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

Okay. I think we've been told to get on with it. So that's what we're going to do. So delighted to welcome Nestle to the stage and CFO, Anna Manz. Thank you, Anna, every year. You're very supportive of our conference. We really do appreciate that. And a lot to discuss. I'm probably going to sort of kick off maybe big picture talking about your favorite topic of real internal growth and the kind of the ambition to get to the 2%. In the first half, you're kind of tracking, you're sequentially improving, I think you about 1.5% and you've still got some headwinds from U.S. pet care, Europe. Maybe you can sort of just share your kind of confidence that you will be able to get to that kind of steady-state 2% algo. And maybe which businesses are you happiest with are tracking and which of them are kind of maybe further away from that kind of 2% level, a good place to start.

So you're right. That is my specialest subject. And we're making really good progress. We've now had full solid quarters of rig-led growth. And you see Q1 to Q2 improved from a 1.2% rig to a 1.8% rig. And if you look at our performance in Q2, we're actually about that 2% number now in coffee and pets. And we're right around there on confectionery, food and snacks. So the thing that's holding our rig is nutrition, and that's largely the infant formula recall. And there again, we're making really steady progress in terms of that, and we're on track. Looking forward, what gives me confidence around sustainable rig-led growth. Firstly, is the resource allocation that we're doing. So the work that we've done to really describe those categories where there is structural growth well ahead of the rest of the category. So those subcategory areas. 30% of our business sits in those areas. And there in the first half, we're growing over 7%. And that incremental investment in that space should see us accelerate. So that resource allocation is important. I think the other thing that's important with respect to regulated growth is execution. Yes. And there, again, absolute focus on if you've got the right taste, the right price versus the competition, the right distribution and visibility, the right media, then we're gaining share and growing. And there isn't any bit of our business where we haven't got those things right where we're not growing. So that's what gives me confidence moving forward. SP1 To be above 2 on rig, but to be consistently over 4% on organic growth.

But I guess within that, North America is your key geography, 35% of revenues and the rig, I think, was flattish. I think you described that as not acceptable. Clearly, you need to be more to get to the 2% of the group. As you look across the North American portfolio, what's your kind of outlook for the U.S. consumer -- and then how much of that kind of gap, I guess, the flat versus the 3% is kind of explained by category headwinds versus sort of internal execution -- because I guess getting that North America piece really moving is going to be a key unlock.

Yes. Yes. So no, we weren't happy with performance in Q2 on North America, more to be done. And the consumer was not the dry. I mean the consumer is weak in North America, but it hasn't deteriorated. It's consistent. There's kind of 3 things going on in North America in the quarter. Firstly, you've got weak category growth in frozen food, and I'll talk about that for a minute. You then got a couple of areas where we are underperforming the category. So that would be Gerber and creamers, and I'll come back to those. And then you've got a third bucket where there's a bit of phasing noise in the quarter associated with retailer inventory levels, timing of price increases. That, I'm not at all worried about. That's just timing phasing. You can ignore that third one. Yes. So maybe then just to focus on the first 2. Firstly, the category as a whole is in slight decline. It plays to the more challenged area of the consumer. Equally, there are big pockets in that category that are growing much faster. And the sorts of trends that where we're seeing that faster growth is around world cuisine around high fiber, high protein, around actually the very small pack sizes or the single pack sizes and then the big family value packs. So it's about making sure that we're playing in the right places in the category to really take advantage of the growth that is there. We are doing a better job of that. Our performance is improving. There is more to do to be consistently growing. Gerber, we've talked about before. It is a journey to turn that around. And the proof point on Gerber will be really the Q1 shelf reset. For those of you that haven't followed the Gerber journey, but I suspect most people have. We've been talking a little bit to the Yoga versus the busy working on -- so not glass jar, we need pouches. We need the formats, the flavors. We've got that right now. We've been working on that with retail over the last year. We've got product in production, but the annual shelf reset is really when we should regain our shelf space. And then the third 1 is creamers, and that 1 annoys me. It annoys me because some of our issue in the quarter was production, and that really isn't acceptable. So we've made the interventions there. Really good momentum on the fast-growing part of the category. A bit more to do on Coffee mate, but good progress. So in short, the U.S. consumer, we're not seeing material change. It is all about our execution. We're making good progress with coffee and pet. And there's a couple of areas where we know we need to do better, and we are intervening and you're seeing that improvement, and you'll see it come through.

I mean maybe just double clicking on U.S. pet food because it's your best most important cell and you talked about like a temporary sort of destocking because retailers no longer need as much safety stock given you've got wet cat capacity. But how can we be sure I suppose, it's a 1 quarter issue because at the same time, we are seeing more generalized destocking happening across U.S. retail because U.S. retailers are taking a more cautious view about the outlook for the U.S. Just trying to understand, do we kind of just look at the sellout of cat and dog and then kind of conclude that if it's a 1-quarter issue, it should marry up in the third quarter as the sellout data that we can see on Cateno. I'm just trying to sort of -- you say it's like a bit of a nonissue. But I think for the market, people are still a bit worried that it could you beyond 1 quarter, I guess, so that's impact that I would point you to the sellout data because that really tells you what consumer offtake is -- and that really tells you around the momentum and the health of the brand.

And you're seeing very strong sellout performance through Q2. But for those of you watching the scan data, that strong sellout in cat is continuing. And there -- so firstly, cats are growing, growing 2% to 3% as people go back to work post-COVID, Capstar and easy pet to have. And cats from a CFO's perspective, they're just -- they're brilliant because you premiumize in Cat because your cat enjoys the experience, and you can see your cat enjoying the experience or you're getting better connection with your cat. The lovely thing about cats is they're super picky eaters. So if you give them a better food, they won't go back and eat the old food -- and that is why being able to innovate into the cat space is wonderful because it gives the opportunity for the consumer to trade up. And that's what you're seeing actually drives the wet cat category now. So it's growing kind of 7%-ish the fact that we've got capacity, and we're bringing all of our flavors into it, that's what's driving it. So you see the momentum. In terms of kind of the stock issue in the quarter, -- there was -- I mean, there is a slightly broader retailer desire to manage cash flow and stocks, and you see that more generally. And we had a bit of a double whammy on pet food specifically because -- when you've got a project that you are being inconsistent around supply, the retailer algorithm seeks, particularly if that product is a product that is got great consumption and is being pulled off the shelves. The retail algorithm looks to try and get more than its fair share of that product. And so they order more. I mean you see the order volume go up significantly if you're in poor supply. -- and retailers hold on to safety stock. And so what you've seen is that situation reverse as we've come back to full capacity, and we're now supplying very consistently, the safety stock has fallen at system.

And your market share is in U.S., are you happy with them?

Growing nicely. Yes.

Okay. Interesting. Maybe moving to coffee because coffee has delivered pretty strong growth for you guys over the last 2 years, driven by pricing. But as coffee prices moderate and pricing contributes less to grow, what does the kind of coffee growth algo look like? Because from the volume data we can see at the moment, it does look a little bit softer. I know you took a high single-digit price increase from Starbucks at the end of the quarter. So you would expect some kind of elasticity from that. But how has that kind of continued? Are you -- is there anything around coffee on volume that is causing any angst or is it very much in line with how you see it tracking?

So maybe just to deal with Q2 specifically, and then I'll talk a bit broad about coffee. So Q2, I think we saw slightly weaker volumes in the U.S. And to unpick that, Nespresso grew very nicely with high single-digit growth and volume growth. Nescafe grew very nicely with, again, high single-digit growth and volume growth. And there was an impact in the quarter specifically with respect to Starbucks where we took price. So -- and the way to think about coffee is I know we think about my mom when I say this. Most people have have coffee in the cupboard as well as out that they're using. And so when you take price on coffee, -- the first time the consumer goes shopping, and they see the higher price. I think, well, I've got coffee in the cover. I don't need to buy more this time. Let's see if it's on promo next time I go shopping. And you often see a couple of weeks of that cycle and then as the stocks dwindle, you then buy more. And that's why you see an initial volume reaction right after a price increase. We've seen it again and again, and then it normalizes. -- that's what we're seeing in the U.S. More generally speaking, good structural growth in coffee. What we're seeing is coffee move beyond the the traditional need to date of hot and first thing in the morning, into refreshment, indulgence, functional. We're seeing convenience, so RTD. And experimentation, actually, with the younger population really really grown all of those things as structurally driving coffee. With respect to us, we are really focused, therefore, on those areas of the category that are exhibiting faster growth. So specifically cold. There's much more cold coffee drunk in coffee shops than at home. And so really driving the offerings to capture that opportunity. RTD coffee, so it's a convenience, driving portion coffee because we have a small share of portion coffee in the U.S., which is a significant opportunity and then continuing to drive penetration of Nescafe across the emerging markets. And so that will systematically drive the category. And to your innovation question, it is all about innovation. To give you an example, to take coffee into the refreshment space, we've launched a Starbucks refresher concentrate, which is a clear fruity concentrate made with green coffee, so it has some caffeine -- it isn't taste of coffee. It's a fruity drink. And that takes that cafe refreshment moment into the coffee aisle and the recruitment that we're seeing with that product, I mean, huge purchase intent in that much younger generation that don't necessarily make their way into the coffee aisle and then great refill. So that's how we keep recruiting into the category.

I'm going to maybe switch gears. Anna, talk a little bit about emerging markets because there's so much focus on the U.S., your Asian rig has been super impressive and quite broad-based some investors sort of think maybe that's you benefiting from supply chain challenges from local players, maybe you can hit that? Or is it just that the underlying food and beverage markets are just in quite good shape in those regions? And maybe you can kind of unpick a little bit what's happening on the ground move, which brands are contributing and sustainability, I suppose, of this I think it was mid-single-digit rig in the region. Just if you can help us a little bit unpack it.

So we've got really, really good broad-based growth across the emerging markets. And I'll put China to 1 because that's probably a different question. And that's across both Lat Am, Asia as well as Africa. And we have -- I think 1 thing because people always ask about China and India, India is 5% -- China is 5% of sales. But we have 6 or 7 markets that are in that 2% to 4% of sales size across the regions, so Brazil, Mexico, Central and West Africa, the Philippines, Malaysia. So really, really broad-based exposure. What we're not seeing particularly is a change in the underlying economy. So it's not consumption driving growth. It is market share-led growth. which is a good thing. And that, frankly, is coming from this consistent improvement in execution that we're driving across the group, coupled with an improvement in our innovation pipeline. And that is what is allowing us to sort of very consistently execute.

You said on that China is a different story. And of course, it is I think we're about a year on from the China reset. Maybe you could share your thoughts with kind of how it's going, how you feel about the work that you've done on the ground in terms of route to market and making it much more consumption-led rather than distribution sort of push.

Yes. So a year ago, we said we needed to drive a consumption-led model in China because for a good number of years, we have been driving growth in China by driving distribution of our brands from Tier 1 to Tier 4 plus cities, and we haven't done a good enough job of driving the consumer pool. So what you've seen us do over the course of this last year is, firstly, revisit our route to market. So consolidate distributors where we had a few places where we had too many take some stock out of the system where, in some cases, it was a bit aged. And we've also reviewed our own sales forces. So you've seen us do things like combine what was effectively 3 different infant nutrition sales forces across illuma, NAN and the specialty brands into 1 very targeted sales force. You've also seen us do things like reduce our SKU count. So China is a very fast pace market. Innovation is really important. And we had done a lot of innovation, but it meant that we ended up with a proliferation of SKUs. And actually, what we've done is focus it right down so that we're bringing the right pace of flavor innovation, for example, in coffee, -- so where we're bringing the sort of rapid flavor innovation, but we're doing it on a rolling basis with real focus on which SKUs were driving. And that is helping us move from a place where we weren't seeing volume growth, for example, in TD, and we are now. We've also been very thoughtful about what influences and which -- what things our consumers are particularly focused around. And so for example, Sharp wafer, which is a confectionary product. linking up with some gain, some games and doing some special edition packs is really connected with the consumer group that consume that brand. So being really thoughtful about how we're doing brand marketing and influence and marketing. So good progress overall, but more to do. I would say the end markets are still challenged. So our categories in China are still declining in value terms to as a category. So it's going to take us a little bit of time to go from a share loss situation to consistently holding share and then outperforming our categories. though obviously, now we're through the destock, we're going to have a period of easier comps comps aside, I'm really focused on our market share and performance versus the category where we're seeing stabilization and some improvement.