nestlÉ s.a.
nesn- ch
November 2010
Overview & Investment Thesis:
Business Description:
• Nestlé S.A. is the largest food producer in the world accounting for roughly 4% of the sector.
The Company is involved in the manufacturing and commercialization of a large selection of
packaged food and beverage products including: powdered and liquid beverages, prepared
dishes and cooking aids, dairy and ice-cream, confectionery, baby food and nutrition, pet care,
bottled water and, through its joint ventures, health and beauty products and cereals. . More
than 140 years old, Nestlé is headquartered in Vevey, Switzerland and employs 278,000.
• Its billionaire brands (brands wich account for more than 1 billion Swiss francs in revenue)
account for roughly 70% of the revenues and include: Nescafé, Nestea, Nespresso, KitKat,
Carnation, Maggi, Nan, Gerber, Purina, Aclon, Hot Pockets, Lean Cuisine, Stouffer’s and
Dryer’s.
• In our view, Nestlé is set to be one of the main beneficiaries of the soaring demand for food,
driven by the global population growth and the increase in nutritional awareness of the
average consumer.
• Its cutting edge research capabilities and an R&D expenditure of CHF 2B allow it to lead the
market through extensive product innovation and rejuvenation and respond quicker to the
increased sophistication of the modern day consumer. Its products are not only an affordable
and convenient source of food but also come with increased nutritional benefits.
• Nestlé has a very strong presence in growth emerging markets, taking advantage of increased
demand for its key food categories as well as the increased nutritional awareness. Nestlé
derives more than CHF500MM of sales in 18 emerging countries and is the market leader in 8
of them, including Brazil and Russia. Its most popular positioned products (high quality low
cost food items) have had a great success opening up new consumer segments.
• The Company has consistently achieved superior results delivering on its promise of increased
year over year sales growth and EBIT margin improvement, also known as the Nestlé Model.
For 2009 the group experienced an 4.1% organic revenue growth and a 30bp increase in
EBIT margin to 14.6%, for 2010 the company targets an organic growth rate of around 5%
together with an improvement in the EBIT margin in constant currencies.
• Nestlé’s operating success translates into sustainable free cash flow generation and consistent
returns to shareholders. Over the course of the last five years the Company returned CHF
44.3B to its shareholders under the form of dividends and share buy-backs. The Company
is estimated to return a further CHF15.6B over the 2010 fiscal year, including CHF10B share
buy-back.
• In our view, Nestlé’s business portfolio and superior management capabilities allows
the Company to navigate through downturns and also to take advantage of the growth
opportunities in the marketplace making it an attractive investment for a large array of
mandates which helps ensure stock price resilience.
Industry Growth Drivers/Trends:
• The Food and Beverage industry is subjected to very strong secular growth trends lead by
the increase in the world population. While the current global crisis has slowed down the
growth pace, the underlying need for food and nutrition, accentuated by the convergence of
the consumers in developing countries, is still strong and poised to push the market forward.
Euromonitor estimates that the growth in the sector will be of about 3.2% CAGR between
2007 and 2012.
• Recent developments in the food retail space point to a strengthening of the generally
cheaper private label products (packaged food branded by retailers) to the detriment of the
manufacturer branded products. In this environment, temporary and even permanent market
share decrease is likely to be experienced by the food manufacturers; in particular the ones
who have brands similarly positioned to the private label challengers. We believe that Nestlé’s
brand management, supported by a policy of continuous innovation and rejuvenation and
increased commitment to consumer facing marketing spend, 10.1% higher in 2009, will allow
the Company to preserve its leading positions and likely benefit in the long term by taking
away market share from other, less pro-active, manufacturers.
• Nestlé is also present in the health and beauty space through its significant equity stake in
L’Oreal and joint ventures with Galderma and Laboratoires Inneov. While being a natural
complement to Nestlé’s nutritional portfolio, these businesses also delivered very lucrative
margins and growth in excess of the market.
Competitive Advantages:
• Leading overall market position and number one or two brands in most areas.
• The extraordinarily large scope of Nestlé’s business provides for significant economies of scale
in manufacturing, marketing and administration.
• The research and development capabilities allow the Company to lead the way in innovation
and provides for maximum portfolio flexibility.
Competitors:
• Food and Beverage: P&G, Mars, Danone, Kraft, ConAgra Foods, Sara Lee, Kellogg’s,
Unilever.
• Commercial Products and Pharmaceuticals: Johnson & Johnson, Novartis, Bayer, P&G.
• Private Label: Costco (Kirkland’s Signature), Wal-Mart (Sam’s Choice, Great Value), Loblaw
(President’s Choice), Aldi, TESCO.
• Regional and Local Manufacturers: China Yurun Food, Nissin Foods, Indofood Agri,Illova
Sugar, Marfrig Alimentos, etc.
Barriers to Entry:
• Economies of scale - To be successful in today’s food and beverage sector the cost component is
critical and economies of scale are a main cost driver.
• Shelf space - Between the shelf share of multi-billionaire brands and the recent push of retailer
driven private-label products a new entrant would be challenged into executing a successful
distribution strategy.
Customers:
• Nestlé’s customer base is atomized, providing little bargaining power to any individual
customer.
• The industry as a whole is very fragmented and as such regional and local manufacturers could
represent feasible substitutes to Nestlé’s brands in niche markets.
nestlÉ s.a.
nesn- ch
Officers and Directors:
Leadership team: Chairman, Peter Brabeck-Letmathe (65); Chief Executive Officer, Paul
Bulcke (56); Exec VP Finance, James Singh (64); Exec VP Europe, Laurent Freixe (48); Exec VP
Americas, Luis Cantarell (58); Exec VP, Frits van Dijk (63)
Corporate Governance:
• 12 member board - 10 directors are external, the Chairman of the Board and the CEO of the
Company functions have been separated during 2008.
• Corporate Governance - The Company scores above average (6) in the Governance Metrics
International (GMI) Overall Global rating and also well above average in the Institutional
Shareholder Services Corporate Governance Quotient (ISS CGQ) Index (74.9) and ISS CGQ
Industry (73.7).
• Nestlé also made some significant changes to the Company’s Articles of Association which
effectively remove a previously existing ‘poison pill’ which precluded any investor from holding
more than 3% of the voting rights and also required 75% majority for certain decisions; the
change in the Articles of Association has been made as the ownership structure has shifted
towards institutional ownership and also incorporates more North American investors.
• Nestlé is committed to the UN Global Compact sustainable business practices; as a result
the group adopted a Supplier Code which promotes fair and sustainable business practices
throughout the entire supply chain.
• Nestlé has made significant efforts to manage risks related to environment and human rights
concerns such as bottled water, slave labour and improper use of baby formula in developing
countries; the Company’s Chairman and former CEO, Peter Brabeck-Letmathe has consistently
championed water sustainability issues.
• The compensation of the 13 members of the executive committee amounted to 0.35% of the
group’s operating profit.
Ownership:
Insiders own 0.12% of outstanding shares. Institutions own 25.2% of outstanding shares.
Notable holders include: BlackRock Institutional Trust 3.9%, Norges Bank Investment
Management 1.74%, Fidelity Management and Research 1.06%, MFS Investment Management
0.82% and Credit Suisse Asset Management 0.78%
Capital Allocation/Uses:
Nestlé’s management is aware of the challenges raised by the recent global financial crisis
and it emphasized cost-cutting and cash preservation measures to weather the storm while
at the same time staying committed to its goal of returning value to shareholders through its
dividend payments and share buy-backs:
• The Company has stopped the recent set-up in capital expenditure, scaling it back to CHF4.6B
in 2009.
• Over CHF 1.5B of efficiency savings was delivered in 2009 and the management targets
further improvements.
• The Company is currently finalizing a CHF25B share buy-back program which will be
followed by a CHF10B buy-back in 2011.
• The proposed dividend was increased from CHF1.40 to CHF1.60 for 2010.
• The Company reduced its exposure to commericial paper financing from CHF18.5B at the
end of 2007 to just over CHF10B at the end of 2009.
• Nestlé recognized the opportunity of cashing out at an attractive valuation and recently
divested a majority interest in Alcon, the world’s leading eye care company, to Novartis. This
Company is returning much of the proceeds to the shareholders.
NOVEMBER 2010
Business Segments:
Business Mix
Dairy
Beverages
Prepared Dishes
Pet Care
Chocolate & Confectionery
Nutrition
Water
Pharmaceuticals
Geographic Mix*
Europe
Americas
Asia, Oceania, Africa
Revenues (%)
2008
2009
Operating Profit (%)
2008
2009
Revenues (%)
2008
2009
Operating Profit Margin (%)
2008
2009
19.9
18.3
17.6
12.1
12.0
10.1
9.3
0.7
34.8
43.4
21.8
19.4
19.2
17.1
12.9
11.7
9.9
9.0
0.8
15.9
28.0
15.4
13.1
10.8
12.0
3.9
0.9
31.9
45.6
22.5
15.7
27.9
14.9
14.1
10.7
11.6
4.2
0.9
28.5
47.7
23.8
25.8
49.7
24.5
Food and beverages (70% of revenues) only
*
Financial Statement Summary: (CHF MM, years ended December 31)
Income Statement
Total Revenue
Operating Income
Net Income, continuing ops
Fully Diluted EPU, continuing ops
ROE
Balance Sheet
Net Debt
Common Equity
Net Debt: Common Equity
2005
2006
2007
2008
2009
91,075
98,458 107,552 109,908 100,579
10,800
12,786
14,437
22,978
12,492
7,995
9,197
10,649
18,039
10,428
2.13
2.45
2.86
3.06
2.66
16.04% 18.04% 20.45% 35.53% 21.32%
10,508
49,847
21.08%
12,272
50,991
24.07%
22,569
52,085
43.33%
17,129
50,774
33.74%
21,130
48,915
43.20%
Key Profitability Ratios and Figures:
Y/E December 31
Operating Margin
Interest Coverage
Return on Equity, continuing ops
S&P Credit Rating
2006
13.0%
10.5x
18.09%
AAA
2007
13.4%
10.1x
20.45%
AA
2008
20.91%
10.9x
35.53%
AA
2009
12.42%
16.9x
21.32%
AA
Sourced from 2009Annual Report.
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