Ladies and Gentlemen,
1998 was an animated year for Nestlé. Indeed, there have not been many periods during which economic or financial crises touched as many different areas of the world. In spite of this difficult environment, Nestlé finished the year with yet another improvement in sales which now approach CHF72bn and in profit. Our company managed to maintain the profit margin at 6% and, adverse operating conditions notwithstanding, the drop in operating margins was very small.
The overall results are significant, in the sense that they allow us not only to close the books in a satisfactory manner but they show without a doubt that the competitiveness of our Company has improved. Thus, in a year in which purchasing power in Asia has been clearly affected by the crisis, when our business in Russia was suddenly hit by the collapse of the national currency, and when some Latin-American countries had to face severe financial problems, Nestlé showed 2.5% growth in its consolidated sales.
More important yet: unlike the previous year, Nestlé had once again to confront monetary headwinds in 1998, as virtually all currencies depreciated against the Swiss franc in which we consolidate our accounts. The overall negative effect amounted to 5.6%. To produce growth in Swiss francs under these circumstances was not easy. In Eastern Europe, after an impressive growth spurt in the first half of the year, our sales in Russia, and to a lesser extent in the other countries of this region, fell at a breathtaking rate as a consequence of the collapse of the Russian banking system. It became virtually impossible to do business and our Company saw its sales reduced by a third from one day to the next. It took extraordinary stamina and inventiveness to maintain our activities in the weeks and months that followed.
Under these circumstances, we have good reason to be satisfied with a real internal growth of 3.3%. During 1998, both our sales and our real internal growth benefited from the good sales development, particularly in the areas of mineral water, of the pharmaceutical sector and breakfast cereals. Nestlé’s broad reach, both geographically as well as in product range, once again proved to be a significant stabilizing factor in a troubled period and allowed us to continue the development of our Company in a very difficult economic climate in several regions of the world.
Nestlé, Ladies and Gentlemen, showed sales growth, but also profit growth at virtually the same rate, and this made it possible to keep the profit margin at 6%. More important yet: we once again increased our expenditures in marketing and in brand support in all markets. Significant investments were made to increase our market share precisely in those countries affected by the crises and we took without delay the necessary measures to face the new situation. Thus, our operating companies immediately started adapting their operating costs; they also launched products whose configuration and packaging took into account the shrinking purchasing power of consumers. Our policy allowed us to maintain a strong presence in the markets and we are in a good position to take advantage of the economic improvement that is perceptible for the second half of the year. Overall then, the Group achieved a good performance in a difficult year. In this regard also, we have every reason to remain optimistic for the future of Nestlé. In view of the overall performance and of the future perspectives, the Board of Directors proposes to increase the dividend. By raising it from CHF35.– to CHF38.–, it will increase by 8.6%, a rate that is faster than the growth of net profit. We nevertheless feel that the overall situation justifies such an increase.
As for our financial situation, it remains very solid. I will come back to several of the important acquisitions for which we invested CHF4bn in 1998. Yet our net financial debt which amounted at year end to CHF6.6bn, increased by only CHF1.4bn demonstrating a very good operational cash flow and a debt-to-equity ratio that remains very healthy at 28.1%.
Moreover, our investments in tangible fixed assets as a percentage of sales show a slow-down. This indicates our determination to benefit wherever possible from economies of scale and to better utilize our capacities. It is true that economic integration and liberalization on a global scale give us the opportunity to restructure our production system. As a matter of fact, trade liberalization combined with the creation and increasing integration of regional economic groupings allow us to concentrate know-how and production in larger units which supply entire areas. This evolution which has already taken place over the years in Europe, is now extended to other continents. It helps us confront an ever more aggressive competitive climate and improve the profit potential of our Company.
Compared to 1998, Ladies and Gentlemen, the current year brought additional volatility and difficulties, as you have already seen. Nestlé was off to a rather slow start, with a slight negative sales growth over the first three months. Since April however, our figures have noticeably improved and we see a positive accelerating trend which should persist over the rest of the year. This makes us look at 1999 with cautious optimism and, unless currencies and other factors take a unforeseen bad turn, we shall once again improve sales and profits for the year as a whole.
I have already mentioned the important acquisitions made in 1998. The purchase of Borden’s international activities in the milk sector, San Pellegrino mineral water and Spillers petfood are in line with our determination to reinforce our strategic product areas whenever we have an opportunity to do so. Nestlé therefore will continue to acquire strategically important companies or assets, but we will also carefully study whether these acquisitions not only fit our needs, but also correspond to our profitability criteria. We are under no pressure in this, as we have already moved into the areas that interest us over the past 15 years, and are therefore not obliged to pay a premium to enter them today. Within this strategic framework, we made several acquisitions in 1999, some of which were reported in the media. We bought a biscuit factory in India, which is a country with a very high per capita consumption of this type of product. In the Ukraine finally, we took a majority in the leading producer of chocolate and sweets, which doubles our sales in this market.
At the same time, we will not hesitate to divest activities that are of secondary strategic importance or which do not have a sufficient profit potential. You will have noted the announcement of our intended divestment of a part of our frozen foods business in Europe. This restructuring will allow us to concentrate on high added-value frozen products which enjoy strong growth, such as prepared dishes, pizzas and snacks. Restructuring, such as this one, is vital for the long-term survival of our Company; as you know, Ladies and Gentlemen, we undertake it in full awareness of our responsibility with regard to the employees concerned. We do not rush such operations through, we give our staff time to readjust and we take all possible measures to reduce the impact on employment.
In the considerable amount spent on acquisitions, part is absorbed by the investments made to increase our participation in a certain number of the Group’s companies, mainly in Asia. As you know, we like as a matter of principle to be the sole owner of these companies, wherever possible. As Nestlé in any case assumes managerial responsibility in Group companies and as we are generally owners of a majority of the share capital, this policy does nothing but reflect a reality. However, a number of countries had in the past legally required the presence of a local partner, or even the listing of more than half of the shares on the local stock market. The liberalization of the past few years, but also changes in the growth strategy of some of our partners has made it possible, recently, to clearly strengthen Nestlé’s position in these companies. I would like to emphasize that these modifications took place in agreement with our partners and we recognize the fact that they greatly helped us when we first started our activities in these markets. In Korea, Bangladesh and in the Philippines, we are now sole owners. This also applies to certain of our operations in China, while in India and in Malaysia, our local companies are listed on the stock exchange. It goes without saying that we are pleased to count Asian investors among our shareholders, but we would prefer that they held shares of the Nestlé Group, rather than of our local operations. We continue to believe that accelerating and simplifying the decision-making process is a good argument for a single shareholder in our operational companies.
The food industry has kept a very diversified structure and very few companies have managed to establish themselves as truly global corporations, with a broad product portfolio and strong international brands. Nestlé is at the head of this group and intends to remain there. The international segment is followed by a much higher number of regional companies that often occupy very good positions in their fields of activity and are perfectly able to survive in the tough competitive climate in our sector. Finally, a very large number of medium and small producers keep on thriving thanks to their skills and their intimate knowledge of the niche markets that they work in. Lastly, let us not forget that some retailers remain active in the manufacturing of a growing range of products under their own brands. This phenomenon which we must neither ignore nor overestimate in its importance, contributes to the competitive climate in the market and logically benefits consumers first.
We react to this pressure by a clearly affirmed branding policy, by innovation and renovation as well as by improving our operational efficiency. Creating a bond with the consumer through quality and permanent innovation - that is the real calling of a branded goods producer. And that is the reason why we annually invest more than 800 million francs in research and development.
As shareholders, Ladies and Gentlemen, you have in 1998 once again profited from the good performance of the Nestlé shares. Until mid-year, there was even some euphoria which was brought to a sudden end by the Russian crisis. For the rest of the year and until a few weeks ago, the stock markets showed an unusual degree of volatility and nervousness. In this atmosphere, we made an even greater effort to correctly inform investors and we thought it prudent to attract their attention to the fact that certain expectations for the Group’s performance in 1998 would not withstand the test of reality. This is why, in November 1998, we issued a cautionary press release regarding the perspectives for the year, taking also into account the uncertainty in the area of the foreign exchange. In the volatile climate characteristic of the stock markets since summer, this resulted in a clear overreaction that drove the price of our shares down. We nevertheless remain convinced that investors prefer a realistic and prudent information that allows them to reach a reasoned judgment about a given situation and we will, in this area also, continue to follow our responsible policies.
This attitude, Ladies and Gentlemen, is also demonstrated by the publication of our corporate business principles. This brochure responds to increased demand by some of our business partners and some of our investors. The document restates the principles we have been applying to our business activities for a long time and we have taken the appropriate measures that our managers at all levels are aware of them. Of course, this does not mean that individual errors and mistakes cannot occur in our Company, but there our staff and our managers know without a doubt what our policies are. Auditing compliance with these policies is part of management’s job as well as of the external auditors. This does not mean that your Company’s value system is dictated from the outside. Often, narrow preoccupations or theories of doubtful value are invoked to make a company behave in a certain way. We are ready to discuss any subject, Ladies and Gentlemen, and we will without hesitation change our practices if new circumstances warrant it. But we have no intention of giving in to extreme demands by groups that have neither the right nor the qualifications to dictate our policies. Nestlé has prospered over more than 130 years because its owners and its management acted not only with a high degree of responsibility but also with realism, and were able to distinguish between what is desirable and what an industrial corporation can do on its own. Let us not forget, finally, that our long experience overseas taught us to respect other cultures. We make a conscious effort to integrate in a local context and we have learned to understand and to appreciate some of the demands addressed to the local authorities and why such demands are sometimes impossible to satisfy. Nestlé is happy to be able to contribute to the economic development of these countries and values the opportunity to be active in them.
As you have seen in the media, our Company, like many others, has fallen victim several times to blackmail attempts. These cases which clearly caused economic harm are difficult issues for a corporation whose products, as a result of a criminal act of a third party, could endanger the health or even the lives of consumers. I assure you that we spare no effort to make our products and their packaging as safe as possible. But it is a fact that the distribution system universally adopted in urban centers the world over and for which no alternative can reasonably be imagined, makes such crimes easier to commit. This is a new vulnerability of our complex society and it needs to be confronted at a judicial level with all the severity of the law. For these criminals attack much more than the wealth of an industrial or a retailing group. They undermine the instinctive confidence that the consumer feels with regard to branded food products.
As for those blackmailers who endanger health or even life by putting poisoned products on the shelves, I find no words to describe their acts. This is intolerable and I think it is urgent that legislators increase the penalties available to the authorities.
I have often taken the opportunity, Ladies and Gentlemen, to underline how important we think Nestlé’s global calling is for us. It offers us virtually unlimited development perspectives and allows us to contribute significantly to the improvement of the standard of living in the countries where we are active. Clearly, widespread activities also include an element of risk and the crises which affect the economies of a considerable number of emerging countries will leave traces in our accounts. We experienced that in 1998 and it is quite evident that we will also feel some effect during the current year. Nestlé has however mastered the situation by adapting quickly. Closing the year 1998 with a performance that we consider quite good required a determined effort from our staff and our management. They never gave in to resignation and battled on with great energy and spirit to achieve the results that you have found in the management report. In your name also, I would like to express to them my heartfelt gratitude.
Coming to the end of my address, Ladies and Gentlemen, allow me to repeat once more the reasons why we look into the future with confidence. In a challenging year, Nestlé has once again shown the capacity to quickly adapt to new circumstances. The Company widened its lead in the food industry, it showed itself ready to confront difficult and unusual situations and it did so with determination and successfully - the results are here to prove it. Once more, competence and commitment of our staff and our management carried the day in an unfavorable environment. Our long-term strategy places us in a good position for the economic recovery that we already see in several Asian countries. We shall take advantage of it, with a stronger position, with increased market share and having proved that a sturdy vessel, with a good crew, can perfectly weather the storm. Nestlé, Ladies and Gentlemen, is such a vessel and you, as owners, are the first to benefit from it.