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Letter to shareholders

For more than 150 years, Nestlé has consistently delivered sustainable, industry‑leading results by offering healthy, delicious, convenient food and beverage products and services. In a rapidly-changing environment, the key to our success has been our ability to balance continuity with change. It has required discipline and decisive actions to build sustainable value for the long term. We continue on our Nutrition, Health and Wellness journey, while we stay true to our purpose and values. We change by adapting our portfolio to meet evolving consumer demands, pushing the boundaries of science, accelerating innovation, as well as driving greater agility and efficiencies. Our people are embracing these changes with passion and dedication. This gives us confidence that Nestlé is well positioned for the future.


On track to meet our 2020 goals

Our value creation model is based on a balance of top-line growth and bottom-line performance, as well as improved capital efficiency. We plan to reach mid single-digit organic growth by 2020. We also aim to increase our underlying trading operating profit margin to between 17.5% and 18.5% (from 16.0% in 2016). Our 2018 results demonstrate that we are on track to meet these targets:

  • Organic growth was 3.0%, with continued strong real internal growth (RIG) of 2.5% and pricing of 0.5%. Growth was supported by stronger momentum in the United States and China, as well as in infant nutrition.
  • Total reported sales increased by 2.1% to CHF 91.4 billion (2017: CHF 89.6 billion). Net acquisitions had a positive impact of 0.7% and foreign exchange reduced sales by 1.6%.
  • Underlying trading operating profit (UTOP) margin reached 17.0%, up of 50 basis points. Trading operating profit (TOP) margin increased by 30 basis points to 15.1%, reflecting higher restructuring-related expenses.

Based on these results, the Board of Directors has proposed a 24th consecutive increase of the yearly dividend to CHF 2.45, to be paid in 2019.

Sharpening our strategic focus

During 2018, our Board reaffirmed the Nutrition, Health and Wellness strategy and took decisive steps to sharpen our strategic focus on food, beverages and nutritional health products. Consistent with this, we continued to invest in advancing the high-growth categories of coffee, petcare, nutrition, water, as well as Nestlé Health Science. We manage the other categories for a balance of growth and value. Due to changing industry dynamics and following detailed analysis, the Board determined that future growth opportunities for Nestlé Skin Health lie increasingly outside the Group’s strategic scope. It therefore decided to explore strategic options for Nestlé Skin Health in the best long-term interest of this business and Nestlé shareholders. The review is expected to be completed by mid-2019.

We further accelerated our portfolio management through targeted acquisitions that come with high growth potential, deliver attractive returns and build on our leadership positions. We acquired the perpetual global license of Starbucks consumer packaged goods and foodservice products. With Starbucks, Nescafé and Nespresso we have brought together the world’s most iconic coffee brands. We acquired Atrium Innovations, a global leader in natural, non-GMO vitamins and supplements. In addition, we completed the divestiture of our USA confectionery business, where our low market share constrained our ability to win in that market. We also completed the sale of the Gerber Life Insurance, which was non-core to our business.

We are executing on our Nutrition, Health and Wellness strategy and creating sustained value for shareholders and society over the short and long term.



 

Accelerating growth through innovation in a fast-changing environment

In 2018, we delivered improved revenue growth and profitability. We achieved this in the context of a volatile economic environment and significant disruption in both our industry and the retail sector.

Consumer tastes, preferences and expectations are changing at an unprecedented rate. Trends towards more natural and organic foods, plant-based proteins, as well as simpler and healthier ingredients, are redefining the pace at which we need to innovate. Our growth was supported by disciplined execution and short innovation cycles. In order to launch new products quickly, we use rapid prototyping and leverage our industry-leading R&D network for quick in-market testing. Examples of fast product innovation include KitKat Ruby, the Yes! snack bar, Perrier & Juice, and Garden Gourmet, an authentic vegan meat analogue offering.

Moreover, the rise of digital and online shopping is fundamentally changing the retail industry. We are embracing the opportunities offered by the digital transformation across marketing, social media and e-commerce. In doing so, we are delivering more personalized products, messages and services directly to our consumers. In 2018, our e-commerce sales grew organically by +18% (+25% excluding Nespresso) and reached 7.4% of total Nestlé sales. There were also strong contributions from other fast-growing channels, such as Direct-to-Consumer, Convenience, Club, Value, Natural, Specialty stores, as well as Out-of-Home. We are constantly adapting our business models to wherever people look for our brands and products.

Our consumers do not just care about what they eat, but they also care about how products are made and their impact on the environment and society. We have placed packaging and plastics at the top of our agenda by announcing our goal to make 100% of our packaging recyclable or reusable by 2025. We are also pursuing collective action at an industry level in collaboration with our retail partners and governments.

As we look to 2019, we see that input costs are rising, particularly in energy, distribution and packaging. As parts of the world are beginning to see reinflation, notably emerging markets and the United States, the strength of our brands and our ability to differentiate and innovate will continue to be key to our success.

Improving operational efficiency

To fuel our growth and improve returns, we have intensified our drive to find operational efficiencies and reduce structural costs. This reflects our belief that consumers should not pay for our inefficiencies. We have made good progress on our significant cost-reduction programs across the areas of administration, procurement and manufacturing.

We continued to strengthen our business focus through simplified and standardized processes. We increased the penetration of our shared service centers from 17% to 35%, and are on track to reach 50% by 2020. In procurement, we realized significant savings by leveraging our size and scale through three global purchasing hubs. We now source 55% of our requirements through these hubs and this will reach 60% by 2020. In manufacturing we have further simplified our factory footprint and increased capacity utilization.

The savings that we have generated so far have made a significant contribution to the improvement in our underlying trading operating profit margin. In 2018, it increased by 50 basis points to 17.0%.

We also continued to deliver efficiencies in the area of R&D and marketing. The primary focus of these efficiencies is to free up resources to reinvest in growth opportunities and innovation.

We continue to simplify our organizational structure to speed up decision-making and responsiveness to new consumer trends. In 2018, infant nutrition successfully moved from a globally-managed to a regionally-managed business reported within the three Zones. Zone EMENA also continued its transformation to a category-focused organization, while maintaining the connection to local consumers through our Nestlé Markets. In parallel, we have tailored compensation to increase focus on pricing and capital efficiency.

Increasing cash returns to shareholders

In 2018, we returned CHF 13.9 billion to shareholders through dividends and share repurchases. Share buybacks amounted to CHF 6.8 billion, as part of the three‑year buyback program started in July 2017. Over the last ten years, Nestlé has returned CHF 104 billion to shareholders, of which CHF 40 billion has been in the form of share repurchases.

Board of Directors engagement

Our Board of Directors is fully engaged and takes an active role in providing guidance on our long-term Nutrition, Health and Wellness strategy and Creating Shared Value. We benefit from the perspectives of seven new independent directors who have been added since 2015. This includes three directors added in 2018, who bring highly-relevant expertise and experience as leaders of consumer-facing companies.

In 2018, the Board conducted a strategic review that included an analysis of recent trends in the food and beverages industry, as well as our responses to them. During the year, the Board also carried out an analysis of the company’s financial structure. It evaluated the M&A approach and track record. It also decided to explore strategic options for Nestlé Skin Health. In addition, the Board also continuously monitors the returns and strategic options of our financial investment in L’Oréal.

The Board reviewed the progress of Nestlé Business Excellence. It assessed the company’s talent pool, supporting actions to improve gender balance and increase cultural diversity. It examined how the company’s talent acquisition, retention and development strategies are being adapted to cope with the demands of a changing work force.

The Board also visited Nestlé in the United States on its annual visit to a major market.

During 2018, the Board continued its ongoing review of the company’s governance policies and compensation to ensure best practices. The Audit Committee and the Chairman’s and Corporate Governance Committee provided thorough risk oversight. The Sustainability Committee reviewed our environmental, social and governance commitments to support our goal of enhancing quality of life and contributing to a healthier future for individuals and families, our communities and the planet.

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 recognize that we need to continually earn the trust of all of our stakeholders. This must be done through the way we manage our businesses, create products and pursue profitable growth. We emphasize a balanced approach by taking an inclusive view of these stakeholders, placing Nutrition, Health and Wellness at the core of our strategy.

We take this opportunity to thank all our associates for their dedication, initiative 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.

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Paul Bulcke
Chairman

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U. Mark Schneider
Chief Executive Officer