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Good morning, Ladies and Gentlemen, and welcome to the Nestlé 2007 results press conference. I want to thank you for your interest and your presence, and I also extend a warm welcome to all of your colleagues and the investors who follow this press conference through the webcast.
You will have seen - or heard - the figures that went out this morning; you can find full details in the press release in your folder. As is our custom, we have already given TV interviews, conducted brief meetings with the representatives of the wire services and Jim Singh took the financial community through a presentation of the Group's results. The facts are out and I am pleased to be able to comment on them in a more strategic perspective, together with my colleagues from the Executive Board. Let me briefly introduce them to you.
On my right, Mr. Paul Bulcke, who as you know, will assume the function of Chief Executive Officer on April 10 of this year.
On Paul's right, Mr. Jim Singh, Chief Financial Officer of the Group since the beginning of this year. Jim also supervises the newly created Global Business Services, the Legal and Intellectual Property Departments.
Mr. Frits van Dijk, who is running Zone AOA, sits on Jim's right.
On his right is Mr. Paul Polman, who is now in charge of Zone Americas.
Next to him, we have Mr. Luis Cantarell, Head of Zone Europe.
To his right you have Mr. John Harris, Executive Vice President, who has been in charge of Nestlé Waters since December of last year.
Next to him we have Richard Laube, promoted to Executive Vice President since January, who leads the global Nestlé Nutrition business.
On my left, François Perroud of Corporate Communications.
Next to him sits Mr. Francisco Castañer, who supervises our pharmaceutical activities, liaises with L'Oréal and is in charge of Human Resources.
On his left, Mr. Werner Bauer, our Chief Technology Officer who is in charge of all our Research and Development as well as Regulatory Affairs and who is one of the key drivers of our innovation and renovation activities both within the Group and in our outside contacts and cooperations.
Next to him you find Mr. Lars Olofsson who supervises the Strategic Business Units, the Generating Demand Unit and Nespresso.
On his left, you have Mr. José Lopez, who is running the Group's Operations Division. This is a highly integrated unit that makes certain that the interface between the Ensuring Supply function and our commercial activities functions smoothly. We have put Supply Chain, Manufacturing, Quality Management, Safety, Health & Environment, Engineering, Agriculture and Operations Performance under one roof in that division. GLOBE, in view of its key operational dimension, also reports to José.
And finally, on the far left of the podium, Mr. Marc Caira, Deputy Executive Vice President, who is in charge of "Nestlé Professional", our centrally managed strategic food service business which we presented in more detail during our October press conference.
This then, Ladies and Gentlemen, is the management team that will lead the Nestlé businesses in the years to come. It is strong in experience, in diversity and in leadership, and with a proven record of achieving ambitious targets. I am entirely confident that this group's commitment to delivering the Nestlé model for 2008, and for many more years to come, ensures continued success in our determination to create long-term, sustainable shareholder value.
Let me now, Ladies and Gentlemen briefly sketch what I consider to be the main conclusions from the figures before you. Nestlé has built a unique momentum over the last years, based on operational efficiency, strategic and operational transformation and unrivaled leadership positions on a global scale. 2007 accelerated this momentum even further.
In absolute terms, our Group sales have grown by more than 9 billion Swiss francs to 107.6 billion. Please note that our core business - food and beverage - amounts to 100.3 billion Swiss francs, while our pharma and cosmetics sector counts for 7.3 billion francs. Growth thus stems essentially from our core activities, driven by positive performances in every single product category. As for profits, I note with satisfaction that we again achieved an EBIT improvement amounting to 50 basis points and that our operational profit margin now stands at 14 percent, as compared to 9.8 percent when we first launched the Nestlé model. Net profit also climbed significantly to 10.7 billion Swiss francs, amply justifying yet another dividend increase of 17.3 percent to 12.20 Swiss francs per share.
And let me add that these results were not just handed to us in an easy year. In fact, they were achieved in a period with extremely high input costs and many market disruptions. While it is true that we were well served by having foreseen already in 2006 that raw material prices would go up and that we took all measures necessary to diminish their impact, it is very important to realize that Nestlé has clearly gone beyond the stage of a mere food and beverage company where input costs are a key factor of success.
Indeed, our performance is largely driven by innovation, by our capacity to bring new, value-added products and services to the market. This also, Ladies and Gentlemen, is a result of our strategic re-orientation in the direction of nutrition, health and wellness. Add to this an increased attention to disciplined finance management, more speed and more skill in execution, and you can easily see where our confidence in the future comes from.
And with that, Ladies and Gentlemen, I hand over to Jim Singh for a detailed look at our results.
- Jim Singh Presentation -
Thank you, Jim.
Ladies and Gentlemen, let me now put these truly great results in perspective.
I first want to mention a few elements that underscore the quality of these figures. Let me draw your attention to the fact that the top-line growth results mainly from an outstanding increase in our food and beverage sales. With 7.1 percent organic growth, clearly far above the industry average, the Group set itself apart from the overall sector.
As I pointed out before, the improvement in our sales is right across the entire business, with all categories contributing to the strong performance. I want to draw your attention to the progress achieved by the chocolate and confectionery segment for example, which, after many years of lackluster results, benefited from a new and inspired leadership. This turnaround demonstrates how important management skills and innovation really are – especially in mature businesses!
Clearly, this was not an easy year. After several years of a decreasing cost of goods sold, the sharp upward movement of input costs resulted in a net 60 basis-points rise of COGS. We did manage to contain these costs to some extent. We were helped by the fact that we foresaw raw material costs going up before some others did and we were thus able to hedge some of our raw materials quite efficiently. We also adapted recipes, eliminated more than 10 percent of all stock keeping units and, finally, adapted our prices in a timely manner to take into account the new reality. This is clearly reflected in the significantly higher pricing component of our organic growth. With three percent, this has reached a level amongst the highest attained in my 12 years as Chief Executive.
As you know, raising prices almost always impacts sales growth. In this trade-off, the Group greatly benefited from the strength of its brands. Consumer trust and loyalty everywhere remained strong. We were thus able to grow our volumes, by adapting our offer. At the same time, we continued to invest in brand support and research and development, as shown by the increased expenditure of 1.5 billion and 150 million Swiss francs respectively. On the other hand, structural marketing costs and administrative expenses came down as a result of continued efforts to improve efficiency in the white collar area.
In short, Ladies and Gentlemen, 2007 was one more in an unbroken string of 12 successful years for the Group. The Nestlé model once again proved its relevance. I think we have now delivered definite proof that Nestlé can, simultaneously, strive for top-line and bottom-line growth. Our ambition to combine complexity with operational efficiency has worked out.
In the course of the past 11 years, we reached an average organic growth of 5.9 percent with sales moving from 70 billion Swiss francs to 107.6 billion, and from 48 billion US dollars to 90 billion dollars. Our internal or volume growth amounts to 3.7 percent on average. Our strategic acquisitions, while sizable, and very important for the future development of the company, did not, once net of divestitures, contribute more than 0.9 percent to that growth.
At the same time, between 1996 and 2007, we pushed our EBIT margin from 9.8 to 14 percent of sales. This is a steady, sustainable improvement which means that in money terms our EBIT evolved from 6.2 billion Swiss francs in 1996 to 15 billion in 2007, an average growth of 10 percent per year. Finally net profit rose from 4 billion Swiss francs to 10.6 billion.
In US dollars, the evolution is even more evident. But both in francs as well as in dollars, sales grew faster than the industry overall, EBIT grew faster than sales and net profit grew faster than EBIT. I think this is a compelling illustration of the momentum in Nestlé.
Let me add that our EBIT improvement is not primarily a result of our savings initiatives, even though they were very rewarding. You know that no company can save its way to success: at the end of the day, sustainable growth needs a viable and future oriented business model. While our operational improvement projects, Market Heads 97, Target 2004 and Operation Excellence kept us fit and competitive, the EBIT improvement came primarily from a voluntary change in our product portfolio, where value added innovations took a much larger place.
And this, Ladies and Gentlemen, is exactly the point of our strategic and structural transformation over the past years.
We took a look at demographics and identified the areas where Nestlé could bring its competitive edge into play. Nutrition, health and wellness, popularly positioned products, the out-of-home sector and finally premiumization are the vectors, where Nestlé can make use of its unmatched R&D capabilities, its geographic reach and its leading brands.
But that strategy requires a structure that gives these businesses enough leeway and focus to cater to their specific consumers, distribution channels and production needs. It is a fleet of fast-moving vessels, rather than one super-tanker, that is best suited to serve the favelas of Recife as well as the sophisticated coffee drinkers of Paris. This is why the Group today comprises stand-alone, centrally led operations such as Nestlé Waters, Nestlé Nutrition, Nespresso and Nestlé Professional while at the same time the bulk of our traditional business is and will remain firmly anchored in our geographic structure.
Finally, the Group needed a tool allowing us to operate this flotilla in an efficient and coordinated way. We wanted an instrument that let us fully leverage the size of the Group, for instance in procurement and in customer relationships. The Global Excellence program (GLOBE) provides this tool by supplying the key elements for operational excellence and management information. It also makes it possible to create an array of global business services that serve the needs of our markets and businesses more efficiently and at lower cost.
It is a source of pride that we managed to implement these fundamental changes while delivering a stream of record breaking results year after year. In fact, cash returned to shareholders since 1996 amounts to 36 billion Swiss francs and total shareholder return in that period was over 400 percent.
I am also pleased by the fact that Nestlé is increasingly recognized as a respected, ethical company with a strong investor focus. Barron's, a prestigious US publication, recently published its annual survey of "Most Respected Companies", based on a broad poll of investors in North America. Nestlé is ranked 7th, the first European company, and one of only two non-US companies among the first 20. We have consistently improved our ranking over time. Here are the three criteria for respect most often quoted by participants: strong management, sound business strategy and ethical business practices.
Overall, then, I will hand over a very healthy, forward-looking business with excellent perspectives to Paul Bulcke on April 10 of this year. The strategy is in place, the structures have been adopted. It is also a great satisfaction that all of these changes have been planned and implemented with this great management team which will accompany him into the future and into another period of consistent growth and performance improvement.
I now would like to comment on another topic that is going to be in the forefront of our annual general meeting in April. Most of you are aware of our project to modernize our Articles of Association. The Board, acting on a very explicit mandate voted by our shareholders 2006, has drafted a proposal. In April that proposal will be submitted to the annual general assembly. The Board feels that the new Articles reflect today's legislative and corporate governance environment and that they meet the expectations and the sometimes conflicting priorities of the shareholders. Above all, they are in the interest of the company and its owners in that they ensure the creation of long-term, sustainable shareholder value. The Board feels that it has come up with a balanced, forward-looking proposal and intends to submit it to the shareholders in a single vote. Let me briefly describe the key changes.
First, we propose to abolish the attendance quorums and the supermajority which are simply not workable anymore because of the number of shareholders who do not wish to register their shares. Important decisions, such as those related to our capital, can in the future be voted with a two third majority of the shares represented at the annual general meeting.
We then reduced the number of shares required to put an item on the general meeting's agenda. Whereas one needed one million shares, corresponding to about 0.25 percent of the total share capital, to do so in the old Articles, we now propose to place that threshold at 0.15 percent.
In our proposal, the terms of office for Board members are reduced from five to three years. We believe such terms are required in view of the complexity of the company and the desirability of avoiding all Board members coming up for election at the same time. We see this also as an element that reinforces the independence of the Board.
Finally, the Board recommends increasing the limitations relating to the voting rights from three to five percent. This was clearly the most contentious issue between our different shareholder groups. The Board favors a solution that affords a degree of protection to our smaller shareholders and ensures the long-term interests of the company, while removing the procedural hurdles that made changes to our Articles impossible. Indeed, with the abolition of the quorum and supermajority clauses, shareholder proposals are possible and if two thirds of the shares represented consent, the five percent limit can be modified.
On the occasion of our annual general meeting, we will also take leave from one of our Board members, Professor Peter Böckli. The Board is deeply grateful to Professor Böckli for his wise counsel in the key area of corporate governance and for his important contribution since he joined the Board in 1993. He was a member of the Audit Committee and he chaired the Board's Compensation and Nomination Committee.
Both Vice-Chairmen of the Board, Messrs Andreas Koopmann and Rolf Hänggi are up for re-election. Their contribution is on record and I look forward to working with them in the years to come.
The Board proposes the election of two new members. Mr. Paul Bulcke, whom you all know and who should become our "Administrateur dèlégué" as well as Mr. Beat W. Hess, Group Legal Director and member of the Group Executive Committee of Royal Dutch Shell.
Mr. Hess, a Swiss citizen, brings extensive legal knowledge and a broad business experience to the Board.
Before coming to the outlook for 2008, I would briefly like to mention some changes in our communication department. As you know, we have over the past years significantly increased our efforts to better communicate the Nestlé approach to a sustainable and socially responsible business conduct. In order to put this effort in a strategic context, both in Switzerland and internationally, we have appointed a Corporate Communication Director in the person of Mr. Rudolf Ramsauer. He joins us from EconomieSuisse and brings a broad experience in national and international issues to his new function at Nestlé.
Today, I am not the only person sitting on this podium for the last time. After nearly 30 years with Nestlé, François-Xavier Perroud will retire at the end of April. He is undoubtedly one of the longest-serving, if not THE longest-serving corporate spokesman in Switzerland. He could sometimes be tough, but he was always straight and totally reliable. I would like to express my personal thanks to François for his exemplary loyalty, for his absolute personal integrity and for the services he rendered to the Company. As his successor at the head of the newly named "Corporate Media Relations Department" I welcome Mr. Robin Tickle, Mr. Perroud's deputy, who is already well-known to many of you.
Well, this brings us to the outlook for 2008. I think the best person to speak to you about that is my friend Paul Bulcke, who is going to have to explain to you, one year down the road, how close to reality we came.
Paul Bulcke Presentation
Thank you, Paul, and we will now be glad to take your questions. Who would like to start?
Questions and Answers
Thank you, Ladies and Gentlemen, for your active participation. I now take leave from you, as this was my last press conference as Chief Executive Officer. I have appreciated the contacts with you over the past 12 years and I have gained many valuable insights from your comments and questions. I encourage you to keep on following our company and it is my pleasure now to invite you to join us for the apéritif and the stand-up lunch to follow.