Nestlé S.A. (NESN) Earnings Call Transcript & Summary

Good morning to everyone. This is Luca Borlini, Head of Nestle Investor Relations. Joining me today are Nestle Chairman, Paul Bulcke; CEO, Mark Schneider; incoming CEO, Laurent Freixe; and CFO, Anna Manz. We will share some introductory remarks before opening the call to questions. As a reminder, this call will cover questions related to the management change only and is not a trading update. Before we begin, please remember that any comments on this call are subject to the usual disclaimer on forward-looking statements. And with that, I turn to Paul.

Thank you, Luca, and welcome to you all to this. Also thank you for calling in, in this important moment for us. And yesterday, as you know, we shared some information. The Board of Directors has announced, as you have seen, that Laurent Freixe is taking over on the role of the Nestle CEO. Mark Schneider has decided to explore new opportunities outside of Nestle. And first, I would like to thank Mark for his contributions over the past 8 years. He has done an excellent job, and we wish him all the best in his future endeavors. And thank you, Mark. I know that this change may come as a surprise for many of you. And the Board, together with Mark have assessed the current environment and situation and have agreed that now is the time for the company for a change. And therefore, I'm truly excited that Laurent has accepted the position of Nestle CEO. I have known Laurent for a long, long time. And some of you have had opportunity to also interact with him at past investor events. And as you know, Laurent, he is 38 years with our company, including also 16 years in general management on the Executive Board. He has been -- in many places, he has been market head in several countries. He has been also leading several zones. He knows Nestle inside out, he knows our culture, our values. He has extensive in-market expertise as well also as profound understanding of markets and the dynamics right there and what our consumers want. Laurent has earned great respect also and credibility, both inside the company and outside the company. And I think all these things matter. And I think Laurent is the right leader for this time. And as such, I also wish you, Laurent, every success in this new role. I want to make it short. So -- but before I hear also from Laurent, maybe Mark, please, I want to give you the floor too, to connect with the people that you know so well.

Thank you, Paul. I'm pleased to have the opportunity to connect with you before you get into Q&A with Paul, Laurent and Anna. I really appreciate the trust and partnership we have had with you, our investors, over the last few years as we build and develop this company. Thank you. It has been an honor and a privilege to serve Nestle and leaving is not a decision I've taken lightly. I would like to thank the Board and the entire Nestle community for all we have accomplished during the last 8 years. Finally, I wish Laurent and the leadership team every success in taking Nestle forward.

Thank you, Mark. Laurent, share a few of your thoughts and...

Yes. Thank you, Paul. Thank you, Mark. Let me start to first express my gratitude to the Nestle Board of Directors for entrusting me with the responsibility of leading Nestle. I'm truly honored and fully aware of the responsibility that comes with this position. I'm deeply committed to Nestle, our purpose and values. As the leading global food, beverage and nutrition company, as you know, we strive to be the best in everything we do. We have an unmatched category and geography mix, a very strong portfolio of iconic brands and unique competitive advantages in route to market, R&D and manufacturing. While the food and beverage industry has gone through significant changes in recent years, our top priority, my top priority is to drive sustainable top line growth and -- through market share gains. It all starts with strengthening trust in Nestle. We will relentlessly focus on meeting consumers and customers' needs. We aim to do this in a decisive and disciplined way through increased investments behind innovation as well as behind our brands. To ensure our success, we will embrace the Strategic Virtuous Circle as our compass with a focus on productivity, cost management, allowing strategic investments in our key brands and key innovations. We will be laser-focused on execution, starting with quality, safety, simplicity, speed and agility. This is pivotal to our success going forward. We will accelerate our data transformation to be a real-time intelligent enterprise, end-to-end connected from farm to fork, that is data and AI-powered. And additionally, we will continue our journey towards achieving net zero emissions while being mindful of natural resources, nature and biodiversity. We will perform as we transform. I'm looking forward to working closely with Anna, who is with us in this call. Having worked with her during these past few months, I'm very impressed with her depth and constructive and collaborative approach. She has my full trust and confidence, and we will be a great team. In the coming months, I'm very keen to engage with you, our investors, in an open and transparent way, something I've always valued in the past. I look forward to hearing your feedback and expectations for the company and, of course, to sharing our plans going forward. Thank you.

Thank you, Laurent. With that, we move to the Q&A session.

We are now opening the lines to questions from financial analysts. [Operator Instructions] And the first question comes from Celine Pannuti at JPMorgan.

Maybe I will start with the first point on -- asking on the Board decision. You said that the change, you assessed the current environment and you decided it was time for a change and effectively, it has been quite an unexpected and sudden change. So could you tell us exactly what assessments you've made? Obviously, the growth has been a bit -- has been weaker than expected in the first 6 months, and there was a lower expectation for the year. Can you talk about the current trading? And has that had an impact on your decision? That's my first question. My second question, may be to Laurent. In terms of what you said, to reenergize growth to -- I hear you about market share gain, but many times you've been talking about strategic investment. Do you think that there will be a need for accelerated A&P in the first year in order to set Nestle for success in the midterm?

To answer your question, we did assess -- clearly, we always permanently assess the situation and we somewhere find the right answer to confront challenges and views our opportunities better is a little bit what we call forward to basics. It is what's going to make or break and secure our success is this really understanding of brands, products, consumers, our strength in our company are and you know them is there's also in-market expertise worldwide, every market per se, it is this innovation pipeline that is translated straight into more, I would say, scaled up rollouts. It is this -- yes, it is the trenches and execution -- flawless execution. It is this reaction, whatever -- and always, you have challenges. It's a fast reaction on these challenges and all that. That is what Nestle is. That is what the strength of Nestle is. And Mark did a good job at all. But there, in that sense, I feel Laurent has with his 38 years of in the trenches experience, with his, I would say, also 16 years in the Executive Board as such, being part of shaping and framing this company in the last 16 years because that's what general management of Nestle is. It is a team leadership, then he is totally aligned with the strategy. There's permanent continuum, there's full buy-in into the hands and feet in the street of this company everywhere in the world. And that is why we feel so he's going to have on day 1 and minute 1 effective traction and leadership. And that is what I think, a little bit of what we call internally, forward to basics. That was the call. There was a second question, and that was more to Laurent. Laurent?

Yes, the second question on marketing and how you see going forward.

Look, as I said, the big focus will be on organic growth, market share gains, market share gains to drive organic growth. That requires investments in the brands, that requires investments in growth platforms. And the objective -- my objective is to create space with the management team to allow for those investments. I've always made the case that innovation, for instance, has to be incremental. Incremental innovation requires incremental funding. And just to highlight what I got in mind there, just think of Nespresso and Nescafe Dolce Gusto in the past. If we would have taken resources from Nescafe to grow Nescafe Dolce Gusto, for instance, we might have done a good job on Nescafe Dolce Gusto, but we would have done a poor job on Nescafe. So we are wise enough and we want to work that line going forward to keep supporting Nescafe, one of our best brands, while putting incremental resources behind Nescafe Dolce Gusto. To do this, to achieve this, we will need to be very strong on productivity, cost efficiencies to create the space again and generate the funds and the resources to invest incrementally behind the brands and the growth platforms. It's through investment behind the brands, through quality and execution, of course, that we will achieve that. Embracing marketing, not just a question of numbers, of course, and investments. We want to make sure that we achieve superiority in every step of the value chain, starting with the quality of our products, the good-for-you strategy, pricing, distribution and investments behind the brands.

Next question is from Jon Cox at Kepler.

Yes, a couple of questions for me, really coming back to Laurent and what you think and what happens next. At the moment, the plan is for you guys to be back in that 4% to 6% growth corridor next year. First question would be, any reason you think you shouldn't be able to do that. And that includes, is there any sort of thoughts about divestments of businesses, M&A, that sort of stuff. And the second question leads into it is really on the margin and profitability. You've talked about innovation. You also seem to be saying you can spend more by increasing productivity. And as a result, that Nestle model of incremental margin gains will continue. Again, any reason why that won't happen from next year? And of course, at the moment, the guidance is for that to happen this year in terms of profitability. Maybe just as a bit of an add-on, when will you sort of do a big bang announcement, with the Capital Markets Day? Is that the plan?

Well, I understand your question. And you understand I'm not going to answer it in the sense, this is not the meaning and the purpose of this call. This is a call about a change of leadership in this company. But I want to say, normally, what you are asking for are results of doing the right things. And what I can say to you, I feel we are doing the right things, putting the right resources, the right leadership behind the right strengths of this company to make them flourish and flourish again. And I repeated that's very important to know. I know this company. I know what has brought us permanent success, which is actually a combination of many things. And that starts with brands and fuel them, care for them, and is products and innovate them, renovate them, consumer link and understanding and meaning the heads and the minds of consumers -- customers, it's in-market capture, that's very -- everywhere is that, to have very good execution, having the troops aligned and proud and working with motivation, et cetera. And I think this leadership is all about that. And that is actually an indirect answer to your question.

And maybe to complement, Jon, be patient. We will come back in detail to these questions at the Capital Market Day. That's the agenda -- that's on the agenda.

As of now, you cannot confirm those targets for next year?

That's not the purpose. I don't feel -- this is totally out of context now. So no, sorry.

Next question is coming from James Edwardes Jones at RBC.

Well, can I try about the current year's guidance? And I think it is extremely relevant, 3% -- at least 3% organic sales growth, a modest increase in margins. Can we still expect that for the current year? And coming back to Celine's question a bit more, is it fair to describe this as more a culture-related decision or a performance related decision?

But that's a little bit, I'm going to have to answer the same way as I asked before. This is not the purpose of -- I don't do that, and I will not do that now. I understand your question though. But look...

Don't you see this is going to be absolutely at the forefront of people's minds.

But you're going to have contacts with our people in the next weeks to come and then that should be ventilated there. I'm not going to speak up for them. But this -- look, what's out there as objectives and things like that is a company dimension, it's not a change of leadership dimension. I don't think that changes.

And if we were changing guidance at this current time, we would have announced that...

Actually, it's a legal thing too. Yes, we're not going to touch anything because legally, we should have announced that. So -- but I don't see anything there that is relevant to be ventilated now in more specifics, really. I see it more are actually putting the right results in place to secure.

So next question is from Patrik Schwendimann at Zürcher Kantonalbank.

Patrik Schwendimann, Zürcher Kantonalbank. I wish you, Laurent, and you, Mark, all the best for the future. Two questions for Laurent. Nestle used to be an end company with a good organic growth and improvement in the EBIT margin. Environment, as you all know, not easy. Just as a best guess, how long does it take to get back to this growth track record and yes, what needs to be done initially? And then second question, as far as I know you, you, in the last decades, you are a big fan of a focused company. How happy are you with the current portfolio?

Laurent, that's for you.

Yes. Thank you, Paul. Thank you.

It's actually more, it's top line and bottom line and resource efficiency.

Thank you, Patrik, for your kind wishes, and thanks, Paul, for answering the question. Value creation, of course, is front and center of the agenda. I want to make sure that we accelerate the organic growth going forward. It's a specific context at the moment, we are out of a long period of high inflation. Prices have slowed down, but we should not forget that even this small price increases are coming on top of significant price increases in the past. The consumer is relatively soft across the board for many reasons. So I think it's more a kind of adjustment here, and that doesn't preclude what the future will be. But then in -- anyhow, in any case, we want to outperform our industry. We want to gain market shares and that comes back to investing in our brands, that comes back to investing in our growth platforms. And the focus will be on driving the current portfolio, primarily organic growth is of the essence. On the portfolio, there might be, of course, adjustment. But again, top priority is absolutely organic growth and M&A is there to complement the strategy to strengthen our portfolio where it can be and is not the core of the strategy.

Great, Patrik. Yes, please. You still have some -- another short question? Okay. Well, next question is from Victoria Petrova at Bank of America.

Laurent, congratulations, and thank you, Mark. I have only one question left. Day one now, what will be the key change in terms of strategic priority, day-to-day operations and maybe top management changes, you mentioned Anna and your close collaboration, anything else we should watch out for short term?

Yes, engaging with people and mobilizing the entire organization, top to bottom, I see as absolutely critical. You know that we are probably the most global and the most local company at the same time. So it's absolutely critical to energize the frontline and invest in the business, raise our game when it comes to quality of execution, and live up to our values and principles. So that will be top priorities on my agenda and investing in the business, connecting with the consumers and the customers, understanding their needs and continue the transformation in areas that will be critical for the short term, long term, and I'm thinking of technology, digital, for instance, as a clear space for investment and preparing for the future.

Yes, that's right. First thing, rally the troops aligned behind. I think that's a good line. Thank you, Victoria.

Just to follow up, you have a new incoming Investor Relations head. Is it still on?

I didn't hear the question. I'm sorry, it was very -- it was...

Yes. Can you repeat the question, Vica? It wasn't clear.

Apologies. Yes, you had announced a new Investor Relations head coming in October. Is it still on?

Yes.

Yes. I see no reason to change that. That was planned and...

Luca has a great next role to go to within Nestle and we'll manage a very seamless transition. And thankfully, Luca will be around to support.

Absolutely, and I'm very much sure. I mean, Nestle is my life, yes.

But the commitments of the company are held, yes.

Yes, absolutely.

Individual things we have to see, but the company events and the commitments are held. No, that's for sure. Yes, sure. Thank you, Victoria.

Next question is from Warren Ackerman.

It's Warren here from Barclays. I've actually got two for Laurent. The first one, Laurent, just on market share. There's obviously been a lot of talk about that. You want to improve it. What's your assessment of where you are currently on market share? Where are the big kind of deltas? And related to that, I mean, execution sounds like it's obviously everything in FMCG. And where do you think Nestle are sort of falling down on execution? And what can you do to actually improve your sort of day-to-day in-market execution? That's the first one. And then the second one is just around the CMD. Can I just confirm the date for the CMD in November, is that going to be just unchanged?

Yes. So on the market shares, hopefully, we are gaining in many of the core areas, but we are not necessarily gaining everywhere and in every geography. I want to make sure that we raise our game and everywhere that it matters, we are in a winning position. That requires investments, investments behind the brands, in the value proposition, investment in growth platforms and innovation. So I come back to the same. Performance is okay, but I think could be better. So we need to raise our game there. And when it comes to the how, I -- and in terms of the execution, I think the complexity of Nestle, you know how big we are, how many categories, how many geographies, how many brands we got. And you know the work we have done on SKUs, for instance, lately, but we are doing the same type of exercise on the brands and the innovations and the growth platforms. Just trying to clarify where are the big bets, where are the big priorities and make sure that those we resource with everything we can and we should to make them thrive and win. Not everything is equal in the portfolio. So we want to make sure that we resource and support the best possible way the core. And in the same vein or in the same spirit, everything that has to do with simplicity, simplifying processes, simplifying ways of working, increasing the speed and agility of the organization, which is a work which we have started some time ago, but I mean there is still some way to go, will be very important and very critical to make sure that the people understand where we are heading, what are the priorities and go with full energy and full resources behind those. If we can do that, and I'm sure we can do that because we have done it in the past and we do it in many areas, we will win in the marketplace. There is no doubt in my mind. We have the strengths, we have the scale, we have the capabilities to make that happen.

On your last question, yes, that stands. There's no change. Actually, it's a good opportunity to get connected on all fronts with Laurent and you and -- so that's going to be good. No, no, we keep that. That's actually good coincidence that we have that in front of us. So we're working and starting and it's the best way for Laurent to -- and the whole team to connect with you holistically and completely. So that's true. So looking forward to that, I suppose. So Warren, thank you for your questions.

Next question is from Bruno Monteyne at Bernstein.

My first question is for Paul, the second one for Laurent, please. Now Paul, in your comments on the reasons for Mark to depart, I think I can sort of think about flawless execution in markets, forward to basics, leadership and all of that. Now if I go back 2 years, everybody would have argued that Nestle was the best at execution. It was massively admired and everybody wished it could be as good as Nestle. So something changed in the last 2 years. And so my question to you is like at what point did the Board feel that, that amazing execution we all admired 2years ago wasn't there anymore. And why did the change have to be so abrupt? Why at this speed? Because if you want to shift the kind of style of leadership, you can do it in a planned kind of way. So doing it so abrupt risk to spook investors in that. So why did -- when did the timing start? And why so abrupt? And for you, Laurent, sort of listening to what you say, you're talking about winning in all places with all brands, and it seems all very sensible and great. And you also mentioned that requires investments in the business. So am I hearing a slight shift in priorities that if you have to trade off margin development versus market share, that you would be willing to prioritize more of the market share developments rather than the margin development compared to your predecessor Mark?

Right. Sharp questions, like always, Bruno. First of all, well, in my question that you have there, you have two things. First of all, what changes it all of a sudden. I must say different situations, different resources, different qualities that are needed. I must say nowadays, I see that -- and we are suffering a bit of not really privileging our basic strength, which is basically marketing-driven, fueling our brands, investing in them, rolling out innovation, connecting and reconnecting and changing and knowing the preference of changing consumer. It is pricing and doing the price dynamics in the markets and not just pricing per se. Understanding the different levels of, I would say, also geopolitical differences in the world and acting to that. That is all what I feel is what we should really privilege now. We call it a bit internally forward to basics. And that doesn't take away what has been done in portfolio management. We have always done performance. We've got an acceleration, a very good and very well done. And that I have said -- I've said that, with Mark, we have done and taken up many, many things that had to be put in order and gotten some priority. We have done that. And now is the time for this permanent execution in the markets by mobilizing our people, aligning them behind specific actions with discipline and right direction, all in the framing of the nutritional health and wellness strategy and fuel that further, and we are doing that. It's not that we turn a page, there is a continuum, but there is emphasis that has shifted towards, I would say, in a nutshell, towards in-market execution and marketing as the classical dimension of marketing and fueling brands, et cetera. That's why we felt, hey, we're moving into that. And there, you have different, different -- yes, maybe quality is needed to do that. And one of the qualities that you need is somebody who really connects with the base and goes out there, motivates and rally the troops into the dynamics. That is what it is all about. And that is not something, you wake up in the morning, you need that. That rolls into it, the whole market situation is such that we feel and privileged that now. And that's where we are. Now it is abrupt. You know that. When you get there, you get -- it amalgamates, it coagulates into, hey, that's where we are, and from both sides, Mark and the Board. And then we say, look, it's the time. And once you are there, once you get that, get to that point, there is no meaning in dragging that on, hiding it, there is also a market and it's a good thing, you have to get it out when you get there. So -- and that's how from both sides, we said, "Look, let's do it this way." And that said, having also the huge advantage of having somebody that is action-ready now and with all the things we are just privileging to -- that we need. That's where that abrupt comes in. And I understand it from the outside say, something happened. Now it's only that fading and getting to a point. And then once you're there, we move fast. And that is -- that move fast is only in the outside world procedure such as. Now on these investments, et cetera, Laurent, I give that to you.

Yes. Thanks, Paul, and thanks for the question. Bruno. It's very, very essential, and I know that market shares are also close to our consideration. I don't see contradiction. I understand the question, I come back to that. I don't see any contradiction between gaining market shares and supporting the margins. On the reverse, we all know the correlation between the higher the market share, generally, the higher the margins, a market leader will tend to be quite profitable, especially if the market either commands a big -- has a big gap vis-a-vis number 2. Number 2 will struggle, Number 3 will have it very, very difficult when it comes to margins. And if you look at the equation, market shares drive the top line, top line drive the margins. So that's the way I see it. Now I understand the question in the sense that I'm making the case that we need to invest more behind the business, behind the brands, behind innovation, absolutely, if you want to gain share and drive organic growth, and your question is where does it come from. And the answer, and I come back to the model I want to follow, is this Strategic Virtuous Circle of value creation. And it starts with a big emphasis on productivity and cost efficiency to generate the margins to invest in the business incrementally. That's the idea. I want to create the space. I want to generate efficiency and resources to invest in the business. That's exactly what we will do.

All right. A few questions. Slightly -- yes, let's give some, and we're going to be very short in answers.

Absolutely. Yes, we will take two more questions, one from Sarah and the other one from David and then we will close the event. Sarah Simon at Morgan Stanley.

Yes. I'll keep it to one then. So Laurent, you were talking about productivity to feed the reinvestment in marketing. Now there's obviously been rumors several times in the last year of a big restructuring at Nestle. And Mark has always said, that's not the Nestle way. We don't do it like that. Do you still remain of that view? I'm just wondering where you think you're going to achieve the productivity if there isn't to be a sort of large cost-cutting program.

Yes, there is the what and there is the how. So determination to be cost productive, cost efficient is there. But it's clear that whatever we do, we'll do it the Nestle way. So that absolutely stands.

And we're not in a situation that we need drama. So it's just that continuous excellence that we drive through we have that now for many years. We just have to fuel it, put it in center place again, maybe, but I don't see any drama, but we're going to work, and there's going to be permanent adjusting and restructuring. I think that's the way we do it normally. Sarah, thank you for your question. Then the last question is from David.

Yes. David Hayes at Jefferies.

Just one then from me as well, I guess. Just in terms of the process for the new appointment, was there a process at all that was able to take place and where there others considered and approached for the role? Just trying to understand how you got to the view that Lauren is the right person for the role at this point?

Look, this is the most important job the Board has, is to have the right leadership, right structure, the right strategic direction, but the right leadership is one of them. And it's, in my eyes, one of the most important ones. This is a permanent process in our Executive Board is to know, hey, how are we to elect, et cetera? And then judging and that's my job too. I'm very close to the day-by-day operations of the company just because of interest and all that, to have permanent feedback, adjusting, tweaking, reporting. We have also the independent director that takes the Board and we don't -- there's check and balances in all these things because these are not individual decisions. This is a full Board assessing, seeing, discussion, also with Mark because there's permanent feedback mutually. And that's how it goes. We permanently also having antennas out, what's out there, who is out there and things like that. And not only for CEO, for all kinds of jobs, we have. And the Board is permanently involved in this process, be it for the Executive Board, be it for -- and especially for the CEO. And it's in that sense and not something that all of a sudden, we woke up, we had an Executive Board, we get to a discussion and we get to that conclusion. This has been somewhere, yes, not maturing into that decision but have been -- we have been observing, discussing, assessing, and yes, then once you get to, hey, let's do it mutually, let's get to this point, then decisions are made, and that's a very formal process then of seeing alternatives. But the alternatives didn't come up when we first, hey, we should now, we always have the eye on possible -- we have emergency replacement, we have organized replacement, projections. We are putting people in the right places to expose them to make them ready. This is a very -- I would say, not complex, but very holistic, complete process that we have permanently in place. And actually, we pride ourselves to do it in a way that is felt by the full Board also as, hey, this is really due process, and they feel very, very much involved in the decisions, each of them and collegiately as a Board.

Great. We have now come to an end of our session today. We look forward to engaging with you in the upcoming road show together with Anna. So we thank you again, and we wish you a pleasant day. Stay safe and healthy.

Well, thank you for your interest. Thank you for your questions. And look, we are always there for you, whatever you may have. And I think there's quite a few things set up already for the future. So -- and well, Laurent, it's for you now.

Thank you, and thank you to all. Looking forward to meeting you very soon.

All right. Thank you very much, all, and good Friday, nice weekend. Bye-bye.