Nestle SA Fireside Chat with JPMorgan Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : <_ALACRA_META_ABSTRACT>Yeah. Thank you for hosting me here in your headquarter in Vevey, Switzerland. Mark, maybe we'll start with a broad question on the endless volatility that we see in the marketplace and from a macroeconomic standpoint. If I look at the sector and yourself, we have seen in the past quarter the hit from destocking, the hit from the normalization of consumption post-COVID, as well as your choice to decide to go for SKU rationalization, and maybe some of the M&A that didn't work out the way it was expected. So what I would like to understand is, when we look at all of that, how do you make of those? Do you think that we could see those in the rear mirror soon or already now? And should we expect NestlT's steadiness to come back? That's one of the features that investors are looking at for your company.

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : You mentioned real internal growth. Clearly, this year, you have given a guidance of 6% to 8% so organic growth that's ahead of your mid-term growth. Real internal growth has been negative in the past quarters, but you are alluding to be coming back to REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 24, 2023 / NTS, JPM.N - Nestle SA Fireside Chat with JPMorgan positive as we look into the second half. And I think some of the points that I mentioned earlier about the SKU reduction or the cost (inaudible) COVID-related normalization have been hits to your performance. I think on the last one on the normalization, I think you said it would take four to six quarters to wash out. Just would like to understand, where are we in that journey? And maybe in plain words, do we expect the rate to be back to 2% to 3% by '24? Could you give us some tangible evidence when you have cut the tails and pushed the heads, what has it brought to the business?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : Pricing, you alluded, has been very strong. Now the market is getting -- quickly looking about the fact that some of the cost, spot commodities costs, have come down. It's not just commodities. You've seen, well, oil prices. You see gas prices. You see the easing of distribution cost. So there's a lot of debate about whether the industry, as a whole, will be able to hold onto quite extraordinary pricing that has been put through in developed markets, especially in the past two years. And that, as well, impact NestlT. I know that you are not -- you still have quite a lot of cost to go through this year in terms of COGS and hedging, as well as on impact, as well as SG&A. But at some point, NestlT also will start to see that easing of cost coming into the P&Ls. So the question is, when we hear politicians, like in France -- when we hear retailers talking about looking for -- having a good deal for consumers, how realistic is it that price will be sticky? How do you expect NestlT to deal with that normalization of the commodity tailwind? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 24, 2023 / NTS, JPM.N - Nestle SA Fireside Chat with JPMorgan

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : One area that I would like to discuss about is the consumer demand. You mentioned at your Q1 stage that -- you got a bit little cautious about the European. So let's start there, the European consumer. And it's true, it has been rather resilient. We were expecting consumer in Europe to be under much pressure. And it has been, up to now, rather resilient. So what -- you've been a bit more cautious. How do you think that the consumer in Europe will evolve? What could be the area of worries, downtrading, private label competition? And we also noted that some of the data, market data, that we look at are starting to show effectively volume being under pressure, though it has not yet shown in your numbers. Are we at risk to see the same impact in Europe that we have seen in the US, we were just discussing, at the end of last year?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : Right. Maybe another big region is the US. And I think in the past weeks, we heard some of your customers, retailers, have been talking about maybe a bit more prudence from a discretionary standpoint for some of the US consumers, though food and beverage had been resilient. Now on the US, your portfolio lends itself to more premium, if I think about pet, coffee, nutrition. Could you tell us what percentage, do you think, of your portfolio is premium in the US? And going into that, if there were more of a pressure on the consumer, going forward, in the US or a recession, how would you expect some of those categories to behave?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : Right. Staying on North America, one, I think, key success has been the pet division, the pet food division. I think structurally, the fundamentals are quite good for this division. And you are also, I think, still capacity constrained. But what I would like to understand is how we should think about the normalization after a very strong period of growth going into the next couple of years. I think on one side, if you could comment on pet adoption, which has been very high, are we seeing now a plateauing level? Or are you still see growth over a very high level? And then on the mix side, you were just alluding that premium tends to be resilient. When you look at pet and the absolute price point, do you also think that this would be the case for that category?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : Yeah. As a cat owner, I as well agree on how they can be very fussy with their food. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 24, 2023 / NTS, JPM.N - Nestle SA Fireside Chat with JPMorgan Now my next question would be on Nespresso. Clearly, we've seen some weakness and clearly as well from a tough comparative base. But at the same time, I think you spoke in prior calls about the total single-serve portfolio. So is it that you are seeing a migration from high-end to maybe more mass market? And is that maybe what we should be looking at for the foreseeable future now that we -- given the economic condition that we alluded before? And then specifically on Nespresso, if I may -- if you could talk about Vertuo and Nespresso in the US, the opportunities there, and how sizable they have become.

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : One deal that effectively created a lot of value and you presented at the CMD last year has been the Starbucks deal. Now I wanted to -- the deal was done a few years ago. And then in 2021, you signed on for the ready-to-drink development in LatAm and Asia. And you acquired the Seattle Best Coffee (sic - Seattle's Best Coffee) as well. I just wanted to know where we are in terms of how this franchise evolves. And if you could specifically also talk about the out-of-home opportunity for the Starbucks brand.

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : Moving on to NestlT Health Science, you did a CMD, a lot of presentation on that. So we're not going to dwell on it too much now. I just wanted to -- and I think you recently said that there's no reason why the profitability shouldn't bounce back post-Aimmune. So that's great news. Now, I wanted to understand from -- how you built that business. You said that you would concentrate on the consumer and the medical portion. And you have ambition to really build this as a pillar for NestlT. But at the same time, you are integrating Bountiful. So are we, right now, at a level where you are looking at integration rather than further acquisition? Or whether -- could that business be built further on different parts of it?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : Moving from health to healthy foods, some investors have asked NestlT to set a target to increase the percentage of healthy foods in your portfolio. Can you share your views on that? I think I heard you in the past talking about the importance to bring indulgence with confectionery or convenience in prepared food or frozen foods. So can you try to help us understand how we can reconcile those with your stated ambition to bring healthy foods to consumers?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : In fact, that brings me to my next question. Confectionery is not one of the category we talk a lot about. But if I look around at NestlT, but your competitors as well, we've seen that the growth for confectionery snacking has been quite elevated as well as translated into good returns for shareholders in this category, value creation. So I just wanted to get your thought on how you feel about that. I would've thought -- I mean KitKat obviously is the flagship, a very successful brand. The portfolio then is quite fragmented. I was wondering whether there would be more of a need to cut down some of those local brands. Or would M&A be part of the journey there?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : Another area where -- there's been some divestment, I mean, in the US waters. The water division I think is now around 4%, less than 4% of your portfolio yet recognized as a growth category. So I just wanted to understand where we are now in that journey. I know you've been focusing on premiumization, but it still seems to be quite a small part of the business. So is there any development that can be made there, organically or not?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : In terms of disposals, we talked about the US disposal. I think altogether, you disposed around [26 billion] worth of business since you came as a CEO. I thought that we were kind of done with that process, but then you talk about the SKU reduction, Canada Frozen Food that's going to be folded out, and then the JV with your Frozen Food Europe. So I wanted to know -- [frozen pizza], excuse me. I wanted to know what else. Are you looking again at the portfolio? And is there effectively more that could be looked at from a disposal standpoint?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : If we speak about divestment, we're going to speak as well about M&A. So you did -- we spoke already some of the few deals that you did in the past. Now, we have been in a time where multiples have been quite elevated. And you've been quite focused on making sure you strike the right balance in terms of value creation. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 24, 2023 / NTS, JPM.N - Nestle SA Fireside Chat with JPMorgan We are also now seeing that multiples are a bit less. But effectively, access to credit may be a bit more complicated for, at least, your competitors in a bid. So how should we look at the M&A pipeline going forward? I also recall you saying that the sweet spot was the mid-sizes deal. And effectively, we talked about Bountiful and Starbucks. But there have been no other of those midsize deals. So is it a lack of available assets? Is it an issue of bad valuation?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : I would like to move to the emerging markets. In fact, I will have a question about acquisition potential there. But first, if I think about the emerging market, performance has been quite strong. But how do you see the opportunity and the landscape, as some of those emerging markets have themselves emerged or are still emerging from COVID in the case of China? And then my second point there would be about China and India. China is 6% of your sales; India, 2% of your sales, big business. But relative to NestlT size, it's quite small. And I think you were talking about -- I think you had more ambition to grow China when you came four, five years ago. How -- can you talk about the potential for evolving the portfolio? And is it an issue as well to do M&A? And shall we think that the pivot now would be more focusing on India, given what seems to be higher growth prospect for that country?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : Talking about capital allocation -- so you are now into a [20 billion] share buyback that will end in 2024. In the absence of M&A, should we expect that the share buyback will be continuing as long as you are in quite your target range on your leverage? And then my other question on that point was about L'OrTal. So you own 20%, which allows you to consolidate a percentage of the profit of L'OrTal. Does it mean that it's a level which you will not go below? Because otherwise, it'll be quite diluted from an earning standpoint? So is it a bit of a no change at this level?

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : As we almost near the end of this discussion, I wanted to go back to the P&L gross margin recovery, which you alluded early on when we were talking about inflation. So you're still at a stage where you need to recover that. And if I look versus 2020, gross margin of about 400 basis point below that level. So any reason why structurally, you could not get there? But then if I look at your EBIT margin guidance of target 17.5% to 18.5% by 2025, at the midpoint, that would imply 100 basis point of margin improvement. So 300 basis point of reinvestment would be the implied guide. So can you talk about those reinvestment? Or can we, as well, think that there's some form of conservatism in how you've guided on the margin performance? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 24, 2023 / NTS, JPM.N - Nestle SA Fireside Chat with JPMorgan

Question: Celine Pannuti - JPMorgan Chase & Co. - Analyst : And maybe just to conclude on that, because we were talking about the defensiveness of NestlT at the beginning, you articulated the target of 6% to 10% EPS growth at the end of last year, which I think was meant to give visibility to investors as we look over the next two, three years. So that confidence in growing that 6% to 10% EPS, is that coming from, you think, the visibility you have on rebuilding that margin? And how do you expect the 4% to 6% -- what is your confidence on the 4% to 6% in an environment that, as we discussed, could still be a bit choppy in the next couple of years? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 24, 2023 / NTS, JPM.N - Nestle SA Fireside Chat with JPMorgan