Nestle SH Call Transcript

8/8/2019 Nestle SH Call Transcript

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NESTL S.A.

2010 KRAFT FROZEN PIZZA ACQUISITION CONFERENCE CALLTRANSCRIPT

Conference Date: 7 January 2010

Chairperson: Mr James SinghChief Financial OfficerNestl S.A.

Mr Roddy Child-VilliersHead of Investor RelationsNestl S.A.

Mr Brad AlfordChairman and Chief Executive OfficerNestl USA

Disclaimer

This speech might not reflect absolutely all exact words of the audio version.

This speech contains forward looking statements which reflect Managements currentviews and estimates. The forward looking statements involve certain risks anduncertainties that could cause actual results to differ materially from those containedin the forward looking statements. Potential risks and uncertainties include suchfactors as general economic conditions, foreign exchange fluctuations, competitiveproduct and pricing pressures and regulatory developments.


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There are two aspects to our Nutrition, Health and Wellness strategy. One is our specialtynutrition business, and second is the constant R&D efforts to build nutritional platforms in ourother core Food and Beverage businesses. Pizza is consumed by almost every household inAmerica and lends itself to constant innovation along Nutrition, Health and Wellnesscredentials, as we have demonstrated with Lean Cuisine and Lean Pockets.

Now if you go to slide three, I would like to begin the presentation by giving you a sense ofthe scale and scope of Nestl Frozen Food business in the USA. We are currentlyparticipating in two of the three segments in the U.S. Frozen Food market with leadershippositions in frozen prepared meals and frozen sandwich and snacks.

In these two segments, our three billionaire brands Stouffer's, Lean Cuisine and HotPockets represent our participation with $3.8 billion in sales. Now in 2008, our Frozen Foodretail sales in North America was CHF4 billion, of which 3.8 billion was in the U.S., thebalance of 200 million is in Canada. Also during the last number of years we havesuccessfully acquired and integrated Chef America in 2002 and a smaller acquisitionJoseph's Pasta in 2005.

Slide 4 Stategic Highlights

Now if we go to slide four. Pizza represents the third pillar. We believe there are three pillarsin the U.S. Frozen Food market. One is frozen prepared meals, the other one is sandwichand snacks, and the third is pizza. And therefore, it makes great strategic sense, with goodfinancial rationale for Nestl to pursue a leadership position in the category.

First of all, from a strategic point of view, pizza is a perfect fit with Nestl's global FrozenFood vision, which is to deliver tasty, convenient, premium, wholesome and nutritious foodsto consumers. In this transaction, we have acquired growing national brands with double-digitgrowth over the last four years, outperforming the category, and therefore gaining share.

They are strong brands, and what is interesting, the growth is primarily in the premiumsegment. One of the brands is now approaching 1 billion in sales. This acquisition also

allows us to achieve number one category positions in the U.S. and Canada. It's, therefore, agreat enhancement to our U.S. portfolio of frozen products, which in addition to food includesa very sizable ice cream business, it in itself in a leadership position in the U.S. market.

Today, Nestl lacks a meaningful presence in pizza and we believe this acquisition willenhance our Frozen Food performance in the U.S. and Canadian markets as we will now beable to compete effectively in all three segments in the Frozen Food category. Achievingnumber one Frozen Food pizza position worldwide is important for Nestl.

Today, in Europe we have about CHF1 billion under our Buitoni and Wagner brands.Combined sales and a global business, with this acquisition, will be in excess of CHF3 billion,or pretty close to the same amount in U.S. dollars. In addition to that, in the U.S. in particular,this acquisition will allow us to complement our existing Ice Cream, Frozen, direct store

delivery distribution system. By merging the Frozen direct store delivery system of pizza withIce Cream, we believe we can develop a very effective and efficient route to market.Additionally, we believe this segment lends itself to a very active R&D innovation andrenovation program. The acquisition of Kraft pizza business allows us to include a significantnumber of highly qualified nutritionists and scientists currently focused on R&D on pizza.

Lean Cuisine and Lean Pockets demonstrate Nestl's ability to execute Nutrition, Health andWellness in Frozen, and we believe pizza is another opportunity.


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If we go to slide eight, I think this is where the business overview gives some interestingpointers for this segment. First of all, as we have shown on the two charts before, the multi-tiered product offer from value to super-premium, covering various price points andconsumer needs, allows the business to gain in excess of 70% of U.S. householdpenetration.

The important aspect of the growth is that super-premium and premium are growing at 8.4%,and even in 2008 you see that the change is in favor of premium and super-premiumproducts. And that's basically the upgrades I referred to before in terms of taste andingredients and other attributes of the pizza offering that is being constantly innovated andrenovated. The business represents the strongest frozen pizza franchise in the U.S. withsome leading brands. As I said, DiGiorno is the leading brand in the U.S., and Delissio is themarket leader in Canada.

Slide 9 Financial Highlights

If we go to slide nine, I think here, this acquisition represents attractive financial metrics forNestl, and therefore, I'll just take a couple of minutes to highlight some key points here. Firstof all, the transaction is 3.7 billion in cash. The structure of the deal is an asset purchase

which allows for the full tax deductibility of the amortization of the acquired assets, whichinclude goodwill and intellectual property. The net present value of the related tax benefit,that is tax benefits related to the structure, is $0.5 billion. So when you look at the multiples interms of sales on a pre-tax basis of 1.8 times sales 2009 estimated sales of $2.1 billion.And before tax, 12.5 times EBITDA, 2009 estimated EBITDA.

But then, you consider the $0.5 billion in tax benefits run from the structure of the deal, themultiple the EBITDA multiple estimated for 2009 is 10.8 times. The margins are alsoattractive, 2009 EBITDA margin will be about 14%, and in addition to that we have identifiedsynergies that will be realized over a number of years; 147 million, 80% of which is based oncost, primarily in the route to market area.

So in the first full year of acquisitions, this business would be enhancing for Nestl. In other

words, it will not be dilutive to our underlying earnings. And we will reach our Nestl cost ofcapital within four years. Now the deal is subject to regulatory review, but we expect this tobe closed during the course of 2010.

Slide 10 Nestl Acquisition Strategy

So if we go to slide 10, the acquisition of the Kraft pizza business satisfies Nestl M&Acriteria on all key metrics. First of all, we talk about leadership positions of strong brands.Number one position in the U.S. and Canada, both markets combined representing almost50% of the worldwide frozen pizza sales.

The second point was on value-added, and it's clearly value-added innovation andrenovation driving growth over the last five years. With brands in leadership positions, webelieve that the integration will not be difficult and we are acquiring a highly competent coreof management that will help in this process.

RIG, cash flow and earnings enhancing, as I said before, and of course within the Nestlfinancial capabilities we can clearly do this with existing facilities. So, again, this acquisitionmeets Nestl criteria.I


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In conclusion, this more or less completes my presentation on what I believe is a verycompelling acquisition for Nestl. So let's go to Q&A and Brad is here to respond toquestions on the business.


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Q&A Session

Questions on; Synergy opportunitiesCadbury situation

David Hayes, Nomura:

Two questions if I can. So just on the synergies that you've outlined in the release of 7%, canyou talk a little bit more about whether that's from cost or revenue? I guess with that in mind,just give us a little bit more detail about the overlaps of these businesses in terms of salesforce, key customers and distribution, just to see whether most of that synergy is in cost andwhether there's a revenue synergy opportunity on top of that potentially?

And then secondly, just following up on the release that you made alongside the Kraftacquisition, in terms of Cadbury, just to talk about were you required by the Takeover Panelto make a release to basically say whether you were going to be involved or not?

And can we just understand whether you could still be involved indirectly with that transaction?So hypothetically speaking, shall we say, do you feel that you have precluded yourself from

maybe buying brands from one or another party that might get involved with the Cadburytransaction in terms of financing it?

James Singh:

I will answer your last question first, then I'll give you some colour on the synergies and I'llhand it over to Brad to give you his point of view.

First of all, as you know anything that involves any one of the parties in the Cadbury situationis of great interest to the U.K. Takeover board. And we have had a discussion with them andI think that we are responding to really be out of the discussion with the Takeover board.I hope our presentation, our press release, is very clear that we have said that we are notinterested or involved in any aspect of the bidding process for Cadbury.

With respect to the other aspects as to what can be or what is not possible, what is possible,I think that's very speculative, and given the nature of this transaction I would not commenton those.

Now on the synergies, we said $147 million, 80% of which will be cost-based, so I will handthat over to Brad.

Brad Alford, Chairman and Chief Executive Officer, Nestl USA:

Let's start on the cost side, and I do want to talk about the growth synergies a little bit too.But, starting on the cost side, I think what you've got to look at first is that when you add up

all the frozen businesses that we will have in the U.S., we have $8 billion worth of Frozenbusiness. So not only our Food business, but including our Ice Cream business, its a largebusiness that is going through primarily a dedicated channel a dedicated distributionsystem, the Frozen system.

When we looked at what the opportunities were in that area, the cost of frozen distribution,as is obvious, is higher than ambient, we saw some good synergistic opportunities thereacross the totality of the portfolio. The businesses combined will spend almost 900 to $950million in terms of distribution. And we think that there's an opportunity to cut that back.


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The other part, as I mentioned, is the growth synergies, and we think as we looked at thedistribution patterns across all the different pieces of business, the different ways that allthese businesses get to market, touch different points of distribution, and there is some partsthat each business do not touch of the others.

We think that if we take the best of all the different ways we go to market, we candramatically expand distribution across all of our ranges of products. And I think Jim's pointof household penetration of frozen pizza being 71% with household consumption being at95% of pizza, what that means is there's 24% of households out there that are not buyingfrozen pizza, but they consume pizza, and that's roughly one-third of the frozen pizza buyerbase. So we think there are huge opportunities if we can put the product within arm's reachof these other households that aren't getting it.

And then I think the other part of growth synergy is the range of brands we're now going tohave in terms of Frozen Foods, with our brands and the Kraft pizza brands you have someinteresting brand-stretching opportunities that we think we can get some growth out of.


Now that might be...Brad Alford::

In terms of crossover.


So you're sort of talking lean pizza, or a sort of from a Lean Cuisine range, etcetera, that kindof crossover of brand?

Brad Alford::

Exactly. Or, can you take the DiGiorno brand into more sandwiches, which we haveexpertise in, in our handheld business. So I think looking at the product forms with thedifferent brands that we'll have, there's a lot of opportunity to play them across one another.

Questions on; Cost of synergiesCost of capital

Martin Dolan, Execution:

Can you tell us what the cost of the synergies will be, and also what cost of capital you'veused in your calculation?

James Singh:

I would say the operating costs for implementing the synergies will be equal to one year ofthe annualized synergy, so it's about 150 million. These are the operating costs to implementthe synergies.

The cost of capital, Martin, you know Nestl cost of capital is about 7 7.5% thereabout; sothat's the cost of capital that we use.



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Okay, if I can just get a follow-up, because I'm a little bit confused if you take the startingEBIT of 275 and add on the synergies of 147 and taxed at 33%, you get about 285 millionafter-tax, which would look to be straight off the bat about 9% of 3.2, or 8% of 3.7? Fouryears seems a long way out for the crossover.

James Singh:

Well, you don't really put all the synergies to the bottom line. Some of it will flow to the bottomline; some of it will be reinvested in the business. So, we believe that the businessperformance will, through the synergies, improve the margin structure year after year oncewe have implemented it. So that's the way we have approached it, Martin.


What kind of retention rate of synergies do you assume?

James Singh:

It could be about half and half.

Questions on; Trade spend in categoryMaintaining margins with increased price competition

Thomas Russo, Gardner Russo & Gardner:

I have two questions, Jim. The first is the reported difference between the gross revenue andthe net revenue. I've read that it's 2.1 billion gross, but 1.6 billion net. What is the is thistypical of the category, and what opportunities do you have to tighten up that disparity?

James Singh:

It's not really a disparity. I think I'll ask Brad to comment a little on that, but basically thedifference here is U.S. GAAP versus IFRS, as we report it in Nestl. So there isn't, it's not agap depending on how you look at it. One is U.S. GAAP, the 1.6, 1.7 is U.S. GAAP, and theother is 2.1 based on our accounting. Our objective is to grow the top line. I mean, this iswhat Brad was talking about. So there isn't a gap as such.


I guess the question is, is that a typical amount of trade spending, that $0.5 billion? Does thecategory have an unusual burden of trade spending that you might be able to address?

Brad Alford:

The difference is obviously the trade spend in terms of the two comparisons you hadthere, and the trade spend is a little higher than what we see in our more traditional FrozenFood businesses. And we think that we haven't built it in, it has to be looked at as we gothrough the integration, but we do think there's an opportunity there.


Thank you. And then Brad and Jim, the second question is, Kraft's business has grown, even


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during a time when you would think that there was increased price competition from thegrocery channel as well as from the spillover effect of cheap home-delivery products. Howhave they been able to grow while maintaining attractive margin in the face of those twoareas of competition?

Brad Alford:

Tom, that's a good question, and I think what you've got to look at, and I think this is part ofthe opportunity, is that the total pizza business in the US, as we said, is $37 billion. The take-home, or the grocery take-home business, is around seven, roughly 10%. That meansthere's $30 billion worth of business out there. And where we see the big advantage is, if youlook at the price of a home-delivered pizza versus the price of these businesses, it is a bettereconomic value for the consumer to buy one of these pizzas at the grocery store versusdelivery. So we think we have an advantage there.

And then, we've also in some of our due diligence done some product testing work of theKraft product against some of the big delivered pizzas. And we think we have a product thatis pretty good. So the value proposition for the consumer, and I think why it's done so well inthis economic environment, is that it's a better value than delivery and at the end of the day

it's an as good or better product.Thomas Russo, Gardner Russo & Gardner:

Thank you. So the last point is innovation around product quality has delivered a productthat's superior?

Brad Alford:

Yes.

Questions on; Pricing over the past three yearsPhasing of synergies

Pierre Tegner, Oddo Securities:

I have two questions. The first question is, could you give us an idea of the pricing effect youhad during the past three years and the like-for-like growth of the Kraft pizza business since2007? That's the first question.

And the second question is, is it possible to have the phasing of the synergies you expect forthe next five years? Will it be 20% a year, or what is the phasing, and can we expect first ofall cost synergies or revenue synergies?

Brad Alford:

Let's talk first about this selling price. The selling price has roughly gone up 6.5 to 7% over athree-year period of time, so if you looked at '09 versus '06. And in terms of how do we seethe synergies phasing in, we roughly see 50% of those coming in by year two, and we hopeto achieve 100% of them by year four.

Pierre Tegner, Oddo Securities:

Concerning the price effect, is only 6.5% to 7% price effect from 2007 to 2009 or is it?


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Brad Alford:

It's over that three-year '06 to '09, over that three-year period of time, it has been that kindof increase. Not an annualized.

Question on; Breakdown of pizza business for 2009

Deborah Aitken, Bryan Garnier:

Looking at slide eight, where you have the breakdown of premium, mass and value over afive-year period, is it possible to get an idea of the super-premium, mainstream and value for2009, in relation to one of your questions where you talked about pizza delivery prices versushome-cooked - to put that into perspective, and look at what's been happening for 2009 onthe value and mainstream side in particular?

Brad Alford:

Give me a second on that one. I'm pulling a sheet now just to look at it just for the last year.And the premium piece -

James Singh:

Slide eight of the presentation, has an evolution over the years; not exactly over the last fivebut you can see 2003 and 2008.


Yes, compounded growth rate I'm just wondering what it would be the mood has beenthrough 2009, given the environment, and just tying that into your comments on the pizzadelivery pricing.

Brad Alford:Yeah, I've got the '09 numbers here. The premium was up eight, the value was up six, andmainstream was relatively flat.


To what do you link the high rise in the value, or the higher rise in the premium, versus thevalue? Is that driven by innovation through 2009?

Brad Alford:

Yes, absolutely. That's primarily California Pizza Kitchen and there's been a lot of innovation

in that piece of the business over the last few years. And I think it might also I'mspeculating now, but it might be that you have a consumer that was eating out, and is lookingfor a nice way to trade down, I guess is the way to put it. To have a restaurant-quality pizzaat home.

Questions on; Excess capacity in DSD systemsImplications of Alcon disposal


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Julian Hardwick, RBS:

You've highlighted the opportunity on the distribution side. I wondered if you could just helpus with what's the scale of capacity utilization you have in Dreyer's and on the Kraft pizzabusiness, how much excess capacity do you have in both the DSD (Direct Store Delivery)systems at the moment?

And, secondly, I wondered if Jim would just entertain a question on the implications of theAlcon disposal. What sort of interest rate should we be modelling for the portion of theproceeds which are not being utilized for share buyback and for acquisitions?

Brad Alford:

There is excess capacity in both systems. What we hope to do is, through expandeddistribution, use those systems. So in terms of giving you a number, I don't have that one.Obviously, with our Ice Cream business, we have a more seasonable business than what wehave in our pizza business. Ice Cream by nature has to have some excess capacity built in.The two businesses are somewhat countercyclical, so we're looking at the overlap on that,but a lot of that needs to be worked out in integration.

James Singh:

On Alcon, as you are aware, we're not going to get the proceeds until maybe the end of thefirst half. But essentially, we still have a fair amount of debt. To the extent that we can paythem down, we would. So we will avoid the cost of the debt. And the excess liquidity, we aregoing to be targeting somewhere between a three and a five-year return on the excessliquidity, whatever those rates are. So three to five-year returns, that's what we will betargeting.


And in terms of your debt paydown, what sort of effective interest saving would you expect?

James Singh:

Well, our interest rate's running at about 3%. Our commercial paper is way below that, butwe have debt in other markets that run at significantly higher rates because of inflation. So Ithink this year our cost of debt will be somewhere between 2 and 3%.


Okay. Thank you very much.

Roddy Child-Villiers, Head of Investor Relations, Nestl S.A. :

Jim, I think Julian's question is going to the dilution issue.Do you want to perhaps talk about that a bit?

James Singh:

Are you asking about the dilution of EPS, Julian?

Roddy Child-Villiers:


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I think that's where he was going with those questions. Perhaps you could expand a bit onthat.

James Singh:

I think given the timing of the flows, both the Alcon inflow and the outflow of the acquisition ofthe pizza business and our investment program that we're working on now, we don't believethat there will be a dilution in our underlying EPS for 2010.

Questions on; Out-of-home opportunitiesPositioning of premium pizza products

Caroline Price, Caprice Management:

Hello, my first question is, did I understand correctly during the presentation portion, did youmention anything about the out-of-home segment as it relates to this acquisition? And if so,can you expand on that?

And then the second question is, just if you could elaborate on how you positioned the pizzasin the super-premium and the premium categories? It must be hard to just say, well thistastes better, it's presumably the quality of the ingredients or the number of ingredients.Maybe you could just help me understand what makes a pizza premium in the frozencategory.

Brad Alford:

Let me start with the food service opportunity first. Kraft has a very small food service saleswith their pizza businesses right now and we did not build any synergy in at this point withthat, but we do think there might be another upside opportunity there. And I think not somuch in the restaurant or the commercial side of food-service, but primarily in the non-commercial side of food-service, and that will be something that we'll look at throughintegration.

In terms of how do you define super-premium versus premium and what does that mean.The way we looked at it is that super-premium has higher-quality ingredients. And I don'tknow how familiar you are with the California Pizza Kitchen restaurants, but when you look atthe ingredients that are on those particular products, they tend to be higher level ingredientsthan what we'd see in a traditional pizza, and they are unique varieties when you see them,too. So we think that's what gives it the premium appeal. And then, also, some preliminaryresearch we did through integration is that the consumer believes that those products arefresher and less processed.

Then on the more mainstream pizza business, if you go from super-premium down to

premium and talk about premium, we think one of the things that the DiGiorno brand has thatreally sets it apart from a lot of other pieces of business is the rising crust technology thatKraft brought to the market with DiGiorno. It gives you a very nice crust.And how do we determine whether that's better or not? Through the due diligence, we sawconsumer in-home testing of the Kraft products versus the competitive set I'm not going toidentify which particular pizzas home-delivered pizzas were in that. But the consumertesting shows that different varieties of the DiGiorno product are either parity orbetter than what are the big delivered pizzas out there.


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Questions on; Advantages and use of DSD in Frozen categoryConfectionery within Nestl

Eric Katzman Deutsche Bank:

I guess, two questions; one to Brad on the Frozen category. Maybe you alluded to it before

with the excess capacity on the DSD, but do you see the frozen aisle becoming more of aDSD business? Are the retailers kind of interested in that, given the turns?And do you see this as kind of giving you a competitive advantage versus ConAgra andHeinz and I guess Schwan's in the U.S. business? And then the second question to Jim,maybe given your comments about not being interested in Cadbury, how should we thinkabout the confection within Nestl overall?

Brad Alford:

I think your question on the Frozen Food section is a really good one. Let me start at more ofa macro level and then drill down to what I think your specific question is. From what we hearfrom retailers, the Frozen Food section is a critical part of the store for them, and it makessense. I mean if you look at the demographics out there, fewer and fewer people know how

to cook, more and more people are time compressed. You have more dual-workinghouseholds. Frozen Food, and particularly frozen meals and prepared frozen products, are agood solution to the consumer in that environment, and we see that environment continuingor getting more advantageous to us over time, as do our retail partners. And they're makingmore and more investments in the Frozen Food capability either in-store or in their supplychains. So I think it's a piece of business that all of us see as an opportunity.

Now where does DSD fit into that? I think DSD is not necessarily a universal solution for allproducts and all accounts. And what I think you have to look at is the dynamics of a particularpiece of business and how DSD fits with that. So let me take Ice Cream as an example. WithIce Cream, different flavours sell in different neighbourhoods, even within the same chain.And with the DSD opportunity, you have the opportunity to change the flavour profile in aparticular store to match a particular local market. The flexibility it gives you is incredible.

I think it also applies on the pizza business. And I think also and for categories that havehigh impulse buys on them, and pizza is actually one of those as is Ice Cream, and that thesales can be dramatically affected by changes in weather, changes in promotion, changes indisplays, that DSD does give you a competitive advantage to react to the marketplacethat our other competitors may not have.

And now, to say that we're going to walk away from warehouse distribution is not true. I dothink warehouse distribution fits on some of the other parts of our business. And then, you'vealso got to look at geography. Sometimes, geography has a better play for DSD than otherparts of the country. So as I said earlier, we have got a lot of detailed work that we've got todo in integration to basically build a hybrid system that maps where the best opportunitiesare for the individual pieces of business.

James Singh:

To get back on your other question. First of all, you have heard it said before, up to the endof 2008, our confectionery business reached CHF12.2 billion in sales. In 2008, it had organicgrowth of 8% with an EBIT margin of 13.1%.

I would say today, our business is performing competitively across the world. 70% of ourchocolate sales are from local brands. Four to five brands and 110 trunk lines have top 10


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positions in the global market, in different markets around the world. We have 152 productsrepresenting 77 brands that are either number one or number two in their markets.

So when you look at our business, we believe we have a sufficient size and scale in differentdimensions of the business that will allow us to continue to compete effectively, regardless ofwhat happens in our industry segment.

We have also said that we will continue to look for bolt-on acquisitions to continue toreinforce our competitive positions in the market. And there may be opportunities from timeto time, but these are always going to be smaller deals and very geographic specific, ratherthan large global brands. So that is our orientation at this stage, and really we don't see theneed to make any dramatic change in that strategy.

Questions on; Details of the acquisition dealShare buyback

Edward Reszetnik, Ontario Teachers' Pension Plan:

Just a couple of things. One is on, maybe you can give us a discussion on the timeline or

how this pizza deal came to be? I'm just trying to figure out who approached who and all that.The other is on your share buybacks announced at the CHF10 billion. Is there a reason youdidn't go higher, is it like something to do with the Swiss law? Maybe you could discuss aboutthat. And in regards to that, is there a net debt level target that you've that you can tell usthat you've set for the company?

Brad Alford:

In terms of how the pizza deal came about, Jim laid the groundwork for it in his presentation.We've looked at the Frozen Food business obviously for years and we think we understand itreally well.

Meals was our first entry into that and then we bought the Chef America business, which was

Hot Pockets to get into the sandwich piece. And we've always felt that pizza was kind of thethird leg of the stool, and we've looked at that for a number of years. And as Jim mentioned,globally, that's a business that we're interested in. We've got a CHF1 billion business inEurope. We think we have some competency in that area, so we've been interested in thatbusiness for a number of years.

We have tried to capitalize on it with some of our own brands. We have a relatively smallpresence with what we do in our own brands, and we've had a lot of respect for the Kraftbusinesses for a number of years and we approached them a number of months ago. TheKraft folks said they'd talk a little bit as long as it was just us. They felt that we would be agood buyer. And one of the reasons we thought that it might be a good time to buy is, if youlook at their portfolio this is the only Frozen Food business that they have. They had triedSouth Beach Diet, a meals business, I think it was two or three years ago and just recently inthe last year got out of it. And that was kind of a signal to us that Frozen Food may not becore to them. And if you look at their global footprint, this is the only place that they haveFrozen Food. So a number of months ago we started discussions and it took us a while topull it together, but that's how it all got started.

James Singh:

When we had our press conference in October, when we announced the third quarter results,we basically said from a balance sheet point of view we believe that over time where we are


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in terms of credit quality, which is a gold standard in any industry today, is something that weshould strive for over the years, over the longer term.

The 10 billion share buyback program, I think you need to interpret that in terms of theadditional share buyback we have to do under the existing program, which is at least another5 billion to do this year, and then we will start the 10 billion program. So I would say that atleast over the next 24 months, over the next two years, we are going to be buying backCHF15 billion of share buyback. So it is a considerable number and it's more or less in linewith the average we have done over the last two or three years.

Edward Reszetnik, Ontario Teachers' Pension Plan:

Is there any Swiss laws precluding you from doing more?

James Singh:

Well, I think there is room, depending on the timing of course. I think 10 billion in any oneyear or anything between 8 and 10 billion is not easy to do because, of course there is thislaw with respect to the 10% of the capital, but there is also a convention that you don't buy

more than a certain percentage of the shares per day.So I think we're trying to be realistic in terms of what we can achieve, given the way we haveoperated over the years and the way the markets have practiced their sole share buybackprogram to the extent that I'm aware. So we feel very comfortable that over the next twoyears, we can do 15 billion, which is, it can be 7, 8 billion a year. And you have seen, lastyear we demonstrated some flexibility, given the performance of our cash flows, that allowedus to accelerate the program. We started with a 4 billion sort of target, and then we wouldlikely end up closer to 7 billion.

Questions on; Projected growth rate and CapExPotential nutritional improvements to productsIncreasing household penetration

Christian Andreach, Manning & Napier:

Just a couple of questions going back to the question on the WACC IRR crossover. Kraft'spizza numbers over the past couple of years have probably benefited from trade-down andtrade into the home. What are you projecting out in the acquisition economics for the top line?And also, what are you seeing as CapEx for the business roughly?

Brad Alford:

Top line is, and I think Jim mentioned it earlier we do believe that the business hasbenefited from the economic downturn, and as you mentioned, consumers trading down. We

do not see double-digit growth for the outgoing years.So we think the growth rate will be less than its been in the last three years but we think it willbe accretive to the Nestl Group. So we're somewhere in the 6% and over range, but lessthan double-digits. And CapEx we have got budgeted somewhere between 1 to 2.5% ofsales going forward.



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Just two other quick ones. Is just so I can maybe catch a glimpse of the Health and Wellnessangle here, do you have any just rough idea I know it's obviously extremely early on butrough ideas of what sort of health improvements you think you can make to the product?

And then, you talk about 70% penetration, driving that higher. What percentage of people doyou think just don't want frozen pizza? They're just too ingrained in behaviour of ordering it,that type of thing?

Brad Alford:

Let me start on the Health and Wellness piece first. I think Kraft had already started to dosome of that. I mean all of us see the same trends in the industry. So you see a lot of peoplemoving in that direction. And I'll talk what they've done and then what I think we can do more.But Kraft had already started to put portion control into the business, and they had alreadystarted to use some better I will call it better-for-you ingredients. They have looked at someall-natural stuff. They have whole wheat in some of the items. So the portfolio is already onthat kind of path.

But where I think we have opportunity, we're going to continue some of that work that Kraft

has already done. But I think the extensive R&D that we have gives us opportunities toreduce sodium and reduce fat and potentially taking some of the ingredients that are lessgood for you and lowering those or putting some alternatives in there. And I think, two, you'vegot to remember that the basic ingredients in this are pretty simple and things that peoplesee as wholesome, whether that's cheese, wheat and tomato sauce and certain toppings.

So I think you can look at the ingredients and talk about what we can do with some of thoseingredients in terms of making them fresher or having more particulate in them that will makethem seem more wholesome to the consumer. So that's the early thoughts on it. But as yousay, we haven't taken that all the way, a lot further. And now to be honest, I forgot the secondpart of your question.


The 70% penetration rate, what percentage of households don't want frozen pizza?

Brad Alford:

I hope none. I don't know. We don't have any information on that. I think as long as theproduct quality is better, as good or better than what the delivery is, why wouldn't they wantthat? Particularly, if you have a favourable price structure. So I really can't give you anyfeedback on that. But just intuitively, I always believe a better product sells, and that's thepremise for a lot of our product development work globally with our company. We try and geta 60/40 competitive advantage against what's out there. So if we can make the product tastebetter and then have some kind of nutritional advantage to it that we talked about earlier, Ithink it becomes a very good alternative to try and get that extra 24% of household

penetration.

Questions on; Nestls capabilities in Frozen FoodsRisk from private label competitionM&A strategy for US

Pablo Zuanic JP Morgan:


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Brad, to start with you first. If you had to characterize or grade Nestl's capabilities in frozen,how would you describe that? And the reason I ask that is that, yes, it seems to be a greatacquisition. Yes, Kraft apparently has done great with innovation. But when I look at whatNestl has done, at least based on the Nielsen data we get, Nestl in frozen dinners has notbeen doing so well. Stouffer's, Lean Cuisine down about 6 - 7%, Hot Pockets down 8%, yourpizza business down around 14%. Heinz and ConAgra in their conference calls, go out oftheir way to say that Nestl in frozen dinners is mostly doing promotions, and not much else.Of course, that's what they would say, I imagine. But it would be good to know you're takingover, this apparently very well-run business, so how good is Nestl really in frozen? That'sone question.

And the second one, thinking a little bit more about the frozen aisle in general, Wal-Mart isimplementing Project Impact. If I'm not wrong, they are making a big push in private labelfrozen pizza in their stores, which is something that they had not done before. Does thatrepresent a risk for the category?

And more in general, Frozen, when I compare Frozen in Europe with the U.S., although thereis more private label in Europe compared with the U.S. across the board, Frozen would bean area where there is significant more private label in Europe than in the U.S. And I justwondered again where there is a risk on Frozen private-label in the U.S. on the growth andwhether Nestl is making this big bet in Frozen and there could be significant risk. Then Ihave a follow-up for Jim, but if you can answer that please, thank you.

Brad Alford:

Let me start with, how we are doing in Frozen. I think that you've got to look over the longterm. Let's start with the fact that we are dominant number one in all of those categories thatyou talked about, whether it's meals, nutritional meals or sandwiches, we are the dominantplayer. And if you look at I think it was 10 years ago on nutritional meals, ourselves andConAgra were really neck and neck. That gap has been dramatically increased.

Now, in the last year, I'd say, on nutritional meals in particular, we have had some issues

there. I don't think we have innovated as much as we possibly could have, and I think you'llsee some things in the next 12 to 18 months that will turn the tide on that. And then on thecomplete meals, we've actually done pretty well. And I think single serve is the one that youquoted there in terms of market share. But if you look at our multi-serve, it has done very well.

And so in total, our Stouffer's business we're actually fairly happy with during the economicdownturn. I think we do have some issues on our Lean Cuisine business. And then onhandheld, or Hot Pockets, that was a Nielsen number I think you quoted. Our business onhandheld has got a much broader distribution and does much better in some of the non-measured Nielsen channels. And our handheld business did very well from a shipmentstandpoint in '09. And I think that sandwich business fits very well with the current economy.It's basically, you get a sandwich for $1. So to me how would I grade ourselves, I tend to lookat it over the long-term. We're the dominant number one and the player we will continue to do

so.

In terms of how what risk do I see from private label? The private label in the mealsbusiness is only 2.7%, I think if I remember. It's less than three, if I remember right. And inthis business in the pizza business, it has done better during the economic recession. Ithink it's grown almost 20% during the period. But I think where the opportunity is for acompany who has the ability to renovate and innovate, they are the ones that are going towin.


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As I said earlier, this category is going to continue to grow. Frozen Food fits with consumerdemographics going forward. And the companies that are going to win are the people thathave the ability to innovate and renovate and bring category expertise to the section, which iswhat the retailer wants.

So I think our track record in renovating and innovating in Frozen Food is very good. I thinkthat the pizza brands that we're acquiring lend themselves very well to continued innovationand renovation. And I think we'll be fairly insulated against private label, but it's one we've gotto keep an eye on. I continually talk to our folks here that I think the big question coming outof the recession is going to be, what is the consumer behaviour as people come out? Andwe've got to keep a good eye on that and we've got to be cognizant of what we need to do toadd value to our products and to continue to make them relevant to the consumer, no matterwhat the economic conditions are.

Pablo Zuanic JP Morgan:

And if I may, just one follow-up for Jim. Jim, you said the U.S. is a fantastic market andobviously your M&A strategy over the last 10 years would clearly demonstratethat Ice Cream, Water, Frozen Foods, and Baby Nutrition and so on. It's already close to

32, 33% of your sales, if I'm not wrong, including the pizza deal. And apparently you willcontinue to look for other opportunities to strengthen your portfolio there. And obviously youdon't want to tell me what you're going to buy there, but could you say you already havetopped your M&A strategy in the U.S., no need to beef up the portfolio anymore, or are thereareas where you see significant opportunities? I'm not going to mention the obvious onesfrom I think most people's point of view. But if you could make some comments on that, thatwould be useful, Jim.

James Singh:

Pablo, as I said earlier, is that we continue to invest in the developed markets, including theU.S. and in the emerging markets; wherever we believe that there are opportunities toadvance our business strategically and profitably. So if there are opportunities in the U.S.

that fit that criteria for the company, we will continue to do that. It is an excellent market andcontinues to be, and I believe for many, many more years to come.

I also said that the emerging markets is a priority for the M&A activity. And we haveincreased our activity in terms of M&A searches or relationship with local organizations tohelp us identify opportunities and pursue them. And we have done some during the course of2009, which we will elaborate a little more when we announce our results.

But they are not major. They are not the size of the ones we have just announced. They arelikely going to be smaller and it does take longer to do deals in emerging markets. Havingsaid that, I mean, we are not discouraged. As you know, we are a very global company. Wehave the capabilities on the ground, and wherever there are opportunities where we canwork together with other folks, we are willing to do that. So it is not one versus the other. We

are building our business on a global basis.

Questions on; Credit rating and net debtDividend policyBuyback rate

Jon Cox , Kepler:


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I wonder if I could just follow-up with Edward Reszetnik's questions earlier to Jim. Just onwhat you're aiming for in terms of the credit rating. Jim, I think you are on the record assaying AA is where you want to stay. You don't necessarily want to go to AAA, and you don'twant to lose the AA. I wonder if you can just give us just confirm that, and then maybe giveus an idea where net debt would stand as a result of that. My assumption, it's probablysomewhere between 15 and CHF20 billion.

Second question, you seem to be mentioning there that now there seems to be anunderstanding that you won't do more than 10% of your daily free flow. I think there were afew weeks in the run-up to Christmas, actually you were up to about 20%. Has there been abit of a change in policy there, like you'll only do up to 10%? That's the question on thatone.

And just bearing in mind everything you've said there, I'm just trying to get a feel for thedividend. My understanding was last year's or 2009's dividend was really a one-off, as inthere was a special payment because of the financial situation and you cut back on thebuyback. Are we to understand now maybe that the dividend is a way is a weaponmaybe you can use to actually soak up some of that cash, and maybe we should be lookingmore at maybe a dividend to put the balance sheet on a more efficient footing?

James Singh:

Yes, Jon, just on the AA, AA-plus rating, that's where we are now. I think over the longerperiod, that's where we think we will be comfortably. There are going to be shortperiods of time where we will be slightly above that or slightly below that. But that's our long-term objective.

Could you clarify the point on the 15 to 20 billion?

Jon Cox , Kepler:

Yes, I'm just trying to work out myself, if you're aiming for a AA rating, then that's probably

consummate with a net debt of around 15 to 20 billion, I'm guessing, because if you go below10 billion net debt, then you're probably going to get a AAA again. That's all I'm myguesstimate. Obviously, if you can give us any clarity on that, that would be appreciated.

James Singh:

I think over time that your projection is right, but sometimes we'll be above that andsometimes we'll be below that. But that's as I said, the AA-plus is where we want to be overtime. Now, coming back to the dividend, we did say last year, you know we increased thedividend by 17% 17.3 or 17.4. But a year before our dividend increase by 15.2, 15.3%, andthe year before that 12.17%.

So we are committed to a dividend policy. How much we will pay and we announce will

depend on the recommendation and the approval of the board and we will be in a position togive you more flavour on that when we announce our results in February. So I hope thatanswers your questions there.

Jon Cox , Kepler:

Just a follow-up then on this on the buyback line, you don't want to go above 10% of dailyliquidity. Is that sort of a new policy? Because I think, as I say, in the last few weeks of last


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we don't want to give you a specific timeframe. We believe sometime in the middle of theyear or soon after we should be able to complete this deal.


But there's no regulatory issues that you're worried about or anything like that? It seems likethere shouldn't be, but there's nothing we should be considering that might take it out to alonger time?

James Singh:

Not anything material that is unsolvable.

Questions on; Use of the Ice Cream DSD systemImproving in-store merchandising

Andrew Lazar, Barclays Capital :

Just a quick follow-up on some of the DSD comments. I'm just curious, have you or do you

currently use any part of your Ice Cream frozen DSD system, even if it's just the in-store,feet-on-the-street piece of it, to help gain some advantage in the broader frozen space,obviously, for your frozen entres? And I'm curious, if not why that is, and if this currenttransaction potentially changes that at all?

Brad Alford:

Yes, we do, and we are ready to distribute some frozen meals into channels that are difficultfor us to get into. So as an example, just to give you one specific is the drug store channel.We do distribute our Lean and Stouffer's brands through the Ice Cream DSD to get into acouple of drug store accounts.

And we think that there is, as we've looked at this, much bigger opportunity. So your questionis a good one. That's what we're thinking, and what we've seen as we look across all thedifferent businesses is that we see different opportunities for the different brands in all thedifferent methods of distribution.

Andrew Lazar, Barclays Capital :

Okay, and then just a follow-up to that. Is there something or anything unique to the frozencase that, I guess, would really benefit more than maybe some other areas in having somemore attention, if you will, than the space currently gets from like an in-store merchandisingstandpoint?

Brad Alford:

Absolutely. What makes the space unique is that it's limited and it's expensive and it has hightraffic. So from a retailer's perspective, they want to get good return out of that. And so howdo we drive more people into that area and how do we get them to buy more when they'rethere? And those categories dynamics are things that we understand already in our IceCream and Meals business.

And I think we haven't gotten into all the detail specifically of that of what Kraft is doing, butlike I said earlier, that's the only Frozen Food business they have. We believe our expertisein this category is better than theirs and that a combination of all the products that we will


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have gives us an opportunity with the retailers to ultimately sell more product to theconsumer.

End of Q& A Session

James Singh

Thank you very much. And first of all, I want to thank everybody for taking time to participatewith us this morning on this conference call. It was very helpful to have Brad on the call, andI'm sure that after this call you have a much better understanding of the pizza business in theU.S. and Canada, and surely why Nestl has made this acquisition which is not small, but it'svery meaningful to our business in North America. Thank you for your time and we lookforward to speaking with you by the end of February. So thanks again.

END OF CONFERENCE CALL

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