Consumer Analyst Group of New York Conference

Feb 20, 2013

Summary

Americas sales reached ~CHF 41B and grew 5.9% last year, with varied category results and growth opportunities in coffee, pet care and emerging formats. Priorities included innovation, route optimization and nutrition, sustainability and rural development initiatives.

Good afternoon, everybody. If we could just find our seats, we will get started with our next presentation. Before we get started, please join me in thanking Nestlé and all of the Nespresso folks for hosting the outstanding coffee bar all week here at the conference. CAGNY is indeed honored to have Nestlé back at this year's conference after a number of years. Nestlé has had a very consistent message to investors over the last two decades and has predictably delivered to its shareholders amid some skepticism that bigger can't be better. Some CFOs and CEOs have come and gone, but one pillar of the company that has not changed is its IR head, Roddy Child-Villiers, who many of you know quite well. Roddy, thanks for coming today and for bringing along Chris Johnson, Nestlé's head of Zone Americas, who we are all looking forward to hearing from. Lastly, if you are looking for the PowerPoint hard copies, there aren't any, as Chris is not using any slides today. With that, I will turn it over to you. Thanks again for being here. All right. Thanks, Andrew, and good afternoon everybody. If it is okay with you, I want to do three things today or talk about three things in the next hour. First, I will just tell you a little bit about myself, then talk a little bit about Nestlé's presence, participation in the Zone Americas, and then third, open it up for Q&A. I want to do this in more of a conversational style. I will try to be as transparent as I can be. I also know how the rules of this thing work as well, and there are certain things I can and can't say. That is why I also brought Roddy along as well. Not only that, I am going to give Roddy this pointed stick, so if ever I find myself saying something I shouldn't be saying, he can gently nudge me during the presentation. As was mentioned, I don't know if you are disappointed or not, I don't have any slides with me. I don't have a script with me. I just want to, again, have more of a conversational style with you and share about Nestlé in the Americas. First, just a little bit about myself. I was born and raised in Los Angeles, California, and I think it was probably fate that I ended up working for this company. Because when I was growing up, I used to spend a lot of time at my grandparents' house, and my grandparents lived across the street from the Carnation Company head office on Wilshire Boulevard in Los Angeles. The bedroom I would sleep in had a large window that faced the Carnation neon sign. That at night, and this is true, I'm not making this up, would spell out C-A-R-N-A-T-I-O-N Company in red and white and flash. This is something that I saw and fell asleep to night after night. Didn't think much about that until then I went to college. Went to Occidental College and received an academic scholarship, by coincidence, from Carnation Company. Every year, I would write to the CEO, then CEO at the time, and thank them for the money, tell them what I was doing, tell them how much I liked their ice cream sandwiches, which I ate every day at that time. When I was a senior, just got out and graduated, looking for a job, I called them up and I got a job with Carnation. Started off in sales and then worked in marketing, and this was back in 1983 when I started. In 1985, Nestlé acquired Carnation Company. I thought it was a great opportunity because I was interested in working overseas. In 1991, 8 years after I started, I got the opportunity to work in Japan. Worked in Japan for 5 years, then moved to Paris, worked for Nestlé Waters there a few years after the acquisition of Perrier by Nestlé. Then transferred to Taiwan, where I was the market head of Taiwan. I got this phone call really out of the blue one day from my boss, who said, "We'd like you to come to Switzerland, the head office, because we have a little project we'd like you to consider." I said, "Well, what project?" He said, "Well, it's an IT project, something about SAP." I said, "Well, I think you have the wrong guy. I don't really know anything about IT or SAP. I can barely turn my computer on." He said, "No, no. It's okay. Just come and see." I went from Taiwan to Switzerland, and often what happens when you have the connections, was delayed, flight was delayed. I arrived late to my boss's office. I said, "I'm here." He said, "You're late." I said, "I know, because it was delayed." He said, "Well, we have to go see the CEO," Peter Brabeck at the time, "right away." I said, "But what's this job?" He said, "That's okay. He'll explain it to you." I went up, again, jet lagged, a little bit nervous, actually very nervous. Went up to Peter Brabeck's office. Met him, and he said, "So what do you think?" I said, "I don't know what to think. It hasn't been explained yet." He said, "Well, let me explain it to you. Basically, we have a project we'd like to do because our concern is that Nestlé is getting bigger and bigger as a company. The concern is that as we're getting bigger, our size perhaps will become a liability for us. We have been very good and very successful because we are very decentralized. We are close to customers, we are close to consumers, and we have been doing that for over 100 years. We do not need to decentralize everything. In fact, it would be better if we can find some ways to standardize some things and harmonize some things. So he said, "There are three things." He said, "It is very simple. Just three things we want you to do. One is to harmonize business processes, especially that back end stuff. Second is we want you to standardize and figure out a way to manage our data because our data is very messy." Even at that time, we did not even know how many SKUs we sold. We were not able to leverage purchasing power and all these sorts of things. So manage the data and standardize it. Third was to standardize the IT systems, IS/IT systems. Because back in that day, 12 years ago, every Nestlé country had their own software, their own hardware, their own systems, which were not only expensive, and our IT costs were going through the roof but also could not connect and talk to each other. So he said, "Okay, that is it. What do you think?" Of course, being a good Nestlé soldier, I said, "Yeah, sure. I will do it." I shook his hand and left the office, and I had really no more information than that. The one thing that concerned me most of all was not that this turned out to be the biggest SAP implementation, I think still to date in history, and it was not all the weight and challenge that comes along with that. At the end of the day, it was what he told me the project name was. Because he said, "Congratulations, you are in charge of Project Bean." I am like, "What?" "Bean, Business Excellence At Nestlé." I am thinking, look. Probably many of you know, and I have already run into many of you here that have heard me talk before back in those GLOBE days, because eventually this became known as GLOBE. In a certain sense, I also was known as Mr. GLOBE, and I knew that it would be very difficult to pull this project off. Very difficult if the project was called Project Bean, and then I would be known as Mr. Bean, exactly. That is a true story. Thank God they changed the name. Did that for six and a half years. Happy to answer any questions you might have about it later, but I cannot imagine this company today running without GLOBE. It was not easy to put in, but the benefits far exceed simple cost benefits. It really enables us to work and to be more competitive, and anyway. Glad to be a part of that program and that history of Nestlé. From there, went back to Japan, was the market head of Japan for four years, and then got another phone call a bit out of the blue, this time from Paul Bulcke, who said, "We would like you to come to Switzerland and head up Zone Americas." That is what I have been doing now for the last couple of years. From a personal standpoint, I am married. Met my wife in the U.S. just before moving to Japan. We got married just before we moved to Japan. She worked for Nestlé. She was the brand manager on Come 'N Get It dog food, and I at the time was the brand manager on Fancy Feast cat food. So that was just a marriage that just had to happen. I have two daughters, two teenage daughters who I love dearly, of course. Maybe one of the things you want to ask in the Q&A or not, it's up to you. In 1976, I came in second in the World Junior Frisbee Championships. So if you have any Frisbee questions, you can also ask that later on. All right. That's about me. Nestlé in the Americas, and probably most of you know that Nestlé splits up the world into three pieces. They're called AMS for the Americas, Europe, and then AOA, which is basically the rest of the world. So I'm responsible for that geographic zone. When I'm talking to you today, I'd like to share with you about really all the businesses that we have in the Americas. So not just my responsibility, which is about 70% of that in the Americas with Zone Americas. I mentioned we have five globally managed businesses. They include Nestlé Nutrition, Nestlé Waters, Nestlé Professional, Nestlé Health Science, and of course, Nespresso, which you've been enjoying out in the hallway. We also have four global joint ventures, which are present in the Americas as well. We have CPW together with General Mills in Latin America. We have BPW with Coca-Cola for Nestea, which in the Americas today is limited to Canada. We've got Galderma, we've got Innéov, joint ventures with L'Oréal. We have a joint venture, a fifth one in the Americas, which is with Fonterra for chilled and liquid dairy products in Latin America, as well as milk powder production. So that's basically how Nestlé's organized there. Again, this is difficult without PowerPoint slides, so I'll try to do a pantomime. So this is the Americas, so North America, South America. Okay? North America, South America. So total population there is about 950 million or so. Out of the world population of 7 billion, that's about 15% of the world's population. But for Nestlé, our total sales in the Americas is around CHF 41 billion. Now, when you talk about population, and that CHF 41 billion is about 45% of Nestlé's- Swiss francs. Swiss francs, sorry. Swiss francs, thank you. Glad you didn't use the stick on me. Swiss franc. When you look at the population, north and south, 37% of the population's in the north, 63% is in the south, but Nestlé sales of that CHF 41 billion is actually the reverse. We do 63 in the top, in the north, and 37 in the south. We're present in all countries and territories. We have 170 factories, 110,000 employees. To put it in perspective as well, we have three countries which do about 80% of the total sales in the Americas. By the way, I should also mention just for growth, that CHF 41 billion in the Americas, all the Nestlé businesses grew about 5.9% last year. Three countries, 80% of the sales, and there's 12 product categories which represent about 90% of the sales. That's what I want to do, explain to you a little bit about the countries, but then more importantly, go category by category and then talk specifically about how we're doing in the different countries where we participate in these. Nestlé is not a simple company this way, but I'm hoping that this is maybe more of a memorable way for you to take away what we're doing in the zone. First of all, to start, the biggest market by far for us, the number one in the group, number one in the zone, is Nestlé USA, or is the U.S.A., Nestlé in the U.S.A. About $24 billion in sales represents about 25% of Nestlé's total turnover, 58% of the total sales in the region. Last year, our sales in the United States grew by 3.4%. We have 120 locations in 47 states. We have about 51,000 employees. Many people are surprised about this because we're not that well-known for actually the products that do most of the business in the U.S. In fact, seven product categories or seven products do, again, about 90% of the sales in the U.S. It's Purina pet care, it's frozen foods, it's Nestlé Waters, it's Nestlé Nutrition, ice cream, Nestlé Professional, which is our out-of-home business, and coffee enhancers all the way down at the end on Coffee mate. Most of these brands do not carry the Nestlé brand on the label. When people think about Nestlé in the United States, you think about what? Chocolate, right? Because of that jingle from the 1950s, that N-E-S-T-L-E, Nestlé makes the very best chocolate. That is now in the Jingle Hall of Fame, I hear, and it kind of drives me nuts because the reality is very different. About 3% of our sales, but top of mind, that's what people think of. Just an interesting anecdote, two years ago, the writer of that jingle, Adam Scott, who wrote that with his wife, Marilyn, wrote me a letter asking if his son could have an interview to work at Nestlé USA. Of course, I was honored to help him out and at least get his son an entry into talking to the company. But I also wrote him back and said, "Wow, I really wish you didn't write such a good jingle, because you just can't get that out of people's heads." But that's where we are in the U.S. I'll talk about each category as we go through. Next is Brazil, CHF 5 billion. Number three in the group as far as, CHF 5 billion, again, Swiss francs. Number three in the group, number two for the region. 6% of Nestlé sales, 13% in the region, grew 9.8%. Despite what you hear, Brazil continues to be robust for us. We have a long history in Brazil, over 90 years. The first factory in Latin America is still operating in Brazil, in Araras. They are very different than the U.S. The Nestlé brand is very, very strong. Three product categories make up 60% of the business. It is ambient dairy or milk powders, it is chocolate, and it is nutrition. Those three combined are key. Mexico would be number three. MXN 3 billion in sales. Number six in the group, number three for the region, 4% of Nestlé, 8% of the region, grew 9.4%. Again, all the sales within Mexico for Nestlé. Again, like Brazil, very, very strong Nestlé brand. Like Brazil, ambient dairy, the largest product category. Although chocolate is number two. In the case of Mexico, coffee down on the end is number two, and nutrition is number three. Those are the three geographies that make up the majority of the business. Let us talk about the product categories. I feel like I am on one of these sort of cooking shows where they go down and move along the table and explain things. We will start with pet care. Pet care last year, about CHF 7 billion. About 18%, again, of the region, and grew 8%. About CHF 6 billion of that CHF 7 billion is in North America. We have reached now the CHF 1 billion mark in Latin America. Again, pet care has been very consistent for us. Strong growth in the north and double-digit growth in Latin America. As you know, we have leadership overall, we have leadership in dog, we have leadership in cat, we have leadership in snacks. I did not bring any litter here because it was too heavy, but this is the portfolio that we have. We participate in all segments, we participate in all channels with a wide range of items. One of the strengths of Purina really is a focus and a real emphasis on innovation. Very long, very strong innovation pipelines and really one of the most outstanding acquisitions with the Purina acquisition that Nestlé did around 10 years ago. The second area, I will just touch briefly on these because we can come back for the Q&A if you have more specific questions. The second area is ambient dairy. Ambient dairy is about CHF 4 billion. This one I said is about seven. This is about CHF 4 billion. Grew 5% last year. These are primarily milk powders in Latin America. There is a range. Full-cream milk powder. This product is coming from Brazil. In fact, this is of the 20,000 SKUs we sell. In fact, now with GLOBE, we do know we have 20,000 SKUs in the Americas. Of the 20,000 SKUs we sell, this is the number one selling SKU that we have, the full cream milk powder. We also have growing up milk powder, which is here. Very strong in Mexico. Getting good traction also now in Brazil. These milk powders are for age gates one plus, three plus, five plus, one plus being the strongest. We also have adult milk powders, generally targeted for women, often with added calcium for bone health. And then also a very important area for us is we call the affordable milk powders, a vegetable-filled milk powder, which is fortified with iron, vitamin C, A, and D, and calcium. It is an affordable chance for folks to get the nutrition they need. Innovation is important in all of our categories, and milk powder is no different. Last year, we launched a new product in both Mexico and Chile, Acticol, with phytosterols. Two cups a day, clinically proven to reduce cholesterol absorption. This is something also we will be rolling out across Latin America, and we are also taking advantage then of selling it in different formats at the same time to leverage the brand, in this particular case, in UHT, as well as in a drinking shot. I am okay so far? Okay, just checking. Next, frozen food. I know there is probably a lot of questions about frozen food. Frozen food is, as you probably know, primarily in North America. It is about $4 billion for us. It is about 10% of the region. It has been a bit of a struggle. The whole frozen category has been a bit of a struggle. Down slightly in our prepared meals, and also down on pizza last year. We compete in basically four segments. First is frozen pizza, which was an acquisition, as you know, from Kraft in 2010. The pizza category is huge in the United States, around $38 billion, let us say, this time, or CHF. It is about the same. The majority of this volume is consumed out of home, at restaurants, or takeout, or home delivery. Frozen pizza only represents about 10% of that or so, and the category was down last year, largely because of some very aggressive activity from the carry-out and home deliver people. But this is something we have seen over time in this category. There have been ups and there have been downs, but in the long term, we are convinced that there are good opportunities to continue to expand our presence in frozen pizza. We have a range of items from the more premium California Pizza Kitchen, more value offerings with Tombstone and Jack's, and an interesting innovation that is coming out, mentioning that DiGiorno has been successful from really going head to head with takeout and home delivery. We really do not have an offering or have not had an offering so far that goes after the independent pizzerias, and this is a product that has just been launched. It is called DiGiorno pizzeria!, with an artisanal crust, with a crispy outside, soft and airy on the inside, dribbled with extra virgin olive oil. I am also trying to sell to you at the same time. This is on shelves now. But I think this is an interesting opportunity for us to go into a new segment that really has not been targeted. The other three segments, I think you are fully aware of. You have got what is called regular meals. This is the Stouffer's line: lasagna, macaroni and cheese, Alfredo are the three main SKUs that we have in that line. Lean Cuisine. Lean Cuisine is a single-serve nutritional meals, and Hot Pockets, which competes in the sandwiches and snacks. These categories, mentioned pizza category was down. We were able to hold share last year. In these particular categories, these two were down slightly. Hot Pockets in the sandwich segment was up slightly as far as the category goes. But this is one also where we have to look at this frozen business holistically and also look at the future. Clearly, in the difficult economic times that we had, there's no doubt that the frozen category in supermarkets suffered. The last place to shop on the shopping trip, in the center of the store. People were looking to save, and so there was a certain crimp on that. At the same time, prices had gone up. We had deliberately pulled back on some promotional activity in this particular category, and that had an impact because we're the leaders in this category on the total volume. There's also a perception issue with frozen. Although frozen is a great way to preserve food, there is a certain perception that it's somehow artificial or not as good as other methods. The fact is, it is. As a leader in these different segments and all the segments we participate, we will work on all of those dimensions to improve, with improved innovation, being more aggressive. At the end of the day, also work on the image of this as, again, a leader. The good news is that while we saw some struggle in the first half, three quarters of the year, in the last quarter, we saw increase and acceleration in volume and in market share across all these different segments. I think we're starting to move on the right track. On waters, number 4, about CHF 4 billion in sales. I'll probably pick them up if you can't see them. About 90% of this is in North America that we sell. We grew 6% in the North and 18% in Latin America. Again, stronger growth in Latin America, but our presence is smaller. The biggest brand is Nestlé Pure Life, which you see here, but also, of course, very strong are the regional brands like Arrowhead, or perhaps you might have Zephyrhills here in Florida. This is an important category for us, showing, again, strong growth. Also, when we talk about being a trusted nutrition, health, and wellness company, this is a great product that is consistent with where we want to go. Number 5 would be nutrition. Here also, a little bit less than CHF 4 billion. Grew 4%. Consists of three different parts. We have the infant nutrition part, which is the Gerber brand in the U.S. and Mexico, consisting both of formula and in what we call meals and drinks. In Latin America, the balance of Latin America, we have the NAN brand, as well as primarily cereals under the Gerber or under the Nestlé brand. This happens to be a new cereal we're going to be launching in North America, but most of the Latin American cereals are branded Nestlé. Here we have leadership in infant formula, clearly in Latin America, leadership in baby food, both in the north and the south. It's also one where innovation is important, relaunched, in fact, changing the approach to eating from glass jars to other forms. This is a pouch, Gerber Organic, that had been restaged and has been very successful. Briefly, nutrition. Next is what we call performance nutrition. Performance nutrition is primarily made up of PowerBar, which you're aware of, and we're kind of going back to our roots on PowerBar. We're going back and focusing on the endurance athlete. Again, also innovation, Performance Energy Blend, a product that was just launched. It's interesting, one of the advantages of having a large portfolio like this is, learned a lot from the infant nutrition people. Basically, this pouch was taken over then in this format. Also, even the recipes, whereas these are for tolerance for stomach, or stomach upset is a problem that athletes have. We have some of the same sort of stomach-soothing qualities in this product as well. The last one, which is a bit more of a struggle, and I think it's no surprise, is our weight management business with Jenny Craig. Jenny Craig is a proven approach, a holistic approach to weight management, which is not only about providing portioned foods, but at the same time also providing counseling and behavioral guidance. We know that this works. We believe in this product, but the business model, our ability to attract and retain people, we've really struggled with this. We're in the process now of revamping, looking at this business from all angles, from the products we offer to the way that we go about our business model. This is one that we would hope to see some improvement with in the future. That's infant nutrition. Take a break. Anything else that I. It's okay so far? Okay, good. I'm quite hungry. I'm out of the range of the pointed stick, so I'm feeling a little bit more comfortable now. Number 6, chocolate. Chocolate's about $3 billion, about 7% of the region, grew 5% last year. About a third of the business is in Brazil. The Brazilian chocolate business is over $1 billion. These are the two main brands, under the Nestlé brand and also under the Garoto brand. Number 2 is in the U.S., where again, we've had some good success last year in the U.S., growth both in share and in volume. One of the contributors to that was a promotion that we've done now with the Girl Scouts of the USA with Crunch. Third largest is Canada. This is a Kit Kat from Canada, but I wanted to bring a Kit Kat from Brazil because one of the interesting things that we're doing is we've relaunched now Kit Kat in Brazil, and it's taken off very well. It's not the first time that we've tried to launch Kit Kat in Brazil. I think it's the third time. This time it's really working out well. Brazil is something that we're going to be expanding with in Kit Kat. Next, ice cream, another area which I think you have a lot of interest in. Very honestly, if you look at the Americas, our ice cream business results are mixed. They're mixed. We have some outstanding businesses, like in Peru, like in Chile, also a very solid business in Canada as well. We have some businesses which are improving, like Mexico and Brazil, which came off some tough years last year or 2 years ago and did better in 2012. But two-thirds of our ice cream volume is still in the U.S. We grew last year. We have positive organic growth. The categories where we compete grew, but we also lost share in these different segments. So three segments. Starting first with super premium, new product that we're launching, Häagen-Dazs Gelato. Then the premium segment, which is the most problematic for us, Dreyer's or Edy's. This particular product is an outstanding product, and it's one of the ones that I find most frustrating because it's got all the taste with one-third fewer calories and half the fat. The Slow Churned product has not met expectations to date. Of course, we have also the snacks category, also grew last year. Drumstick being an important brand. Launched some new products as well. Skinny Cow, again, providing this NHW values through ice cream bars, and also launching a new coconut water with Dreyer's as well. So the focus for us has really been more on the super premium area as well as in the snack area. But ice cream for us is a challenge. Next, Nestlé Professional. This is our out-of-home business. Two-thirds of the business for Nestlé Professional is done in North America. Two parts to it. There's food and there's beverage. Actually, the food part, the food solutions business, is about 60%, and the beverage solutions is 40%. This is just an example of Minor's, which is a beef base for restaurants, gluten-free. A lot of innovations in the food area. An example of the bag that goes inside one of our coffee system machines that we have in Nestlé Professional, and we have three. We have Viaggi at the high end, we have Milano, and we have Alegría. This Milano machine has gotten some great traction, some great listings and key accounts like Tim Hortons up in North America and also Burger King in Latin America. So Nestlé Professional, important. Again, around $2 billion, around 7% organic growth last year. Next is on coffee. Coffee in the Americas is relatively underdeveloped. If you compare this to the rest, you can see where it is on the lineup of products here on the table. The largest business that we have today is in Mexico, with very strong leadership under Nescafé Clásico. Because of this success and because of the growing Hispanic population in the U.S., we've also been successful in growing this business in the U.S. But we have many dimensions that we can play on across Latin America. Nescafé Dolce Gusto is now available in 10 countries across the Americas. We have struggled to gain traction in North America, and today we have a limited presence in the specialty retail channel, and we're trying to figure out ways to really penetrate better with this item. It's a great product. It's done well everywhere that it's been launched. Like I mentioned, in Latin America and the other eight countries, it's doing extremely well, particularly strong in Mexico and Brazil. But it's going to require a different approach, probably a different route to model given the competitive state that we have. I set up a separate organization here in the United States, an independent organization, to try to figure out how to make a good business out of this. That's Dolce Gusto. We also have, of course, some interesting innovations in Brazil with Duo Grão, under the Molienda brand in Mexico, is a soluble coffee with micro grinds. Works particularly well penetrating a market like Brazil, which is a roast and ground market. We're able to create something of a new category with this product, and so far results are good. The figure that I told you, the CHF 1.8 billion, doesn't include Nespresso sales. We're very secretive about Nespresso, so I just left that out of the sales figures. But when we talk about our opportunities in the Americas for coffee, we have a number of different platforms to play on. On the high end, of course, Nespresso. We have Dolce Gusto, which is sort of an in-home barista experience. We have our soluble coffee, not just the pure soluble, but also the mixes with innovations. Then, of course, as I mentioned earlier, we have the out-of-home business as well. So I think there are some good opportunities for us in coffee that have yet to be explored. Next in line, number 10, if you're keeping score, is cocoa and malt beverage. A little over CHF 1 billion, 7% organic growth. Here in the U.S., you probably think of Nesquik as the number one brand, and it is in the United States. But the number one brand in the Americas is actually Nescau from Brazil, which is a Nesquik type product. Second would be Nesquik. Nesquik is sold in a number of markets: U.S., Canada, Mexico, Central America, Peru, and Argentina. This happens to be a product from Peru. This one is very interesting, too, because it actually includes Andean cereals like quinoa and kiwicha and these sorts of things. So it's a very unique product, also fortified with vitamins and minerals. Next is Nestlé Health Science, which is the latest globally managed business. A little over CHF 1 billion in sales. Includes the heritage healthcare nutrition business that we acquired from Novartis a few years ago. So globally, this is around a CHF 2 billion business. It's about CHF 1 billion, as I mentioned, in the Americas. It's also a big part of this business is pioneering some new territories in nutrition and health science, pioneering that area between nutrition and food and pharma. We're focusing on three platforms: gastrointestinal, we're focusing on brain, and metabolic. We already have done a number of acquisitions or participations, whether it be Prometheus for gastrointestinal, Accera, participation in this company with respect to Alzheimer's, and metabolic for severe weight issues with Optifast. This is all supported by a dedicated R&D center, which was inaugurated last year in Lausanne, the Nestlé Institute of Health Sciences. Then last and not least, a 1 billion category, which is also close to my heart because I mentioned when I started my job at Carnation, the first job I had was to be an associate brand manager on this particular product, which is Coffee mate. Coffee mate was invented back by Carnation Company in 1960, and over 50 years later is still going strong. Over 1 billion, primarily in the U.S. What is growing fastest and actually the biggest category now is the liquid Coffee mate. Powder is also an important part of our business. We also launched or expanded last year, we launched in 2011, but expanded Natural Bliss, which is a new all-natural coffee creamer, which is just milk, cream, sugar, and natural flavors. This one is doing extremely well. This particular category, as you probably know, is growing very rapidly. So that's in a little over a half hour, a rundown of the geographies we participate in as well as the categories, main categories, which again, represent about 90% of the business. I want to touch on just one more thing before we go over to the Q&A, and that is about the importance we put in our role in society, which we call Nestlé in Society. There's three components to that, and these are very important. The first is compliance. That may sound very boring or tedious, but the fact is, and I'm sure as you can tell with the issues that are hitting the news, that compliance is extremely important. In order to operate as such a decentralized company and to make sure that we're all on the same page and the glue that sticks us together, we do have common principles. The first is Nestlé corporate business principles, along with a code of business conduct and a supplier code. These codes go, of course, beyond what is legally required in the different countries we operate in. But it's how we engage externally with our customers, with our suppliers. It's something that all employees, all 339,000 employees, in whatever local language they have, are aware of, have access to, and subscribe to. We also have something called the Nestlé Management and Leadership Principles. Again, called somehow maybe the glue that sticks us together. This is basically expectations of our management and our employees. These are audited both internally and externally. We're also going through anti-bribery and anti-corruption training across the zone amongst our white-collar employees. So that's first base, compliance. Second area, which is very important, is sustainability. Here we really focus on the importance of preserving the environment for the future. We produced last year something around 10 million tons of product, and this is a 10% increase over the last four years. During that last four years, we set very specific objectives for reductions in energy, reductions in water, greenhouse gas, and waste to landfill. In the areas of water, greenhouse gas, and waste, we're actually able to reduce in absolute terms, or absolute amounts, versus what we had four years ago. In the case of energy, have reduced it per ton produced. Once we do these, and those are sort of the foundations, then we can talk about something called Creating Shared Value. The idea behind Creating Shared Value is that we feel that it's important for us, not out of obligation, but it's in our interest to ensure that we have a bright future, not just for our own company, but that we can do what we can to help society at large. There's three areas where Nestlé is heavily involved, as you know, and where we can have that sort of impact. One is nutrition, the second one is rural development, and the third one is water. In nutrition, this means, first of all, being very consequent with our products. Our products must meet, not only be tasty but also be healthy, and for that, we have a concept called 60/40+, which means that in blind taste tests, our products need to be preferred versus competition. The plus part means they need to have a nutritional foundation and also a competitive advantage versus the competition. Sometimes you may be wondering or asking, you say you want to be a nutrition, health, and wellness company, but look, you're selling ice cream, you're selling chocolate, you're selling other things. We really believe that as people, whether we're in these businesses or not, we'll eat these products. We have an obligation to provide the best products we can in these areas, to use our research to provide the healthiest choices and options possible. Education is clearly an important part. That means, of course, on pack, but also we are involved throughout the world with a program called Nestlé Healthy Kids, which is a training program for nutrition in schools. Nutrition training in schools is something that's lacking around the world, and it's something that we've now touched millions of children with. We've also combined this now with the tie-up with the International Association of Athletics Federations to make sure there's an exercise component with this as well. We also, to be consequent, have nutrition training amongst our own employees. 75,000 employees in the Americas have gone through basic nutrition training as well. You also have the situation where obesity is a concern. As the world's largest food company, we have a role to play as part of the solution. We're not the only solution, and it's complex, and it will involve partnerships, it'll involve work with others, but we're fully dedicated to dealing with this. On the flip side as well, and particularly in the Americas, there's issues with malnutrition. Iron, zinc, vitamin A, and iodine are micronutrients that are lacking in many diets. We have the ability, again, because of the nature of the products we sell, to provide things like this. Looks very simple. This product is sold across Central America. It's a bouillon. Just a few pennies per serving, but this provides 15% of the requirements of iron daily, and this is a daily usage product. We deliver over 3 million servings of iron every day through this product. Even products like biscuit products like we have in Brazil, very popular brand that's even fortified with zinc. We talked about before, the growing up milk powders by definition, the affordable milk powder is also fortified. That is an area that we are also dealing with. So it is both ends that we have concerns about, whether obesity and on the malnutrition end. Rural development, very briefly. We have a long history in Latin America. As I mentioned, Brazil, over 90 years. Milk districts we have across the region, and we touch a lot of farmers through education programs and helping them to improve their efficiencies. Coffee, Nestlé globally has a coffee plan that we have committed to, where we have involvement in a number of markets like Mexico, Brazil, Colombia, and most recently in Haiti, helping them to rebuild after the earthquake. The cocoa plan, another commitment that the group has made to ensure that we have a good, high-quality cocoa supply in the future, which we have participation in Mexico, Brazil, Venezuela, and Ecuador. Last but not least, water. Mentioned before what we are doing on the usage standpoint to try to minimize our water footprint. But at the same time, also, we are involved in a lot of education programs and have a long-standing program in the U.S. called Project WET on education. So that is basically it. To summarize it. You have seen the numbers. We have had a good year. But I think what looks to me most assuring and what I appreciate about, I cannot say any forward-looking statements, but the fact that we have strong presence, strong brands, I think bodes us well for the future. Okay. With that, we have got about 20 minutes. Open it up for Q&A. Andrew. Thank you. I know over the last couple of years in the U.S., you have been looking to integrate better some of the direct store delivery systems that you have got across ice cream, that you got with the frozen pizza acquisition. Right and perhaps into the middle of the frozen space, meals and such. Perhaps you can give us an update on where you stand on that. Sure. More importantly, what is the ultimate goal in terms of what you are trying to accomplish with that? Does it ultimately give you perhaps a competitive advantage in the frozen space, maybe at the point of sale that maybe others won't or can't have ultimately? Right. Thank you. Well, maybe just as a bit of background. We had a direct delivery system with the Dreyer's business, and we have had that for a while. Then in 2010, with the purchase of the Kraft Pizza business, they had also a direct delivery business. For the last couple of years, our focus has really been on integrating these two routes because we basically had a lot of duplication. Duplication in trucks and routes and drivers. We realized a certain number of synergies by putting these things together, and it hasn't been that simple. The ways of selling the product portfolios, as you can imagine, the people now who only sold pizza are now selling ice cream, vice versa, ice cream to pizza. There are more SKUs on these trucks. What we feel very confident about. By the way, there are still improvements to be made. We're not satisfied with our customer service levels in most cases, and that's certainly understandable to a point when you're putting things together. What we do believe, though, is that this really is an interesting competitive advantage because, as mentioned, we have a big presence in the frozen aisle. This allows us to go in and to merchandise. We know that when pizza boxes are standing up, the off-take is higher. It seems like a very basic thing. When you have the opportunity to install small freezers, or we call them points of interruption, which do well. In those cases, the ice cream, particularly the impulse items, sell particularly well. You have that ability to do that when you have your own direct delivery network. Now, at the same time, you've heard that the volume on this particular business has been down, and so that's put a certain amount of strain on the system, a certain amount of strain on the cost. We're in the process of optimizing this, in the process of optimizing the routes that we're delivering to and so on. We're convinced this is a really interesting advantage that we have in the future. We've gone through the first step, and I think we've done it fairly well, delivered the synergies that we expected and actually a bit more. The next one is how do we turn this really into a competitive advantage? Yes. Hi. Just a question about single-cup coffee in the U.S. Or maybe can you maybe just also- Oh, sorry. Bryan Spillane from Bank of America. Yeah. Question about single-cup brewing, single-cup coffee in the U.S. You've got a competitor who expects to have a household installed base by the end of the year of 16 million households. The concept has really exploded here in the U.S. Yes in terms of consumer adoption. Could you talk a little bit about how you see Nespresso fitting into that? Has the adoption rate in the U.S. grown faster than you thought it would? Maybe some parallel between what you've seen in Europe versus what you've seen here, and sort of what your expectations are in terms of how you play in this space. Yeah. I'm going to talk about the Americas, and maybe I'll throw it to Roddy if you want to help me out or again, if I misspeak. As I mentioned before, this category for us is underdeveloped. In fact, Nespresso's been around for the U.S. for a long time, but has not had the sort of, I would say, rate of growth or adoption that we've seen. I must say, although I can't give you the sales figures, the growth has been significant in the area of Nespresso. Because Nespresso is offering something very different. This is not offering basically the coffee that you can have in your office at home. This is really truly a specialized coffee experience. It seems like American consumers are getting more and more interested or maybe even accustomed to these types of coffees. I know that in the U.S., historically, a flat black cup is sort of the norm, but now people are actually seeing crema on the top of coffee and perceiving this as something that's worthwhile. We are seeing some good growth. We have in the Americas 44 boutiques. We have 20 in the United States. We have four flagship boutiques. We just opened one in San Francisco. The response from these things has been tremendous. We think that we have a good opportunity to grow in what has been very underdeveloped for Nespresso. As I mentioned, Dolce Gusto, I don't think Dolce Gusto has any aspirations to become the leader or the number one, but it also provides an interesting niche in a category which is growing very rapidly. As I mentioned as well, the other coffee offerings that we have, the soluble coffee mixes, which is something that is starting to get some more traction in the United States, as well as our out-of-home presence. I think we're on a good path to compete in the U.S. Anything else you wanted to? Well, I think one should always remember that the market itself is growing quite rapidly, so there is clearly room for more than one player. I am sure many of you come here every year, so you are able to do a year-on-year taste test with Green Mountain last year and Nespresso this year. They are quite demonstrating different products, playing in different areas of the market. I think Nespresso, like Dolce Gusto, never had the ambition to be the leader in the market. It has the ambition to be the leader in high-end, super premium or luxury coffee. That is what it has achieved in Europe. It is achieving it in other parts of the world, and it has a very strong position in the U.S., growing comfortably into double digits. even if we are not going to tell you the number. Off a base that is actually quite sizable. Thank you. Okay. Yep. Anybody? Okay, yes. Thanks. Robert Moskow, Credit Suisse. Yeah. I remember a couple of years ago, I think it was, that you took the Gerber brand into the infant formula category in the U.S. I noticed that the performance of the brand has really accelerated. I wanted to know what your aspirations are in the infant formula category. I always thought that one of the limitations were that Nestlé didn't have a big direct professional sales force for pediatricians. Has that changed? What other steps are you taking to grow this category? Okay. Do you want to take this one? Of course, infant formula is not one of Chris's direct reports. That is why I am asking. I think one of the great things about Gerber is it has, in the 90%, unprompted awareness with mothers. To put the Gerber brand in infant formula was the obvious thing to do. As you say, it has been a great success. We have clearly been expanding our team of people who interact with the pediatricians and such like. It is going extremely well. Clearly, we are handicapped because, as you well know, the birth rate in the U.S. has fallen quite dramatically, albeit not in the Hispanic section, but in the U.S. as a whole. We are optimistic that those are postponed births, not canceled births, so the market will come back. I think we will come back very strongly with the market. Sir. Thanks. Rob actually stole my question, but that is okay. I do not know if I got in here a little bit late, so maybe you pointed this. When you benchmark yourself against some of the U.S.-based competitors in terms of productivity targets, do you think that 3% kind of productivity levels relative to COGS is reasonable? What kind of inflation do you see broadly across your territory in 2013? From the retail perspective, the changing outlet landscape, how does Nestlé see approaching that? I do not remember you talking about much of the products other than maybe at the end being an organic item. Right. How do you adapt to Whole Foods and the bifurcation of the consumer? Right. Okay. I think there were three questions in there. I understand what the first one was. Go with the. Oh, productivity, yeah. I would say that if we look at the U.S., and it is a bit historical about how Nestlé in the United States has come about. As I mentioned, 1985, the acquisition of Carnation Company is where really put a footprint into this country. Then, of course, built upon with acquisitions like Gerber acquisition, like the Purina acquisition, Waters, Nestlé Health Science. So we have had a lot of large businesses that have been built over time, and I think there are good opportunities to leverage a bit more the synergies we have between these different businesses. It is sort of Nestlé's way when acquiring a business to sort of just let them run and let them go, and that is one of the reasons why they are successful. But again, as we talked about in the GLOBE example, sometimes there are certainly synergies in the back which you can certainly find. I am convinced there are still some more synergies that we have in the U.S. Now, the second one, I remember the third one. The cost pressure. Oh, yeah, the cost pressure. We don't give guidance on costs. We don't see, I think probably like all of you, anything right now that would indicate some sort of hugely volatile situation. I remember last year, here in the U.S. in June, looking at the corn crop as we were driving through St. Louis and thinking, "This is going to be a great year for grains." It turned out, of course, to be a horrendous drought. You never know in these sort of situations. I have to say, at this point we don't have any indications there's something that's hugely volatile that's going to happen. The last part maybe about channels or let's say alternative channels. If I look at the business in the U.S., we are, I would say, relatively strong or very strong in the grocery channel. There's clearly opportunities for us in the club channel, in the dollar channel, as well as in the digital or e-channel space. That's not necessarily with all products, but those are three particular areas where I think that we could probably do a bit better. I think just on the input cost, historically, we have guided on input costs, and we said we wouldn't this year because there wasn't much to guide on. We're not expecting anything very significant. Basically, it's low single digit for the group. We started guiding because we had this massive volatility, and we wanted to help the market understand how we'd manage through that. When it's normal course of business stuff, the guidance seems rather redundant. Chris. Or, well, yeah. Thank you. Chris Growe from Stifel. I just had a question for you in relation to the, if you could quantify or even in broad terms, the amount of innovation, like how much that generates of your sales, whether it is over the last three years or last year, however you look at that. I was also curious, and maybe it fits a bit into Eric's question about channels. Other companies have talked about using innovation, packaging, for example, in the emerging markets to move to get into, say, dollar stores or get into a cheaper format in the developed markets. I am just curious if you are doing that, and if not, how Nestlé is set up to allow for those to flow through the markets. Yeah. Do you want to comment maybe on the group? What we say for the group as far as innovation goes? Just to make sure I use the right figures. Yeah. Sure. I mean, the group level, I mean, Chris mentioned 60/40+. The 60/40+ is also a key driver of innovation because the point of 60/40+ is to ensure that we have consumer preference on blind taste and nutritional superiority relative to its main competitor. If we do 60/40+, and we have it, then we do not necessarily need to innovate because we are already in the best possible position. We did something like 7,000 product upgrades in 2012 out of 60/40+. But we did well into the tens of thousands of 60/40+ tests. So where we were not, where we were already winning, we did not do the innovation. Having said all that, we are churning the portfolio something like every four or five years, setting aside things like Perrier and Spring and the like, which clearly are too pure to be innovated. Yeah. It really varies, to be very frank, by category for us. I mean, this one, much higher rate of innovation and churn. One of the areas where we struggled, very honestly, is in frozen food, where we are now building up an interesting pipeline. As I mentioned, I don't even think I mentioned this one. I have to mention this one. Did I mention Salad Editions? No. Oh. This is a great way to also make a point. A very interesting innovation is that in a category which has not seen necessarily a whole lot of innovation, this has just been launched. It is an add to salad or add to fresh, value-added, frozen components. It includes a dressing. It includes frozen chicken and some crunchy bits. But this allows you basically at home or at work to make a restaurant-quality meal. This is something that's very interesting. When we look at the frozen landscape, a lot of the products that are out there are everything in a bowl or everything in a tray. This is an interesting future area of value-added components. So I'm glad I got this chance to pass that on. You asked a question about the packaging. Oh, yeah, packaging as well. Well, when we often talk about it at Nestlé as PPP or popularly priced products, which in the developed world or developing markets are similar to this, which are small unit cost per item. In the developed world, these are often products which are targeted to certain channels like dollar stores where you need a certain price point. What's very important about these is that they're not a lower quality product. You're not sacrificing quality. What you're doing is you're putting the same product, same quality in a packaging or format or a size, along with it, a route to market that allows us then to be profitable. This category or PPP products for Nestlé are growing at more than twice the rate of the balance of our products here and are profitable as well. Okay. Why don't we do this? We'll go ahead to the breakout room and take some more questions. Please, again, join me in thanking Nestlé for being here and for sponsoring the coffee all week. All right. Thank you very much.