Nestlé – Annual Review 2017 Good Food, Good Life Annual Review 2017 Nestlé. Enhancing quality of life and contributing to a healthier future. Our purpose Nestlé. Enhancing quality of life and contributing to a healthier future. Nestlé is the world’s largest food and beverages company and is present in 189 countries around the world. We offer a wide portfolio of products and services for people and their pets throughout their lives. Our more than 2000 brands range from global icons like Nescafé and Nespresso to local favourites like Ninho. Nestlé is based in the Swiss town of Vevey where it was founded more than 150 years ago. Contents Accompanying reports 2 Letter to our shareholders Annual Review 2017 6 Our strategy Corporate Governance Report 2017 Compensation Report 2017 10 Innovating for a changing world Financial Statements 2017 14 Connecting through our brands 26 Creating Shared Value 38 Financial review Online 54 Corporate Governance and Compliance You can find more information about the Nestlé Group at 61 Shareholder information www.nestle.com Find out more about Creating Shared Value at www.nestle.com/csv Our performance Our performance is driven by our Nutrition, Health and Wellness strategy, the engine of our value creation. Our 2017 organic sales Group sales (in CHF) Organic growth * Real internal growth * growth was within the guided range but below our 89.8 billion 2.4% 1.6% expectations. Our cost reduction initiatives delivered margin improvement ahead of expectations. On the right is a summary of the results Underlying trading Underlying trading Underlying trading we achieved during the year. operating profit * (in CHF) operating profit margin * operating profit margin * 14.7 billion 16.5% +50 basis points Constant currency Constant currency Trading operating Trading operating Trading operating profit * (in CHF) profit margin * profit margin * 13.2 billion 14.7% –50 basis points Constant currency Earnings per share Earnings per share Underlying earnings (in CHF) per share * 2.32 –15.8% +4.7% Constant currency Operating cash flow Free cash flow * (in CHF) (in CHF) 13.5 billion 8.5 billion 75.4% of net financial debt * Proposed dividend Proposed dividend (in CHF) increase 2.35 +2.2% * Financial performance measures not defined by IFRS. For further details see Financial review on page 40. Nestlé Annual Review 2017 1 Our business For over 150 years, Nestlé has been making products that enhance quality of life and contribute to a healthier future. Around the world, we What we sell (in CHF billion) provide safe, quality Powdered and Nutrition and Milk products nutrition for individuals and PetCare families. Across our seven Liquid Beverages Health Science and Ice cream product categories, we offer tastier and healthier choices for all life stages and all 20.4 15.3 13.4 12.5 times of the day. Prepared dishes Confectionery Water and cooking aids 12.0 8.8 7.5 Through our products Where we sell (in CHF billion) and services, we want to help shape a better and EMENA healthier world. We also want to inspire people to live 26.1 healthier lives. This is how we ensure the long‑term success of our company while contributing to society. AMS AOA 40.7 23.0 Number of employees Number of countries we sell in 323 000 189 Total group salaries and social Corporate taxes paid in 2017 welfare expenses (in CHF) (in CHF) 17 billion 3.7 billion Our commitments Our 41 commitments featured in the Creating Shared Value chapter guide our collective efforts to meet specific objectives. Every day, we touch the lives For individuals of billions of people: from and families the farmers who grow our ingredients and the families who enjoy our products; Over 1000 174 billion through the communities new nutritious products launched servings of fortified foods and where we live and work; that address daily needs and gaps as beverages in 66 countries to the natural environment per children intake studies with higher vulnerability to micronutrient malnutrition upon which we all depend. CHF 40.1 billion Over 8000 sales of products providing products/year renovated Portion Guidance for nutrition or health considerations (2012–2016 average) For our communities 159.9 million 41 867 coffee plantlets distributed (cumulative job opportunities, traineeships or since 2010) to farmers, against a target apprenticeships were provided for of 220 million by 2020 young people through our Nestlé needs YOUth initiative 57% 431 000 of the volume of our 12 priority farmers trained through categories of raw materials and paper capacity-building programmes are responsibly sourced For the planet 33.2% 253 reduction in our GHG emissions factories achieved zero waste (scope 1 and 2) per tonne of product for disposal since 2007 38.1% 25.7% reduction in our water withdrawal per of our electricity comes from tonne of product since 2007 renewable sources Dear fellow shareholders, For over 150 years, Nestlé has built its success During the year, we confirmed our long‑term value on a profound understanding of nutrition. That creation model. Our mid‑term targets underscore success is based on a continuous, compelling our commitment to the right balance of top‑line strategy that leads to sustainable value creation. growth and bottom‑line performance. We have It is also based on the ability to change and adapt. set an underlying trading operating profit margin 2017 was no exception. It has been a year of both target of 17.5% to 18.5% by 2020, up from 16% in continuity and change. We continued to build 2016. We aim to achieve mid‑single digit organic our company for the long term, while increasing growth by 2020. speed and efficiency to adapt to the changes Food and beverages are at the core of our around us. Competition is intensifying and business, with many different categories. To consumers’ expectations are shifting. Likewise, grow steadily, we are managing the categories of digital disruption is reshaping how consumers coffee, pet care, bottled water and infant nutrition connect and communicate, buy products, and for growth. Consumer healthcare is an additional engage with companies. We are anticipating area for growth, especially in meeting the these changes and responding to them with a nutritional needs of ageing populations around healthy sense of urgency, setting an agile course the world. Furthermore, we are building on our for the future. strong position in emerging markets by allocating For the year 2017, Nestlé’s organic growth capital for growth. was 2.4%, supported by real internal growth We are actively developing our portfolio to of 1.6%. Pricing of 0.8% was consistent reflect new consumer tastes and lifestyles. Our with the prior year. Net divestments reduced sales aim is to have the tastiest and healthiest products by 1.9% and foreign exchange had a minimal in each of the categories in which we compete. negative impact of 0.1%. Total reported sales We are capitalising on recent consumer trends increased by 0.4% to CHF 89.8 billion. Organic such as organic, whole grain, reduced calorie growth was 4.8% in emerging markets and and natural foods. We are also delivering more 0.7% in developed markets. Underlying Trading plant‑based alternatives. operating profit margin was up by 50 basis points Continuous innovation is a key differentiator in constant currency and up 40 basis points for Nestlé, fueling growth from within the on a reported basis to 16.4%. Based on these company. Driven by our industry‑leading research results, the Board of Directors is proposing and development network, combined with the 23rd dividend increase, underlining deep consumer insights, we are speeding up our commitment to continuity, of 5 centimes meaningful innovation to bring products and to CHF 2.35 per share this year. services to the market quickly. In 2017, several acquisitions helped to A clear path forward strengthen our positions in fast‑growing categories Nutrition is at the heart of our company. It has and to give access to new business models. been since Henri Nestlé invented the farine lactée Responding to consumer demand for new coffee that saved the life of a child. Our Nutrition, Health experiences, we took a majority stake in the U.S. and Wellness strategy is now more relevant than coffee roaster and retailer Blue Bottle Coffee and ever as people around the globe want to lead acquired Chameleon Cold Brew, the number one healthier lives. They are more interested in the organic cold brew brand in the United States. role nutrition plays in their personal health and With the market for healthy, convenient meals well‑being. We are well positioned to support growing, we acquired Sweet Earth – a California them, providing quality, nutritious food and based frozen meals company offering high‑quality beverages that are both delicious and convenient. vegetarian dishes. We also bought a minority Nestlé has a broad portfolio that includes some interest in the online meal delivery platform, of the world’s most recognised brands. We are Freshly. In consumer healthcare, we announced a leader in many of the fastest‑growing food and the acquisition of Atrium Innovations, a global beverages categories. leader in nutritional health products. 2 Nestlé Annual Review 2017 Paul Bulcke, Chairman (left), and U. Mark Schneider, Chief Executive Officer (right). Nestlé Annual Review 2017 3 Letter to our shareholders Increased efficiency our value creation model. As a result, we can To support our growth, we are increasing operating return more capital to our shareholders. In June, efficiency across the company. We are focusing the Board approved a share buyback programme on structural cost savings in the non‑consumer of up to CHF 20 billion which is to be completed facing areas, specifically in manufacturing, by the end of June 2020, conditional to any procurement and administrative services.