Nestlé S.A. Presents at 2013 Consumer Analyst Group of New York Conference, Feb-20-2013 12:30 PM

| About: Nestle S.A. (NSRGY)

Nestle Sa Reg Shrs S (OTCPK:NSRGY)

February 20, 2013 12:30 pm ET


Chris Johnson - Executive Vice President, Zone Director for United States of America, Canada, Latin America & Caribbean and Member of Executive Board

Roddy Child-Villiers


Bryan D. Spillane - BofA Merrill Lynch, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Unknown Analyst

Good afternoon, everybody. If we could just find our seats, we'll get started with our next presentation. So before we get started, please join me in thanking Nestlé and all of the Nespresso folks for hosting the outstanding coffee bar all week here at the conference.

CAGNY is indeed honored to have Nestlé back at this year's conference after a number of years. Nestlé has had a very consistent message to investors over the last 2 decades, and has predictably delivered through its shareholders, amid some skepticism that bigger can't be better. Some CFOs and CEOs have come and gone, but one pillar of the company that has not changed is its IR head, Roddy Child-Villiers, who many of you know quite well. Roddy, thanks for coming today, and for bringing along Chris Johnson, Nestlé's head of Zone Americas, who we're all looking forward to hearing from. Lastly, if you're looking for the PowerPoint hard copies, there aren't any, as Chris is not using any slides today.

With that, I'll turn it over to you. Thanks, again, for being here.

Chris Johnson

All right. Thanks, Andrew, and good afternoon, everybody. If it's okay with you, I want to do 3 things today, or talk about 3 things in the next hour. First, I'll just tell you a little bit about myself, then talk a little bit about Nestlé's presence participation in the Zone Americas, and then third, open it up for Q&A.

And I want to do this in more of a conversational style. I'll try to be as transparent as I can be. But I also know how the rules of this thing work as well, and there's certain things I can and can't say. So that's why I also brought Roddy along as well. And not only that, I'm going to give Roddy this pointed stick, so if ever I find myself saying something I shouldn't be saying, he can gently nudge me during the presentation.

So as we've mentioned, I don’t know if you're disappointed or not, I don't have any slides with me, I don't have a script with me, so I just want to, again, have more of a conversational style with you and share about Nestlé in the Americas.

So first, just a little bit about myself. So I was born and raised in Los Angeles, California. And I think it was probably fate that I ended up working for this company. Because when I was growing up, I used to spend a lot of time at my grandparents' house. And my grandparents lived across the street from the Carnation Company head office on Wilshire Boulevard in Los Angeles. And the bedroom I would sleep in had a large window that faced the Carnation neon sign, that at night, and this is true, I'm not making this up, it would spell out, C-A-R-N-A-T-I-O-N Company in red and white and flash. And this is something that I saw and fell asleep to night after night. I didn't think much about that until when I went to college. I went to Occidental College and received an academic scholarship, by coincidence, from Carnation Company. And so every year, I would write to the CEO, then CEO at the time, and thank them for the money, tell them what I was doing, tell them how much I liked their ice cream sandwiches, which I ate everyday at that time. And then when I was a senior, just got out and graduated, looking for a job, I called them up and I got a job with Carnation. I started off in sales and then worked in marketing, and this was back in 1983 when I started. And in 1985, Nestlé acquired Carnation Company. And I thought it was a great opportunity because I was interested in working overseas. In 1991, 8 years after I started, I got the opportunity to work in Japan. Worked in Japan for 5 years, then moved to Paris, worked for Nestlé Waters there, a few years after the acquisition of Perrier by Nestlé. Then transferred to Taiwan, where I was the market head of Taiwan, and then I got this phone call, really out of the blue one day, from my boss who said, we'd like you to come to Switzerland, the head office, because we have a little project we'd like you to consider. And I said, what project? He said, well it's an IT project, something about SAP. And I said, well, I think you have the wrong guy. I don't know about anything about IT or SAP. I can barely turn my computer on. He said, no, no, no. It's okay, just come and see. So I went from Taiwan to Switzerland, and often what happens when you have the connections, it was delayed, the flight was delayed. I arrived late to my boss's office. And I said, I'm here, and he said, you're late, and I said, I know because it was delayed. And he said, well, we have to go see the CEO, Peter Brabeck, at the time, right away. I said, but what's this job? And he said, that's okay, he'll explain it to you.

So I went up, again, jet lagged, a little bit nervous, actually very nervous, I went up to Peter Brabeck's office, met him and he said, so, what do you think? And I said, I don't know what to think. It hasn't been explained yet. He said, well, let me explain it to you. Basically, we have a project we'd like to do because our concern is that Nestlé is getting bigger and bigger as a company, and the concern is, that as we're getting bigger, our size perhaps will become a liability for us. We've been very good and very successful because we're very decentralized. We're close to customers, we're close to consumers, and we've been doing that for over 100 years. But we don't need to decentralize everything. And in fact, it would be better if we can find some ways to standardize some things and harmonize some things. So he said, there's 3 things. He said, it's very simple, just 3 things we want you to do. One is to harmonize business processes, especially that back-end stuff. Second is we want you to standardize and figure out a way to manage our data, because our data is very messy, and even at that time we didn't even know how many SKUs we sold. We weren't able to leverage purchasing power and all these sorts of things, so manage the data and standardize it. And third was to standardize the IT systems, IS/IT systems. Because back in that day, 12 years ago, every country, every Nestlé country had their own software, their own hardware, their own systems, which were not only expensive and our IT costs were going through the roof, but also couldn't connect and talk to each other. So he said, okay, that's it. What do you think? And of course, being a good Nestlé soldier, I said, yes, sure, I'll do it. And so I shook his hand and left the office. And I had no, really no more information than that. But the one thing that concerned me, most of all, was not that this turned out to be the biggest SAP implementation, I think, still to date in history, and it wasn't all the weight and challenge that comes along with that.

At the end of the day, it was what he told me the project name was because he said, congratulations, you're in charge of Project Bean. I'm like, what? Bean, Business Excellence at Nestlé. I'm thinking like, if you -- I mean, look, probably many of you know, and I've already run into many of you here that have heard me talk before, back in those GLOBE days, because eventually this became known as GLOBE. And in certain instants, I also was known as Mr. GLOBE. And I knew that it would be very difficult to pull this project off, very difficult, if the project was called Project Bean, and then I would be known as Mr. Bean, exactly. And that's a true story. Thank God they changed the name. I did that for 6.5 years, happy to answer any questions you might have about it later, but I can't imagine this company today running without GLOBE. It wasn't easy to put in, but the benefits far exceed simple cost benefits. It really enables us to work and to be more competitive, and anyway, glad to be a part of that program and that history of Nestlé.

So then from there, I went back to Japan, I was the market head of Japan for 4 years, and then I got another phone call out of the blue, this time from Paul Bulcke, who said, we'd would like to come to Switzerland and head up Zone Americas. And so that's what I've been doing now for the last couple of years. From a personal standpoint, I'm married, met my wife in the U.S., just before moving to Japan. We got married just before we moved to Japan. She worked for Nestlé. She was the brand manager on Come N Get It dog food and I, at the time, was the brand manager on Fancy Feast cat food, so that was just a marriage that was -- just had to happen.

I have 2 daughters, 2 teenage daughters, who I love dearly, of course. And maybe one other thing, if you want to ask in the Q&A or not it's up to you. In 1976, I came in second in the World Junior Frisbee Championships. So if you have any frisbee questions, you can also ask that later on.

All right. So that's about me. Now Nestlé in the Americas. And what I'm -- probably, most of you know that Nestlé splits up the world into 3 pieces. They call AMS for the Americas, Europe; and then AOA, which is basically the rest of the road. So I'm responsible for that geographic zone. But when I'm talking to you today, I'd like to share with you about, really, all the businesses that we have in the Americas. So not just my responsibility, which is about 70% of that, in the Americas with Zone AMS. So I mentioned we have 5 globally managed businesses, they include Nestlé Nutrition, Nestlé Waters, Nestlé Professional, Nestlé Health Science, and of course, Nespresso, which you've been enjoying out in the hallway.

We also have 4 global joint ventures, which are present in the Americas as well. We have CPW, together with General Mills in Latin America. We have BPW with Coca-Cola for Nestea, which in the Americas today is limited to Canada. We've got Galderma, we've got Innéov, joint ventures with L'Oréal, and then we have a joint venture, a fifth one in the Americas, which is with Fonterra, for chilled and liquid dairy products in Latin America as well as milk powder production.

So that's basically how Nestlé's organized there. And again, this is difficult without PowerPoint slides, so I'll try to do a pantomime. So this is Americas, North America, South America, okay? North America, South America.

So total population there is about 950 million or so. Out of the world population of 7 billion, that's about 15% of the world's population. But for Nestlé, our total sales in the Americas is around CHF 41 billion. Now when you talk about population, and that's CHF 41 billion, that's about 45% of Nestlé.

Roddy Child-Villiers

Swiss francs.

Chris Johnson

Swiss francs, sorry. Swiss francs, thank you. I'm glad you didn't use the stick on me. Swiss francs. So when you look at the population, North and South, 37% of the populations in the North, 63% is in the South. But Nestlé sales of that CHF 41 billion, is actually the reverse. So we do 63% in the top, in the North, and 37% in the South. We're present in all countries and territories. We have 170 factories, 110,000 employees.

And to put it in perspective as well, we have 3 countries which do about 80% of the total sales in the Americas. And by the way, I should also mention, just for growth, that CHF 41 billion in the Americas, all the Nestlé businesses grew about 5.9% last year. Three countries, 80% of the sales, and there's 12 product categories which represent about 90% of the sales. So that's what I want to do, explain to you a little bit about the countries. But then more importantly, go sort of category by category, and then talk specifically about how we're doing in the different countries where we participate in these.

Nestlé is not a simple company this way, but I'm hoping that this is maybe more of a memorable way for you to take away what we're doing in the Zone. So first of all, to start. The biggest market, by far for us, the #1 in the group, #1 in the Zone, is Nestlé U.S.A. or is the U.S.A., Nestlé in the U.S.A. About CHF 24 billion in sales, represents about 25% of Nestlé's total turnover, 58% of the total sales in the region. And last year, our sales in the United States grew by 3.4%. We have 120 locations in 47 states, we have about 51,000 employees. And many people are surprised about this because we're not that well-known, for actually the products that do most of the business in the U.S. In fact, 7 product categories or 7 products do, again, about 90% of the sales in the U.S. It's PetCare, it's frozen foods, it's Waters, it's Nutrition, ice cream, Nestlé Professional, which is our out-of-home business and the coffee enhancers, all the way down at the end on Coffee-Mate.

And most of these brands do not carry the Nestlé brand on the label. When people think about Nestlé in the United States, you think about what? Chocolate, right? Because of that jingle from the 1950s, that N-E-S-T-L-E-S, Nestlé makes the very best chocolate. And that is now in the jingle hall of fame, I hear. And it kind of drives me nuts because the reality is very different. About 3% of our sales, but top of mind, that's what people think of. And just an interesting anecdote, 2 years ago, the writer of that jingle, Adam Scott, who wrote that with his wife, Marilyn, wrote me a letter asking if his son could have an interview to work at Nestlé U.S.A. And so, of course, I mean, I was honored to help him out, and at least get his son an entry into talking to the company. But I also wrote him back and said, wow, I really wish you didn't write such a good jingle because you can't just get that out of people's heads. But that's where we are in the U.S. And I'll talk about each category as we go through.

Next is Brazil. CHF 5 billion, #3 in the group as far as -- CHF 5 billion, again, Swiss francs. #3 in a group, #2 for the region, 6% of Nestlé sales, 13% in the region, grew 9.8%. Despite what you hear, Brazil continues to be robust for us. We have a long history in Brazil, over 90 years. The first factory in Latin America is still operating in Brazil, in Araras. And they are very different than the U.S., the Nestlé brand is very, very strong. Three product categories make up 60% of the business. It's Ambient Dairy or milk powders, it's chocolate, and it's Nutrition. So those 3 combined are key.

Mexico will be #3, CHF 3 billion in sales, #6 in the group, #3 for the region, 4% of Nestlé, 8% of the region, grew 9.4%. Again, all of the sales within Mexico for Nestlé. Again, like Brazil, very, very strong Nestlé brand. And like Brazil, Ambient Dairy, the largest product category. Although chocolate is #2, in the case of Mexico, coffee down at the end is #2 and Nutrition is #3. So those are the 3 geographies that make up the majority of the business.

So let's talk about the product categories, and I feel like I'm one of these sort of like cooking shows where they go down and move along the table and explain things. We'll start with PetCare. So PetCare, last year, about CHF 7 billion, about 18% again of the region and grew 8%. Now about CHF 6 billion of that CHF 7 billion is in North America. We've reached now the CHF 1 billion mark in Latin America. Again, PetCare has been very consistent for us, strong growth in the North and double-digit growth in Latin America. As you know, we have leadership -- overall, we have leadership in dog, we have leadership in cat, we have leadership in snacks, and I didn't bring any litter here because it was too heavy. But this is the portfolio that we have. We participate in all segments, we participate in all channels, with a wide range of items. And one of the strengths of Purina, really, is a focus and a real emphasis on innovation. Very long, very strong innovation pipelines, and really one of the most outstanding acquisitions, with the Purina acquisition that Nestlé did around 10 years ago.

The second area, and by the way, I'll just tell briefly -- touch briefly on these, because we can come back for the Q&A if you have more specific questions, the second area is Ambient Dairy. So Ambient Dairy is about CHF 4 billion. So this one, I said, is about CHF 7 billion, this is about CHF 4 billion, grew 5% last year. And these are primarily milk powders in Latin America. So there's a range, full cream milk powder, this product is coming from Brazil, and in fact this is, of the 20,000 SKUs we sell, and in fact now with GLOBE, we do know we have 20,000 SKUs in the Americas. So of the 20,000 SKUs we sell, this is the #1-selling SKU that we have, the full cream milk powder. We also have growing-up milk powder, which is here, very strong in Mexico, getting good traction also now in Brazil. But this is -- these milk powders are for age gates, 1-plus, 3-plus, 5-plus, 1-plus being the strongest. We also have adult milk powders, generally targeted for women, often with added calcium for bone health. And then also very important area for us is what we call the affordable milk powders, a vegetable filled milk powder, which is fortified with iron, vitamin C, A and D and calcium, so it's an affordable chance for folks to get the nutrition they need.

Innovation is important in all of our categories, and milk powder is no different. Last year, we launched a new product in both Mexico and Chile, Acticol with phytosterols, 2 cups a day, clinically proven to reduce cholesterol absorption. This is something also we'll be rolling out across Latin America, and we're also taking advantage then of selling it in different formats at the same time to leverage the brand, in this particular case, in UHT as well as in a drinking shot. Okay so far? Okay, just checking.

Next, frozen food. I know there's probably a lot of questions about frozen food. So frozen food is, as you probably know, primarily in North America. So it's about CHF 4 billion for us. It's about 10% of the region. And it's been a bit of a struggle. The whole frozen category has been a bit of a struggle. Down slightly in our prepared meals, and also down on pizza last year. We compete in basically 4 segments. First is frozen pizza, which was an acquisition, as you know, from Kraft in 2010. The pizza category is huge in the United States, around $38 billion, let's say this time, or Swiss francs, it's about the same. And majority of this volume is consumed out of home, at restaurants, or take out or home delivery. Frozen pizza only represents about 10% of that, or so, and the category was down last year, largely because of some very aggressive activity from the carry-out and home delivery people. But this is something we've seen over time in this category. There's been ups and there's been downs. But in the long term, we're convinced that there is good opportunities to continue to expand our presence in frozen pizza.

We have a range of items from the more premium CALIFORNIA PIZZA KITCHEN, more value offerings with TOMBSTONE and JACK'S. And an interesting innovation that's coming out, mentioning that DiGiorno has been successful from really going head-to-head with take out and home delivery. We really don't have an offering or have not had an offering so far that goes after the independent pizzerias. And this is a product that's just been launched, it's called Pizzeria, with an artisanal crust, with crispy outside, soft and airy on the inside, dribbled with extra virgin olive oil. So I'm also trying to sell to you at the same time. This is on shelves now. But I think it's an interesting opportunity for us to go into a new segment that really hasn't been targeted.

Now the other 3 segments, I think you're fully aware of. We've got what's called regular meals. This is the Stouffer's line, lasagna, macaroni and cheese, alfredo, are the 3 main SKUs that we have in that line. Lean Cuisine. Lean Cuisine is single-serve nutritional meals, and Hot Pockets, which competes in the sandwiches and snacks.

Now these categories mentioned, pizza category was down, we were able to hold share last dear. In these particular categories, these 2 were down slightly. Hot Pockets in the sandwich segment was up, slightly as far as the category goes. But this is one also where we have to look at this frozen business holistically and also look at the future. Clearly, in the difficult economic times that we had, there's no doubt that the frozen category in supermarkets suffered. The last place to shop on the shopping trip, in the center of the store, people were looking to save and so there was a certain crimp on that.

At the same time, prices had gone up. We had deliberately pulled back on some promotional activity in this particular category. And that had an impact because we're the leaders in this category on the total volume. And there's also a perception issue with frozen, although frozen is a great way to preserve food. There's a certain perception that it's somehow artificial or not as good as other methods. But the fact is, it is. And as a leader in these different segments and all the segments we participate, we will work on all of those dimensions to improve, with improved innovation, being more aggressive, and at the end of the day, also work on the image of this, as again, a leader.

The good news is that while we saw some struggle in the first half, 3 quarters of the year, in the last quarter we saw an increase in acceleration and volume and in market share across all these different segments. So I think we're starting to move on the right track.

On Waters, number four. About CHF 4 billion in sales, if I pick them up, if you can't see them. About 90% of this is in North America, that we sell. We grew 6% in the North and 18% in Latin America. So again, stronger growth in Latin America, but our presence is smaller. The biggest brand is Nestlé Pure Life, which you see here. But also, of course, very strong are the regional brands like Arrowhead, or perhaps you might have Zephyrhills here in Florida.

This is an important category for us, showing again strong growth, but also when we talk about being a trusted nutrition, health and wellness company, this is a great product that is consistent with where we want to go.

Number five would be Nutrition. Here, also a little bit less than CHF 4 billion, grew 4%, consists of 3 different parts. So we have the Infant Nutrition part, which is the Gerber brand in the U.S. and Mexico, consisting both of formula and in, what we call meals in drinks. In Latin America, the balance of Latin America, we have the NAN brand, as well as primarily cereals under the Gerber or under the Nestlé brand. This happens to be a new cereal we're going to be launching in North America, but most of the Latin American cereals are branded Nestlé.

Here we have leadership in infant formula. Clearly, in Latin America, leadership in the baby food, both in the North and the South. And it's also one where innovation is important, relaunched, in fact, changing the approach to eating from glass jars to other forms, and this is a pouch, Gerber Organic, that's been -- they've been restaged and has been very successful. Briefly Nutrition.

Next is what we call Performance Nutrition. Performance Nutrition is primarily made up of PowerBar, which you're aware of, and we're kind of going back to our roots on PowerBar. We're going back and focusing on the endurance athlete and again, also innovation, Performance Energy blends, a product that was just launched. And it's interesting, one of the advantages of having a large portfolio like this is we learned about from the Infant Nutrition people. Basically, this pouch is -- was taken over then in this format, and also even the recipes, whereas these are for tolerance, for stomach or stomach upset, is a problem that athletes have. We have some of the same sort of stomach-soothing qualities in this product as well.

And the last one, which is a bit more of a struggle and I think is no surprise, is our Weight Management business in -- with Jenny Craig. Jenny Craig is a proven approach, a holistic approach to weight management, which is not only about providing portioned foods, but at the same time, also providing counseling and behavioral guidance. And we know that this works, we believe in this product. But the business model, our ability to attract and retain people, we really struggled with this. And so we're in the process now of sort of revamping, looking at this business from all angles, from the products we offer, to the way that we go about our business model. And this is one that we would hope to see some improvement within the future. So that's it for Nutrition.

We'll take a break. Anything else that I -- it's okay so far? Okay, good. So I'm out of the range of the pointed stick. So I'm feeling a little bit more comfortable now.

Number six, chocolate. So chocolate is about CHF 3 billion, about 7% of the region, grew 5% last year, about 1/3 of the business is in Brazil. The Brazilian chocolate business is over CHF 1 billion. These are the 2 main brands under the Nestlé brand and also under the Garoto brand. #2 is in the U.S, where again, we've had some good success last year in the U.S, growth in both in share and in volume. One of the contributors to that was a promotion that we've done now with Girl Scouts of America with Crunch. Third largest is Canada. This is a Kit Kat from Canada, but I wanted to bring a Kit Kat from Brazil, because one of the interesting things that we're doing is we've relaunched now Kit Kat in Brazil and it's taken off very well. It's not the first time that we've tried to launch Kit Kat in Brazil, I think it's the third time. But this time, it's really working out well, so Brazil is something that we're going to be expanding with in Kit Kat.

Next, ice cream. Another area which I think you have a lot of interest in. And very honestly, if you look at the Americas, our ice cream business results are mixed, they're mixed. We have some outstanding businesses like in Peru, like in Chile, also a very solid business in Canada as well. We have some businesses which are improving like Mexico and Brazil, which came off some tough years last year, or 2 years ago and did better in 2012. But 2/3 of our ice cream volume is still in the U.S. And we grew last year, we had positive organic growth. And the categories where we compete grew, but we also lost share in these different segments. So 3 segments, starting first with super premium, a new product that we're launching, Häagen Dazs Gelato. And then the premium segment, which is the most problematic for us, Dreyer's or Edy's. This particular product is an outstanding product, and it's one of the ones that I find most frustrating, because it's got all the taste with 1/3 fewer calories and 1/2 the fat, this slow churn product has not met expectations up to date.

And then, of course, we have also the snacks category, also grew last year, Drumstick being an important brand. And launched some new products as well. Skinny Cow, again, providing this NHW values through ice cream bars and also launching a new coconut water with Dreyer's as well. So the focus for us has really been more on the superpremium area, as well as in the snack area, but ice cream, for us, is a challenge.

Next, Nestlé Professional. This is our out-of-home business. 2/3 of the business for Nestlé Professional is done in North America, 2 parts to it. There's food and there's beverage. Actually, for the food part, the food solutions business is about 60% and the beverage solutions is 40%. This is just an example of Minor's, which is a beef base for restaurants, gluten-free. A lot of innovations in the food area. And then an example of the bag that goes inside one of our coffee system machines that we have in Nestlé Professional, and we have 3. We have Viaggi at the high end, we have Milano and we have Alegria. This Milano machine has gotten some great traction, some great listings in key accounts like Tim Hortons up in North America and also Burger King in Latin America. So Nestlé Professional important, again around CHF 2 billion, around 7% organic growth last year.

Next is on coffee. And coffee in the Americas is relatively underdeveloped. If you compare this to the rest, I mean, you can see where it is on the lineup of products here on the table. The largest business that we have today is in Mexico, with very strong leadership under Nescafé Clasico. And because of the success and because of the growing Hispanic population in the United States, we've also been successful in growing this business in the U.S. But we have many dimensions that we can play on across Latin America. Now Nescafé Dolce Gusto is now available in 10 countries across the Americas. We have struggled to gain traction in North America and today we have a limited presence in the specialty retail channel. And we're trying to figure out ways to really penetrate better with this item. It's a great product. It's done well everywhere that it's been launched. I could mention in Latin America and the other 8 countries, it's doing extremely well, particularly strong in Mexico and Brazil. But it's going to require a different approach, probably a different route to model given the competitive state that we have. I've set up a separate organization here in the United States, an independent organization to try to figure out how to make a good business out of this, and that's Dolce Gusto.

We also have, of course, some interesting innovations in Brazil with Duo Grão under the Molienda brand in Mexico, is a soluble coffee with micro grinds. It works particularly well, penetrating a market like Brazil, which is a roast and ground market. We're able to create something of a new category with this product, and so far results are good.

And then the figure that I told you, the CHF 1.8 billion, doesn't include Nespresso sales. We're very secretive about Nespresso so I just left that out the sales figure. But when we talk about our opportunities in the Americas for coffee, we have a number of different platforms to play on. On the high end, of course, Nespresso. We have Dolce Gusto, which is sort of an in-home barista experience. We have our soluble coffee, not just the pure soluble but also the mixes with innovations. And then of course, as I mentioned earlier, we have the out-of-home business as well. So I think there's some good opportunities for us in coffee that have yet to be explored.

Next in line, number 10, if you're keeping score, is cocoa and malt beverages. A little over CHF 1 billion, 7% organic growth. And here in the U.S., you probably think of Nesquik as the #1 brand, and it is in the United States. But the #1 brand in the Americas is actually Nescau from Brazil, which is a Nesquik-type product. Second would be Nesquik. Nesquik is sold in a number of markets, U.S., Canada, Mexico, Central America, Peru and Argentina. This happens to be a product from Peru. This one is very interesting, too, because it actually includes Andean cereals like quinoa and kiwicha and these sorts of things. So it's a very unique product, also fortified with vitamins and minerals.

Next is Nestlé Health Science, which is the latest globally managed business. A little over CHF 1 billion in sales, includes the Heritage Healthcare Nutrition business that we acquired from Novartis a few years ago. So globally, this is around a CHF 2 billion business. It's about CHF 1 billion, as I mentioned, in the Americas. And it's also a big part of this business is pioneering some new territories in Nutrition and Health Science, pioneering that area between nutrition and food and pharma. And we're focusing on 3 platforms: gastrointestinal, we're focusing on brain and metabolic. And we already have done a number of acquisitions or participations, whether it be Prometheus for gastrointestinal, Accera participation in this company with respect to Alzheimer's and metabolic for severe weight issues with Optifast. It's all supported by a dedicated R&D center, which was inaugurated last year in Lausanne, the Nestlé Institute of Health Science.

And then last but not least, a CHF 1 billion category, which is also close to my heart, because I mentioned when I started my job at Carnation, the first job I had was to be an associate brand manager on this particular product, which is Coffee-Mate. And Coffee-Mate was invented back by Carnation Company in 1960, and over 50 years later, it's still going strong. Over CHF 1 billion, primarily in the United States. What is growing fastest, and actually the biggest category now, is the liquid Coffee-Mate. Powder is also an important part of our business. And we also launched or expanded last year -- we launched in 2011, but expanded Natural Bliss which is a new all-natural coffee creamer, which is just milk, cream, sugar and natural flavors. And this one is doing extremely well. And this particular category, as you probably know, is growing very rapidly. So that's, in a little over half hour then, a rundown of the geographies we participate in, as well as the categories, main categories, which again represent about 90% of the business.

I want to touch on just one more thing before we go over to the Q&A and that is about the importance we put in our role in society, which we call Nestlé in society. And there's 3 components to that. And these are very important. The first is compliance. And that may sound very boring or tedious, but the fact is and I'm sure as you can tell with the issues that are hitting the news that compliance is extremely important. In order to operate as such a decentralized company and to make sure that we're all on the same page and to have glue that sticks us together, we do have common principles. The first is Nestlé corporate business principles, along with a code of business conduct and a supplier code. These codes go, of course, beyond what is legally required in the different countries we operate in, but it's how we engage externally with our customers, with our suppliers. And it's something that all employees, all 339,000 employees in whatever local language they have, are aware of, have access to and subscribe to.

We also have something called the Nestlé Management and Leadership Principles. Again, call it somehow maybe the glue that sticks us together. This is basically the expectations of our management and our employees. These are audited both internally and externally, and we're also going through anti- bribery and anticorruption training across the zone amongst our white-collar employees. So that's first base, compliance.

Second area, which is very important, is sustainability. And here, we really focus on the importance of preserving the environment for the future. We produced last year something around 10 million tons of product and this is a 10% increase over the last 4 years. And during that last 4 years, we set very specific objectives for reductions in energy, reductions in water, greenhouse gas and waste to landfill. And in the areas of water, greenhouse gas and waste, we're actually able to reduce in absolute terms, or absolute amounts, versus what we had 4 years ago. And in the case of energy, have reduced it per ton produced.

So once we do these, and those are sort of the foundations, then we can talk about something called Creating Shared Value. The idea behind Creating Shared Value is that we feel that it's important for us, not out of obligation, but it's in our interest to ensure that we have a bright future, not just for our own company but that we can do what we can to help society at large. And there's 3 areas where Nestlé is heavily involved, as you know, and where we can have that sort of impact. So one is Nutrition, the second one is rural development and the third one is water.

And so in Nutrition, this means, first of all, being very consequent with our products. Our products must meet -- not only be tasty, but also be healthy, and for that, we have a concept called 60/40+, which means that in blind taste tests, our products need to be preferred versus competition, but then the plus part means they need to have a nutritional foundation and also a competitive advantage versus the competition. Sometimes you may be wondering or asking, you see want to be a Nutrition, Health and Wellness company, but look, you're selling ice cream, you're selling chocolate, you're selling other things. We really believe that as people, whether we're in these businesses or not, we'll eat these products. We have an obligation to provide the best products we can in these areas, to use our research to provide the healthiest choices and options possible.

Education is clearly an important part and that means, of course, on-pack but also we are involved throughout the world with a program called Nestlé Healthy Kids, which is a training program for nutrition in schools. Nutrition training in schools is something that's lacking around the world and is something that we've now touched millions of children with. We've also combined this now with the -- a tie up with the International Amateur Athletic Foundation to make sure there's an exercise component with this as well. And we also, to be consequent, have nutrition training amongst our own employees. 75,000 employees in the Americas have gone through basic nutrition training as well. But then you also have a situation where obesity is a concern. And as the world's largest food company, we have a role to play as part of the solution. We're not the only solution, and it's complex and it will involve partnerships and involve work with others. But we're fully dedicated to dealing with this. But on the flip side as well, and particularly in the Americas, there's issues with malnutrition. Iron, zinc, vitamin A and iodine are micronutrients that are lacking in many diets, and we have the ability, again, because of the nature of the products we sell to provide things like this. Looks very simple. This product is sold across Central America. It's a bouillon. Just a few pennies per serving, but this provides 15% of the requirements of iron daily, and this is a daily usage product. We deliver over 3 million servings of iron every day through this product. And even products like -- biscuit products like we have in Brazil, very, very popular brand that's even fortified with zinc. We talked about before the growing up milk powders by definition, the affordable milk powders also fortified. So that's an area that we're also dealing with. So it's both ends that we have concerns about, whether obesity and on the malnutrition end.

Rural development, very briefly. We have a long history in Latin America. As I mentioned, Brazil, over 90 years, milk districts we have across the region. And we touch a lot of farmers through education programs and helping them to improve their efficiencies. Coffee, Nestlé globally has a coffee plan that we've committed to where we have involvement in a number of markets like Mexico, Brazil, Columbia and most recently in Haiti, helping them to rebuild after the earthquake. And in the cocoa plan, another commitment that the group has made to ensure that we have good, high-quality cocoa supply in the future, which we have participation in Mexico, Brazil, Venezuela and Ecuador.

And last but not least, water. Mentioned before what we're doing on the usage standpoint to try to minimize our water footprint, but at the same time also we're involved in a lot of education programs and have a long-standing program in the U.S. called Project WET on education.

So that's basically it. To summarize it then, we had a -- you've seen the numbers. We've had a good year. But I think what looks to me most assuring and what I appreciate about, I can't say any forward-looking statements, but the fact that we have strong presence, strong brands, I think bodes us well for the future.

Okay. So with that, we've got about 20 minutes. Open it up for Q&A. Andrew?

Question-and-Answer Session

Unknown Analyst

I know, over the last couple of years in the U.S., you've been looking to sort of integrate better some of the direct store delivery systems that you've got across ice cream, that you got with the frozen pizza acquisition and perhaps into the middle of the frozen space, meals and such. Perhaps you can give us an update on where you stand on that? And more importantly, what do you -- what's the ultimate goal in terms of what you're trying to accomplish with that? And does it ultimately give you perhaps a competitive advantage in the frozen space, maybe at the point of sale that maybe others won't or can't have ultimately?

Chris Johnson

Sure. Right. Well, maybe just as a bit of background. So we had a direct delivery system with the Dreyer's business and we've had that for a while. And then in 2010, with the purchase of the Kraft pizza business then, we had -- they had also a direct delivery business. So for the last couple of years, our focus has really been on integrating these 2 routes because we basically had a lot of duplication, duplication in trucks and routes and drivers. And we realized a certain number of synergies by putting these things together, and it hasn't been that simple. The ways of selling the product portfolio, as you can imagine, the people now who only sold pizza are now selling ice cream, vice versa, ice cream to pizza. There's more SKUs on these trucks. But what we feel very confident about -- and by the way, there's still improvements to be made. I mean, we're not satisfied with our customer service levels in most cases and that's certainly understandable to a point when you're putting things together. But what we do believe though is that this really is an interesting competitive advantage because, as I mentioned, we have a big presence in the Frozen Aisle. This allows us to go in and to merchandise. We know that when pizza boxes are standing up, the offtake is higher. It seems like a very basic thing. When you have the opportunity to install small freezers, or we call them points of interruption, which do well, in those cases, the ice cream, particularly the impulse items sell particularly well. And you have that ability to do that when you have your own direct delivery network. Now at the same time, you've heard that the volume on this particular business has been down, and so that's put a certain amount of strain on the system, a certain amount of strain on the cost. So we're in the process of optimizing this, in the process of optimizing the routes that we're delivering to and so on. But we're convinced this is a really interesting advantage that we have in the future. So we've kind of gone through the first step, and I think we've done it fairly well. Delivered the synergies that we expected and actually a bit more. The next one is how do we turn this really into a competitive advantage. Yes?

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Just a question about single-cup coffee in the U.S...

Chris Johnson

Well, maybe can you -- maybe just...

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Oh, I'm sorry. I'm Bryan Spillane with Bank of America. A question about single-cup brewing, single-cup coffee in the U.S. You've got a competitor who expects to have an install base, household install base by the end of the year of 16 million households. The product -- the concept has really exploded here in the U.S. in terms of consumer adoption. So I guess, could you talk a little bit about how you've seen Nespresso fitting into that? Has the adoption rate in the U.S. grown faster than you thought it would? Maybe some parallel between what you've see in Europe versus what you've seen here and sort of what your expectations are in terms of how you play in that space.

Chris Johnson

Yes. I'm going to talk about the Americas and maybe I'll throw it to Roddy, if you want to help me out or, again, if I misspeak. As I mentioned before, I mean, we -- this category for us is underdeveloped. And in fact, Nespresso has been around for the U.S. for a long time, but has not had the sort of, I would say, rate of growth or adoption that we've seen. And I must say, although I can't give you the sales figures, the growth has been significant in the area of Nespresso, because Nespresso is offering something very different. This is not offering basically the coffee that you can have in your office at home. This is really truly a specialized coffee experience. And it seems like American consumers are getting more and more interested or maybe even accustomed to these types of coffees. I know that in the U.S, historically, a flat black cup is sort of the norm. But now people are actually seeing crema on the top of coffee and perceiving this as something that's worthwhile. So we are seeing some good growth. We have, in the Americas, 44 boutiques. We have 20 in the United States. We have 4 flagship boutiques. We just opened one in San Francisco. And the response from these things has been tremendous. So we think that we have a good opportunity to grow in what has been very underdeveloped for Nespresso. As I mentioned, Dolce Gusto, I don't think Dolce Gusto will -- has any aspirations to become the leader or the #1, but it also provides an interesting niche in a category which is growing very rapidly. And as I mentioned as well, the other coffee offerings that we have, the soluble coffee mixes, which is something that is starting to get some more traction in the United States, as well as our out-of-home presence, I think we're on a good path to compete in the U.S. Anything else you want to add?

Roddy Child-Villiers

I think the [indiscernible] the market itself is growing quite rapidly, so there's clearly room for more than one player. I'm sure many of you come here every year, so you're able to do a year-on-year taste test with Green Mountain last year and Nespresso this year. And they are quite demonstrably different products playing in different areas of the market. And I think Nespresso, like Dolce Gusto, never has the ambition to be the leader in the market. It has the ambition to be the leader in high-end superpremium, more luxury coffee. That is what it has achieved in Europe, is achieving it in other parts of the world. And it has a very strong position in the U.S., growing comfortably into double digits, even if we're not going to tell you the number, off a base that is actually quite sizable.

Chris Johnson

Okay. Yes, anybody? Yes?

Robert Moskow - Crédit Suisse AG, Research Division

Robert Moscow, Credit Suisse. I remember a couple of years ago, I think it was that you took the Gerber brand into the infant formula category in the U.S. and I noticed that the performance of the brand has really accelerated. And I wanted to know what your aspirations are in the infant formula category. I had always thought that one of the limitations were that Nestlé didn't have a big, direct professional sales force for pediatricians. Has that changed? And what other steps are you taking to grow this category?

Chris Johnson

Do you want to take this one?

Roddy Child-Villiers

Of course infant formula is not one of Chris' direct reports.

Chris Johnson

That's why.

Roddy Child-Villiers

I think the -- I mean, one of the great things about Gerber is they have a 90% unprompted awareness with mothers. So to put together a brand of infant formula was, obviously, the obvious thing to do. And as you said, it's been a great success. And we've clearly been expanding our team of people who interact with the pediatricians and such like. And I mean it's going extremely well. I mean, clearly, we're handicapped because, as you all know, the birth rate in the U.S. has fallen quite dramatically, albeit not in the Hispanic section, but in the U.S. as a whole. But that -- we're optimistic those are postponed births, not canceled births, so the market will come back. And I think we will come back very strongly with the market.

Chris Johnson


Unknown Analyst

Rob actually stole my question, but that's okay. I guess, I don't know if -- I got in here a little bit late, so maybe you pointed this, but do you have -- like when you benchmark yourself against some of the US-based competitors in terms of productivity targets, are you also kind of -- do you think that 3% kind of productivity levels relative to COGS is reasonable? What kind of inflation do you see broadly across your territory in 2013? And from the retail perspective, is there -- the changing outlet landscape, how does Nestlé see approaching that? I don't remember you talking about much of the products other than maybe at the end, being an organic item. What -- how do you adapt to whole foods in the bifurcation of the consumer?

Chris Johnson

Right, right. Okay. So I think there were 3 questions in there. Let's start with the first one. Productivity, yes. So I would say that if we look at the U.S, and it's a bit historical about how Nestlé in the United States has come about. As I mentioned, 1985, the acquisition of Carnation Company is where really put a footprint into this country. Then of course built upon with acquisitions like Gerber acquisition, like the Purina acquisition, Waters, Health Science. So we've had a lot of large businesses that have been built over time. And I think there are good opportunities to leverage a bit more the synergies we have between these different businesses. It's sort of Nestlé's way, when acquiring a business to sort of just let them run and let them go, and that's one of the reasons why they're successful. But again, as we talked about in the GLOBE example, sometimes there are certainly synergies in the back which you can certainly find. So I'm convinced there are still some more synergies that we have in the U.S. And the second one, I remember the third one.

Roddy Child-Villiers

The cost pressure.

Chris Johnson

Oh yes, the cost pressure. So we don't give guidance, right, on cost. We don't see, I think probably like all of you, anything right now that would indicate some sort of a hugely volatile situation. But I remember last year, here in the United States in June, looking at the corn crop, as we're driving through St. Louis and thinking this is going to be a great year for grains, and it turned out, of course, to be a horrendous drought. So you never know in these sort of situations. But I have to say, at this point, we don't have any indications or something that's usually volatile that's going to happen. And the last part, maybe about channels or, let's say, alternative channels. If I look at the business in the United States, we are, I would say, relatively strong. We're very strong in the grocery channel. There's clearly opportunities for us in the club channel, in the dollar channel, as well as in the digital or e-channel space. And that's not necessarily with all products. But those are 3 particular areas where I think that we could probably do a bit better.

Roddy Child-Villiers

I think just on the input cost. I mean, we -- historically, we have guided on input cost and we said we wouldn't this year because there wasn't much to guide on. We're not expecting anything very significant. So it basically is low-single digit for the group. But we started guiding because we had this massive volatility and we wanted to help the market understand how we've managed through that. But when it's normal course of business stuff, the guidance seems rather redundant.

Chris Johnson

Yes, Chris?

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Chris Growe from Stifel. I just had a question for you in relation to the -- if you could quantify, or even in broad terms, the amount of innovation. Like how much that generates of your sales, whether it's over the last 3 years or last year, however you look at that? And then I was also curious and maybe it fits a bit into Eric's question about channels. Other companies have talked about using innovation packaging, for example, in the emerging markets to move to get into, say, dollar stores or get into a cheaper format in the developed markets. So I'm just curious if you're doing that. And then if not, how Nestlé's set up to allow for those to flow through the markets?

Chris Johnson

Do you want to comment maybe on the group, what they will be saying for the group as far as innovation goes, just to make sure I use the right figure?

Roddy Child-Villiers

Yes, sure. I mean, at the group level, I mean, clearly, Chris mentioned 60/40+. The 60/40+ is a sort of key driver of innovation because the point of 60/40+ is to ensure that we have consumer preference on blind taste and nutritional superiority relative to its main competitor. If we do 60/40+ and we have it, then we don't necessarily need to innovate because we're already in the best possible position. And we did something like 7,000 product upgrades in 2012 out of 60/40+. But we did well into the tens of thousands of 60/40+ tests. So where we weren't -- where we're already winning, we didn't do the innovation. Having said all that, we are churning the portfolio something like 4, 5 -- every 4, 5 years, setting aside things like Poland Spring and the like, which clearly are too pure to be innovated.

Chris Johnson

Yes. And it really varies, to be very frank, by category for us. I mean, this one, much higher rate of innovation and churn. And one of the areas where we struggle, very honestly, was in -- is in frozen food where we are now building up an interesting pipeline. I don't even think I mentioned is one, I have to mention this one. Did I mention salad additions?

Roddy Child-Villiers


Chris Johnson

This is a great way to also make a point. A very interesting innovation is in a category which has not seen necessarily a whole lot of innovation. This has just been launched. It is an add to salad or add to fresh value-added frozen components. It includes a dressing, it includes frozen chicken and some crunchy bits, but this allows you basically at home or at work to pick a restaurant quality meal. And this is something that's very interesting. We look at the frozen landscape, a lot of the products that are out there are everything in a bowl or everything in a tray, and this is an interesting future area of value-added components. So I'm glad I got this chance to pass it on.

Roddy Child-Villiers

You were asked a question about the packaging.

Chris Johnson

Oh, yes, packaging as well. Well, when we talk about -- what we often talk about at Nestlé is PPP or popularly priced products, which, in the developed world or developing markets, are similar to this which are small unit cost per item. In the developed world, these are often products which are targeted to certain channels like dollar stores where you need a certain price point. What's very important about these is that they're not a lower quality product. You're not sacrificing quality. What you're doing is you're putting the same product, same quality in a packaging or format or a size and then along with it a route to market that allows us then to be profitable. This category or PPP products for Nestlé are growing more than twice the rate of the balance of our products here and are profitable as well.

Unknown Analyst

Okay. Why don't we do this, we'll go ahead to the breakout room and then take some more questions. And please again join me in thanking Nestlé for being here and for sponsoring the coffee all week.

Chris Johnson

All right. Thank you very much.

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