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

Yes. So let me talk around it a bit because I think context is important here. So firstly, what I would say is the fundamentals of the pet care category that underpin a sort of medium-term trajectory of mid-single-digit category growth are really strong. And they are increasing pet adoption, which we're seeing globally, an increasing desire to humanize pets and treat them as members of the families, less babies, more pets and that drives premiumization. And then the third one in the emerging world is increasing calorific coverage. So the U.S. is at 90%, but Mexico is at 60%, India is at 20%, actually, Eastern Europe is sort of 70%-or-so. So that's the opportunity. Now in the U.S., there is also great fundamentals in that we're seeing growth in pets. Actually, we're seeing really good growth in -- good growth in cats. Dogs are flattish. But actually underneath that, families with multiple dogs are not replacing a third or a fourth dog when they pass away, but more families are coming into dog ownership, which from a category fundamental thing is a good thing. And the desire to treat dogs as members or pets as members of the family absolutely is very present and stronger in the younger generation, and that's who we see coming into pet ownership. So the fundamentals are good. But the -- it's been a lumpy category for a number of reasons. Firstly, in COVID, we saw significant pet adoption accelerated into the period. And that probably has meant that we've seen slightly slower pet growth since even though it's growing. Secondly, because of that, we have seen capacity shortfalls. And because the category has been lifetime capacity, we haven't seen the innovation and innovation is what drives premiumization. That humanization of the pet that I want a new experience to give my pet, and its innovation that drives me to try. So that has held the category back. And then thirdly, you've seen a period of extreme price inflation through '22 and '23. So we were taking about 25% pricing over that period. And then in 2024, you've seen all of this come together. So less price inflation. Through the year, we then saw the return of a more normal promotional environment. By normal, I mean, less deep than prior to COVID, but we have promotion we didn't have in those previous 2 years. That was deflationary and coupled with the lack of innovation driving the premiumization. By the end of 2024, the category was flattish, which is -- felt quite subdued. As we've moved into this year, and we're sort of coming through that promo period, and we've got a little bit more capacity and coming into the category, we've seen it in a 12-week window, probably the highest about 2.5% category growth. It's been a little bit slower in the last few weeks, but pets eat less in hot weather, these things come and go. So that's the sort of shape of things. Where are we, though, on that capacity journey. We still do not have enough capacity in wet cat food. And the growth in the category, the acceleration that we're seeing is in cats, which is wonderful because pet cats are wonderfully picky eaters. And somebody told me, a cat can go for nearly a week. If it doesn't -- if it didn't like the food, not eating, whereas a dog, it's a matter of seconds. So cats are good. So we're seeing that nice growth in wet cat food, but we don't have the capacity that we need to meet it in the U.S. at the moment, and that is holding us back. We get more capacity this quarter in Jefferson. And then we've got some more capacity coming at the end of the year, which will be really helpful in terms of reigniting growth and category growth as we then bring more innovation.

There's also a new chambers -- new segments like refrigerated is a segment. We've seen General Mills are now making a big push into that area. You talk about pet therapeutics as one of the big things at the CMD. Maybe you can sort of touch on those 2 next.

Yes. So those are both faster-growing segments. And of the 2, if I just -- to compare them a minute, the one that we are really focused on growing is therapeutics. What is therapeutics? It's specialty diets, often prescribed by a vet to help with Pet Nutrition and Health. And actually, you can do a lot with pet health with the appropriate diet. And then, we have the R&D. It's very technical. The investment that we are making is to work with vets and veterinary schools around nutrition and educate them in this space and educate them in our products and how they solve problems. And it's an area where our share is 10% of the sector for the category, which is significantly lower than it should be given our share elsewhere and our capabilities. And so the reason that we're very focused here is it's a high-margin, fast-growing area, and we have the R&D capability. So what do we need to do? It's the investment in the footfall to get to those vets. I am more excited about that as an investment because I am very clear on the returns than I am about fresh. Now fresh is also growing, and you've got different types of fresh. You've got frozen, you've got chilled, you've got some ambient offerings. Now we know a lot about frozen and chilled and frozen and chilled route to market and the complexity and the margins in frozen and chilled route to market. And it's a harder place to sustainably win profitably. And so what you see us doing there is making some smaller scale investments. So we've had a stake in just food for dogs for a couple of years now to really explore the space. We're also -- we have a number of innovations in this space that we are learning from. But we want to be really clear how that investment will scale before we put significant funds behind it.

I want to switch gears to China because it was a big topic in the second quarter. You're making quite a big change to the model in China. You're moving much more to kind of consumer pull from a distribution push. You also, as part of that, taking inventory out, you got new management in. So my question really is it's that -- how easy is it to actually make that pivot? Because it is quite a fundamental change? And given the speed of change in China is dizzying, so quick, you're trying to do that whilst the market is so dynamic. So just interested in the concept of how you go about doing that?

Yes. So it's an important change. And while 1 level, 3 to 4 weeks, too much stock is not a dramatic number. It's the difference between having control of your distribution network, and therefore, the pricing of your products through that network so that everybody is seeing your products as profitable and therefore, behind them and not. And the other thing is it gives you freshness. So that's why it's really important that we get it right. Now in terms of driving consumer pull. This is about capability uplift in the market. Now there are areas where we're doing a really good job. So for example, NAN, which is the Nestlé Infant Nutrition brand as opposed to Illuma, which is the legacy wise one. It's doing really well. It's consistently gaining share because we've absolutely got that consumer offering right. And that consumer offering is a special diets or special formulas for babies that have allergies or specific intolerances, and we have the R&D and we're delivering on that. And because we're delivering on the consumer need that we've got really nice growth. We need the same quality of consumer-led growth on the Illuma side and sharing the capabilities there is one of the ways that we will raise our game on consumer pull on Illuma. Another area where it's working well, and we need to learn from is in out-of-home, where back to your speed piece, I think we've cracked the speed piece and it's working well. We're working with a customer that knows the consumer well. So in out-of-home, we are a big provider of the dairy products that go into Luckin Coffee. For those of you that have been to China, Luckin is the really big coffee chain growing really fast and has a dizzying pace at which new products are launched, new -- 2 new products each week, and they're fascinating products. I mean last time I was there, I had a cheese cappuccino and a prune one.

Sounds delicious.

Actually, they were, genuinely, genuinely they're absolutely delicious. But there, we've got the R&D pace and the product development working really well, and we are delivering on what is a weekly innovation, ideation, innovation cycle with Luckin. So we know how to do it. What we need to do is build that capability across the organization, and that's around uplift of capabilities. And that's exactly why we brought a great leader in across from the Philippines, who's been doing it there very successfully to lead the Chinese business and support with the uplifted team.

Can I ask you about the pricing rig dynamic?

Yes.

I think you said that most of the pricing is done in chocolate. Is there still more to do in coffee? And are you seeing actually new pockets of food price inflation emerging again? Some countries are starting to see it pop up again as a topic.

Consumer price inflation.

Yes.

Yes. So the 2 categories where we are seeing consumer prices move, and that's because of the commodity cost is a coffee and cocoa. In terms of where we are on that, we have, as we've said, largely taken the price that we need to take this year on confectionery. There's a little bit more to go, but not much. And on coffee -- and by the way, that was 10% pricing. And on coffee, where we've taken about 5%. We've taken the majority of price, but there's a little bit more in the second half.

And the elasticities that you're seeing?

Yes, where we expected them to be. So it's worth just saying on elasticities. There's 2 elements to elasticity. There's the absolute price point and whether you go over a price -- sort of psychological price point for the consumer, but there's also elasticity vis-a-vis the competitor set. So elasticities can be a bit distorted if you take price, but your competitor doesn't. And so you have a period until they do that it distorts things. I say that because I think we have led on pricing in both coffee and confectionery. And so generally, we go first. Actually, I'm aware that there's been quite a significant number of announcements around price increases more broadly by other players in confectionery in H2, which we won't be taking. But largely, so confectionery, we're seeing what we expected to see. It's a little bit more price elastic than coffee. That's to be expected, but playing through. It's a bit more elastic in LatAm than it is in Europe, but where we thought it would be. Coffee, performing well. Actually, we've been slightly positively surprised with the price elasticity on coffee. Coffee is a deep, deep habit, and I say that smiling knowing that it takes an awful lot for me to shift my coffee behavior. And I think that is true for many people. We're seeing some sort of interesting things. So obviously, pricing has come up more on roast and ground just because there's more green coffee in it. And that's moved people a little bit into soluble, which is good. Pricing is less elastic on soluble and even less so on portion where that the pricing impacts also have been...

What about Nespresso because that's obviously a slightly different cycle in terms of people don't buy it as often. Is there any kind of concern about some maybe delayed elasticity?

It's a good question. I mean people don't buy it as often. And while we see no evidence of that yet, we continue to watch it closely. But actually, Nespresso has been very -- we've taken our price increase as well and that's partly because we're investing behind our brands at the same time. Historically, in Nestlé, for the last few years, when we've taken significant price increases, at the same time, we've been reducing marketing spend. I think the difference this year is we're increasing marketing spend where we are taking pricing, and I think that's helping us.

And on the 6 big bets on the innovation, obviously, it's quite a big change in terms of focusing bigger, bolder innovations. I think you want to build CHF 100 million platforms over multiyear. Can you give us maybe an update on how those big bets are doing? Any of them that you'd call out, any of that you're scaling more quickly? That would be really helpful.

Yes. So we've got 6, who said they'll reach CHF 100 million. We've already collectively got CHF 200 million in the first half, and we've got good momentum. I would say all of them are on track. We've got kind of 3 that are a little bit ahead, some more than others, 3 that are there or thereabouts, but usually, it's because we've been a little bit slower to execute because we wanted to get the proposition right rather than any kind of consumer response. Where have we got really good performance? Fancy Feast, the pyramid cat food. And so this is one where it's all about scaling up manufacturing and actually, at the moment, we can sell more than we can make. The Sinergity is the infant nutrition brand with 6 HMOs and probiotics, which together really build gut health for the infant and very discernible health benefits, is doing very well. And that sort of innovation, these are the ones -- the thinking behind big bets, which goes broader than these 6 actually, it's about really making sure that where we have a winning proposition that should work everywhere, we roll it out with pace. Because as I've looked backwards on what's been the single biggest reason we've underperformed our innovation business cases, it's because we haven't launched the brand in the countries that we expected to launch in when we wrote it because when we got there, the parties have moved on. When you've got a winning proposition that is going to work in all countries, we should roll it out. And that's what you see us doing, both around the ones we call big bets, but there are also the same level of focus and clarity at the zone level. So for example, KitKat tablets in Europe, is going Europe-wide. So that sort of clarity is what we're driving clarity and focus.

Slightly surprised you didn't mention ice coffee as one of the big bets. I mean in terms of the rolling out quicker. I mean, it's a great product. And if you can -- can you maybe double-click on that? Where are we that liquid roast? And how many markets is it in? Is it doing what you want it to do? Can you go quicker?

Yes. No, no, it's doing what we want it to do, and it's a great product. It's interesting, if you just compare it with Sinergity and Fancy Feast for a minute, the consumer behavioral change is bigger because Fancy Feast you already feed your cat -- wet cat food, this is a different, more interesting better one, which the cat loves. Same with infant formula. How to consume infant formula is completely described, it is a better one. Nescafé Espresso concentrate is a bit of a new concept. And so it takes a little bit longer to communicate to consumers what it is and how to consume it. So it will naturally be a slightly slower build, but it's building really nicely, and we've rolled it out. I don't know exactly how many countries because it's changing by the day, but we're exactly where we want to be.

I'll ask a final one just on margins. I think -- I mean, you outperformed in the first half, 16.5%. I think you said the second half will be 100 basis points lower than the first half. So 15.5%. You still reiterated your full year margin guidance importantly. Can you maybe walk us through a little bit of that step down from H1 to H2? How much of that is tariffs? How much is, if you can, but give us buckets -- how much is just higher COGS and currency, that would be helpful?

Sure. So -- and again, maybe just to step back a bit, our margin guidance for the year was to be at or above 16%. And we gave that margin guidance before we've seen significant increase in commodity costs before tariffs happened, and before the U.S. dollar weakened. And I say that because a lot has changed. We're holding our guidance, and we're holding our guidance because we're doing 3 things. We're driving efficiencies hard in the business. We have been a bit quicker to take pricing, and we worked very hard to mitigate the tariff impact through changing footprint, supply footprint, ingredients, but also making sure that we moved product into the U.S. ahead of tariffs. That has all benefited the first half. Now as I look forward to the second half, actually, the big shift between the 2 is, yes, we have some bigger tariff impact. But the large shift really is the fact that the commodity cost because of the timing of our hedging are very much weighted to the second half. So we'll see that flow through to the second half. But as I look forward to 2026, we've got cost savings, which will continue to come. You'll see us continue to act to improve our gross margin through innovation and pricing. You'll see us -- you'll also see that depending on how commodity prices play out, we should be in a slightly better commodity environment given how coffee and cocoa are moving and all of that will be allowing us to see a margin improvement.

I think we're in the buzzer, Anna, sadly. So I think we're going to have to cut it there. Thank you for your time. I'm going to figure out from, David, whether there's a breakout or not. Okay. No breakout. So thank you, Anna, for your time. Always appreciated your support of the conference. Thank you.

Thank you.