Full Year 2020 Nestle SA Earnings Call
And most segments grew at a double digit rate with market share gains.
We continue to bring innovations to the market, including Purina Pro plan, and lastly, and Purina Prime loans.
Nutrition and health Science grew at one 7%.
And some nutrition saw slightly negative growth, reflecting the impact of our sales contraction in wireless China infant formula.
Outside of China growth was in low single digits with market share gains led by non unsafe ILEC.
HMO infant formula is known sales and 64 markets and delivered more than 100 million Swiss francs and incremental sales in 2020.
In sensory and posted strong growth boosted by increased demand in China, Brazil, and South Asia.
We have already commented on Nestle Health science.
In prepared dishes and cooking AIDS growth was broad based by region and products segment.
We are building a portfolio of strong plant based brands, such as garden Gourmet and Sweet Earth.
We are also launching products across our portfolio using more climate friendly ingredients, such as meat less net Danielle and Columbus Peds ads.
Altogether on sales of plant based food products are close to 700 million Swiss francs with strong growth.
The newly acquired direct to consumer meal delivery businesses, freshly and mindful chefs.
So strength, but saw strong growth since our consolidation during the fourth quarter.
Milk products and ice cream grew at seven 9% within the category dairy performed strongly with elevated demand for home baking and fortified products, such as new and Behr brand.
Coffee mate resource Congress also saw strong growth in retail.
After a difficult start to the year ice cream showed sequential improvement with gross reaching a double digit rate in the second half.
Growth in confectionery was slightly negative with reduced demand for inputs seasonal and gifting products, partially offset by strong momentum in baking products on tablets.
Water saw negative growth given its high exposure to the outage on channel.
Sales decline moderated in the second half.
Moving to profit evolution by product categories as we saw with growth. The contrast, and margin evolution strongly reflect the level of exposure of each category to see out of on channel.
Powdered and liquid beverages saw a slight increase in margin supported by significant contribution from our coffee businesses.
Petcare prepared dishes as well as milk products on ice cream, so material improvements, reflecting strong organic sales growth and the benefit of operating leverage.
Margin and nutrition and health science reduced mainly reflecting sales decline in wireless infant formula.
Water on confectionery saw and margin decreased mainly as a result of lower sales in out of on channels.
Looking at our gross margin we finished the year at 49, 1% excluding.
Excluding Netflix announce on gross margin improved to 10 by 10 basis points.
Gross margin has improved in seven of the last nine years.
This illustrates the quality of our portfolio.
The improvement also reflects our capacity to efficiently manage our product mix and industrial operation as well as to neutralize commodity and packaging inflation.
This slide shows the progress of our underlying trading operating profit margin, which increased by 20 basis points and constant currency and by 10 basis points on a reported basis.
The disposal of Nestle skin health, which had a very different P&L structure.
The reading of the different components of our own margin improvement difficult.
It is therefore more relevant to look at margin expansion on a like for like basis, excluding net lease greenhouse which is shown on the next slide.
Excluding key networking sales our underlying trading operating profit margin increased by 30 basis points and constant currency.
Our gross margin continued to improve as our portfolio evolves towards more value added products.
Margin expansion was supported by structural cost reduction portfolio management on slightly lower consumer facing marketing expenses, which more than offset commodity inflation and COVID-19 related costs.
During the second half of the year marketing expenses returned to a more normalized level and even increased versus the same period of 2019 net.
We are increasing our media investments, particularly in digital channels, which now accounts for 47 per cent of total media spend.
Moving on to the P&L items from underlying trading operating profit down to underlying EPS.
Restructuring expenses and net other trading items decreased by 200 basis points, reflecting a significant reduction of asset impairments and COVID-19 related delays to restructuring programs.
And the trading operating profit margin reached 16, 9% and increase of 200 210 basis points on a reported basis.
Gains on disposals decreased as a result of the large gain on the disposal of mistake and house in 2019.
Income from associates and joint venture increased by 120 basis points, mainly due to the revaluation of our original equity investments in AI immune and freshly.
The underlying tax rate decreased by 50 basis points to 21, 1%, mainly due to the evolution of the geographic and business mix.
As a result, the net profit margin increased by 90 basis points to 14, 5%.
Underlying earnings per share increased by three 5% in constant currency.
Moving on to working capital on this chart shows our working capital levels based on a five quarter Rolling average working capital decreased by 60 basis points to zero percent of sales, marking nine consecutive years of improvement there.
This reduction came even as the company increased inventory levels materially to meet COVID-19 related demand.
Payables was the main factor during this improvement driving this improvement.
The group's return on invested capital increased to 14, 7% as a result of improved operating performance and disciplined capital allocation.
This is the sixth consecutive year of improvement.
We are pulling all levers to improve ROIC.
Including sales gross margin improvement working capital reduction as well as disciplined capex on portfolio management.
Free cash flow was $10 2 billion Swiss francs of 12, 1% of sales the.
The slight reduction as a percentage of sales was mainly due to one off items in 2020.
We expect our free cash flow margin to remain around 12% as we work on all drivers of cash generation, such as sales growth margin improvement and working capital reduction.
Net debt increased by $4 2 billion Swiss francs closing at $31 3 billion Swiss francs on December 31st 2020.
The increase largely reflects share buybacks of $6 8 billion Swiss francs completed during 2020 and is in line with our intention to avoid deleveraging our balance sheet.
Our net debt to EBITDA ratio now stands at one seven times versus one four times in 2019.
During 2020, we returned $14 5 billion Swiss francs of cash to our shareholders in dividends and share buybacks.
And we're committed to maintaining our practice to increase the dividend every year in Swiss francs.
And the next annual General meeting the board of Directors will propose a dividend of $2 75 Swiss francs per share and increase of 517. If approved this will be the company's 26th consecutive annual dividend increase the.
The company has maintained or increased its dividend in Swiss francs of over the last 61 years.
This concludes my remarks, I now hand over to Luca to open the Q&A session.
Thank you Francois.
With that and we move on to the Q&A session. We.
We are opening the lines for questions from investors and financial analysts day as a reminder, please press star one to enter the queue and start to if you want to withdraw.
Please limit yourself to no more than two questions Sir.
Our first question is from Richard Taylor and Morgan Stanley. Please go ahead Richard.
Good afternoon, everyone and thanks for the question and say.
And just for me and in my view one of your biggest opportunities is to combine your high exposure to the big structural growth categories.
Really well on line with advanced digital capabilities.
And these together will drive a higher level of top line growth the Greek and.
And enable you to reach your midterm targets consistently so I'd like to ask where you are versus where you would need to be digital.
And then what you think it could mean for growth and market such.
Okay.
While it please mark.
I think he may address the question on digitalization and and then we will take the next question from Bruno English.
Yes, and so Richard Thank you I heard your first question and then I somehow you were breaking up and I didn't hear the second part of the question on digital and.
Yes, and this is a major opportunity and I think it didn't take Covid force, who realize that so I think the fact that we were able to scale up so nicely in 2021.
And when that opportunity presented itself is really due to some fairly meticulous preparation and we've taken and inside the company and of course and now having seen that major step up.
Where we expect even further growth down the road and certainly no sliding back.
And we've redoubled our efforts here and I think the best area to exemplify that is petcare.
And we're clearly you know we've been four years patiently building up.
What I call, a petco and Petcare ecosystem.
And when it comes to the total advice around pet ownership and nutrition of course being a big part of that and then increasingly bundling and E commerce opportunities, including a bespoke such as sales dot com and just right and the U S. So I think this is a major opportunity.
Petcare being one example, I think you're seeing similar opportunities and other major categories Petcare. It does stand out and so I agree with you that this is a key area of focus class going forward.
Next question is from Bruno Montana Bernstein, and please go ahead and Bruno.
Hey, good afternoon, and all links and mass.
First question is can you comment on what percentage of your markets are you gaining market share and and especially related to your midterm guidance for mid single digit growth does that require a material improvement and execution or is it steady execution and line of what you've done recently and my second question is at quarter four.
For quarter, three you are very cautious and sort of the growth guidance.
As I noted that you were at three 9% and quarter, four and you're progressing towards mid single digits.
Is it again, a level of caution and there because if I just progressing very well timed and mid single digit I'm already getting up missing mid single digits for 2021, so is that a reasonable amount of caution and your guidance or should we revert and single digit and 2020 on thank you.
Yeah.
Speaking I will take the first question on market share. So we gained market share in and around 60% of our business sales.
Which is actually made of 52 person gaining on 8% holding market share. This is close to the highest level and that we had since 2013, so and I think that good if we look at it more by maybe geography and category and we gained market share on cross categories in a M and now on the M. S M S with <unk>.
And of water, but this is largely related to the business that we just disposed off and if we look at it by category, we have gained market share in petcare.
In Saudi bolt on portion and the coffee in sensor realized cream and so forth and we have gained market share as well if we look at it by channel on the E Commerce channel in General. So you were talking of the reasons behind that is certainly linked to stronger execution, but it is largely linked as well to the.
Premium musician effort and to the innovation effort that we have and carried out over the last couple of years.
Based on supply and Pune and packages and one element to that first answer before we sort of get to your second question.
To me execution is key and I think this is one aspect that you probably don't see and appreciate that much from the outside I mean portfolio changes and so much more visible but execution is a key element of the ramping up that we've seen in recent years. The best example is that totally new.
<unk> approach to R&D and innovation under the guidance of our new Chief Technology Officer, and how that directly related to a faster time to market, a new and exciting stream of products and that really reinvigorates, our categories and how that relates to and to the success. We've seen over the past few years in rig.
Cause product mix and my view, which is part of rig are really reflects a lot of that progress we've seen on innovation, and especially and low pricing and environment that of course was important in order to try and Oh Gee. It's one of many examples where execution comes in I.
I mean cost consciousness, and tight operating parameters and capital management out of us, but our innovation I think you're seeing it most visibly and and the numbers bear it out.
Now when it comes to 'twenty. One is there caution yes, there is and I think you would want us to be cautious and an environment, where you still have a major unknown and that is where COVID-19 is going to curve and that's why I was pointing out we arent, giving you guidance, we are giving you backstops.
But he is of course, we also need to have some.
And cushion here in case.
The pandemic techs and unexpected turn on.
A good example, when you look back at last year was the second quarter and what the strong lockdowns and some of the impact on our out of home business day to our organic growth rate and so that's why.
We need to leave ourselves a little bit of room here, but I think.
And you also sensing the underlying optimism here as we exit 'twenty and 'twenty, we're seeing good success on pricing and we've certainly given it a lot of effort on AR and AR.
PFM, he's spending and some of this will bear out in 'twenty. One we've started to address the infant nutrition and issue in China and that has improved already and the second half and then hopefully will give us more.
Tailwind in 'twenty, one and of course, you'll see and the benefit of some of the portfolio changes.
That either have been completed recently such as in low.
Or where we have Santa contracts and we'll complete them soon such as Nestle waters North America. So when he took on about together with some of the underlying positive fundamentals. Yes. We have good reason to look at 'twenty, one with lots of optimism.
And next question next.
Next question is under water and I came in at Barclays. Please go ahead, we're on.
Good day, Mark Crosswhite water and at Barclays have your cake and safe and well yeah. That's it for me also firstly tomorrow, just touch up on China I know you've got a question on the media call. This morning, and but be interested to get a bit more time go one level deeper as to how you'll get China back and see to good growth is not just Chinese new year.
Underlying.
And our infant nutrition, I think it was down double digit and.
And I had a bell so it's coming but is that going to be enough to turn around and big browse like luma and one of our F. 'twenty six which have been a problem for a while now you know how old is your patients lost on brands like that just a just a general question on China, and then secondly for Francois on margins and returns I mean could you define what.
Moderate margin expansion means to nestle.
Maybe give us an outline of some of the moving parts and 21 for margin around input costs and I may be COVID-19 costs climate investment share all the kind of pluses and minuses to give us some feel for the modeling and then linked to that on the ROIC you've done very well on that day at 15%, but no new Targa is there still upside on ROIC.
Okay.
One thanks, and so I'll start us off on the first question and I would invite Francois chime in when it comes to some of the more detailed information.
Formation and around S 26, and and luma per term.
Say first and foremost we share your disappointment around the 'twenty and 'twenty performance and China No question.
We had expected more but then we also need to be fine.
And this has been a year.
I mean, the best way to describe what would be a perfect storm and whether theres been several elements here that were impacting our business and some of these will not reoccur to the same extent in 'twenty. One so the calendar thing I was not trying to make is closer and excuses at the counter element did apply and that really the year 'twenty two.
<unk>.
Got shortchanged.
Shortchanged by the timing of the Chinese new year on both ends it had an early Chinese new year in 'twenty and 'twenty. So that means most of the cell and occurred in Q4 of 2019 and then the Chinese new year. This year is relatively late and that means most of that cell and occurred in January of 'twenty one.
And hence you didn't see much cell and occurring in the year 'twenty that related to Chinese new year again, I don't want to overplay, the calendar and not a big fan up and but it is large enough and factor that it needs mentioning.
China was also one of those.
Countries, where when you look at the timing of Covid in the middle of Chinese New year. You know this is when some of the locking down started.
On the Chinese consumer didn't have much time to do consumer stockpiling inventory building and so that search that helped us and so many western European and North American markets and other markets around the world that did not happen to the same extent in China.
We did have several.
Issues on a self inflicted issues that of course, what dragging us down in addition in low being one of the biggest contributors and of course with you and Louis you know.
We have completed this transaction and we're now focusing on our ready to drink products, having sold the and the peanut milk and down at the Polish business. So I think that side, we have taken care of and that.
That is not an option we're looking at for infant nutrition and this is one of our core businesses and so we have moved aggressively starting from last spring to fix the issues here. It is not only about bell saw this is one example that we had mentioned as a local premium brand.
It's also about a deeper push into tier three tier four cities, where we want to be more aggressively present and also a stronger emphasis on cross border E Commerce, which I think is an opportunity where we'd still left some room on the table for improvement and and hence we need to do more of that.
So I think bill.
Between these different elements on the timing side the COVID-19 side.
And then some of the businesses.
Where we knew we had an issue and we have to improve.
We're seeing now lots of room for improvement in 'twenty, one and last but not least let me also say our Chinese business has a relatively large share of out of home and of course out of home to on the strong lockdowns of last year got severely impacted that already started to improve significantly.
Significantly in the second half of this year.
So I hope that answers most of your questions around your first one but maybe Francois you could focus a bit more on Illumina is 26, and then move on to the second question.
Yes. Thank you good afternoon, Werent and so I can give you maybe a little bit more details why yes infant formula and so sales contract on traction in 2020, which moderated and the second part of the year, but to be totally transparent we lost market share for wireless, but the market share losses were stabilizing in edge to our wireless business.
Was it a so significantly impacted by the significant sales decline and Hong Kong, which didn't help but on the other Honda non posted positive growth and Gerber infant cereal honest, so strong double digit growth in China and as Mark said, we have started to see some early signs of progress in our journey round of Wyeth infant formula business.
As with market share stabilization, Mark talked about Bell solar, which is locally manufactured and which gives us the opportunity of entering into tier three and tier four cities and the launch is on track for the time being we are expanding our super premium offering for Illumina with new launches, we are doing with a two milk hypoallergenic formulation.
Well Hmos you know, it's not registered in China, but we are trying to address it through them.
Exports through our exports to China, and Hong Kong whenever possible.
And we are stabilizing as 26 by entering into Super premium segment like organic which we launched in August.
And that's basically what our what we can do.
And on your question on margins you know that over the last three years, we have generated and improvement of <unk> and.
Your line trading operating profit margin of around 50 basis points per annum on.
And we expect to generate less to generate at the end of the day are probably as much as what we did over the last couple of years, but we will use some of the margin generation to support our growth starting with sustainability investments on moving into additional marketing investment as well and so the net will be what we said to moderate margin improvement.
Can provide you a figure but it will be more than a zero, obviously unless and what we have achieved over the last couple of years, but it will be a moderate improvement on return on invested capital only yes. Indeed, we have done quite a long.
Julian and significant improvement moving from 10% plus in 2014, two almost 15% last year. So very happy about the about it we used all levers from growth acceleration organic growth acceleration and margin improvement.
And the reduction of our working capital discipline.
Capex polices and disciplined M&A as well, we will continue using the same levels and that being said on alloys. He can also be influenced by M&A strategies and the acquisition in the future. We are confident that our bar any significant acquisition, we should be able to maintain our return on invested capital.
And possibly improve it but it can vary from one year to the other depending on what happens on the M&A front.
Okay. The question is from selling penalty of Jpmorgan. Please go ahead and sell in.
Yes, and good afternoon, and Mac I suspect Eddy and Lea County, and my first question and it's really on the on portfolio changes Mark If I remember last year, you said that you would expect to have and more balance and at current between net disposal and M&A and in 2020 and.
What we saw is that you added four 6% decline on a.
On net basis for 'twenty and 'twenty. So could you share with us what has been the hurdles for you and delivering on that creation and the lack of opportunity or valuation and could we expect that gifts and net.
The balance will be per search balance as we look into 'twenty 'twenty one.
And then my second question, I'm, sorry, but I'm going to come back on and nutrition and thank you for sharing your and.
Ineffective and Catlin and China.
I think that ex China, and you said it was a low single digit growing business and if I look at the past, yes. Despite the reorganization.
We are really attached to treat this and type of growth. So and have you changed your mind in terms of day.
And is being.
And if their growth and shine and as you add.
Yeah, and talked about three years ago, and what really is the midterm opportunity of this category. Thank you.
Thank you Celine and both are very important questions. So when it comes to portfolio.
I mean, you have to understand my comment from last year against the backdrop of what we had seen in 2019. So we had done some significant divestments in 2019.
But except for one little transaction and that is the acquisition of persona by Nestle Health science and pretty much no acquiring and as you know persona is at the time when we bought it.
Very very tiny business. It has strongly grown sense, but nonetheless, a very tiny acquisition and then you had some significant divestitures such as Nestle skin health. So what I was saying is I'm, hoping that and that there's going to be more on the acquisition side of the ledger.
And I think that part has certainly come true.
On the biggest standout clearly being and Nestle health science and it's several acquisitions it's done.
Sent per viral proteins, a immune as examples and but it was not the only one I think lilly's kitchen in Petcare was another good one so I think there was certainly more activity in 'twenty and 'twenty than in 2019 on the acquisition side and.
It was not totally bounced and.
So when I was saying more balanced and didn't mean to imply that dollar for dollar was going to be even on both sides.
Clearly we had our plans that we wanted to go through on divestitures and I think these are to the benefit of the company's organic growth and profitability.
Building and also near and mid term expectations.
And on the acquisition side, the one hallmark that I think we need to exercise is caution and prudence and we need to stay selective having said that we do believe that in 'twenty and 'twenty, one as well we will see some good additions to our business. It will not be a repeat of 2019 and time.
Of course, having gone through waters now.
Once that is closed Meanwhile, what they will be in the midterm other portfolio adjustments, but I'm not expecting midterm something similar of similar size and leaving the group. So again I think we will put more emphasis on growth and acquisitions not just organic growth, but also absolute growth, but you all.
Sorts with Canada, and us, we're not leaving our prudent behind here and.
One thing over.
Three decades of.
All of business and M&A experience and what you Overpay day, one or what you buy and the one category or the wrong strategy or their own cultural fit is very very hard to fix down the road and box you for a long period of time, and hence a cautious acquisition.
Strategies, I think to pay off over time.
In terms of nutrition.
You are right on that I think over the past few years the fundamentals of this business have certainly not improved.
And I'm still a big fan of the benefits I've seen from moving this business from a globally managed business to one that is handled by our zones. The zones are clearly the better.
Operators of these businesses and we're dealing with issues so much sooner, but around the world. What you have seen is a certain downdraft from declining birth rates, increasing price speeding rates, which of course, we strongly salute and.
So the fundamentals.
<unk> not been a grade when it comes to the more narrow definition of infant formula.
And all the more for US the piece of homework, we have to do is to take a slightly wider definition around what we call. The first 1000 days from conception into the first few years of life of a newborn and then and see what we can offer to both mother and child as the optimal nutritional solutions.
This is something we are hard at work at our between our strategic business unit.
In nutrition and the market and R&D is also deeply involved and so this is a core business of ours that we consider in the mid and long term to be clear.
A clear growth driver, everyone is interested and giving their children and the best possible start and life.
There is strong center evidence that if you get that right.
From a physical and mental development, you're doing the best possible St per your trials and so this to me is you know company DNA and certainly not something we're giving up on.
Next question is from Richard Taylor from Morgan Stanley was going to ask the second question that it and Atlantis to ask some minutes ago.
Thanks for having me back and well have you.
Can hear me properly now so maybe just to start again and so I was just saying that one of your biggest opportunities is to combine your high exposure I'd say, the big structural growth categories, and what really well on line with advanced digital capabilities and combining these together will drive a higher level of top line.
Growth for the group and enable you to reach your mid term targets consistently so what I wanted to ask is where you are versus where you need to be with your digital capabilities and what you think it could mean for growth and markets like China and the U S. And then in terms of acquisitions besides that.
Heavy investment, you're making and building up Youll, Nestle health science business and the tuck in acquisitions and areas like Pat cash should we also expect acquisitions to build out your digital capabilities across the supply chain.
Thanks, Richard and.
So.
In terms of the digital opportunity and as mentioned earlier fully agree.
When it comes to assessing where we are.
And relative to the food and beverage space I feel and you can see this from the numbers, we're doing quite well, but obviously you know this is now.
On a giant that has awakened and you know.
This idea that the food and beverage industry is all of a sudden and seeing a major digital component and so we need to work hard to stay ahead of this so we're very focused on this and our chief our new Chief Marketing Officer, who joined US last year and.
And who came from Google and obviously has lots of expertise and the area and so I think relative to the industry I feel good but hey, there's so much more now to be done and we want to go and capture it and Youre right, we need to pair it up.
With the key growth categories, and and look for opportunity there.
In terms of acquisitions.
I mean.
When it comes to just digital enablers.
E. A more often this is about partnerships and it's about licensing.
When it comes to business models, yes, and take as an example, our investment and freshly where clearly and you have a business model and there's a strong digital component to it and sell or take our.
Acquisition of a majority stake several years ago, and tails Dot Com, where you have bespoke pet food and <unk>.
And.
Clearly digital is the way to order that food and to get into those subscriptions. So this is where the way I would see the speed that the sweet spot. So we have a digital model with a business model combined interest digital tools alone frankly, I'm not sure we should be the only one on that.
And I think there, it's better to license in or to partner.
Next question is from the Guild Inmarsat UBS. Please go ahead and Gila.
Luca.
And my two questions are firstly on on your plant based business and in particular on your Zeke and Burger offering appreciate it's still very early days category, probably still very embryonic but.
Are you happy overall with your performance there.
Because when I think about your investor event in D. C. A couple of years ago are you on that.
And I think the launch of the incredible awesome burgers. It seems nestle the ambition was to be one of the leaders in that category.
And at this stage at least it seems you are still more of a challenger and a leader in and that part of plant based on maybe altogether or you're encouraging us today not to focus so much on with alternatives because increasingly you state is just a tip of the plant based opportunity.
And my second question is going back to your previous question on margin commodity prices and 'twenty 'twenty one water.
And what your expectations are.
How it compared to last year and whether at this stage, we anticipate a loss contract between the first and the second half of the year. Thank you.
Okay.
Thank you Jim Let me take the first one and then hand it over to Francois for the second one so on plant based I have to tell you bet I feel really good about the progress and.
And I think what you have to separate carefully here is our market share and size and growth rates of the business, which I feel very good with.
And from you know share of mind, because we were certainly not the headline grabber in this industry I think some other companies are better and doing that.
I think when it comes to the pure innovation.
There's been quite a few where we were first out there. So we were the first for example to offer you know from one source a complete bacon cheeseburger and so you have the Burger Patty you have the beef and cheese and you have the beacon Beacon and Bacon alternative.
And from one hand, so we can offer complete kit to out of home partners that work with us and.
And we had seen create success last summer with the product.
That a few people that had on the radar screen and that is our plant based and tuna alternative Ah.
Which you know it has been now one of the best selling a plant based items and select European markets and we're still scaling this up and can't make it fast enough. So that's why I was saying earlier, if you reduce it simply to the Hamburger Patty and do you know who is and business with what fast food chain Youre missing part of the action and do keep in mind there.
And for all of our ambition out of home.
And 85% of our business is retail and success on shelf and and I think this is where we're doing well and will continue to stay focused on that.
And I was not trying to.
Shift the attention now from plant based food to dairy.
To me, it's not an either or I think both on and any sort of protein sources, whether it's in food or whether its in and dairy I think we have lots of follow on opportunities and hence it's important for us to be fully engaged in both areas.
Also speaking on the your question on commodities and <unk>.
Let's start with 'twenty and 'twenty, we had a moderate increase of commodity and packaging material, we have been able to offset it with some moderate pricing as you could see on some efficiencies as well and our supply chain. We expect for 2021 more significant increase in input cost, which is largely coming from dairy from cereals and.
Packaging, so that will by itself trigger a higher level of pricing on our side and especially when we combine it with and in the impact of a currency depreciation and that has to happen in 'twenty and 'twenty as well we will cover some of it as we always do through efficiencies as well and.
And you were talking about the timing of it. This is more on edge to 'twenty 'twenty, one event more than each one where we will see a steel or rather a moderate increase of commodity and packaging material.
Next question is on Jon Cox Kepler. Please go ahead John.
Yeah, Thanks, and thanks very much good afternoon, guys. Just a couple of questions listening into the call. This morning, I think you were talking about China getting back to mid single day chip and given the fact that AOA was up mid single digits.
Ex China.
And that could imply something like a point plus in terms of gross group gross dynamics. This year and just wonder if you can take my reasonings.
Wrong and is it because you assume that there'll be a slowdown and the Americas and.
The rest of the world because of Covid trends I E.
People going back and side.
And maybe not.
And Ah eating as much in home second question just on the.
The COVID-19 costs.
Look at your notes and the financials, you mentioned 420 million Swiss net.
And plus 120 million.
Salary costs, so it's quiet and it's quite a big mine.
And to money I'm, just wondering what you think about COVID-19 costs this year.
And did you think some of that stuff flowing back is just going to be absorbed into the other things you've mentioned like commodity costs going up and environmental things to pay for thank you.
Yeah.
Thanks, John Let me take the first question and then hand, it over to Francois and so look I mean AOA as a zone. Overall there was no reason why that shouldnt be the CRO of locomotive of this group when you look at the underlying economies and and how theyre doing and how much opportunity there is and I think.
It may and previous years. This is exactly what it added up to <unk>.
And.
That doesn't need to be linked with any reduced growth from the Americas or immuno and fact that can be additive and so yes, I mean, if China improves this year and if the rest of AOA maintains its performance. That's good news for AOA overall and that's good news for the group. So when it comes to the crew.
<unk> organic growth expectation of overall.
And I was pointing to prune low earlier, yes, we are optimistic but again when it comes to our guidance that we're giving you where you know we have a meet or exceed culture. We also need to have our usual safety margin here and and uncertain times like Covid.
It's important to have a bit of cushion and I think this is what we're trying to express to you.
And John for speaking on the Covid costs. So we have north of 400 million of Covid cost and total out of which about $260 million impacted on underlying trading operating profit or the actual impact is a little bit lower because we had some savings as well just to the main accounts, where we had some savings abuse leisure travelers.
<unk> expenses.
And you need to understand as well that about two third of these costs were actually incurred in each one on a 30 day too because we made some progress over time and we learn how to better handle the crisis on the needs related to Covid. So I think that I'm, not saying that there won't be and in the future, but it will certainly reduce even further when we make some progress.
Next question is from David AIDS at Societe Generale. Please go ahead David.
Thanks, Larry and good afternoon, I'll save my two questions. The first one on pricing, but the second one on on espresso and all.
On the pricing side, a developed market pricing still down like one eight per cent for the full year, but it looks flat for the fourth quarter and.
Mentioned raw materials previously and just now but are there things that youre doing and the U S and Europe that means that that pricing contribution could improve.
Through next year and beyond beyond just the raw material pricing changes and and the second question on on the espresso you called out virtue of doing particularly well and I just wonder whether you could talk about the percentage of Nespresso and sales that are now and the new system. The virtue system versus the traditional system and how that's changed over the last 12 months, maybe you could go there.
And over the last.
12 months, what the machine sales look like are you moving the system much more towards virtual quite rapidly.
Over that period of time, thank you so much.
There is also speaking I will take the first question on pricing and indeed, we have had for years and it goes against last year hardware on negative pricing in western countries and more specifically in U S and in Europe.
And obviously, if we see an increase of commodity and packaging material and this will probably reflect overtime, because we need time and in order to get there with some higher pricing levels on our side and but it's always a little bit more complicated and U S and Europe, because we have negotiation with retailers that are usually valid for a year. So there is a time delay there.
There is another way to handle on pricing pricing is not just about raising prices whenever we can each about managing our promotional activities as well because we report on net net sales, which is after a certain level of promotional activity and that it's not necessarily about reducing them each about being more efficient and we have done a lot of progress I would say about that.
And as two years with what we call strategic revenue management, which allows us to not necessarily reduce but be much more efficient in this promotional activities, which are at the and fairly costly.
And David on the second question with regards to and espresso and I Hope you appreciate the transparency now by separately breaking out that business and reporting on it and also the underlying confidence that we have when it comes to the future development of Nespresso.
And the tool is a major growth driver no question about it.
But having said that we're committed to the growth of both of these systems. The original line and per tool we.
We have not gone just to avoid competitive signaling here, we have not gone now into disclosing sort of relative performance between the two but both of them are clear.
Clearly per.
Performance drivers and the two in particular has been a major growth driver.
We are drawing are towards the end of this Q&A session.
And I see that there is still a list of people who would like to ask questions. So, but unfortunately, we have limited time available, but we will still take a few.
And they tried to close it in 510 minutes, a day nexon and jump Philippe <unk> from Vontobel.
And silica good afternoon, and my first one is on the LTE I and I think it's very important for you to be aligned with shareholders.
Earnings per share of GSR and returning this capital location and the following especially after the disclosure of Shaw aggressive targets for ambition for yes your sustainability.
Are you having discussions to includes those targets and the LTI and she can quantify that or would it be disclosed.
Some numbers and some.
And the second one is.
Back to <unk> question on the portfolio management and.
And I see that when you took over a large beverages nutrition, let's say hotelier and said Petcare Celtic accounted for 50% to the 60%.
On the longer term perspective, let's say five years voyages to the trip going well considering the fact that you said you don't want to.
Divest confectionery.
Excellent.
Yeah.
Thank you John and Felipe so on the long term incentive and let me just clarify and what we have adopted for the year 'twenty. One now in the short term bonus is also ESG related and targets.
For the executive Board.
They are not yet reflected in the long term incentive plan. This is an item that's still under discussion we felt that it was important to get started on the short term bonus first learn the ropes and how this works remember this is an evolving area and any data also that you would want to use for bonus purposes.
And needs to be rock solid needs to be Auditable, and verifiable and Santa company. So this is still an area that's under development.
On our disclosures around this for the year 'twenty, one and not going to be materially different from what you've seen in the past. So I think on the long term incentive plan and it's the same disclosures and our plan as before because this is unchanged and on the <unk>.
Short term on.
And again, what we have not done in the past is disclose exactly the metrics and the detailed hurdle levels that people are working towards.
So we are confirming and there is now ESG targets and there we will soon also.
And with our compensation and report.
And confirm the percentage related to that.
But we will not give a precise target levels and I think this is in line with the plant and we're seeing and some other firms.
Longer term on the group.
And I'm not sure I completely understood. The question Howard related, but let me try and take a stab at it and.
When it comes to the revenue here from our high growth areas and the share of revenue from the high growth areas. I think we have over the years done spectacularly, well and coffee and pet count.
But and also the first one to say that we have not met our growth ambitions and nutrition and and water I think and water what the new strategy that we outlined last summer and now taking the first step towards net we're taking one of several steps to address that issue over time and to get it too competitive and attractive growth rates for us.
And then on nutrition, we will cover on that point earlier, we need to give this whole area I knew we think we are equally committed to it as in the past and we'll have to give it a rethink to look at broader opportunities related to the first 1000 days. In addition to fixing some of the specific market circumstances and.
China was one of them that we covered earlier theres a few other individual country markets were not quite happy and with the infant formula performance and where we need to redouble our efforts, but we're fully committed to that and that's something I underlined.
And when it comes to categories outside the high growth areas. We always made it clear that just because you're not on the high growth list doesn't mean your divestiture candidates and so we are fully committed to improving those over time.
Infection area last year of course with given that there is an impulse part and Franco was talking about that.
The performance has been disappointing to me when a trail into our confectionery business and when a separate out the Chinese situation around seafood tree and look at chocolate in particular, I'm seeing and very encouraging signs.
And when it comes to product innovation and when it comes to market shares and you know.
This is Paul and betting on the future and and where I hope that we can expand this business and get it to very attractive growth rates, but judging that business and a COVID-19 setting is certainly not attempting to do.
Our last question.
And I'm, James target that better and better and we will make sure that I or we will call or the GAAP or those who are still there and in our Q later on.
And I'm talking first squeezing me on and get off ne and Se, obviously, a retail base sales growth nearly doubled to 7% and 2020. So I was wondering to what extent do you see nestle portfolio, having a direct tradeoff between recovery and your out of home sales and moderation of Europe, although retail sales.
And I appreciate you can call and predict out of hiring sales recovery, but what level of growth rate do you think are sustainable and 21.
And then my second question is on and.
And you have sustainability on.
But the sustainability and you mentioned your commitment to lower scope three emissions always wanted it what the role of this portfolio management play and that goal. Thank you.
Thanks James.
So look on retail and out of home.
Obviously, it's very hard at this point to predict where out of home is going on our base expectation is that it'll take a two to three year path of recovery and that in addition to this being a little trying out the nature of out of home will also changed slightly from what it was pre COVID-19 and 2019.
And.
You've seen and heard a lot about companies, becoming more flexible about remote working and so I think many of us and the future while still being anchored to some office somewhere.
And may have more flexible lifestyles, and and and and work life balance that is more remote based and and including working from home and so I think the nature of demand in out of home is going to change.
But that also offers new opportunities because out of home is not only about what you consume away from the home. It's also about the fact that someone prepares it for you and so along with the disappointment.
Disappointment, we have seen for example around canteens and restaurants and bars. We are also seeing the rise of dark kitchens and delivery services and a blurring. If you will of some of the out of home and in home consumption. So long winded way of saying in addition to waiting for the travel recovery I think we're also very actively re imagining on.
And out of home business to be sure of that.
We capture these new opportunities and we've planned away for all products into these new opportunities.
Which I'm sure we'll see the continued successful future and then on retail.
Again, it's very hard to pinpoint here a precise per cent number but.
We believe that some of the.
Increases for in home consumption and here to stay again. This is related to this more flexible remote work lifestyle, where on some categories take coffee as an example.
It is safe to expect that a larger share.
These products will be consumed and home in the future and I think we're ready to stand and benefit from that and.
And then some behaviors such as for example, teacher and entire cogeneration and how to bake I think that also will not all of a sudden drop off a cliff when the pandemic is under control and.
And so I think you'll see a fairly long positive tail on the retail side it won't be to the same elevated levels.
I would expect as in 'twenty and 'twenty, but certainly above 2019 levels and that's good news for us.
And on sustainability.
To me.
And this was portfolio alone is not a solution because what the planet and eats as someone opening the hood and doing the hard work of rewiring operations in ways that they are having a lower.
Environmental footprint.
Just selling it and getting and out of a spotlight and then saying look we'll find them and someone else continues with the same practices as before is not a solution for anyone and so we're not seeing primarily a portfolio of choices here is the way to go about it.
To me this is a deeply operational matter and when I look inside the company the people that deploy our initiatives. This is an area that reports to our head of operations and then Theres a strong data line too.
Our strategic business units and the marketing area, because obviously whatever you do you want to be sure. It becomes part of your consumer communication and your proposition to consumers.
And this goes along the lines of what I said earlier.
Not only do on sustainability homework, you're also winning of Halo with consumers who are increasingly sustainability minded and so this is how we're trying to reflect that.
Well, we come to an end of our session. Today. So thank you very much for your interest and net let I will make sure to call a dose and we're still at question and we're not able to ask their questions today and leave it to mark for the final conclusions.
Well. Thank you for joining us today lots of question and sorry, we didn't get into all of them.
And.
We will make sure we have a chance to get back to you and answer your questions and then we look forward to touching base with you in a as we reported Q1 in April.
Day healthy stay safe and all the best.
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