Consumer Analyst Group of New York Investor Conference 2018

Feb 23, 2018

Summary

The 2020 agenda combines portfolio upgrades, stronger innovation and cost reductions to target mid-single-digit growth and 150–250 bps of margin improvement. U.S. growth, e-commerce and high-growth channels are central priorities.

Morning, everybody. In our final presentation of the conference, we would like to welcome Nestlé. Nestlé's strategy remains one of commitment to nutrition, health, and wellness to keep on top of changing consumer demands across its impressive breadth of category and geographic exposure. Management is increasingly focusing capital behind its higher growth leadership positions of coffee, pet care, waters, and nutrition, while it has also intensified its efforts on portfolio management, as evidenced by a number of recent acquisitions in high growth segments and the sale of its U.S. confectionery business. These are just a couple of the drivers that Nestlé believes will help deliver sustainable mid-single digit revenue growth by 2020. In aspiring to deliver a stronger combination of growth, cost discipline, and improved profitability, management has also more recently set a target to improve the operating margin by 150 to 250 basis points by 2020, the first time the company has ever provided such a target. Here to take us all through it are François Roger, EVP and CFO, and Steve Presley, who has been CFO for Nestlé USA and is the newly appointed CEO of Nestlé USA. Thanks for being here. Thank you, Andrew. Good morning, everybody. I will take the disclaimer as read. During my presentation today, I will cover mainly two topics. The first one is our growth agenda and our ambition to go to mid-single digit growth by 2020, and I will detail the building blocks to get there. Then I will talk about our continued focus on efficiency and margin improvement. I will start with just a quick summary of our portfolio, just as the reminder. As you know, we have a very diversified portfolio of assets, both in terms of countries, in geographies, and categories. We are not actually dependent on relying on any single geography or country or any single category. From a geography point of view, our largest market is the U.S., with $28 billion of sales. From a category point of view, our largest category is beverage, which includes mainly coffee and cocoa malt beverages, which accounts for 23% of our sales. From a geographic point of view, as you know, we operate in 190 countries. We have a large number of brands. Many of them are local or regional or global. Most of them are iconic brands, and they resonate very well among consumers, including with millennials. We have 34 brands whose value is above $1 billion at retail value. Short recap of 2017. We had sales of almost CHF 90 billion. Organic growth at 2.4%, which is clearly below our expectations. Real internal growth at 1.6%, which clearly puts us, as far as volume is concerned, at the higher end of the industry. Our underlying trading operating margin increased by 50 basis points on a constant currency basis, which puts us on the right track for our margin improvement by 2020. The 50 basis points is actually quite good, taking into consideration the fact that we had CHF 900 million of additional cost coming from commodities last year. If we look at our broad range of categories, you can see that all of them are actually positive by volume, which is the blue part of the bars. You can see that all categories but one are actually fairly close to the average group, which means that we have a very consistent portfolio of assets. The only category that was not growing really is confectionery, still positive by volume. If we adjust for the U.S., we would be at close to 1%, and it was a little bit at a lower level due to the timing of Chinese New Year, given that we have a sizable business there with Hsu Fu Chi. Moving now to our ambition for 2020 to move to mid-single digit growth. We have three building blocks, fixing the base business, and we made some progress already last year with the stabilization at Yinlu and the relaunch of Gerber. I will come back to that on my next slide. We made some progress as well in terms of portfolio management with the disposal of U.S. confectionery, with a couple of acquisition from Atrium to Blue Bottle Coffee, Sweet Earth, Chameleon, Terrafertil, and so forth. We have announced as well the strategic review of Gerber Life. I will cover most of these topics in my coming slides. The key growth engine is on our base business, on our high growth categories. There we have achieved quite a lot already on 2017. If we look at our performance for e-commerce, +32%. If we look at Nespresso in the U.S., we were at mid-teens in terms of growth, strong development of our business, pet care in emerging market, and so forth and so forth. I am just talking there, by the way, of drivers of growth. If I were talking of geography, I would certainly point the U.S. We have to get growth in the U.S. We were flat basically in the U.S. last year. We have to get growth in the U.S. to get to our mid-single digit ambition. I will not cover that specifically because Steve is going to talk about it in the next few minutes. Starting with addressing the underperformers. Gerber has been a drag, clearly, for Nestlé for many years. We have relaunched the entire range and repositioned the entire range. It goes beyond packaging. We changed the packaging, but we launched a total new range of organic and natural. We simplified our number of SKUs as well. We expect to have 90% of our range which will be GMO-free by the end of 2018. We already saw some signs of it because we did that in the middle of last year. We moved from negative to flat already as at the end of last year. Yinlu is another asset that was underperforming. In 2016, we were at -22%. We finished the year last year slightly positive, so we are happy to see that trend. As you know, Yinlu is in China, is made of three large categories. One of them is peanut milk, which is still underperforming. We are still working hard in order to fix it. The second one is congee, which is a traditional Chinese breakfast, kind of a porridge, which is actually doing well. We are back into positive territories. The third part of the business is ready-to-drink coffee, where we are doing actually very well and is growing fast. Addressing underperformers is really the first driver of our growth for 2020. Once again, we did some progress last year. Moving to the next one, portfolio management. We made some progress already in 2017. You can see that roughly speaking, what we have done is to swap CHF 900 million of sales that were declining with our U.S. confectionery franchise and swap it for a certain number of assets for the same value of sales, CHF 900 million, which is growing at double-digit growth. That means that this swap will contribute about 20% of additional organic growth on its own. What we have bought, we have bought Atrium, which is a vitamin mineral and supplement company, which sales are about CHF 700 million. They are very differentiated product. They are growing double digit. We bought as well Blue Bottle, which is in a new space for us, which is coffee shops, but they are in restaurant ground as well. We bought Chameleon, which is the leader in the U.S. of organic cold brew coffee, and we bought other assets with plant protein-based products, Sweet Earth, Terrafertil, and so forth. It is very good as well for the bottom line. If I just take the swap from confectionery to Atrium, for example, we are disposing of a business with a low profitability and acquiring a business with a much better profitability. It has some positive impact on the bottom line as well. We are moving further with active portfolio management. We have announced the strategic review of business that you might not have been aware that we had it, Gerber Life Insurance. It was part of what we acquired in 2007 when we bought Gerber from Novartis. We have been a good owner of that business over the last 10 years. We grew it from $400 million of sales in 2007 to $840 million last year. That is clearly a business that is non-core to us, even if we developed it nicely. That is a regulated insurance business, which is not something that we are especially expert into. We remain fully committed, though, to the Gerber business, which is about meals and drinks and infant formula. That is obviously a core business for us. Moving now to the last part of our growth agenda, which is certainly the most important, which is growing our best business. This is very much about innovation. Innovation is really at the heart of everything we do. We renovate and innovate about a third of our products every year. Last year we even accelerated it. We launched or innovated or renovated 1,200 products last year, which is an acceleration from the pace that we had in the past because it is 8% more than what we did in the past. Innovating means what? It may mean new products. Obviously, a lot of it has to do with naturalizing our products, making them more natural, organic. This is what we do there with Maggi, what we do with dairy, what we do with pet care even, with, for example, Beyond for Purina or Merrick. Innovation can mean as well other forms like premiumization, which I will cover in a minute. It can mean scientific innovation, which is what we do with, for example, oligosaccharides that we introduced in some of our infant formula with NAN here. Innovation can mean as well new business models such as, for example, direct to consumer, and I will elaborate a little bit further during my presentation on that one. Innovation may mean premiumization as well, and this addresses clearly one part of consumer demand. There is clearly a polarization of consumption towards affordability at the bottom end and premiumization at the high end. As far as premiumization is concerned, we do a very good job. We increased the share of premium products from 11% of our total sales in 2012, five years ago, to 21% last year. These products grow two times faster than the average of our sales. We have as well a benefit on the bottom line because these products have an average, an operating margin which is around 300 basis points better than the average of our other products. I have a lot of examples for that. S.Pellegrino or Perrier for water. We could take Häagen-Dazs for ice cream. We could take Nespresso for coffee. We could take illuma for infant nutrition, for example. So we have many, many examples of it, and we will continue to drive that. I'm confident on the fact that we should have one fourth of our portfolio coming from premiumization soon. Emerging market is another growth driver. We have a strong franchise there. We have almost CHF 39 billion of sales in emerging market. We have been in many of these markets for long. We opened in China or India around 1870. We opened in Brazil in 1921. So we have a very strong franchise, very good growth. Last year, we grew in emerging markets in terms of organic growth by 4.7% to be compared with 0.7% in the developed world. That's really clearly a growth driver. We happen to have a better margin as well in emerging market, which gives us some support on the bottom line as well. You can see that we have increased our footprint moving from 32% of our sales 10 years ago to 43% last year. The opportunity doesn't stop now. The opportunity is very large because of our exceptional footprint in this market. I'm just indicating one opportunity that we have for coffee, for example, where consumption is on average quite low. If you look at the number of cups per consumer in China, India, Africa, it's below 15, it's above 140 in the rest of the world. We are confident that even in markets where there is a strong tea culture, we can move consumers, and especially younger consumers, progressively to coffee. You have the example of Japan, which illustrates extremely well that opportunity. Growing our best business can also be valid with businesses that have been there for quite some time. Nespresso is an amazing business. We launched Nespresso 30 years ago. In spite of the fact that we don't have any patent protection on the original system, in spite of the fact that we have thousands of compatible offerings in the market, we still continue to grow mid-single digit with that business, and we have a business which is north of CHF 5 billion. We grow in our three geographies, in Europe, in Asia, in the U.S. And the U.S. became our second-largest market recently, and we grew at about 15% last year in the U.S. And we are even in the U.S., in the third position as far as portion coffee is concerned. We keep on innovating with Nespresso, launching new SKUs. We launched, for example, 13 new ones last year. We increased our footprint. We opened 80 new boutiques last year. We entered 8 new countries and we launched as well and we expand with our new system, Vertuo, which is doing long coffee. We entered into new market after the U.S., after France. We entered last year in Canada, in Australia, in the U.K., and we will continue pushing further in new markets. Vertuo is a new system that does long coffee, contributed to almost one-third of our growth last year. Driving growth may come from new forms of access to our products for consumers, and e-commerce is one good illustration. You can see that there has been a significant acceleration recently. E-commerce accounted for 6.2% of our sales last year, and if we exclude Nespresso, it grew by 32% last year. It's really driving growth. It is highly concentrated in terms of categories, on four categories: pet care, water, coffee, and nutrition. They represent 90% of our business. So pet care, water, coffee, and infant nutrition. And it is highly concentrated as well in terms of markets, because we have six markets which are contributing as well, 90% of our e-commerce sales. This is the U.S., France, Germany, the U.K., China, and Japan. We clearly see that as a good growth driver with no negative implications at all on the bottom line. As I said earlier, innovation can take different shapes and form. It can mean as well, introducing new engagement with consumer and going direct to consumer, DTC. This accounted last year for 8% of our sales. We do it in many categories. Again, Nespresso is part of it, but we do a lot of it with Nescafé Dolce Gusto. Blue Bottle is a good example of it, our franchise with ReadyRefresh in the U.S. 20% of our water sales in the U.S. are actually direct to consumer. We do it even for confectionery with our KitKat stores, which we call Chocolatory. We had some originally in Japan. We expanded it in Malaysia. We expanded it in Australia as well. We like DTC because we control the entire value chain, because we have a better engagement with consumers. We can do promotion much faster. The price point is higher as well. Even if distribution costs are higher, usually we have a better margin with direct to consumer. We are investing heavily in that space as well. Moving now to conclude on margin. We improved our margin by 50 basis points on a constant currency basis last year, 40 basis points on reported basis. We are clearly on track for our ambition to improve our margin by 150 to 250 basis points by 2020. The main building blocks is really to attack our structural cost, as I presented in our capital market day in London in September. We had the ambition to take away permanently between CHF 2 billion and CHF 2.5 billion of cost from our P&L. I'm saying permanently because this is something that we do not want to reinstate. We are delivering as per the plan. We took away about CHF 500 million of cost last year, mainly in G&A and procurement. Manufacturing will come, but we need a little bit more time, as we shared originally with you. We are really delivering as per the plan. The idea is really to attack non-consumer-facing activities so as to protect our capacity to grow. That being said, we mentioned as well that whenever we can reap off some benefits in terms of marketing spend, we do it, and we do expect to get about CHF 500 million of savings between now and 2020 by being more efficient in managing our marketing spend. We got a significant portion of it last year, which explained the fact that we marginally decreased in terms of absolute value in marketing spend. We got it through efficiency. You have some examples there. Obviously, we are spending more in digital, which accounts for 32% of our total spend, but we are centralizing some activities. We reduced the number of agencies we work dramatically, consolidating whenever we can, not in a single market, but at regional level. We do more production in-house as well, and this has been a critical factor for margin improvement last year as well. To conclude, we are confident about our growth agenda, mid-single digit growth in 2020, even if the landing point of 2017 was a little bit disappointing. We are aware of the fact that we have to accelerate our growth from now on, and the U.S. will be a critical part of it. But we are very confident on the fact of getting there through a combination of fixing the underperformers, addressing whatever can be addressed with these underperformers, be active in portfolio management, and accelerate our high-growth categories. We are not worried at all either on our capacity to deliver our margin improvement by 2020. I leave the floor to you now, Steve, for the U.S. Thank you. Thanks, François. The last presentation of the conference. I'm not sure if that means I'm batting ninth or I'm the closer, and I'll pretend I'm the closer. Anyway, why don't we get going? Just to set the stage, I've been the CFO for six years for Nestlé in the U.S., just newly appointed last week as the CEO. What I'll talk about is just how we drive value creation in this kind of new U.S. reality. To remind everybody, look, obviously, U.S. is a key contributor for Nestlé globally. It's 30% of the globe, over $27 billion. What I'll primarily talk about today is our core food and beverage business, which is roughly 40% of the U.S. If you look at it, you've probably seen this 50 times this week, but we're competing in an ever-changing food and beverage landscape. Everything in this business is changing rapidly, whether it is we are in this kind of sustained low growth environment, which I think is going to continue. Consumer expectations are changing, and they are changing faster than they ever have. Channel shifts are going on at an amazing rate. This kind of evolving market structure within the categories we play, whether it is small food kind of disrupting big food, private label expansion from our retailers. As we all chase to find the same growth, I think that has been a big push in our industry. Then really across the industry, there has been a hard focus around cost cutting in the last few years. When we look at these are really external factors that are driving disruption in our industry that really cause us to go through this hardcore internal transformation. When we do it, we have really been focused on this continuous transformation for the last five years. I would say we have been more focused on the cost side and starting to build towards the growth side. If you look, we have been able to take our structural cost down by 160 basis points in this market. Our total delivered cost, we have taken down by 230. Our manufacturing and supply chain guys have done a tremendous job of just taking inefficiencies out of the system. We fundamentally believe consumers are not going to pay for our inefficiencies, and so we have got to be relentless in anything that is not consumer-facing, we are going after every single dollar. It has allowed us to actually invest more behind marketing, not only spend more in marketing, but to drive sales capabilities as well. That is really been the last five years in terms of what we have done. Very successful, very strong cost discipline. If we look at the next three moving forward, we still think there are opportunities in structural cost. I think most of you have seen, we relocated our U.S. headquarters from Glendale, California, to Arlington, Virginia, and that has been great. We believe in complete transparency with consumers. We believe in that same level of transparency with our employees. I think that transparency around why you need to use these relocations as fundamental catalysts to change the business. That is really why we see a relocation as a very effective tool. It causes every single thing in your business to be put up in the air, be challenged, and to drive the organization to reinvent itself. For us, when we step back and go, "Whoa, that is a big decision, for we have got a lot of employees and lives we affect that we take very seriously in that decision." But did we do it right and did we make sure we brought our employees along the journey? The fact that we got 70% of our high potential employees to join us, going from California to Virginia, and over 40% of total employee base to actually come with us, has been great. We have had really good business continuity, and they believe in the transformation journey that we are taking them forward. We think that will continue to unlock structural cost opportunities. We think we will get another 150 basis points out of our just structural cost moving forward. François talked a little bit about manufacturing. For us, we've got a really strong pilot going in our ice cream business that just takes a different approach to look at how we manufacture. We've seen really strong success in 2017. We're going to take that same mindset and principle and roll it across the rest of our factories in the U.S. We think that'll be a big unlock. François and Mark have both talked before about NBE and really kind of globalization of our shared service and the unlocking opportunities there. Then continue to drive building these new capabilities that takes the win in the future. That transformation has really allowed us to kind of accomplish what we think is a balanced game. We've expanded margins while we've been able to invest for growth on our core food and beverage business. In the last five years, we've grown 280 basis points in margin. It's actually accelerating since 2014, it's up 220, and 2017 was over 100 basis points of growth in margin. We've got a really strong focus around margin enhancement, and that's actually in a rising commodity market. We know consumers today have been challenged on inflation in the marketplace, and so those things we haven't been able to pass historically. We've been able to deliver that margin enhancement in the face of commodity markets. We don't just drop all that transformation to the bottom line. We actually believe we've got to fundamentally reinvigorate growth in this market. Do I ever think it's going to be an explosive market in the near future? No. You've got to find moderate growth that will drive the health of the fundamental business long term. Whether that's investing in innovation renovation, driving marketing spend, whether it's better or more marketing spend. Project Pure, this is one that- Fundamentally, we call it Project Pure, which is really think of moving all your ingredient statements to kitchen cupboard type ingredients. We believe that's a price of entry in the food industry. That's what consumers want to see. We've really migrated. That's more expensive. We've been able to do that, because we think it's the right thing to do to bring our core brands back to relevancy with consumers, and then invest behind those capabilities. As we look through that first phase of our transformation, we've been able to drive that margin, build those capabilities, and hold the top line. As we shift and really start to think about where do we find and build a new growth model, it's behind these five key tenets. Portfolio, strategically evolving our portfolio. Innovating the core brands, right? That's a fundamental one that a lot of people don't talk about. Exploring new innovation models, investing in high growth channel, go where the growth is, and then building these capabilities and deploying them across the organization. For us, we've been very disciplined and focused around how we deploy our resources in the marketplace to go where the growth is. If you look at some of our core brands, and we move our marketing and trade investment to where the core is. If you take our top 10 food and beverage brands, those grew at over 3.5% last year. We'll continue that discipline to drive our investment behind the highest return generating growth vehicles. Then you move to make sure your current resources are deployed as effectively as possible against your current brands. Find where in that consumer need state spectrum that your brands can't reach to, then fill that with M&A. We've been quite successful. I think Sweet Earth, we're happy about plant-based protein's a big trend, and we think we have a big opportunity. We don't think our core brands can extend completely into that space, so we added Sweet Earth. François talked about Blue Bottle and Chameleon. We're very happy with that on the super premium end. Freshly is one that's an investment, that's a direct to consumer business doing really, really well. We love the learnings we get from that company, and they've been a great partner in the investment. The last piece of evolving the portfolio is really divestitures. You've all seen the confections announcement. We've divested over 11% of our sales in the U.S. We continue to evaluate the businesses we're in and the ones we don't want to be in long term, then we work to manage that portfolio. This is one I think that we're really proud of, and we fundamentally believe there's still growth for your core brands in the market if you bring the relevancy that consumers want to those brands. If you look, the active lifestyle, organic, natural, are the core macro consumer trends, then you bring the brands against those specific core macro trends. Whether it's Fit Kitchen Bowl and Active Life, I won't go through all these, but I'll use Coffee mate as an example. Huge business for us. High single digit growth last year. We expect it to continue. We touch on several different macro consumer trends on this business and continue to find new growth. The next one is really just exploring new innovation models. For us, I think when you look at where you find growth, and you go through that M&A lens, and you decide, all right, this is where we want to buy. The next step is, we don't want to buy, we want to build. We do it in two different kind of approaches. The first one is this internal incubation, and we set the teams to the side, we give them a different resource structure, different rules to run the game, and we give them nine months from idea to launch. Frankly, we'd like to get that down to six months. We want a rapid prototyping, fast to market, test and learn, then go with these products. We've got some really good examples. Outsiders Pizza is doing quite well in the market right now. Wildscape, one of my colleagues presented last year, in this same conference, and it looks really promising in the market results. We'll continue this mindset of where we can't take our core, we'll internally incubate. The second one is this external incubation. We've got a partnership with Rabobank and RocketSpace and Astera. Great access to these startups. We've been really excited about that. I think, one, it's been really good to just get exposure to build the funnel a bit. But two, the learnings and just the thinkings as you start to understand these startups better, to then bring that learning back into Nestlé and drive the change and transformation in the organization to move at that pace of a startup. Then partnering with our vendors. We haven't done enough to partner with our vendors to leverage their expertise as well. We have world-class suppliers across our network, and we've tapped into that to leverage their collective intelligence as well. Then investing in high growth channels. Look, the consumers and shoppers are shifting where and how they shop. Some channels are winning, some channels aren't. We've had really strong success as we focused against these growth channels, club, value, natural. We've had an 8% CAGR in those on our food and beverage business, and we doubled e-com last year. We think we'll double e-com again on our core food and beverage business. If you look at our portfolio, you wouldn't think that we have a heavy frozen presence. You wouldn't think it would be, but we've actually had really good success as our retail partners continue to expand that click and collect model. This one is not just about going where the growth is, that's the obvious piece, but it's about re-engineering your business to make sure you're set up for success to win in those channels. What are the right products, right packs, right price that it takes to win, and we've got some good examples of that. Then I won't go into this just to keep time for questions, but really deploying these capabilities across the organization, it's about changing the way you run the business, whether it's analytics, digital excellence, or flexible manufacturing. Those new capabilities have got to be brought to bear to capture these growth opportunities. The biggest change for us that I think we really push in the organization is empowering our entire workforce to innovate. Innovation is not about product innovation. That's not the sole issue. Every single thing we do in the organization can be improved, and it can be improved every single day. So we encourage our teams to innovate everything you touch to make the business better and to find new fuel to leverage that growth. Then just in closing, look, you guys know as well as we do, very competitive landscape. I think we're well-positioned to continue to succeed. We're going to drive this continuous transformation mindset. Transformation is not a project. It is a lifestyle and a way you're going to go about running the company. It never stops. You always can get better. Really drive aggressively behind this hybrid growth model. I think you've got to have a multi-pronged approach to growth, and then work these capabilities across the organization to enable that growth. If we continue to do that, I think we'll continue to enhance our margins and seed for future growth. So that's it for the U.S. I think now we'll turn it over to some Q&A. Thank you very much. I'll now over who the MainFirst. I have two questions. The first is for Steven regarding partnering with vendors. Does it mean that you are going to outsource more in the future, similar like you currently do with Barry Callebaut? The second question is for François regarding the timeframe and the parameters for the portfolio. Could you help us a little bit? How long time do you give to a brand which has a problem regarding the parameters you look at and regarding the timeframe until you are going to divest it or keep it? Okay. Maybe I'll answer that question first. Whenever we have a brand that doesn't work, I know that there is an immediate temptation to go and offload it and sell it. This is not the way that we look at it because first of all, we are not in the trading of assets. We are in the business of managing assets or operating assets. So that's what we do. Whenever there is a problem, we have to fix it first, provided that it is feasible to fix it. But we have plenty of example, you saw two of them, which are presented, Gerber. Gerber is still early to draw any conclusion, but Yinlu, we have been able to fix it. Even frozen in the U.S., to be totally transparent, we had some issues a couple of years ago. We have been at -2% for two years in a row. We have been able to fix it and then grow again at 7% and then further even in the following year. So what we have to avoid first is to avoid having this problem or they will always happen, so we will not be able to avoid them totally, but we have to make sure that we react fast enough. We have proven that we can fix them, but we need to move significantly faster. There is another thing that there could be a point where we may decide to dispose of these assets, not necessarily because they are bad assets, but maybe we are not the right owner or maybe we don't have the ability to win, which is exactly the conclusion we arrived at as far as confectionery U.S. is concerned. We like confectionery as a category. We are still left with almost 8 billion CHF of sales with leading positions in other markets. In the U.S., where we don't have the KitKat license, we had about 4% market share with good brands, I mean, Butterfinger, Crunch, Baby Ruth, and other. Our ability to win, though, with 4% market share was limited. So this is the reason why we decided that we better spend our resources on other categories. So in a way, it's difficult, I would say, to apply one single rule. We look at it on a case-by-case basis, but we look at a certain number of dimensions, always first with a view, can we manage these assets and turn them around if they are facing issues? Maybe Steve, I'll let you answer. Yeah, then just on your question, does it mean outsourcing was more the question? No. I think we look at every single part of the value chain, and if that leads us to an outsourcing decision, we would consider that. But the discussion specifically was around, look, our suppliers are innovating at a rate just like we are trying to innovate. So how do we leverage their innovation to help bring products to market faster and extend kind of the innovation universe and collective intelligence of our supply network? Thank you. Jon Cox, Kepler Cheuvreux. Maybe a question for Steve, just on the U.S. market currently. I am just wondering if you have seen any sort of improvement more recently, in the last little while compared to, say, much of last year? Maybe what you think about the market going forward. Is there any pricing coming back at all or is it to remain pretty deflationary environment out there? Thank you. Sure. Look, it has been a challenge market and pricing for sure. I do think we see some improving trends where the market baskets are growing at a little faster rate. The challenge I think we have got to fundamentally understand in pricing coming back to the market is consumers, household disposable income still continues to be stretched, and the amount they are spending on food continues to be under pressure as other things occupy that. So inflation needs to return to the market. I think it will return. I think it will be at a very measured pace, would be my view for 2018. Thanks. Thank you. Steve, you have got, I think, a direct store delivery system in the U.S. across frozen pizza and ice cream, and I think you have done a lot to optimize that, and bring them together in a more sensible way over the last couple of years. It has been interesting that we have seen some other companies with DSD systems start to really challenge the notion of, in some categories, whether it is a necessity, right? Given the high cost nature of it. Are there some elements around ice cream and frozen pizza that you feel like are different or unique or in need of that or where you get a return on that high cost system that we would not necessarily appreciate? Or are there ways to think through it and maybe there are some different ways or hybrid ways to go about it? How much do you challenge that thought process, I guess? Yeah, good question. Clearly, DSD is a big topic in the industry right now. For us, we've actually really gone after aggressively the structural cost of that business and been able to reduce that by 250 basis points. We've driven a lot of that ROIC growth actually by improving the cost structure of our DSD model. It's a fairly simple math equation in terms of you keep the volume in the network and drive your cost down. It becomes a very efficient route to market. I think for us, as you look at everyone's struggles to finish that last mile in a distribution network, DSD does have some real core strategic advantages in our category. What we like in our pizza and ice cream business with DSD, we have leading brands, and we have premium brands with Häagen-Dazs, DiGiorno, California Pizza Kitchen, that we're able to leverage this network to extend those businesses. As I talked about those high growth channels, DSD is actually an enabler for us to get to those pretty effectively and outpace our competition. The other thing is just operational excellence in DSD right now to drive, if I go back to the kind of natural disasters we had in the U.S. in 2018, whether it was in Puerto Rico, Texas, or Florida, we were first back on shelf in frozen in every single instance, generally because of our DSD network. We're able to do that through that asset. The question is, how do you leverage it better? I think we're always looking for what's the right mix of a hybrid model to best serve our retailer and consumer needs. I'm a bit confused by the message about whether the issues in the business are more about the portfolio that you've got, or the fact that you haven't really focused on the growth agenda and been too focused on the cost agenda. Maybe you can just talk a little bit to that, both in the U.S. and globally, François. I think that there is not one single issue. I think that portfolio is part of the equation, and we have to work actively on our portfolio, and we have already made some steps in 2017. There is more to come. We have indicated that we expected to turn around about 10% of our portfolio, which is a sum of what gets in and what gets out. That's part of it, and I discussed earlier the fact that, for example, it will help us both on the top line and the bottom line. That being said, I indicated as well that this doesn't prevent us from working on the base business, because the base business is CHF 90 billion of business, which last year did not grow as fast as we expected. We have to work predominantly on that part under all dimension, which is the reason why you can see that it's not just working on one single issue, which is innovation, because innovation, for example, has different features itself. It can be innovations with technology, it can be innovation in new business models. We have to get growth in other markets, as in some markets where we don't get growth, and the U.S. is one of them. I said it, if we want to go to mid-single digit, we have to do more than what we have done last year in the U.S. In the U.S., we were flat in a flat market. Nothing wrong against the market, but we ambition to do more than that. This is clearly what we have to do. There is not one single answer to the issue. It's not only about portfolio, it's not only about fixing the issues that we have been facing in the past or that we may face in the future. It has several dimension, and I think in the U.S., it's the same. Thanks. Question for Steve. Can we talk about pet food and sparkling water? I see Mars has been very active in the natural premium space. They just launched Nutro. They have Eukanuba, Crave. Just tell us, where are you in the process of evolving to natural premium in pet food in the U.S.? That's one question. Regarding sparkling water, Perrier to me has moved into flavored sparkling water, but very expensive product. Then you have your regional brands that you're extending to flavored sparkling water, but those are more mass market brands. If you can just give us some color on those two points. Then one for François-Xavier. François, when I hear of Sweet Earth in plant-based, and I see them now buying WhiteWave, or I hear about Blue Bottle Coffee and I see JAB buying Peet's, buying Panera. Then I think back, you bought Cailler in chocolate in Switzerland a long time ago, and you didn't do much with it. You are the largest food company in the world, and here you are doing this, buying very small assets in categories where there's probably more attractive properties. If you can comment on that. Thanks. I'll take the question on plant-based food and beverage. Actually, we made some acquisition, but we already have a sizable business in that space. Already even with Yinlu, for example, part of the asset that we have, or other asset that we have in China, we are already playing in that space. If you take in Europe or, yes, in the whole of Europe, we already market plant protein-based food and beverage. It happened that in some geographies, we are not well established in that category, so we address it through M&A. Take the example of France, for example. Since we have the brand, which is the best brand in consumer mind, which is called Herta, which is chilled. So we are leveraging on the fact of owning that brand in order to launch plant protein-based food and beverage, which we have done already for months. In the rest of Europe, we launched it already a few quarters ago under the Garden Gourmet brand. The question, maybe I can answer the question on Perrier. I'm not sure exactly of what the question was, but can you maybe reformulate the question? Sure. I am just trying to understand. It seems that, again, this is a general theme I see with Nestlé. It is my interpretation, of course, I could be wrong, is that, okay, sparkling water is there, and you have Pepsi launching bubly, making a big bet on it. Here you are extending what I call mass market brands like Poland Spring and things like that. Again, when we are looking at buying assets, Blue Bottle, Sweet Earth, I find that they are very small assets for what is available out there, so I want to understand that better. Yes. Lansin sparkling water in general. On Perrier, on the water business in the U.S., we actually own basically the category of premium sparkling, and we are doing very well. S.Pellegrino and Perrier are growing in the U.S. and are growing elsewhere, high single digits, so we are doing well. What happens is that the market in the U.S. has developed very significantly. One of the fastest-growing market is sparkling mainstream, where we were not present. As we speak, we are launching for our five regional brands. We are launching a full range of water, which is sparkling under the same brand, which in the mainstream category is absolutely okay in our opinion. Maybe you want to answer the question on pet care for the U.S., or I can do it if you want, but let me do it. Pet care, the fastest-growing segment today in the pet care segment in the U.S. and elsewhere is clearly organic and natural. Which is the reason why, for example, we made an acquisition a few years back with Merrick in the U.S. because we had, roughly speaking, at that time, two years ago, a third of the market, 32% market share, but we were weak in natural and organic, I think we are 6%, and we were relatively weak as well in specialized stores. So Merrick was a very good addition and complement to our range. But we do have our own range, even under the Purina brand, which is called Beyond, which we currently market in the U.S., which we market as well in Europe. But we may need, in some instances, to have more than one brand, which is the reason why it makes sense to complement organic growth in some instances with some of these smaller brands. You are certainly aware as well of the fact that anyway, the smaller brands in our industry are the ones that are growing faster as well because they may address some specific needs of consumers. So it makes sense as well for us to do it as part of our growth agenda. It is not exclusive, though. Can I ask whether the General Mills and Purina transaction came as a big surprise to you? Well, the news of this morning, I do not want to comment too much on it, but just a general comment. First of all, it is a change of ownership, so it is not part of a consolidation. If it had been part of a consolidation in the industry, in the specific segment of pet food, that would have been different, but change of ownership is somewhat a little bit different. We welcome a new competitor, but we know them quite well because we are in partnership with another segment with them. We value them. I think that what I saw as well is that the price reflects certainly the attractiveness of the category. So it confirms to me, gives me confidence in the fact, I knew it before, but it gives me further confidence that we are playing in the right category, which is a high-growth category, which is very attractive. It confirms one other thing as well, is that in today's world, asset prices are extremely expensive. I do not have any further comments to make, but you saw the multiples as I did. So that is a further confirmation of what we probably already knew. Okay. If there are no other questions, we are going to take it over into the breakout room for further questions. Please take all of your things out of this room, if you would, and join me in thanking Nestlé for being here today.