Rainer E. Gut
Chairman of the Board
(Script version - not checked against delivery)
Ladies and Gentlemen,
Your Company looks back on a year marked by sharp contrasts. We are quite pleased to be able to announce that 2004, once again, resulted in a growth of sales in real terms and in an improvement of our operating margin. It is true that organic growth, with 4.5 percent, remained slightly below our objective. It is, however, the tenth consecutive year in which we show growth and combine it with a constant improvement of our operating result. For a Company the size of Nestlé, this is a remarkable achievement.
Economic slowdown and a negative consumption climate continue to affect two key countries of the European Union. I am happy to point out, however, that Southern Europe, as well as Central and Eastern Europe see a good development.
This also applies to the Americas, Asia and a good part of the Middle East and Africa, where our business has progressed well. Overall then, we have good reason to be satisfied with the organic growth of 4.5 percent. In Swiss francs, however, our sales figures retreated slightly as a result of the combined negative currency effect as well as some divestments. This is not a novel phenomenon – we see it happening, in 2004, for the third consecutive year – and it need not worry us. In fact, using the world’s most solid currency for consolidating the accounts of a Group that does 98 percent of its sales outside of its country of origin is in itself a perpetual challenge and forces our management and our staff to be particularly rigorous in conducting our business.
Our business is doing well. This is underlined by the repeated improvement of our operating margin which now reaches 12.6 percent. Let me emphasize that this result was obtained in a period that was anything but favorable. Indeed, raw materials – from coffee to grain – went up significantly; I also remind you of the effect of higher oil prices which impact not only our transportation costs but also the cost of packaging materials. You are finally aware of the intense competitive climate in our sector during the past year. Consumer pessimism in Western Europe and the rush to discounted prices clearly exerted downward pressure on our margins. To be able to produce an operating margin improvement under those circumstances is an extraordinary success and gives rise for great optimism for the future.
As for our net profit of 6.7 billion francs, it results in a net margin of 7.7 percent.
The good results and the favorable perspectives moved your Board to submit a dividend proposal which would increase the payout 11 percent to eight Swiss francs. Provided you agree to this proposal, Nestlé will pay out nearly half of its profits to its owners – 46.3 percent to be precise – in the form of dividends.
You saw, Ladies and Gentlemen, that cash flow reached 10.4 billion Swiss francs in 2004. This amounts to 30 million Swiss francs that end up in our coffers day after day. This extraordinary capacity to generate cash allowed us once more to reduce net debt and put us in the enviable position that one year’s cash flow amply covers existing debt. In this perspective, the solidity of our AAA rating hardly needs discussing. We are the only European industrial company which has such a rating and we intend to keep it because of the added flexibility the AAA rating gives us in our financial operations and the lower cost it brings.
You will also have noticed, Ladies and Gentlemen, that the investments in fixed assets have remained at the same level as last year. Our industrial capacity meets our needs for the time being. It also so happens that no important acquisition is on the horizon. You certainly remember the major acquisitions which allowed us to accede to leadership positions in ice cream, pet care and in water. In the area of nutrition, which will form a particularly interesting axis for growth in the years to come, there are no large corporations that are likely to come on the market. In this situation, that many competitors would envy, the Board has authorized management to buy-back shares for an amount of up to one billion Swiss francs. The operation will take place in the second part of the year and next year, you will be asked to approve the cancellation of the purchased shares. This will result in the dividend being paid on a smaller number of shares, leading to a higher book value and – most probably – also to higher share prices for Nestlé.
I would like to reassure you, Ladies and Gentlemen. Nestlé is not discarding its long-term development strategy in order to glean financial advantages. The possibility which came up this year results from a given set of circumstances and gives us more flexibility in managing our capital structure. We will make use of it in keeping with the principle that has long inspired our action – value creation through sustainable and profitable growth.
Through our flexible and dynamic dividend policy, and with this measure that directly influences the value of your shares, we believe we are in a position to contribute to an attractive total yield of your investment. It is true that the stock market over these past two years has been somewhat disappointing for Nestlé and in no way reflects the development of our business. Furthermore, the sector as a whole stagnated on the stock market and the difficulties that some of the important actors had to confront are not a surprise.
As for Nestlé, we did show an organic growth of between 4.5 and 6 percent, year after year, and we have continuously improved our operating margin which, in 10 years, has climbed from 9.8 to 12.6 percent. This is a significant improvement and, what’s more, it was achieved without ever compromising the long-term development of the Company. Our expenditures for Research & Development have risen; we continue to invest significant amounts in supporting our brands and we have never hesitated to seize the opportunity of acquiring a strategically important company.
No wonder then that Nestlé confirms and enhances its leadership position in its sector. It is by combining top-line growth and the improvement of operating performance that ensure the future of a company. You, Ladies and Gentlemen, some of you long-time investors in Nestlé, are well placed to be aware of that. Let me simply remind you that in 1980, 25 years ago, the market value of our Company amounted to approximately 7 billion Swiss francs. Today, the market values Nestlé at some 125 billion francs, an increase of about 1 700 percent in 25 years. Granted, three equity increases occurred in that period, in 1984, 1989 and in 1993, but their modest size does not explain the extraordinary development of the share price. In a longer term perspective, the two last disappointing years are therefore nothing but an insignificant blip that in no way threatens the attractiveness of your investment. Let me further point out that this success is founded on an exceptionally sound financial basis, as indicated by our AAA rating. Our participations in L’Oréal, as well as in Alcon, play a very positive role in the development of our profits.
Overall then, our perspectives for the future are very positive. We own strong and well-established brands; our presence is universal, covering also those areas where demographic growth and increasing purchasing power drive progress; our regular investment in Research & Development ensures a pipeline of new high added-value products. We also have defined a long-term strategy that allows us to face the future with confidence. This strategy consists in strengthening our position in key areas. This is exactly what we did with the acquisitions of Ralston Purina in the pet care sector, with Dreyer’s in ice cream and with numerous smaller acquisitions in the water business. Finally, we put our agreement with L’Oréal on a new basis with perfect transparency and offering a large degree of freedom of action to both partners in the future.
The Group’s principal asset, however, Ladies and Gentlemen, are the women and men who make up the management and the staff of the Group across the world. Without their hard work, their creativity, their punch and their motivation, none of the successes I have just described could have been achieved. I would like to express to them, in your name also, our deep gratitude and recognition.
We are proud of the value system that exists in Nestlé; we are proud of the loyalty shown by our people at all levels and we are proud of our attitude as a responsible employer that really cares about its staff. Finally, we are proud of the quality of our people who continuously show their adaptability and their flexibility allowing them to adopt tools or working methods that help them deal with acceleration and growing competitive pressure.
I have never been as impressed with the Nestlé family spirit as when I read the reports about the catastrophic tsunami that struck Asia. Our broad presence in these countries and the great number of Nestlé staff members who visit southern Thailand privately lead to some of them paying a heavy price in the tragedy. Quietly, without fanfare or grandstanding, our local companies swung into action in those tasks that were most urgent, bringing help and succor to the hard-hit people and the rescue teams. The groundswell of generosity was extraordinary and Nestlé, with its direct, concrete and focused aid once again showed closeness, compassion and competence that forms part of our image in these countries.
You will allow me, Ladies and Gentlemen, to close on a personal note. For 24 years, I have had the privilege of being associated with this Company. After my election as Director in 1981, I have had the opportunity of broadening my knowledge. As Vice-Chairman and Chairman of the Board, I purposely made it a point to get to know the women and men who run this Company. I did so in the course of more than 40 trips which took me to all continents. And I am happy to report here to what extent I was impressed by the human qualities and the professional competence of these people. They fit perfectly into a given framework, they know their markets like their back yard and they are determined to ensure the success of our businesses. Better yet: they are the champions of a universal value system. Whether in Malaysia or in Argentina, you immediately know that you are in a Nestlé factory or in a Nestlé office. This Company has the good fortune to have in its employ an extraordinarily well-supplied reservoir of competent and motivated managers, allowing it to fulfill the needs of the Company mainly through internal promotion.
You are the owners of a Company in an industrial sector where the human factor plays a key role. What distinguishes us from our competitors is less likely to be found in technology or know-how, in the end it is the quality of our people that makes the difference. Compassion, wanting to help one’s neighbor in danger or in distress, is a reflex that forms part of a universal value system. These values are ingrained in the Nestlé culture, and having seen top leadership, management and staff in action over 24 years, I am entirely confident that this culture will continue to mark their attitudes and their actions in the years to come.
Ladies and Gentlemen, after this General Meeting, I will step down from the Chairmanship and from the Board of your Company. As you could see in the media, your Board has decided to entrust the Chair to Mr. Peter Brabeck-Letmathe who, since 1997, has been successfully running Nestlé as Managing Director. You have authorized the Board to constitute itself, and the Board, to the best of its conscience, opted for the solution that is most appropriate under the circumstances and the present personnel constellation. By entrusting the double mandate to Mr. Brabeck, your Board has, pragmatically and responsibly, chosen a structure that Nestlé has resorted to in the past and that worked out well.
This decision, made after deep reflection, results from a particular set of circumstances. In principle, we also believe that separating the two functions is the solution that would have our preference. In fact, looking back over the past 85 years of Nestlé, you will see that only 12 of them saw a manager assuming both roles simultaneously. Seven of those 12 years, by the way, were marked by the chairmanship of Mr. Helmut Maucher who laid the base for the spectacular expansion of the Group.
At the present time, most members of the Board as well as of the Executive Board have not been in office very long. We also believe it to be important not to name a new CEO while the strategic re-orientation of Nestlé, started by Mr. Brabeck in the year 2000, has not yet been concluded. We are convinced that it is vital to ensure strategic continuity and strong leadership at all times. This is why we refuse to be hobbled by voluntarily introducing limitations that go beyond what Swiss law and the Swiss standards of corporate governance prescribe. Such a decision would go against the policy that has always been the Board’s, namely the determination to create value through profitable, sustainable and predictable growth.
This is, Ladies and Gentlemen, what led our shares to become one of the preferred investments of pension funds. I am therefore somewhat disappointed that several public pension funds have chosen to follow the precepts of a fund that specializes in sustainable investments. I do not believe that the work of the Board of Directors of Nestlé deserves such mistrust and I must wonder about the true motives that led to the proposals you are going to be voting on in a few minutes.
On these issues, Nestlé has always followed a pragmatic policy, based on common sense and on the experience of its managers. With Peter Brabeck, we have the certainty of entrusting Chairmanship and management to a man who can be trusted and who is profoundly steeped in the corporate culture and in the principles of Nestlé. Furthermore, he has the competence and the charisma to lead Nestlé into an even brighter future.
As for me, Ladies and Gentlemen, I leave my functions in Nestlé with the conviction of handing a strong corporation to my successor, with excellent perspectives and which will continue to lead its sector over the next decades. I have drawn much satisfaction and pleasure from my different attributions in the Group and I take pride in having been able, together with the entire Board, to contribute to the development of Nestlé over all these years.
I therefore take my leave by wishing Nestlé a great future and by wishing its owners, its staff and all those who, in one way or another, are linked to Nestlé, much satisfaction.
Thank you for your attention.
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