth trend leading the super premium category with now a run rate above CHF1 billion in sales. We are preparing for the introduction of new regulations and we feel that we are well positioned to meet all new requirements by the beginning of 2018. In other markets more specifically the US, Brazil and Mexico, we took pricing which led to sellout volume contracting margin. Southeast Asia, Pakistan experienced good growth supported by innovation in infant formula and cereals. Moving now to other businesses, as you remember, Nestlé Professional has moved from globally managed business to regionally managed business. As a consequence from the beginning of 2017, sales of Nestlé Professional have been reported within the zones and not anymore in the other business category. We have restated sales accordingly and you can find them in the appendix on our website. Other businesses as a consequence includes Nespresso, Nestlé Skin Health, and Nestlé Health Science. All these categories combined, we had organic growth of 5.8%, RIG of 6.4% and negative pricing of 0.6% Looking more specifically at Nespresso, we had mid-single digit organic growth fueled by double-digit growth in North America. The retail network expansion and the rollout of new boutiques combined with increased distribution helped to drive growth in markets such as the UK, Nordic and Canada. Moving now to Nestlé Health Science, we had mid-single digit growth driven entirely by RIG. Medical nutrition is experiencing a high-single digit growth led by strong brands mainly in our allergy portfolio. Consumer care has been driven by the - the growth has been essentially driven by Europe and Asia. To finish Nestlé Skin Health, we had double digit growth in terms of organic growth and a strong RIG. We benefited during the quarter from low counts last year, but we benefited as well from several new product launches in consumer care as well as in aesthetic and corrective. We expect Nestlé Skin Health growth to moderate in the coming quarters. Let's look now at the development by product category, and once again RIG overall has been impacted by the calendar effects that we mentioned earlier. We start with powered and liquid beverage which is mainly coffee. NESCAFÉ soluble coffee remains positive in terms of growth but the RIG has been slightly impacted by some pricing that we took during the quarter. We had good results from innovation and more specifically with NESCAFÉ GOLD and Azera. And finally Nespresso and NESCAFÉ Dolce Gusto grew well. Waters I won’t cover because I talked about it earlier. Milk products and ice cream, we had a soft start of the year. This category has been impacted by Yinlu and the difficult markets like Brazil and the Middle East. In ice cream, we have different dynamics, if we look at the US, it has been a little bit challenging with difficult comps last year, while AOA has experienced a good level of growth. Nestlé Skin Health and Nestlé Health Science I have already covered. We’ll now to move now to prepare dishes and cooking aids. We had the strong growth mainly in ambient culinary in South East Asia and Sub-Saharan Africa. Frozen Food in North America is lapping high comps last year, but in spite of that stuff did well during the quarter. And we had good growth for Maggi in India. Confectionery as you can see and as I mentioned earlier, we had a difficult start for the year. This is a category that has been the most impacted by the calendar impact. Frozen Food example for Hsu Fu Chi in China but as well in Brazil with Easter. In addition the Easter category in Brazil has been under pressure. That being said, for confectionery we have some pockets of good performances with Kit Kat in Europe and in Japan. Finally Petcare, we had the strong performance in Europe and LatAm. The situation is more challenging in North America as I mentioned earlier, this is linked to a soft performance in dry dog. This takes me to the last slide, reconfirm of full-year guidance, which means organic growth going between 2% and 4%. We ended Q1 within our guidance range in spite of the headwinds coming from the calendar and seasonal effects. To support our future growth, we plan to increase restructuring cost to drive future of profitability. As Mark indicated earlier we are now entering into the execution phase and we will provide regular feedback on restructuring and cost saving progress. As a result, we expect to reach a stable and trading operating profit margin in 2017. As you remember, the trading operating profit is after restructuring and we expect as well to achieve underlying EPS growth on improved capital efficiency. I’m now handing over to Steffen to manage the Q&A session. A - Steffen Kindler: Thank you Mark, thank you François. We move now onto questions and the first question in line comes from Celine Pannuti from JP Morgan. Good afternoon Celine.

My first question is on the AOA momentum, you mentioned it's the fourth consecutive quarter of acceleration. And can you pin down what you see in terms of the market itself, market demand, and what has been Nestlé performance against that. So trying to understand your own maybe ability to gain share but as well growth in that market. Unilever as well this morning was talking about accelerating pricing in this market and I see that your pricing accelerated not that that much, so if you could as well touch upon on that. My second question, in fact I'll come back to the US. It seems that RIG was negative, can you mention what you've seen in terms of market performance, your performance in different category in terms of market share and also what's your outlook for the US for the remainder of the year? Thank you. François Roger: Okay. I will take the question on AOA. I think Mark you will take the question on the US. In the US, we had positive momentum as I explained earlier. In spite of negative organic growth in China, overall we improved our market share in AOA. As I indicated, this is the fourth consecutive quarter of accelerated organic growth and you said it. This has been supported partly by pricing. China is still negative. It has been broadly impacted as I indicated by the Chinese New Year impact, which had significant impact on Hsu Fu Chi for confectionery. Yinlu continues to be negative, but the pace of decline is reducing, has reduced basically by half. So we see some progress there. We always said that we would need sometime. We had a strong momentum in Southeast Asia with good organic growth. This has been the largest contributor to the zone’s RIG. Sub-Saharan Africa had the strong growth, which both in terms of pricing and in terms of volume, if we take a country like for example Nigeria, it’s not new about pricing, but we have double digit growth by volumes, which is quite amazing. And finally, in Oceania and Japan, we had a good RIG and solid organic growth. So we have different configuration. Once again, the main issue we’re facing is China, but the rest of AOA and emerging markets, we have done pretty well.

Celine, this is Mark. On the US, I think there's a general observation here and that is pretty weak consumer demand and that's not a particular issue here for Nestle. I think that's all throughout. That typical transmission belt we've seen in the past between good economic performance as measured by GDP and then consumer spending, that doesn't seem to be working one for one this time. And so category by category, whether it's us or anyone else, what you're seeing is fairly soft demand, even in the face of pretty good fundamental economic data. The one area that does stand out a little bit, François pointed to it is petcare. I think here, we've seen a soft quarter. We had some issues in particular in drydock and I think we're moving aggressively to fix those. So I'm more optimistic for the rest of the year.

Next one in line is Jon Cox from Kepler. Good afternoon, Jon and your two questions please.

Yeah. Good afternoon, guys. Thanks so much for taking the questions. Actually, I'm just trying to get an idea of the impact of that calendar. I think ahead of the results, you were talking maybe up to 150 basis points. Is that still the figure we should be thinking of and if that's correct, should we just be adding 150 basis points into the Q2 numbers? And then just on the -- the second question, just a follow-up on the North America situation. Did you see actually the exit of the quarter things improving or has it just remained as subdued as the start of the quarter? Thank you.

Let me take the second one first on North America. I think it's pretty hard to comment here on the exit of the quarter, in particular with the timing of the holidays now. So I can't help you on that. Again, with a full year perspective, we have a more positive view than what you've seen now in Q1. François Roger: On the second one, on the calendar, it's always difficult to measure the impact. We know that there are some impacts. The main one is obviously is leap year. The second one is Chinese New Year and Easter had probably a smaller impact. So it’s difficult to quantify it. We believe that overall the impact is probably north of 100 basis points. I would not go as far as 150 basis points probably. It’s certainly impacted some categories more than others and confectionery is the one that has been by far the most impacted by the combination of these three events.

Okay. Thank you very much. Next one in line is David Hayes from Bank of America. David, good afternoon. Your two questions please.

Good afternoon. Thank you. So just firstly on China baby formula. You talked about the better trend and you mentioned the two, one child policy change, but just wondered whether you could be -- any commentary that you've got on the destocking -- the inventory destocking, whether that’s subsiding, whether the discounting levels are perhaps less aggressive than they have been through the back end of last year and whether you’ve got any more visibility on whether that's a dynamic system all the way through this year or starts to maybe ease off as we move towards the regulatory change at the beginning of 2018. And the second question, if I can take the liberty to touch on margin despite being just a sales call. We've obviously seen one of your peers step up plans for margins towards 20% over the next few years. Just wonder whether that's something that you would say is the target that would be reasonable for Nestle to try and achieve as it looks to execute on the cost saving and implement more aggressive, but not ridiculously draconian cost saving initiatives across the business? Thanks very much.

Thanks, David. This is Mark. Let me comment first on China. As François said, we've seen a good first quarter here for nutrition and that's giving us good hopes and in particular when it comes to that potential impact from the second child policy, nonetheless, I think for the remainder of the year, it is important that we stay on the lookout for potential destocking effect. So this is still an item we need to watch as we go through 2017 and then I think it's going to be clear assailing from 2018 onwards. So again good quarter, but nonetheless I think it is worthwhile to watch quarter-after-quarter how that destocking will take shape. In terms of the margin improvement, we don't have at this point anything to add to the targets that we laid out in February. We stand by those targets and fully confirm them. The one for 2017 but also the ones that point towards the mid-term. We welcome those. We’re encouraged by our progress towards those and I think margin improvement is one of them. We emphasize growth and efficiency, but we have no specific new target to add at this point.

Good. Next one in line is Jeremy Fialko from Redburn. Jeremy, good afternoon. Your two questions please.

Hi. Jeremy Fialko of Redburn here. So firstly on Latin America, just a little bit more on your outlook for that one over the balance of the year. It was very difficult Q1 for you and everybody else. Do you see or presume particularly getting better over the balance of the year. And then secondly, on Yinlu, do you think it's realistic that you can get that business back to rough stability by the end of the year. Thanks. François Roger: On LatAm, so we said we don't want to give any forward-looking statements on that. The environment is quite volatile. In all respect I would say, first of all, we saw was with some interest, but the fact that some of the currencies are actually revalued, for example, the Brazilian real has revalued by 25% in the quarter versus the same period of last year, which forces to adjust a little bit our strategy. For example, we took some significant price increases last year at the end of June as we communicated before. We have to give back part of it because of the revaluation of the currency, so there was less need for pricing as a consequence. On the other hand, we have been a little bit, I would say, maybe surprised by the fact that we were moving into negative territories where we had negative territories in some countries like Brazil. Mexico continues to do well and so we saw a little bit of a slowdown, but we had nice level of growth last year and we are still positive in terms of growth. But I would be careful given the volatility of the environment in Latin America to make any forward-looking statement.

And then on Yinlu, Jeremy, just to comment, very encouraged by the progress that Wan Ling and her team are making with that. But nonetheless we did caution right at the beginning that this would take time and so I’m confident that we’ll see relative improvement from where we are, but it's very hard to pinpoint a specific moment in time when it will come to exact plus minus zero.

Good. Gets us to the next question from Alain Oberhuber from MainFirst. Alain, good afternoon. Your two questions please.

Good afternoon, everybody. Just two questions regarding the ice cream business in US. Could you elaborate a little bit more, when you think it will come back again, in particular keeping the competition you have from all the players. And then regarding the Froneri development, could you also highlight a little bit what the current development is in your joint venture there. François Roger: For ice cream in US, we had slightly negative organic growth with different momentum by category. We had positive growth with Haagen-Dazs and snacks. Dreyer's was negative. But as I mentioned earlier, we had some -- we suffered a little bit from lapping comps, especially we had a competitor's record last year. So it’s a little bit of one-off issue. We gained in terms of market share on snacks, but we lost with the -- on the premium side. So I would say we had different dynamics there. Froneri, we started this joint venture and I think in October last year. So far, I mean the integration of both original companies is working very well and we had very attractive results so far. As you know, we do not consolidate that business anymore, because it’s a joint venture, but we are extremely pleased with the early developments, both on the top line and the bottom line.

Next question is Vincent Baron from Oddo. Vincent, good afternoon. Your question please.

Yes. Hello. Good afternoon. I have a question about the US market and regarding the price competition between Walmart and Amazon. It seems that these guys are asking strong discount to their suppliers. So are you affected by this situation in the US market?

Vincent, it’s a little hard to comment specifically on two important customers of ours here. But I think what applies to the entire retail channel in the US is that there is a significant competition and yes, that makes it of course harder to roll forward any price increases and improve pricing, but nonetheless we work with all of those in very constructive fashion to be sure that everyone meets the objectives.

That gets us to the last question and that is from Jonathan Feeney from Consumer Edge Research. Jonathan, your question please.

Good morning. Thanks very much for the question. You mentioned that a change in that one to one return on spending in the market surprised, given the improved economic fundamentals. Can you give us a little bit more detail on what you think is driving that, how much of that is maybe transient, how much of that is maybe more structural. And secondly, one of your competitors highlighted basically growth in ecommerce in China being a little bit cannibalistic to other channels like declines elsewhere. Can you comment about the migration of your business, [indiscernible] other places in China to e-commerce? Thank you very much.

Thanks, Jonathan. I guess for the US, I mean there's probably different theories out there, but I think what we're seeing in spite of good economic data is a very large amount of uncertainty and that of course translates into somewhat subdued consumer spending. So that's my best theory and explanation. As and when that uncertainty subsides, I think there will be good news then, because it might lead to improved consumer spending going forward. But again, this is one of several theories that's my view of the situation right now. In terms of e-commerce, yes, I think at the end of the day, whether you look at China or other markets, the sale that gets done through one channel is very likely to come at the expense of a sale through another channel. That's all the more important then to be sure that we are part of that e-commerce trend. I'm very encouraged by the progress we are making in China, close collaboration with the leading e-commerce companies out there and hence, it's important to be really one of the frontrunners in this trend and I think we are in that market.

Okay. So we have got another question. It’s from Alex Smith from Barclays. Good afternoon, Alex. Your question please.

Yeah. Hi. Good afternoon. Just a quick one on pricing in the Americas. It seems to have softened a little bit versus the end of last year. Just wondering what's driven that, is that just lapping price increases in Latin America or is it something more promotional around North America and can we expect that to therefore pick up during the course of the year as per the guidance for pricing at the group level? And then just quickly on petcare North America, do you want to talk a little bit more about what really happened that's beneficial -- the impact there seems quite dramatic. I mean, we kind of used the same petcare growth, 4% to 6%, very consistently, it's up just one and a bit. And you talk about good growth in LatAm and Europe. So, it feels like North America petcare was down quite significantly? Thanks. François Roger: Thanks for your question, Alex. Regarding pricing in the Americans, we’re positive in pricing in North America. No specific issue there. We’re positive in pricing in LatAm as well but lessened in the past. The main reason is what I mentioned earlier. I think that in Brazil, we had to give back some of the price increase that we took last year as a consequence of the significant revaluation of the currency locally. Pricing for the group overall, we expect it to continue to increase as it has been the case over the last couple of quarters. Once again, it will not necessarily increase each and every single quarter, but we expect to see some increase -- further increase during the year. I think you had another question on petcare in the US. So petcare, we had soft start of the year. Beneful and Dog Chow are still difficult. The drydock category has slowed down as well. So part of it is linked to a category. As Mark mentioned earlier, we are not -- we are below our expectation clearly there, especially in terms of recovery in Beneful and we are aggressively working it.

Okay. Then, we have another question from Jon Cox. Jon?

Yeah. Thanks, Steffen. So let me have a second bite of the cherry as it were. Mark, you gave a little sort of teasing comments at the start, just talking about you’re aware of the M&A going on in the space and shareholder activism. And just following on from what David was asking you earlier and also our breakfast meeting we had in London, are you tempted to actually introduce targets in terms of margin expansion targets, maybe you give them back later in the year at that Capital Markets Day, just following on from what Unilever and others are doing in the space, given the sort of threat posed by 3G Kraft Heinz et cetera.

Yeah, look, fair question. Let me say first and foremost, it was not a teasing comment. It was a fair observation of what's going on around us and that is a significant amount of change. It’s clearly somewhat unprecedented in the fast moving consumer goods area. And so I think it was very meaningful after the February conference call to meet a lot of our investors and analysts in London and elsewhere and get their input and we listen very carefully to what you have to say. So for now for this moment, we have little to add to what we laid out to you February 16, but let me also underline that this past quarter until basically two weeks ago was a period that was focused on one significant item and that is a smooth handover in leadership of this company. So we have a new CEO and that's me starting from January 1 and then we completed the leadership handover with our shareholders meeting two weeks ago. And we elected a new board, a new Chairman and now that transition process is complete and as François mentioned, now, it's basically rolling up our sleeves and getting to it through the execution stage. So I think it's a little early at this point to comment specifically to anything over and above what we laid out in February, but we got the message and I think I acknowledged that in my opening remarks very clearly that you are looking for improved combinations of organic growth and margin and we’re certainly determined to move in that direction.

That gets us to the end of today's call. Thank you very much for attending our call today. And as usual, if you have more questions, Investor Relations is available for you via telephone or e-mail and we see you again at the occasion of our half year conference call. Thank you very much and good bye.