Letter to our shareholders
Nestlé stands for Good food, Good life. Quality of food and quality of life go together. What and how we eat and drink is fundamental to our health and wellness, today and for the future. Our Nutrition, Health and Wellness journey is guided by our Creating Shared Value approach to business. We live our purpose and responsibilities to our shareholders, the communities in which we operate and the planet on which we live. We aim to be trusted and dependable. That means responsibly manufacturing our products and managing our supply chain, bringing meaningful innovations to market, and building brands that delight and do good. We do this in a way that is true to the values that our company has been built on for more than 150 years. Because Good food and Good life are good business.
Our balanced pursuit of top-line growth, bottom-line performance and improved capital efficiency is delivering sustainable results.
We continue to drive profitable growth and progress towards our mid-term targets through:
- A sharpened focus on Nutrition, Health and Wellness
- Faster innovation
- A simpler, more cost-efficient organization
- Purposeful use of technology
We believe that our company can only be successful in the long term by creating value both for our shareholders and for society.
Read the full letter to shareholders below.
Delivering results sustainably
2019 was again a year of progress on all fronts for Nestlé. We delivered improved and industry-leading results, with a balance of top- and bottom-line growth. Highlights include:
- Actively managing our portfolio. We sharpened Nestlé’s strategic focus on food, beverage and nutritional health products.
- Accelerating innovation. Science and technology are fundamental to Nestlé. We made fundamental changes in our research and development. This is empowering Nestlé to anticipate changing consumer trends, with faster innovations and product launches.
- Embracing new technologies. We continued to advance our capabilities, from digital marketing and e-commerce to supply chain traceability.
- Taking a leadership role in sustainability. We accelerated actions to tackle climate change and we committed to zero net greenhouse gas emissions by 2050. We made substantial progress on our journey to make 100% of our packaging recyclable or reusable by 2025.
Making progress toward our growth and profitability targets
Our long-term value creation model is based on the balanced pursuit of top-line growth and bottom-line performance as well as improved capital efficiency. Our ambition is to reach a sustainable mid single-digit level of organic growth as from 2021 / 2022 and to increase our underlying trading operating profit margin to between 17.5% and 18.5% in 2020. We are pleased with our progress against these targets:
- Organic growth increased to 3.5%, with 2.9% of real internal growth (RIG) and pricing of 0.6%. Increased organic growth was supported by good momentum in Nestlé’s largest market, the United States, and Purina PetCare. Innovation was key to the accelerated growth.
- Total reported sales increased by 1.2% to CHF 92.6 billion (2018: CHF 91.4 billion). Net divestments had a negative impact of 0.8% and foreign exchange reduced sales by 1.5%.
- Underlying trading operating profit (UTOP) margin increased by 60 basis points in constant currency and on a reported basis to 17.6%.
- Underlying earnings per share growth increased by 11.1% in constant currency and by 9.8% on a reported basis to CHF 4.41.
- Free cash flow increased by 10.9% to CHF 11.9 billion (2018: CHF 10.8 billion).
Based on these results, the Board of Directors has proposed a 25th consecutive increase of the yearly dividend to CHF 2.70, to be paid in April 2020.
Sharpening our strategic focus around nutrition, health and wellness
Harmonizing and simplifying our organizational structure
We took the decision to migrate the globally-managed Nestlé Waters business to our three geographic Zones from the start of 2020. This represents a further step toward harmonizing and simplifying our organizational structure. The move is expected to increase responsiveness and competitiveness, as Nestlé Waters generates around 60% of its sales through local brands. This structure change follows the successful migrations of Nestlé Nutrition and Nestlé Professional into the Zones.
Boosting organic growth through fast innovation
An engaged generation of consumers is driving a new food ideology, with trends toward more natural and organic foods, plant-based proteins and simpler, healthier ingredients. They expect brands to provide experiences beyond the product, be authentic and act as a force for good – both socially and environmentally.
These forces have led us to redefine our approach to new product development with shorter innovation cycles and faster launches. During 2019, we shortened timelines of fundamental research projects by 30% on average. Fifty key fast-track projects made the journey from idea to launch within 12 months. In total, we introduced around 1400 new products worldwide and reformulated 4000 products to improve nutritional value.
Starbucks. The rapid launch of our Starbucks portfolio is a prime example of how we aim to act with urgency and speed to maximize growth opportunities. Within six months of acquiring the license, we successfully launched the first wave of new products. In 2019, we launched 29 Starbucks products into more than 40 countries and generated incremental sales of more than CHF 300 million.
Plant-based food. We believe that plant-based products should be delicious, offer a better nutritional profile and have a lower environmental footprint compared to meat. Through our strong innovation capacity, we developed our Garden Gourmet Incredible Burger in one year and launched it successfully in 10 European countries during 2019. We also launched the Awesome Burger in the United States under the Sweet Earth brand. Both Garden Gourmet and Sweet Earth have developed a wide range of plantbased products that go beyond the burger, including vegan alternatives to chicken, cheese and bacon. We have the ambition and scale to be a major player in this area.
Leveraging technology at all levels of our business
Science and technology touch every part of our business from farm to fork. As suppliers, customers and consumers are increasingly going digital, we are also adapting and evolving our way of working. We take practical inspiration from experts and pioneers across all industries and look to understand emerging, long-term trends with the advice of our Scientific & Technology Advisory Council.
Digital transformation. We are investing in digital transformation across marketing, social media, e-commerce, manufacturing and supply chain. This helps us become data-powered, develop new business models, and deliver more personalized products, messages and services for our consumers.
Supply chain transparency. During 2019, we became the first major food and beverage company to pilot open blockchain technology. This allows consumers to track our food right back to the farm. This is part of Nestlé's journey toward full supply chain transparency and traceability. We want our consumers to make an informed decision and be able to choose responsibly produced products.
Fueling growth and returns through cost efficiencies
Driving efficiencies across the organization is critical to free up resources for investment in product innovation and brand building, while improving returns. We continued to make progress in reducing our structural costs across administration, procurement and manufacturing. Our structural costs in percentage of sales declined for the third consecutive year, reflecting our ability to control costs even as we grow our businesses.
As part of our structural cost savings program, Nestlé USA started to transition its pizza and ice cream businesses from a frozen Direct-Store-Delivery network to a warehouse distribution model. This change will leverage the highly-efficient warehouse network that is already used for frozen meals and snacks. Leveraging a simpler route to market unlocks resources we can use to fuel our efforts in demand generation, such as product innovation and brand building. This is a key step to support Nestlé's profitable growth.
Returning significant cash to shareholders
In 2019, we returned CHF 16.9 billion to shareholders through dividends and share repurchases. Share buybacks amounted to CHF 9.7 billion, as part of our buyback program started in July 2017. Over the last fifteen years, Nestlé has returned CHF 153.6 billion to shareholders, of which CHF 67 billion has been in the form of share repurchases.
On December 30, 2019, Nestlé announced to distribute a further amount of up to CHF 20 billion to shareholders over the period 2020 to 2022. We intend to maintain the company's longstanding sustainable dividend practice. The new distribution reflects Nestlé's continued strong cash generation as well as significant cash inflows from disposals. We maintain a preference for value-creating investments in our food, beverage and nutritional products businesses. We will retain the flexibility to adjust the amount distributed through share buybacks, should any sizable acquisitions take place.
Taking a leadership role to be a force for good
Companies that Create Shared Value demonstrate that business should be a force for good. Making a real contribution to society and helping to find solutions to global challenges is fundamental to our way of doing business. To give focus to our efforts, we have set goals that include best environmental, social and governance practices across our operations.
Board of Directors engagement
Our Board of Directors takes an active role in providing guidance on our long-term Nutrition, Health and Wellness strategy and Creating Shared Value approach to business. We continue to add new perspectives and relevant experience to the Board. In 2019, we appointed two independent directors with expertise in food retail and technology.
During the year, the Board conducted deep-dive analyses of our infant nutrition, coffee and Nestlé Health Science strategies. It also evaluated the company's postacquisition returns and performance and reviewed our digital strategy. The Board approved the sale of our U.S. ice cream business to the Froneri joint venture and the sale of a 60% stake of Herta to create a joint venture with Casa Tarradellas.
The Board agreed to accelerate action on climate change and committed to achieve zero net greenhouse gas emissions by 2050, consistent with a 1.5° C path defined by the Paris Climate Agreement. It also reviewed our Creating Shared Value approach to business and progress against our commitments. It endorsed our broader vision and action plan on achieving a waste-free future by tackling plastics packaging and reviewed progress on gender and inclusion.
The Board carried out an analysis of the company's financial structure and resolved that a further CHF 20 billion be distributed to shareholders between 2020 and 2022. The Board continuously monitors the returns and strategic options of our financial investment in L’Oréal. The Board visited Nestlé in Switzerland on its annual market visit in 2019 after visiting the United States in 2018.
Value for all stakeholders
We believe that our Creating Shared Value approach enables us to optimize value for our shareholders and have a long-term positive impact on all stakeholders connected to our business. This includes: employees, consumers, business partners, as well as the communities in which we operate. We take this opportunity to thank all our employees for their dedication and energy in driving our results. We also express our gratitude to the communities in which we live and work. Finally, we thank you, our shareholders, for your continued support, trust and confidence.
U. Mark Schneider
Chief Executive Officer