Q1 2022 Nestle SA Corporate Sales Call

Good afternoon, and good morning to everyone.

Welcome to the Netflix three months of 2022 since the webcast.

Luca Bodine head of <unk> Investor Relations.

Today I'm joined by our Chief Executive Officer, Mark Schneider, and our Chief Financial Officer Francois regime.

Mark will begin with our usual key messages and discuss the full year 2022 guidance.

<unk> will follow with a review of the three months 2022 sales figures.

We will then open the lines for your questions.

Before we begin please take note of our disclaimer.

And now I hand over to Mark.

Thank you Luca and a warm welcome to our conference call participants today and as always we appreciate your interest in our company.

We're pleased to report another strong start to the year.

It reached seven 6% organic sales growth in Q1.

With increased pricing and resilient real internal growth.

Building on the strong start in 2020 and 2021. This brings our three year compound annual organic sales growth rate to six 5% for Q1.

It is literally the story of growth on growth on growth.

In a year that saw a significant and increasing input cost inflation, we stepped up pricing in a responsible manner.

At the same time, we launched meaningful innovations and saw strong growth in our affordable offerings, which ensures that consumers retain access to our products.

And that's the team did a superb job navigating continued supply chain challenges.

Taking mitigating actions to offset cost increases.

And staying focused on mid to long term business and sustainability priorities.

This is the third year in a row, where the entire team has to operate under external crisis conditions.

And I tip, my hat and admiration for their commitment and.

G and pay severance.

The war in Ukraine brought unspeakable human suffering.

It also exacerbated supply chain disruptions and inflationary pressures in the food industry.

Our values as a food company, a more needed than ever to avoid unintended consequences and unnecessary suffering and shortages.

I am, particularly proud of all the help and support that Vanessa team has been providing on the crown in Ukraine.

And she Ukrainian refugees in neighboring countries.

Turning to business development I am pleased to confirm that our acquisition of a majority stake in all gain close in April 1st.

We had announced this transaction on February 2nd and are pleased with the prompt closing, which create strong momentum for the integration in necessary health science.

We will come against founder Dr. Andrew Abraham who will continue as CEO of gain to our team.

We share a common vision of what healthy and nutritious food can do.

And look forward to learning from each other.

Before handing it over to <unk>, let me turn to our guidance.

As you can see on slide five we are confirming our full year guidance for 2022.

Obviously, a lot has happened since our full year 2021 publication on February 17th.

Our start into the year was stronger than expected and we believe that our organic sales growth guidance is conservative at this point.

At the same time inflationary pressures have increased a lot since then and in ways that were not foreseeable at that time.

As a result of this change in context, our guidance range of 17 to 17, 5% for the underlying trading operating profit margin has become more challenging than before when we described it as conservative.

With this I would like to hand, it over to Frank for the detailed financials.

Look forward to answering your questions later.

Thank you Mark good morning, or good afternoon to you all let me start with the highlights for the first quarter of 2022 organic growth was seven 6% pricing stepped up to five two person to reflect significant cost inflation rig was resilient at two 4%.

We now exclude the Russia region from organic growth given disrupted trading conditions on our decision to focus on essential food in Russia has announced on March 20, <unk>. This is a conservative approach as our organic growth would have been higher if we had included the Russia region.

Net divestitures reduced sales by one 3%.

Largely related to the initially what else in North America transaction, which closed on March 31st 2021.

Divestitures, where possibly you partially offset by acquisitions, including the Ko brands of the Bountiful company.

The negative impact on sales from foreign exchange moderated to 0.8% total sales for the first three months were $22 2 billion Swiss francs with five 4% increase versus last year on a reported basis.

Turning to the distribution of girls between developed and emerging markets.

Any growth in developed markets was 6.7% based on increased pricing on resilient region.

Growth in emerging markets reached eight 8% with balanced contribution from read on pricing growth was supported by strong momentum for affordable offerings, particularly in Italy.

Let's now consider the breakdown of sales by channel organic growth for retail centers remained strong at five 9% with a high base of comparison in 2021.

Gross remained well above pre COVID-19 levels.

Within retail E Commerce sales grew by 5% building on a very strong growth of 39, 6% in the first quarter of 2021.

Again growth in out of home channels reached 35, 6%, which sounds now exceeding 2019 levels.

Pricing stepped up to five 2% in Q1, we expect sales of price increases over the course of the year to reflect significant cost inflation.

<unk> will continue to be implemented in a progressive and responsible manner.

The impact from cost inflation is expected to be significantly higher in 2022 versus 2021.

Compared to when we talked to you in February we now expect an even greater inflationary impact as a result of the wall in Ukraine.

So far we have not seen any material what have you done something to get the rig elasticity linked to price increases we expect to see some going for a wild as we increase pricing sales are following higher higher level of inflation.

Market share trends continue to evolve favorably.

Rig was two 4% in Q1 2022, following a high base of comparison.

Just as a reminder, REIT was exceptionally high last year at six 4% in Q1 based on strong COVID-19 related demand.

This chart shows a two year average rig which provides a more meaningful view of our underlying performance as it reduces the volatility of COVID-19 related demand.

The two year stack for rig was four 4% in the first quarter, which is broadly in line with the trend we have seen over the last few quarters on high yield than pre COVID-19 levels.

Let's now look at the results of four seven operating segments, beginning with North America, where we saw nine 9% organic growth.

Bruce was supported by increased pricing.

I meant I mean, you come out on premium products as well as ourselves a recovery of out of home channels.

The zone. So continued broad based market share gains led by pet food coffee and cream aisles.

By product category, Purina, Petcare necessary professional Starbucks out of own products on water posted double digit growth.

We didn't want to essentially out posted close to 40% growth.

The beverage category reported high single digit growth with strong demand for Starbucks at home products on coffee mate.

Frozen foods saw positive growth despite supply chain constraints under high base of comparison in 2021.

Shifting to southern Europe , which we bought at high single digit organic growth supported by increased pricing sustained e-commerce momentum on the SASSA recovery out of home channels.

The zone continued to see market share gains, particularly in pet food coffee infant nutrition and plant based food.

By product category, the key growth driver for US was nifty professional with sales exceeding 2019 levels.

Purina Petcare infant nutrition on water all grew at double digit rates.

Confectionery reported mid single digit growth with a strong recovery for kitkat on gifting products.

Growth in coffee was almost flat following double digit growth in the first quarter of 2021.

Cooling a resource and a decrease impacted by a high base of comparison.

Garden Gourmet plant based products continued to see strong momentum.

Moving next to zone AOA zoned reported mid single digit organic growth with particular strength in South Asia on sub Saharan Africa, Japan, and South Korea.

Growth was supported by increased pricing that fills a recovery in out of home channels and continued momentum for affordable offerings, which delivered close to double digit growth there.

The zones are market share gains in most categories, particularly culinary coffee and ice cream.

By product category culinary Amnesty professional grew at a double digit rate.

Coffee cocoa out more beverages as well as confectionery posted high single digit growth.

Growth in infant nutrition was positive driven by Electrogen.

Next is zone, Latin America, which reported double digit organic growth building on a high base of comparison in 2021.

<unk> remained resilient despite significantly higher pricing it.

It is worth highlighting that foreign exchange had a positive effect of one 8% incentives girls.

They're also supported by strong execution and continued e-commerce momentum with broad based contributions across most geographies and product categories.

The zone, so market share gains in pet food infant nutrition and cheese dairy.

By geography, the zone, three largest markets, Brazil, Mexico, and Chile, all reported double digit growth.

By product category confectionery Purina Petcare unnecessary professional reported strong double digit growth within confectionery guarantor in Brazil performed strongly in the first quarter.

Infant nutrition saw mid single digit growth based on robust demand for needle a nonfunctional products.

Growth in dairy was flat following a high base of comparison in 2021.

Moving now to zone, greater China organic growth was three point focus on partly impacted by the timing of Chinese new year.

Pricing was slightly negative, reflecting low food related inflation in the region.

Excluding infant nutrition zone reported close to double digit growth supported by innovation and market share gains, particularly in culinary ready to drink coffee and confectionery.

By product category strong sales development in most categories were partly offset by sales declines in infant nutrition with turnaround initiatives continued.

Sounds in coffee and culinary grew at a double digit rate supported by new product launches, including Starbucks mini cups, and totally always still source.

Nestle proficient known reported high single digit growth despite regional Lockdowns under a high base of comparison in 2021.

Confectionery posted high single digit growth.

Led by strong demand for shark Westfield chocolate.

Solid gross felt super cheap.

Next season, espresso, which reported low single digit organic growth following 17.1% growth in the first quarter of 2021.

The virtual XI stem so continued momentum on out of home channels recover up sell though particularly in old town restaurant on catering segments.

New product launches also supported girls boutique sales increased strongly with the lifting of movement restrictions.

By geography, North America posted double digit growth with continued market share gains.

Europe reported a sales decrease following double digit growth in 2021.

Other regions combined reported double digit growth.

Finally, looking at Nestle Health Science, the business posted mid single digit growth building on two consecutive years of double digit growth.

The version on geographic expansion, where key growth contribute tolls.

Consumer chaos, so low single digit growth healthy aging products grew at a double digit rate supported by boosting the United States and Canada, a new trend in Brasilia.

That means minerals and supplements posted slightly positive growth following a high base of comparison in early 2021 during the pandemic.

Vital proteins and <unk> continued to see strong momentum.

We also saw strong rules for uptick fast a weight management solution.

Medical nutrition reported double digit growth with continued strong sales development for pediatric products.

Sylvia the peanut allergy treatment, so signs of increased adoption after COVID-19 related delays.

By geography Sams in North America grew at a mid single digit right Europe saw a slight centered decrease while other regions posted double digit growth.

Let's now look at product categories growth was broad based and supported by increased pricing with market share gains, particularly in coffee pet food culinary and Nestle Health science.

When looking at growth for the first quarter, we see consumer demand somewhat normalizing by channel.

Categories with greater at AUM conception, such as culinary in dairy so softer we're all sort of a high base of comparison, but Sam's remained ahead of pre pandemic levels.

By contrast categories with greater exposure to out of home channels on the go consumption, such as confectionery and water. So a strong recovery of a low base of comparison.

Within powdered and liquid beverages coffee, so high single digit growth over a high base of comparison in 2021 with broad based contributions from all brands.

Sandoz off NIST cafe ready to drink and Starbucks products grew at a double digit rate supported by new product launches.

Cocoa out on more beverage he's reported high single digit growth driven by strong demand from Milo.

Petcare maintained double digit growth with strong pricing and solid rig sounds in most segments and geographies grew at a double digit rate with market share gains.

<unk> performance was driven by sustained strong demand for premium products Purina Pro plan Purina, one as well as the veterinary products.

The recently launched propane life's clear continues to resonate strongly with consumers and they'll get any growth reached 65%.

The product is now distributed in 25 markets.

Nutrition and health Science posted 4.5 thousand gross sounds in infant nutrition grew by three 9% led by the Americas and Europe in North America growth was held by supply shortages in the markets.

Outside of China infant nutrition, so market share gains helped by double digit growth for HMO products, we have already discussed Nestle health science.

Prepared dishes and cooking AIDS. So two 9% growth based on strong set of development for ambient culinary in zone AOA in China.

Plant based food products continued to deliver double digit growth.

Meat products on ice cream recorded for 2% growth the key growth drivers, where coffee creamers on ice cream ambient dairy so positive growth building on the mid teen base of comparison for 2021.

Growth in Confectionary reached 10, 5%, reflecting a continued recovery in person gifting products.

Within confectionery samples of kit Kat grew at a double digit Detroit.

What they are supposed to 21, 3% growth composed of seven to pass on pricing and 14.1 pill once a week.

Growth was supported by a steady recovery in out of home channels unstrung roles for international premium brands.

Let me know hand over to Luca for Q&A.

Thank you Francois <unk> with that we move to the Q&A session.

He moved the lines up for questions from the financial analysts.

Please limit yourself to no more than two questions. The first question is from MS. Selina and with J P. Morgan. Please go ahead the Selena.

Yes. Good afternoon. Thank you for taking my question.

Right.

I would like to rebound on them.

Mark your commentary at the beginning of that and your guidance on margin that does become more consistent and.

And one challenging.

Can you talk about what are the 17 to seven cheniere half is still.

Something that you would expect the year and marching to.

And we didn't.

And it can be a bit of an understanding of how your cogs inflation as smooth as it seeks to where you where you thought in February and whether we should expect and as a consequence H two margin to be down as well as H one.

And my second question is on consumer demand, you said that she's so that'd be detail and evidence of elasticity.

And is it possible.

To see where I mean that you are looking for one maybe two are some pressure thing.

In the future and can you talk about where exactly you would expect that say by regions all category and is it possible to know and how your P. P. P. In your opinion, probably that grew in the quarter. Thank you.

Celine. Thank you and then when it comes to the guidance, it's very important to US we confirmed the guidance in all elements.

Just because I did qualify the underlying trading operating profit margin for U S. Conservative in February given of course, all the changes that have happened since I felt it was necessary to point out that that description no longer applies that has become more aggressive so disinterest in the spirit of keeping you up to date information.

Let me also circling back to that spirit mid of February and before the Russian invasion in Ukraine, I think some people had expected that we would put a share some inflation expectation, which we didn't do at the time I hope everyone understands and highlight in hindsight that this was prudent this is a highly volatile situation and I think the company is fully.

Focused on navigating this very.

Particular circumstance where.

We have significant inputs input cost inflation and then of course, we have to take responsible pricing action, but this is not an environment, where it's easy to share detailed forecast and it's really literally day to day week by week and this is what we're fully focused on right now.

When it comes to comparing elasticities in Reagan and so forth.

You can clearly try and give you some helpful hands, but it's also important when you compare different quarters here that we are dealing with significant supply chain constraints. So for example, when you look at North America, we could have sold more and we were clearly supply chain constraints in some areas.

This applies to our raw material.

But also to our labor, sometimes we couldnt run lines that we wanted to run and it also applies to distribution because distribution capacity is super Super tight.

So that's why it's important as much as we're trying to give transparency not to jump to wrong conclusions I think so far the punch line is that our consumer demand has proven to be resilient and then obviously, we do expect now some elasticity late in the year because of the fact that simply when you stack all of these price increases.

On top of each other it does have some impact on what the consumer has to pay for the basket.

Maybe first of all you want to take the question on premium and the affordability, yes I can.

Good afternoon sitting on P. P. P M premium PPV and premium is indeed, both of them have grown that to higher rates and do you ever edge off nicely. During the first quarter of 2022. So she's good news. He sees the same trend is what we have seen in the past, which mean that there is a polarization of the markets towards the extremes. If I can say, so both premium and <unk>.

So no change versus what we have seen in the past.

Great. Our next question is from that give them deny said UBS. Please go ahead again.

Thank you very much good.

Good afternoon, I'm not can pose.

Two questions for me please.

The first one is on Nestle health Science, where you've reported mid single digit organic sales growth.

I think that's the lowest quarterly organic sales growth we've seen from this division in more than three years and it seems to be mostly due to vitamins Luke.

Looking ahead the base of comparison, it doesn't get any easier.

Easier. So I'm wondering if 2022 should be viewed as a Europe normalization for Nestle Health Science as you lapped two very strong years.

Or if you expect some sequential acceleration over the coming quarters.

And then my second question is on the tragic deaths affect two children in France, and also doesn't children Apache suffering permanent injuries.

Public authorities in France of confirm the link between this case yourself the E coli infection and the consumption of good Tony is frozen Pizza and we've also had in the French media, some former employees upside the necessary manufacturing plants.

Talking about poor hygiene conditions in Japan.

So my question is do you think nestle today has adequate processes in place and also adequate capex minimized any product safety or quality risk.

And I guess typically how many audits of your plants do you do every year and is it an outsourced all of it or is it done in house. Thank you.

Thank you and let me address both of these questions. So first of all unnecessary health science, it's important to recap what that first quarter of 2021 looked like in the northern Hemisphere. So this was one of the peak COVID-19 quarters. It was.

Before the time that most of US received their first Colby gap and hence it was.

One of those moments when interest in.

All matters related to personal health and boosting the immune system.

Were at their peak.

And so clearly that translated into a super strong quarter do you see some of that when you look at Franco Slide I mean, clearly out of home was still severely impacted in Q1, and then retail was that basically the strongest for all year and Q1 last year. So clearly this was an unusual quarter in it if it proves to be a very.

High level of comps in particular, then for Nestle Health Science, we're actually quite happy with.

What's how the first quarter went including in vitamins minerals and supplements as close as I mentioned growth was more muted than before but it was still positive and in fact some of the early scenarios. When we looked at the situation from last year.

Pointing to potentially slight negative for one or two quarters, and we have been able to avoid that.

It's going to be smooth sailing for the rest of the year. This first quarter, what's the most important one to lap.

Do keep in mind the base of comparison as little right here because the first quarter last year did not include the bountiful company yet first quarter. This year of course does include it.

When you look at the company now Nestle Health science on a two or three year stack, you're seeing double digit growth and overall, we're quite excited about the underlying growth dynamics of the health science. So no concern there.

Regarding your second question in <unk>.

First and foremost offer our deepest sympathy to all those affected and also wanted to confirm to you that we of course give all the support we can to the people who are affected and their families.

This is all the more upsetting sense out there soon embark children.

The people who are impacted.

Let me tell you that as soon as we were informed by the French authorities.

On the suspicion here that are in.

The pizza dough, what they would be E. Coli stec, we immediately carried out a voluntary recall of the product out of an abundance of caution interrupted all deliveries and suspend production.

At the moment as you know there's a public investigation underway. This limits also how many details we can share on that situation, but let me tell you that we're fully cooperating with the French authorities. They have a very important task to do and that is to find the ultimate origin of this but she ever outbreak, France does have a world class food safe.

And public health system, and we also stand ready to support that investigation with Arnold our scientific resources let.

Let me show you would take this very very seriously because consumers trust and our product is very key to us and so in addition to the official investigation when it comes to getting into the matter handling all the details of the matter is trying to do maximum learnings from there.

Will keep us busy for months and years to come.

So clearly this is something that we we do not cut any corners on let me also tell you when it comes to overall.

Quality work that we're doing.

We do not outsource that work at any large scale, we have 9000 quality professionals worldwide that deal with this.

Including 800 scientists in 'twenty level laboratories.

And we're doing about 4 million analysis each year into the matter. We're doing audits also here from the center into our quality systems and all of those of course are in house as well. So this is clearly one where we do not cut any corners, and we consider it as core and not something that we would like to outsource at any point in time.

Regarding the video, but let me just tell you that these are old pictures from 2020, they're not representative of the strict sanitary and quality standards at Indianapolis factory and they are also not related to that current situation. So we clearly are taken out of context, and we do regret any misstating impression that this has created.

So hope that answers your questions.

Thank you next question is from them, what and I came in at Barclays. Please go ahead Warren.

Good afternoon. So we're an argument here at Barclays.

Two questions from me come up can we dive maybe into a couple of the categories.

One on coffee I'm looking into espresso growth, there's been a bit slower now for three quarters in a row I guess is mainly comps, but I would've thought that would've been more benefit from mobility, particularly in the nespresso boutiques, but that's not visible in the numbers because Rick is flat. So your question is what is the kind of next big growth engine.

For new espresso is it still devote showed rollout globally or was something else you can point to it maybe last one on the topic of coffee can you maybe update on the Starbucks growth.

This quarter plays and then the second category I want to touch almost pet care you mentioned about growth on growth on growth I think pet care is probably the best example of that.

A 14% growth almost this quarter with a record growth last year is very very impressive. So I was wondering whether you can kind of dive into a little bit more detail exactly where and why you are taking so much market share.

Is that share gain mainly in the U S and Europe or is it global is it also a M and more so on the topic of pet food any update to share on your ambitions for pet care in Asia, where you are still very underweight.

And in that geography, thank you.

No coffee and espresso you need to look into that.

<unk> three.

Three 3% of organic growth may look a reasonably soft in Q1, but it comes on the top of 17, 1% last year. So if you look at the two year stack, we are double digit actually 10 to a person. So we continue having a very strong gross phone. This first so in for coffee in general virtual you said it is our largest growth engine that we have and it will continue.

To be most probably the largest growth engine that we have Starbucks and we continue to do very well there on all the.

Dimension. The first Starbucks food service is really coming back very strongly now as you know we continue gaining market share as well in the Nespresso compatible capsule design, we have already captured 20% of the market worldwide.

More than two years, which is a really exceptional for coffee and tea as well there is a as we see that shift back from at home consumption two out a form which is obviously benefiting the out of home business a little bit at the expense of at home, but we can see that there is a lot of resilience, even though at home sales.

Coffee in general felt initially for pet care, and we gained market share basically across geographies and across categories as well on sub segment. So it's really driven by largely by innovation and science based innovation that.

That does make a big difference in Israel and this is one of the area, where we are getting market share as well and we are still at a relatively.

Which is a relatively small market share related to the one that we have in Europe or in the U S. But are gaining as well and are investing in the market is teed up to relatively early stage of development. So no specific concern there in for pet care in Asia.

Warren if I could just build on one point you on Asia, there were a number of assets coming to market in the last year or so not large companies as Franco said this is not a very consolidated space, but nonetheless, I think people were trying to take advantage of the good times that the pet food industry and choice right now and to us largely.

This was a matter of what I call acquisition price discipline. So clearly pet food is hot right now a lot of even though we're gaining share I think everyone else's numbers of harp too and so clearly we walked away from a number of deals simply because the the financials didn't makes sense because.

But we do continue to invest in the internal cross we have strong brands and we'll continue to do that in fact, what I called them out next question is from them brewing and maintain advancing them. Please.

Please go ahead Bruno.

Hi, good afternoon.

My first question is back to something you said, it's quite an exceptional quarter and clearly retail holding up so while all this home rebounding.

And do you is it simply because what you're doing out of home is a very different product mix.

At home or do you expect that those special circumstances are both doing well with very soon change and death of the retail decline or is there something we're missing in that whole explanation I struggled with it.

The second one is tiny in penetration it keeps being quite materially negative dragging down the overall, China has been therefore the wall.

Just update us on the timing when we think the drag of China infant nutrition.

Should.

To get out of the system.

Bruno Thanks, and maybe I can take a first crack and then maybe frostbite can built in particular on some of the in home out of home. So on China first I know that there were some questions about the negative pricing for the first quarter and that is related to infant nutrition, we've taken a number of portfolio adjustments there.

And as a result of our work that we're doing to reposition the infant nutrition business.

That was one of the consequences.

We lost to a very slight extent market shares in the first quarter, but we do now expect the situation has stabilized and we expect us to return to positive growth at late in the year.

We've seen from some of our peers can be industry beyond the situation is not as bad as structurally as some people might think so this is mostly about doing our homework nest. The homework and then later on returning to positive growth and we're confident about that.

But we know from speaking.

Good afternoon. So indeed, we see a lot of resilience in the retail channel and it's amazing to see that in Q1, we grew five 9%, although very strong nine 2% of organic growth.

Last year. So it's very resident we monitor very carefully are changing consumer pattern and we see that our consumer has structurally.

Structurally change over the last two years and we're seeing that some of these habits are here to stay such as one goes up with strong demand for e-commerce , such as increase the interest of all our house on uniquely benefits increased pet adoption and as well as a higher level of working from home and as a consequence. This may explain as well the fact that at home consumption.

<unk> remains a very strong so I would say so far so good that's something that we are monitoring carefully but very positively surprised by the fact that we see out of them rebounding nicely on exceeding the pre COVID-19 level in a while.

While at the same time is seeing a very resilient retail business.

Thank you.

Next question is from Jon Cox Kepler. Please go ahead John .

Yeah. Good afternoon, guys. Thanks for the question, Jon Cox Kepler Chevron.

Just a couple of questions one on Russia, and how you're accounting for that you said, it's no longer in <unk>.

Organic I wonder, if you'll keep that full year, and where where bags as it being shown in the M&A.

Line and I'm wondering if you're moving to deconsolidation that basis and if so.

What sort of if any write down should be expected I know the business is not particularly large for you guys.

Anyway.

And then just back to the sort of inflation on the guidance question again.

You know you, you're saying that that's more challenging and I'm wondering is that because you now have to go back to European retailers, specifically to talk about price rises again or is it because you're more worried about the impact on volumes and then capacity utilization.

And that having an impact on margin just trying to get an understanding why do you think it's more challenging is it really because it takes more time.

Or is it because you think the impact on volumes is going to be worse as we go through the year. Thank you.

John Let me take a crack at the pricing side and also make some general comments about Russia, and then maybe Francois can comment specifically on the on how we account for it.

So clearly.

I mean, I think this the effects of this upheld worldwide.

And one immediate transmission belt here to every aspect of our business was the rise in energy prices because as you know that's not only our own energy consumption. That's also our trucking and distribution costs and it's also to launch extend our packaging materials P. T being one example.

So it was the energy plus certain commodities shooting up.

That clearly you know within a matter of few weeks change the situation and then obviously as we discussed in the full year conference call different markets different environments have different timetables for when you can review pricing I think by now everyone has understood that there is such a significant search underway starting from last.

Here that clearly price stability is simply not in the cards I mean, where we are we were literally as you know when you compare full year margins were defending our margins here, we're not expanding our margins and we're doing the pricing as responsibly as possible, but clearly the situation has become worse and thats what were trying to signal.

Because we had expressed a larger degree of conservatism when it comes to be your top margin as part of the full year guidance. So again, all we're trying to do is sort of give you the latest impression on that.

When it comes to Russia overall, I hope that no. One has questioned our motives for the path that we have chosen regarding all our presence. There. This is not about gaining commercial advantage.

For us as it is about a universal human right that we don't want let's go likely and if that didn't come across clearly enough I wouldn't want to offer my regrets.

Very hard as you can imagine for food companies tell them to stop supplying food.

Like it's hard for a pharma company to stop making medicines or for a hospital to start to stop accepting patients and for US our presence on the ground. It's never just a business opportunity. It also comes with what I call extensive rainy day responsibilities for the communities we serve with.

We demonstrated that around the world when it comes to the Covid pandemic and I think we're demonstrating in today in particular on the ground in the Ukraine, but we're one of the few food companies still operating and supplying the population when it comes to Russia.

Now consistent with there's very limited approach and that the trade restrictions and everything else that applies I think we've chosen the most conservative option.

For computing, our Q1 growth and tap out is excluding it and I think that's very consistent with the announcements that we made on March 23rd regarding our plans for Russia, but let me turn it to Francois for a more detailed description here on how we intend to account for this.

Thank you Marc and good afternoon, Jon So we decided to exclude Russia region from the organic growth. So we redefined the apm's your alternatives performance measurements for organic growth.

So we did that because we see that we have significant disruption in terms of operating conditions in the Russia region. It would bring a lot of volatility as Mark said, we did not need Russia to show a good quarter could have been even better but I mean, we had very good very strong quarter.

Even without Russia, just technically so we excluded Russia from organic growth, but it remains consolidated in our accounts. So it remains reported consolidated net in that sense as well as in our profit. So we needed to reconcile it somewhere around the adjustment as far as the Russia. Originally is concerned goes into the Forex on any line of interest.

For your information in Q1, it was about to sell that in the Forex line under about one third in the M&A line. There was a lot of Forex impact linked to Russia, because we had the significant depreciation of the ruble during Q1.

Next question is from the Pascagoula.

Stifel. Please go ahead Pascal.

Yes, good afternoon, everyone I'll ask a question on espresso again on the router flat Lake.

What what is behind there I mean, I see the high base last year on the other hand.

You also report its declining or or.

The weak sales in Europe for Nespresso, but a good performance.

Performance in Starbucks and that's cafe.

My question here is S.

Espresso is a D to C.

The business.

Yes, you have pretty good insights into your consumer so do you have incremental consumers do you have.

Flat to weak also driven by.

By people trading down maybe I'll support.

And that's what was that.

Farmer arching once and what's the dynamic here.

So Pascal no no signs of trading down for the time being as I indicated earlier, we see a premium product and this is very useful coffee as well growing faster than the average of our of our own sales. So we continue seeing a very strong momentum the flat rig that you are too.

Looking about is essentially link to a D of unfavorable comps with a very high growth last year of 17, 1% of sort of displace one concern is concerned there last year. The only change that we saw is a shift from our at home consumption to outperform so we see a very strong development in our telephone conception.

For <unk> pursue as well, but so this is something that we expected would happen as we see less lockdowns around the globe.

Thank you so innovation continues as well to be a significant growth factor along with virtual as you indicated earlier I think that if you look at no concern now in terms of volume I think that if you look at the volume of misplaced for today. It is something like 20% high yield on what we were selling.

Pre pandemic. So we remain with a very strong base that has grown significantly in terms of consumption and the volume from companies.

Company is only the beginning of the crisis.

Okay, maybe if I can build on that in general not just for an espresso you may recall in one of the earlier conference calls I pointed out the need whenever possible to built.

Either two or potentially even three year stacks to get a good view of how a brand or a category has performed and that still continues to apply.

And in my opinion, and he says such stack should begin in 2019 or 2020, and then you should incorporate the latest data and if something meaningful happens you can trust us we would try to call. The analysis that you have a good sense of where category is going but this is a time with significant.

[laughter] gyrations and I.

I think prior year comps are a meaningful are important and something that needs to be incorporated and obviously then in some categories. You also especially in the U S. Market. You also have to take our supply chain constraints into accounts. So that's why there's lots of noise in the system, it's important not to over interpret and we're trying as much as possible.

Separate that noise from what is the true underlying category dynamic and I'm also not concerned about net price. So just like Francois that impact our.

Business is stepping up to a much higher level and continues to perform well based on innovation in general and then the rollout of the virtual assistant.

Next question is from James targeted Biomedical. Please go ahead James.

Hello, Good afternoon, everyone.

Wanted to build on a couple of questions I was previously one on pricing and one on Russia. So just on pricing.

An additional price increases will be required during the year, but can you could you say how confident you are in Europe in particular retailers what would your pet to.

Negotiating pricing if you like more than me the typical kind of once a year that they did historically and so therefore, we should expect material incremental pricing in Europe before before the beginning of next year when the next window would land.

And then on them on Russia.

Possible to quantify.

Quantify how.

What the magnitude of the growth was in Q1 and I. Appreciate it's not part of the organic growth now, but I'd be curious to know what that was and how.

How big is the kind of essential food part of that Russia portfolio that you continue to produce and supply Russia. Thank you.

James Thank you and Tim look on the pricing, obviously, we're trying to be transparent and helpful. But we don't want to handicap. How next pricing moves are going to walk out and obviously, we're trying to do with this with the best of our interest.

Interest of shareholders in mind and.

So sorry that we can't be more transparent on that suffice.

Suffice it to say people do see significant commodities and energy as I mentioned before going up and so I think that's generally good understanding and the public that obviously something has to give and we can't keep things constant in light of the significant cost pressures that are affecting everyone in theres no exceptions and then.

For Russia, let me turn it to Francois. So if we had kept our Russia into organic growth organic growth at group level would have been higher which means that Russia grew at a higher level than the average of the group is essentially linked to the fact that we did quite a lot of pricing and in Q1 as a consequence of the significant depreciation of the ruble because it went down by.

Almost 50% at the given time in addition to that we have seen that there was a lot of pantry loading in the context of the crisis locally. So when you add up the pricing and pantry loading as a reason why we had to.

This benefit in terms of sales in Russia in Q1.

Next question is from Tom Sykes Deutsche Bank. Please go ahead Tom.

Yes, thanks very much good afternoon, everyone. Firstly, just on the North American pricing, which was obviously very high.

Could you maybe get a little bit more detail as to some of the categories, where you saw some of the highest pricing.

And is that at a peak level of increase.

And was there any impact to the supply chain chain constraints. He spoke about shorter term impacting that crossing which may alleviate a bit.

And then just on consumer behavior offline versus online.

Is it it's all easier to engage in net revenue management and is that potentially a bit less price sensitivity.

Flying is online and are you benefiting from that at the moment as some of the channels rebalance a bit.

Yeah.

Tom Let me take a crack at the pricing side, and then hand over to Francois.

Can't go into too much detail on the categories, but I think the Patriot, you've seen and that is higher pricing in the U S market than <unk>.

<unk> in Europe or elsewhere, I think that's not unusual and I think it's very consistent with some of the peers are reporting I've seen.

And I think a lot has to do with the fact that in addition to commodities. You've also seen significant labor cost inflation, plus the distribution cost inflation theres, a real distribution shortage and crisis.

In town that has an impact on trucking costs and and of course, it's something that we need to reflect and so I think we are just as I said, we're trying to be as responsible as possible in pricing, but when we see these cost items shoot up we need to take appropriate action and that is what the U S team has done.

One complement that can be used to that.

The which is linked to two of the question that you asked in terms of consumer behavior on trade spend as well.

Certainly above market and it has happened in the U S and that explains part is one of the high level of pricing that we had given that we were facing supply chain constraints, we did less promotional activities.

As you can understand if we were very tied to supply the market. There was not necessarily point to maintain heavy promotional activities for some of our categories of some of our skus on products. So this is the reason why you thought to part of the reason why you see a lot of pricing in the U S. As you know in the U S as well.

So usually easier to implement pricing because we have less constrained than in Europe timing wise, so, which mean that we can usually react faster than some other markets and more specifically in Europe .

Next question is from the peanut allergy going at Morgan Stanley . Please go ahead the printer.

Good afternoon, and thanks for taking my questions I have a high level. One could you. Please share your perspectives on the state of the consumer globally.

As a consumer in a much better shape than what some of us here or are we yet to see the impact of the rising cost of living on consumer behavior, when it comes to demand or down trading and things like that.

And then the second question is on supply chains back in February at the full year results. You mentioned that you had been facing significant supply chain constraints in the U S, especially.

Especially on the logistics side, how did those evolve in Q1 beyond frozen foods and could you. Please give us any update on the latest situation both for Nestle on your views on the industry wide supply chain constraints. Thank you.

Thanks, Pierre let me start with the second one and I think when we reported in January and February we were still very much under the influence of how constrained January was.

This was probably the peak of the omicron crisis in the U S and so the absenteeism here among our own walk us, but also of centers everywhere, among our suppliers and our distribution was pretty significant and that really exacerbated the supply chain constraints I think since then the situation has slightly improved.

And.

Clearly that Covid part has certainly released itself.

I think what we're still seeing as a result of the significant step up in demand now in 22 over let's say 2019 levels. We still have some catching up to do when it comes to capacity and install capacity pet food is one. Good example.

So this may hit some categories more than others, but I think overall the situation has not improved simply because the omicron wave has come and gone.

Good afternoon on the consumables.

Consumer behavior as we indicated we have not seen any evidence of down trading two days have you done. So if it is the fact that we see for example, a premium products growing faster than the average of Nestle.

And we have not seen any if you don't see the often they get to you did at TCT on volume. We met we do expect that there will be some probably as we progress further in the year one as we raise prices.

This is not saying that it couldn't medicine as a surprise, but as we raise prices to levels that we have not seen for at least 15 years.

We could have expected probably more there might be one reason to be seen but it is a fact that probably during the COVID-19 causes probably a lot of consumers did increase their savings and they are all of them continue to consume at a relatively high level I mean, we see that across FMT G them by the way if you will.

You did listen I'm sure to many of our peers as well and you can see that the level of consumption is relatively solid across our segments and industries as well because that might be one of the explanation certainly something that we are monitoring carefully I'm pleased to see so far that we have not seen Israel downgrading no negative elasticity.

Not too significant legal.

We have our last question of the day coming from the Jeremy Falco with HSBC. Please go ahead Jeremy.

Hi, good afternoon, thanks for taking my questions.

One follow up on Russia, and then a question on Asia.

Firstly on Russia, clearly you are still recording sales in that market.

But you said, you're not going to be booking any profit as it naturally.

That is a little bit of a headwind to your margins. So can you quantify what that might be it. So is that kind of included within the 17% to 17, 5% margin guidance or is that margin guide is now completely excluding Russia.

First one and then secondly on the Southeast Asia clearly these economies are facing kind of the typical kind of inflationary pressure issues, but at the same time. These are cognizant, she's so quite a severe COVID-19 impact and now reopening as restrictions are removed. So can you talk a little bit about how you see the.

Kind of puts and takes of that over the coming quarters in terms of whether actually the reopening.

Could outweigh any sort of broader inflationary impact on demand. Thanks.

Jimmy on Russia, Let me start there. So this is a pause situation with lots of moving parts right now as Francois mentioned currency is generating we have significant supply chain constraints. We are also as you know in the middle of suspending our key brands and really focusing on just.

So lots of moving parts, which I think fully vindicated, but.

A decision here to not counted towards organic growth.

When it comes to consolidate in the business you don't have a choice as long as you control that you have to consolidate it and so this is not something we can simply say I don't so this is the difference between organic growth, which is in the alternative performance measure and and simply consolidating our guidance here is not koala.

So this is the guidance and Thats something that you know you can use as a good point too to navigate from and so we're not making this dependent on a specific decision regarding Russia.

And on South East Asia, Let me hand, it to Francois, but here again, it's always important at times of lots of volatility and lack of visibility.

The more prudent course is not to be out there with cran Tls forecast and expectation. So clearly it's very hard to gauge at this point, where some of the Covid App for example, in greater China and other southeast Asian countries is going.

So in general I mean, just to complement so in southeast Asia, We had low single digit growth with robust demand for example for some products like Maggie on this cafe, we have some countries that did very.

And then he went on were key contributors to growth like Malaysia and Thailand.

With the strong demand for coffee on culinary and even we launched new products like Milo sorry that resonated very strongly with consumers and then we have countries was a totally different behavior also Philippines and Vietnam. We had this slide to a set of decrease was negative category dynamics in some categories. So it's very difficult to draw a conclusion as you know me.

Any of these countries are also very dependent on tourism and they have been suffering quite a lot over the last two years as a consequence until we see diverse behavior also unfortunate there we remain very positive on the outlook for these countries on this should come back to growth.

As we progress all the time.

Okay, well, we have no further questions.

Come to an end of our session. Today. So we thank you very much for your interest in echelon.

Do you have any further questions I or the IR team is available.

We thank you very much I wish you all the best stay safe and healthy.

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