Nestle SA ADR Earnings Call Insights: Zone AOA and Input Cost

Nestle SA ADR (NSRGY) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Zone AOA

Eileen Khoo – Morgan Stanley: My two questions. The first one is on Zone AOA. If I look at the growth in the fourth quarter, it was about 5.9%. So that is still substantially below the usual double-digit run rate. Would it be right to assume then that the one-off issues that you’ve raised in the third quarter were still impacting growth to an extent maybe in October and November last year and therefore your underlying growth might actually have been highly excluding that? Then the second question is on the balance sheet. I mean your net debt is now back at CHF18 billion which I think was your original target before you made the Pfizer acquisition. So can you share with us how you’re thinking about capital allocation and possibly a return of your share buyback program at some point?

Wan Ling Martello – EVP and CFO: Two questions. Let me address the question on AOA. First of all, the markets where we had highlighted in Q3 and in the nine-month call that Roddy had highlighted they have all come back. They have all reversed the trend. So really happy to see the performance, the reversal of the trend in AOA markets towards the end of the year. But also want to highlight that H1 performance in terms of growth for AOA was unusually high. If you look back in recent years, AOA’s growth has averaged in the high single digits. So we do not expect any different for 2013 and going forward. In terms of net debt, you are completely right, it was a few years back if I recall that we had guided net debt to be in the CHF15 billion to CHF18 billion range by 2013, excluding acquisition. So you’re completely right, despite Pfizer acquisition we’re now at CHF18 billion, the close of last year, so we’re very happy about that. So what we usually say on share buyback whereas the dividend policy is one of a sustainable dividend policy for share buyback it’s more opportunistic so to the extent that we have excess cash, we will always consider a share buyback program.

Roddy Child-Villiers – Head of IR: On AOA, Eileen, I think you need to strip out the impact of the pricing, because has obviously trended down in each quarter during the year so that has a negative impact on the trend in the fourth quarter if you like, but the trend in RIG is absolutely clear if you look at the RIG in AOA for the final quarter comparative of previous quarter there is a very significant improvement.

Input Cost

Patrik Schwendimann – ZKB: Roddy, I have a question regarding input cost. What are your best guess estimates for 2013? My second question is regarding the Powdered & Liquid Beverages, the margin was down 20 basis points for the full year, but was down 60 basis point in H1, so a clear improvement to H2. What should we expect for the future in terms of mixes, I mean you’re investing a lot in Dolce Gusto, for example in new boutique, but obviously your best guess for the future in terms of margin development?

Wan Ling Martello – EVP and CFO: In terms of input cost, while we have guided for last year for 2012 was exactly spot on, for 2013 we are not giving any guidance because we only give guidance if we anticipate high input cost volatility, which we do not anticipate for 2013. In terms of powder and liquid beverages categories, it was down for three main reasons; input cost was up; the second thing is our continuing investment in Nescafe Dolce Gusto; and the third one being we were lapping in some markets with pension cost benefit in 2011 that was not repeated in 2012.

Roddy Child-Villiers – Head of IR: I mean the second half trend that you referred to, I haven’t actually looked at the second half numbers, but clearly the input cost pressure that Wan Ling referred to was greater in the first half than the second half.

Patrik Schwendimann – ZKB: Looking into the future?

Roddy Child-Villiers – Head of IR: We would – as we do with the other categories, we would want powder and liquid contribute to the Nestle model. But I think one has to remember that Dolce Gusto now is a materially-sized business. It is a fast-growing business and because it’s still in sort of launch phase in a number of markets, it’s still dilutive to the powdered beverage margin. So that’s clearly a drag that is there and it’s now on purpose because clearly over time it will become a margin accretive business for that division.

Wan Ling Martello – EVP and CFO: That also goes back to the point on the presentation which is that we deliver on short-term, but also have the coverage to continue to invest in the future and Nescafe Dolce Gusto clearly is a great example of that.