N e s t l é – A n n u a l R e v i e w 2 0 1 7 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. 2 6 Contents Accompanying reports Letter to our shareholders Annual Review 2017 Our strategy 10 Innovating for a changing world 14 Connecting through our brands 26 Creating Shared Value 38 Financial review 54 Corporate Governance and Compliance 61 Shareholder information Corporate Governance Report 2017 Compensation Report 2017 Financial Statements 2017 Online You can find more information about the Nestlé Group at 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 growth was within the guided range but below our expectations. Our cost reduction initiatives delivered margin improvement ahead of expectations. On the right is a summary of the results we achieved during the year. Group sales (in CHF) Organic growth * Real internal growth * 89.8 billion 2.4% 1.6% Underlying trading operating profit * (in CHF) Underlying trading operating profit margin * Underlying trading operating profit margin * 14.7 billion 16.5% +50 basis points Constant currency Constant currency Trading operating profit * (in CHF) Trading operating profit margin * Trading operating profit margin * 13.2 billion 14.7% Earnings per share (in CHF) 2.32 Earnings per share –15.8% –50 basis points Constant currency Underlying earnings per share * +4.7% Constant currency Operating cash flow (in CHF) Free cash flow * (in CHF) 13.5 billion 8.5 billion 75.4% of net financial debt * Proposed dividend (in CHF) Proposed dividend increase 2.35 +2.2% * Financial performance measures not defined by IFRS. For further details see Financial review on page 40. 1 Nestlé Annual Review 2017 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 provide safe, quality nutrition for individuals and families. Across our seven product categories, we offer tastier and healthier choices for all life stages and all times of the day. What we sell (in CHF billion) Powdered and Liquid Beverages Nutrition and Health Science Milk products and Ice cream PetCare 20.4 15.3 13.4 12.5 Through our products and services, we want to help shape a better and healthier world. We also want to inspire people to live healthier lives. This is how we ensure the long‑term success of our company while contributing to society. Prepared dishes and cooking aids Confectionery Water 12.0 8.8 7.5 Where we sell (in CHF billion) EMENA 26.1 AOA 23.0 AMS 40.7 Number of employees Number of countries we sell in 323 000 189 Total group salaries and social welfare expenses (in CHF) Corporate taxes paid in 2017 (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 of billions of people: from the farmers who grow our ingredients and the families who enjoy our products; through the communities where we live and work; to the natural environment upon which we all depend. For individuals and families Over 1000 new nutritious products launched that address daily needs and gaps as per children intake studies 174 billion servings of fortified foods and beverages in 66 countries with higher vulnerability to micronutrient malnutrition CHF 40.1 billion Over 8000 sales of products providing Portion Guidance products/year renovated for nutrition or health considerations (2012–2016 average) For our communities 159.9 million 41 867 coffee plantlets distributed (cumulative since 2010) to farmers, against a target of 220 million by 2020 job opportunities, traineeships or apprenticeships were provided for young people through our Nestlé needs YOUth initiative 57% of the volume of our 12 priority categories of raw materials and paper are responsibly sourced 431 000 farmers trained through capacity-building programmes For the planet 33.2% reduction in our GHG emissions (scope 1 and 2) per tonne of product since 2007 253 factories achieved zero waste for disposal 38.1% 25.7% reduction in our water withdrawal per tonne of product since 2007 of our electricity comes from renewable sources Dear fellow shareholders, For over 150 years, Nestlé has built its success on a profound understanding of nutrition. That success is based on a continuous, compelling strategy that leads to sustainable value creation. It is also based on the ability to change and adapt. 2017 was no exception. It has been a year of both continuity and change. We continued to build our company for the long term, while increasing speed and efficiency to adapt to the changes around us. Competition is intensifying and consumers’ expectations are shifting. Likewise, digital disruption is reshaping how consumers connect and communicate, buy products, and engage with companies. We are anticipating these changes and responding to them with a healthy sense of urgency, setting an agile course for the future. For the year 2017, Nestlé’s organic growth was 2.4%, supported by real internal growth of 1.6%. Pricing of 0.8% was consistent with the prior year. Net divestments reduced sales by 1.9% and foreign exchange had a minimal negative impact of 0.1%. Total reported sales increased by 0.4% to CHF 89.8 billion. Organic growth was 4.8% in emerging markets and 0.7% in developed markets. Underlying Trading operating profit margin was up by 50 basis points in constant currency and up 40 basis points on a reported basis to 16.4%. Based on these results, the Board of Directors is proposing the 23rd dividend increase, underlining our commitment to continuity, of 5 centimes to CHF 2.35 per share this year. A clear path forward Nutrition is at the heart of our company. It has been since Henri Nestlé invented the farine lactée that saved the life of a child. Our Nutrition, Health and Wellness strategy is now more relevant than ever as people around the globe want to lead healthier lives. They are more interested in the role nutrition plays in their personal health and well‑being. We are well positioned to support them, providing quality, nutritious food and beverages that are both delicious and convenient. Nestlé has a broad portfolio that includes some of the world’s most recognised brands. We are a leader in many of the fastest‑growing food and beverages categories. 2 During the year, we confirmed our long‑term value creation model. Our mid‑term targets underscore our commitment to the right balance of top‑line growth and bottom‑line performance. We have set an underlying trading operating profit margin target of 17.5% to 18.5% by 2020, up from 16% in 2016. We aim to achieve mid‑single digit organic growth by 2020. Food and beverages are at the core of our business, with many different categories. To grow steadily, we are managing the categories of coffee, pet care, bottled water and infant nutrition for growth. Consumer healthcare is an additional area for growth, especially in meeting the nutritional needs of ageing populations around the world. Furthermore, we are building on our strong position in emerging markets by allocating capital for growth. We are actively developing our portfolio to reflect new consumer tastes and lifestyles. Our aim is to have the tastiest and healthiest products in each of the categories in which we compete. We are capitalising on recent consumer trends such as organic, whole grain, reduced calorie and natural foods. We are also delivering more plant‑based alternatives. Continuous innovation is a key differentiator for Nestlé, fueling growth from within the company. Driven by our industry‑leading research and development network, combined with deep consumer insights, we are speeding up meaningful innovation to bring products and services to the market quickly. In 2017, several acquisitions helped to strengthen our positions in fast‑growing categories and to give access to new business models. Responding to consumer demand for new coffee experiences, we took a majority stake in the U.S. coffee roaster and retailer Blue Bottle Coffee and acquired Chameleon Cold Brew, the number one organic cold brew brand in the United States. With the market for healthy, convenient meals growing, we acquired Sweet Earth – a California based frozen meals company offering high‑quality vegetarian dishes. We also bought a minority interest in the online meal delivery platform, Freshly. In consumer healthcare, we announced the acquisition of Atrium Innovations, a global leader in nutritional health products. Nestlé Annual Review 2017 Paul Bulcke, Chairman (left), and U. Mark Schneider, Chief Executive Officer (right). 3 Nestlé Annual Review 2017 Letter to our shareholders Increased efficiency To support our growth, we are increasing operating efficiency across the company. We are focusing on structural cost savings in the non‑consumer facing areas, specifically in manufacturing, procurement and administrative services. our value creation model. As a result, we can return more capital to our shareholders. In June, the Board approved a share buyback programme of up to CHF 20 billion which is to be completed by the end of June 2020, conditional to any sizeable acquisitions. We are simplifying our manufacturing footprint Our Board ensured the transition to a new and optimising our factories to utilise capacity more effectively. To leverage our size and scale in our procurement activities, we have established three global purchasing hubs. By 2020, we expect these hubs to source 60% of our requirements. Through Nestlé Business Excellence, we continue to simplify, standardise and share services and processes. We aim to increase the penetration of shared services to 50% by 2020, up from the current level of around 17%. We are also simplifying our organisation by delayering functions and strengthening local and regional decision‑making. We have reorganised our infant nutrition business, moving it from the Globally‑Managed Nestlé Nutrition to a Regionally‑Managed business to enhance its agility and to respect local preferences. A dedicated Strategic Business Unit has been created to retain the strengths of Nestlé’s globally‑aligned nutrition strategy. We continued the transformation of Zone EMENA, establishing regional category leadership teams with profit and loss responsibility for our food, confectionery and dairy businesses, while keeping the fundamental role of the respective Nestlé Markets. This model has been successful with both Nestlé Purina and Nescafé. All of these changes will help to ensure faster execution and a closer connection to local business realities. Board engagement Our Board of Directors is committed to the highest standards of corporate governance. It oversees management to ensure the long‑term health of our company, so it can continue to deliver value over time. During the year, the Board reconfirmed Nestlé’s value creation model, delivering both top and bottom‑line growth, as well as capital efficiency. It undertook a comprehensive review of the company’s capital structure and priorities to support and enhance our ability to deliver on 4 Chairman and CEO. At the same time, it rearticulated the company’s purpose and values. Our Board’s actions to create sustained value included adding four new independent directors in the past three years. The Board continued its refreshment by selecting strong candidates for election. It also expanded the mission of our Nomination and Sustainability Committee to review all aspects of our non‑financial performance and it strengthened risk oversight by our Audit Committee. The Board visited Germany on its annual visit to a major market, where it received a strategic briefing on the food business. Special presentations during the year also included Nestlé’s Group strategy, a broader view on M&A, a review of consumer trends, our business in Zone AOA including China, as well as our Nestlé Health Science and Nestlé Skin Health businesses. The Board also reviewed the company’s shareholder base, its exposure to cybersecurity risks, its capital investment strategy and capital investment plan, and its annual risk and compliance reports. Active engagement with our shareholders and other stakeholders allowed the Board to take into account their views on our performance, governance and long‑term strategy. At the 2017 Annual General Meeting, the shareholders elected Paul Bulcke as Chairman of the Board of Directors, following his 37 years of service to Nestlé, including nine years as CEO. They further elected Nestlé CEO U. Mark Schneider and Ursula M. Burns, Chairman of the Board of Xerox Corporation, as new members of the Board. The Board thanked Peter Brabeck‑Letmathe, who did not stand for re‑election, for his almost 50 years of service to Nestlé and named him Chairman Emeritus. There were also changes in the Executive Board. Stefan Palzer has been appointed Chief Technology Officer as of 1 January 2018. Nestlé Annual Review 2017 Chief Technology Officer Stefan Catsicas decided to pursue entrepreneurial and venture capital activities outside of Nestlé. He will continue as an advisor in science and technology. Deputy Executive Vice President Heiko Schipper decided to pursue interests outside the company as of 31 December 2017. He will not be replaced on the Executive Board following the reorganisation of the Nutrition business. Value for shareholders and society Amid many changes, two important dimensions do not change – our purpose and our values. Our purpose is to enhance quality of life and contribute to a healthier future. Our values, rooted in respect, guide our decisions and actions. We believe that business can have a positive impact on society. By doing so, we create shared value. This ensures the long‑term success of our business and continued value for our shareholders, while also contributing to society. Since 2013, Nestlé has been actively involved in supporting young people through initiatives like Nestlé Needs YOUth. We firmly believe that young people are our future. They will be our leaders, employees, suppliers and farmers. In 2017, we extended our Nestlé needs YOUth initiative globally to encompass our entire value chain and set out an ambition to help 10 million young people have access to economic opportunities by 2030. In recognition of our work in contributing to the United Nations Sustainable Development Goals (SDGs) through our Creating Shared Value approach, Nestlé received the Concordia Leadership Award. We have also renewed our commitment to the UN Global Compact. It promotes the principle of public‑private collaborations in support of the SDGs. These efforts, among others, show that business has a vital role to play in building a better, more sustainable world for everyone. 2017 was an exciting year – one of both continuity and change. Continuity in building on the strong Nutrition, Health and Wellness strategy of our company; change to increase our speed and efficiency, and to simplify the way we work. Nestlé has the people and the leadership across the globe to guide the company through these changes and ensure our long‑term success. We want to thank our 323 000 employees for their ongoing dedication to Nestlé. It is their hard work and commitment to excellence that drives our company day to day. We thank you, our shareholders, for your continuing support. We value your ongoing trust in our company and our people, and your confidence in our leadership setting a solid, stable course for the future. Nestlé has a strong foundation, a clear path forward and a bright future. Paul Bulcke Chairman U. Mark Schneider Chief Executive Officer 5 Nestlé Annual Review 2017 Our strategy Through enhancing quality of life and contributing to a healthier future, we aim to deliver sustainable, industry‑leading financial performance and earn trust. For over 150 years, we have built a successful business through understanding and anticipating consumer needs, and adapting to succeed in an evolving marketplace. Based on a compelling strategy, our company delivers dependable value over the short term and long term. 6 Nestlé Annual Review 2017 Nestlé has many enduring strengths that keep us at the top of our industry. We have great brands that people love. We have a unique global footprint, a size and scale that we use to our advantage, and the capacity to invest for the long term. In 2017, we reconfirmed our value creation model. Through the right balance of sustainable growth and efficiency, as well as capital efficiency, we will continue to create long‑term value for our shareholders and for society as a whole. Building on our Nutrition, Health and Wellness strategy Nestlé’s success is built on its Nutrition, Health and Wellness strategy. Our founder, Henri Nestlé, believed that good nutrition was the key to a healthy life. Today, food and beverages remain core to our strategy. Our aim is to provide the tastiest and healthiest choices, at all times of the day and for all stages of life, delivered in a convenient and time‑saving manner. We also offer consumer healthcare products to help people meet their health and wellness goals. This is what we mean by ‘Good food, Good life’. Understanding and serving the consumer Nestlé’s portfolio is well‑positioned for growth. The key to our long‑term success continues to be understanding and serving the consumer. By identifying consumer trends early and acting quickly to capture them, we remain at the forefront of the fast‑moving consumer goods industry. People today know the importance of good nutrition and of managing their health more proactively. They want products with simple, understandable ingredients, natural or organic, and ideally locally produced. Likewise, many people do not have the time to prepare and cook meals, so they are looking for food and beverages that are convenient too. Nestlé has the largest research and development network in the food and beverages industry, continually innovating and renovating our portfolio to meet changing consumer demands. We also work with leading‑edge partners around the world, including start‑ups, academic institutions and public organisations. They help strengthen our own capabilities by generating ideas, accessing skills and developing new technologies, so we can remain at the forefront of consumer trends. We are focusing on products with nutrition, health and wellness benefits. This includes delivering products with simpler ingredients, as well as more premium, organic, natural and fortified foods and beverages. Nestlé also offers a range of affordably‑priced, high‑quality, nutritious products. Many of our foods and beverages, especially those for children, include added micronutrients such as iron, iodine, vitamin A and zinc to support good health and well‑being. 7 Nestlé Annual Review 2017 Increasing efficiency Nestlé is committed to margin expansion. We have set an underlying trading operating profit margin target of 17.5% to 18.5% by 2020, up from 16% in 2016. Our primary driver is to reduce structural costs in non‑consumer facing areas. Well‑identified projects in manufacturing, procurement and general administration are expected to deliver total savings of CHF 2.0 to 2.5 billion by 2020. We are optimising our manufacturing footprint and increasing efficiency throughout our operations. This will both increase our capacity utilisation and reduce our conversion costs. Through global procurement, we leverage Nestlé’s purchasing power worldwide. We are supporting our centralised purchasing activities by establishing global procurement hubs. Scaling up the use of shared services brings further efficiency. We aim to increase the availability and use of shared services to 50% by 2020. Enhanced local and regional decision‑making allows us to move more quickly in the market. Furthermore, we are reviewing and consolidating our real estate portfolio, and we have outsourced the management of the Nestlé pension fund. Our strategy Accelerating growth At Nestlé, we believe that long‑term value creation is the result of both growth and operating efficiency. We achieve sustainable top‑line growth by investing selectively in high‑growth categories and geographies. The target, set in 2017, is mid‑single digit organic growth by 2020. We aim to achieve this by refocusing our base businesses, active portfolio management and prudent investment behind our high‑growth categories. We are managing our coffee, petcare, infant nutrition and bottled water categories with an emphasis on growth. Nestlé has a significant global market share in these categories. We have some of the world’s leading brands, including Nescafé, Purina, Gerber and Nestlé Pure Life. Furthermore, we have science and technology‑based competitive advantages across these categories. Nestlé is also pursuing growth opportunities in consumer healthcare to complement our focus on these key food and beverages categories. As a result, we are expanding our presence across the pharmacy channels in both emerging and developed markets. The core of value creation comes from product, service and business model innovation. Strength in research and development is a key differentiator for Nestlé, helping us to respond quickly to the ever‑changing world. Our innovation is broad‑based across all categories, from product renovations to service delivery platforms. It starts with transforming our core portfolio to keep products, brands and services relevant, as well as creating and scaling new brands where needed. Digital innovation presents us with further opportunities for competitive advantage in developing more personalised experiences and new delivery methods. We are connecting with younger consumers in the digital space, using both local and specialised platforms. We are fully committed to digital marketing and e‑commerce platforms as avenues for growth. Hence, we are expanding these new business models, focusing strongly on our direct‑to‑consumer models, as well as partnering with key online retailers around the world. 8 Nestlé Annual Review 2017 Creating Shared Value Creating Shared Value (CSV) is the fundamental principle of how Nestlé does business. It is our way of creating value for both shareholders and for society at the same time. We understand that the prospects of our business are linked to the health and resilience of the society and world in which we operate. Our priorities are those areas with the greatest connection between Nestlé’s business and society. Our 41 public commitments bring to life our purpose of enhancing quality of life and contributing to a healthier future. These commitments contribute to the UN’s Sustainable Development Goals. The details of our progress against them are published in this Annual Review. Allocating capital prudently Nestlé has a strong portfolio, with profitable growth platforms and leading market positions in many categories. We take a prudent and focused approach to capital allocation to ensure solid long‑term growth. We constantly review our brand portfolio and are selective in evaluating merger and acquisition opportunities. We will make acquisitions in fast‑growing categories only if they are complementary to our existing portfolio, deliver the attractive returns our shareholders expect and are in line with our Nutrition, Health and Wellness strategy. Nestlé regularly revisits its capital structure to reflect changing market conditions and strategic priorities. Our financial strategy aims at striking the right balance between growth in earnings per share, competitive shareholder returns, flexibility for external growth and access to financial markets. In June 2017, we announced a new CHF 20 billion share buyback programme to be completed by the end of June 2020. Should any sizeable acquisitions take place during this period, the share buyback programme will be adapted accordingly. We increasingly focus capital spending on advancing our high‑growth food and beverages categories. We are also building on our strong position in emerging markets and pursuing growth opportunities in consumer healthcare. We are taking actions to drive long‑term growth through a mix shift towards higher‑margin and high‑growth categories, and an unmatched dedication to research and development. 9 Nestlé Annual Review 2017 Innovating for a changing world At Nestlé, continuous innovation is part of our DNA. Our success is founded on over 150 years of anticipating trends and understanding consumers’ needs. This approach remains fundamental to our strategy. Nestlé has the most advanced science and innovation network in the food and beverages industry. This enables us to translate our knowledge into highly‑relevant products and services for our consumers. 10 Nestlé Annual Review 2017 Our understanding of the relationship between nutrition and health is continually evolving. Nestlé’s researchers are looking ahead to discover how we can further enhance quality of life and contribute to a healthier future. At our different sites across the world, including the Nestlé Research Centre and the Nestlé Institute of Health Sciences, we are working to discover, develop and deploy new products and services that we aim to scale up rapidly. To augment our own capabilities, we also collaborate with leading universities, research organisations and start‑ups. Likewise, we have a number of innovation partnerships with ingredient suppliers and equipment manufacturing companies to accelerate product and technology development. Creating tastier and healthier products We are constantly looking for ways to improve the nutritional profile and taste of our products. Our scientific and technological solutions are inspired by nature. structured sugar, and are delivering the first confectionery product containing it in 2018. Enhancing infant and maternal nutrition Through our research, we know that metabolism and, to some extent, taste preferences are programmed at an early age. We also know that these dietary preferences and patterns can have an impact on health for years to come. So, providing optimal nutrition for infants and young children in the first 1000 days of life – from conception to their second birthday – is crucial. Our focus on the first 1000 days also includes understanding the nutritional needs of mothers from conception of a child to breastfeeding. Maternal nutrition is one of our main research areas today. To this end, we are working in partnership with a number of universities around the world. In one of the largest public‑private partnerships of its kind, we are looking at the impact of nutrition and lifestyle on maternal and infant health in collaboration with the EpiGen Global Research Consortium. In 2017, over 60% of our R&D budget was Food sensitivity and allergies in infants is dedicated to developing more nutritious products. For our food and beverages categories, the focus remains on developing tastier and healthier offerings. We also continue to deliver specific health benefits through our products in categories like infant nutrition and health science. Using food material science, we can increase the sensorial impact of the ingredients we use. For example, our research shows that parts of the ingredients that deliver taste are not fully released or dissolved during eating. Hence, they are not interacting with the taste buds. Applying our knowledge, we can increase the amount that dissolves in the mouth. This allows us to reduce the amount of the ingredient, while keeping the same perceived taste, and make new products that taste good and use fewer ingredients like sugar, salt and fat. Our groundbreaking work in sugar reduction is an example of this. By structuring sugar differently, we were able to make it dissolve in the mouth quicker. This means we can use significantly less sugar in our confectionery products, while ensuring the same great taste. We have scaled up the production of this new another key area of research. A number of babies and children suffer from cow’s milk protein allergy. To help their parents and doctors to better manage their dietary needs, Nestlé Health Science has developed a range of nutritional solutions (Althéra, Alfaré, Alfamino). It has also developed tools that enable early and accurate diagnosis of the allergy. Breast milk is the ideal nutrition for babies. For babies that cannot be breastfed, we continue to deepen our understanding of the composition of breast milk. Our mission is to innovate and offer the next best alternative. Human milk oligosaccharides (HMOs) are the third most abundant component of breast milk. They play a key role in an infant’s healthy development and well‑being, supporting the baby’s immune system and promoting healthy gut microbiota. We are the first company to produce two varieties of HMOs on an industrial scale for our NAN infant formula range. Understanding the microbiome The billions of bacteria that live in our gastrointestinal tract are known as the ‘human 11 Nestlé Annual Review 2017 Innovating for a changing world Enhancing infant and maternal nutrition Our researchers are focusing on the nutritional needs of both mothers and babies. Products like NAN Optipro provide the right amount and quality of proteins needed for babies’ growth. gut microbiome’. They make up the internal ecosystem that influences people’s overall health. As science and technology advances, we see how important the microbiome is in helping to shape people’s health. That is why our interest in the human gut microbiome goes beyond infants, to include adults and the elderly. Through Nestlé Health Science, we are strengthening our collaborations with external research partners. Nestlé Health Science’s partner, Seres Therapeutics, is a leader in the field. It is exploring its microbial strains to develop therapeutics that aim to restore a healthy microbiome. This year, Nestlé Health Science also entered a partnership with Enterome, jointly creating Microbiome Diagnostics Partners. It seeks to develop diagnostics tools to support personalised therapies in microbiome‑related diseases, such as inflammatory bowel disease (IBD). 12 Supporting healthy ageing Nutritional needs evolve with age as the body’s ability to efficiently metabolise and absorb nutrients declines. The resulting lack of essential nutrients can then impair body functions, cause feelings of fatigue or weakness, and lead to mobility issues. To support the nutritional needs of a growing ageing population, we have substantially expanded our R&D capability. Some of our research has already been applied to products like Nestlé Health Science’s Boost and Meritene ranges. Both are designed for individuals who need extra nutrition to fill gaps in their diets. These products provide missing nutrients that can help active seniors enjoy a better quality of life. We know that the same diet can have very different effects on different people, as we each have unique nutritional needs and a unique microbiome. Hence, we are also developing personalised programmes for individuals. Personalising nutrition By giving people a better understanding of their own individual nutritional status, lifestyle, environment and genetics, we can help individuals to preserve their health throughout life. Both the Nestlé Institute of Health Sciences and the Nestlé Research Centre are working in this field to develop more personalised solutions using the ‘Internet of things’. As part of this work, we have begun collaborations to harness the power of nutrition science and digital sensor technologies. Through our expertise in systems‑based technology, we are moving towards providing personalised nutrition solutions in and out‑of‑home. These are based on the personalised experience we already offer through our beverage systems. We envisage a future where sensors and devices in our daily lives, such as mobile phones, wearables and ‘smart’ appliances, can connect with each other. The data they provide can help us to understand our nutrition and activity, and guide us towards a healthier and happier life. Innovating in digital As well as researching nutrition science and food technology, we also find and develop Nestlé Annual Review 2017 Supporting healthy ageing Research shows that special nutrition may help to manage normal age‑related changes. Our Meritene formulas contain nutrients such as dietary fibre, protein, vitamins and minerals to support the needs of active seniors. Innovating in digital New mobile platforms developed for our brands like Nescafé have brought us closer to younger consumers, and increased direct sales through ‘buy‑now’ buttons. new business services, and invest in new food business models to access new ideas and new paths to market. This year we partnered with the Terra Food and Agriculture Technology Accelerator, to select and coach some of the most innovative and disruptive start‑ups in the food and agricultural industry. We are developing new digital services to enhance the personal consumer experience through our brands. To this end, our Silicon Valley Innovation Outpost (SVIO) acts as a hub for sourcing and developing new digital solutions to build our brands. Here we focus on consumer data and intelligence, then identify and apply digital innovations from start‑ups and emerging technology partners to support brand engagement. Our open innovation platform Henri@Nestlé enables entrepreneurs to work as collaborative partners alongside Nestlé teams to tackle social and Nestlé business challenges. It gives us access to the fast‑moving start‑up mentality and entrepreneurial spirit that a global company needs to stay ahead. These are just a few of the ways we are constantly building a deeper understanding of nutritional science, and developing products and services that enable us to fulfil our purpose: enhancing quality of life and contributing to a healthier future. 13 Nestlé Annual Review 2017 Connecting through our brands Through our products and brands, we connect with people and their pets millions of times a day and throughout their lives. We have more than 2000 brands, ranging from global icons like Nescafé and Nespresso to local favourites like Ninho. Powdered and Liquid Beverages Nutrition and Health Science 14 I N FA N T C E R E A L S ® Nestlé Annual Review 2017 Milk products and Ice cream PANTONE 361C PANTONE 151C PetCare ARCH prints Dreyer’s Brown. ARCH INLINE prints 30M 100Y. ARCH LOGOTYPE k/o to white. ICE CREAM CONE k/o to white scoop with Dreyer’s Brown outline and process match pms 7509 cone. BANNER field prints Dreyer’s Brown. “Scooping Since 1928” prints 30M 100Y with Dreyer’s Brown outline. Dreyers Brown CMYK PROCESS MATCH PANTONE® 7509 C ITEM Dreyer’s + Scooping Since 1928: 5 Color Version DATE 11.19.2015 Please be sure to scale trademarks to minimums depending on your usage. When scaling this logo more than +/- 10%, you must manually scale the ai Drop Shadow effect that is under the Arch and “Scooping Since 1928”. Use the same percentage of scaling. Your Document Raster Effects must be set to 300dpi as well. Prepared dishes and cooking aids Confectionery Water 15 Nestlé Annual Review 2017 Powdered and Liquid Beverages To suit consumer preference for unique coffee experiences, we are innovating and building our coffee portfolio – already the world’s largest – by introducing new products and services, and making strategic acquisitions. The world’s leading coffee brand, Nescafé, is available in over 180 countries with nearly 5500 cups consumed every second. 2017 saw the largest ever renovation of Nescafé Original, improving both taste and aroma. In response to consumer desire for quality coffee in a portable format, we launched new premium mixes of Nescafé Azera and expanded the Nescafé ready‑to‑drink range. Nestlé Professional is delivering products like Nescafé Cold Brew to out‑of‑home businesses that want to reach consumers who seek more artisanal coffee experiences. Starting in the United Kingdom, we are relaunching the Nescafé Gold premium range globally with improved blends, new packaging and a new global communication campaign. We are also expanding Nescafé Gold globally, with the introduction of new premium mixes across the ASEAN markets in 2017. Nescafé Dolce Gusto is the leading retail coffee system brand outside of North America. It is present in more than 80 markets. Known and loved for its wide range of high‑quality ‘coffee shop at home’ recipes, Nescafé Dolce Gusto extended its range of products with a limited edition – Catuai do Brasil. Nespresso, a truly premium brand with unrivalled brand loyalty, launched 80 new boutiques in 2017. With more than 600 boutiques worldwide, Nespresso is giving consumers an unmatched premium coffee experience both in boutiques and through e‑commerce and digital platforms. As a new offering this year, Nespresso Explorations included two limited editions. Launched twice a year, these coffees come from unique growing regions such as Laos and Kenya. To further enhance Nestlé’s coffee portfolio in premium experiences and e‑commerce, we acquired a majority stake in the super premium U.S. roaster and retailer Blue Bottle Coffee in late 2017. Blue Bottle’s success is built on three key values: deliciousness, hospitality and sustainability. With 49 cafés and a further 39 to be opened in 2018, future strategic growth focuses on expanding its retail presence in the U.S. and Asia, and accelerating its online and supermarket presence. In late 2017, we also acquired Chameleon Cold Brew, a leading provider of premium crafted coffee. It is the number one organic cold brew brand and one of the top three refrigerated cold brew brands in the U.S. In healthy on‑the‑go beverages for younger people, we expanded the number of portable ready‑to‑drink options available. These included sugar‑reduced Nesquik, and Milo Activ‑Go in Nigeria, India and Thailand. We want to encourage children to have healthy, active lives. In 2017, Milo and Nesquik became sponsors of FC Barcelona, supporting children’s sports activities in a number of countries. 16 Nestlé Annual Review 2017 1 2 3 4 1 Nescafé Gold 3 Nescafé Dolce Gusto Catuai do Brasil Introducing micro‑grounds of roasted Arabica coffee enhances the taste of Nescafé Gold, while new packaging for the range has a more premium look and feel. This limited edition is an unconventional way to discover single origin coffee. From the Brazilian region of Cerrado Minero, Nescafé Dolce Gusto selected a unique variety of Arabica: ‘Catuai’, which means ‘very good’ in the Native American language. 2 Nespresso Explorations 4 Blue Bottle Limited edition varieties are launched twice yearly from unique coffee growing regions. Nespresso works with more than 70 000 farmers in 12 countries through its AAA Sustainable Quality Program to embed sustainability practices on farms and the surrounding landscapes. The U.S. premium coffee roaster, Blue Bottle Coffee, offers customers personalised online ordering, as well as café and retail experiences. 17 Nestlé Annual Review 2017 Nutrition and Health Science Our aim is to enhance quality of life with innovative, science‑proven, high‑quality nutrition for mothers and infants in the first 1000 days. This period, from conception through pregnancy and up to a child’s second birthday, can have a profound impact on long‑term growth and development, and is vital for setting the foundation for a healthy future. Our high‑quality products are made from carefully selected ingredients to meet the specific needs of infants and young children in this critical timeframe. Breastfeeding is the ideal nutrition for at least the first six months of life. If breastfeeding is not possible due to medical or physical conditions, infant formula is the only breast‑ milk substitute that is recognised by the World Health Organization (WHO). We are committed to marketing infant formulas responsibly and complying with the WHO Code as implemented by national governments, as well as our Nestlé Policy on the Marketing of Breast Milk Substitutes, to ensure breastfeeding is supported, promoted and encouraged around the world. Our Start Healthy Stay Healthy First 1000 Days nutrition e‑learning programme helps new mothers understand what to feed, how to feed and why the first 1000 days are crucial to their baby’s future health. We launched NAN Optipro and Optipro Supreme with human milk oligosaccharides (HMO) infant formulas in eight markets in 2017. HMOs are an important component of breast milk, supporting babies’ overall health. These science‑based products are inspired by breast milk, optimising the quality and quantity of proteins. In response to consumer preferences for natural products, our Gerber, Nido, illuma and NAN product ranges now include organic options. We achieved this by working closely with farmers to source raw materials that meet organic standards and quality requirements. 18 1 2 1 Gerber Baby Food Gerber’s new range includes organic baby cereals with fruit to help satisfy the needs of growing babies. New formats include convenient pouches for on‑the‑go parents and caregivers. 2 illuma Organic Launched initially in Hong Kong, illuma Organic is the first organic product of its kind in the region. Nestlé Annual Review 2017 Nestlé Health Science (NHSc) delivers solutions designed to meet the nutritional needs of children, healthy ageing adults and patients with specific medical conditions. Meritene Mobilis, a powder drink solution for improved mobility, was launched in European markets. To extend our consumer healthcare portfolio, we agreed to acquire Atrium Innovations, a leading provider of over‑the‑counter health supplements. Atrium’s largest brand, Garden of Life, is the number 1 brand in the natural supplement industry in the U.S. In Asia, NHSc expanded its medical nutrition range with the launch of Resource Thicken Up in China, for people with swallowing difficulties after a stroke. This year, we partnered with Enterome to develop solutions for gut diseases and continued to work with Aimmune to develop treatments for food allergies such as peanut. Prometheus, a subsidiary of NHSc, launched four diagnostic tests to help healthcare professionals monitor patients with persistent diarrhoea, Crohn’s disease, liver fibrosis and inflammatory bowel disease. Nestlé Skin Health aims to change the way the world thinks about skin health. In 2017, we initiated changes to the portfolio and optimised the product ranges. Important restructuring programmes were started to set the base for future success. We continued to build strategic brands in our Consumer, Aesthetic and Prescription categories. In our Consumer business, we launched new range extensions of Cetaphil, our dermatologically-formulated skincare range. In our Aesthetic business, we broadened our portfolio with new launches for Restylane, our leading dermal filler brand, providing new options for patients and healthcare professionals to achieve natural-looking results. In the Prescription business, we enrolled the first patient in a clinical trial for ‘Nemozilumab’, a disruptive innovation in the treatment of atopic dermatitis, and we continued the global roll‑out of Epiduo Forte for acne and Soolantra for rosacea. 3 4 3 Differin Gel Differin Gel 0.1% is the first U.S. FDA‑approved prescription‑strength retinoid that can be used to treat acne without a prescription. Nestlé Skin Health focuses on meeting consumers’ increasing skin health needs with innovative products with scientifically‑proven benefits. 4 Boost Nestlé Health Science partnered with Ali Health to launch the consumer products Boost Energis and Boost Mobilis in China. Boost Energis is a high‑quality protein powder that provides 20 vitamins and minerals including vitamin B2, B6 and B12. 19 Nestlé Annual Review 2017 Milk products and Ice cream We continued to transform our portfolio to reflect changing consumer needs in dairy and dairy‑free options. We introduced more value‑added and alternative products such as organic, yoghurt, plant‑based and lactose‑free while reducing sugar and improving fortification. Our affordable dairy ranges help meet the nutritional requirements of children in developing countries. New product launches in Asia included Bear Brand Yogu, a fortified ready‑to‑drink solution for school snacking with the goodness of milk, yoghurt and fruit juice. With a growing need for products that address specific dietary needs, Nido added several new products including: Nido FortiGrow low lactose, tailored to the nutritional needs of school‑age children who have difficulties in digesting lactose; Nido Nature’s Benefits, the first organic proposition of the range, and Nido GoldenStart, a breakfast on‑the‑go solution in ready‑to‑drink format. Consumers are looking for more plant‑based dairy‑free options. Coffee Mate natural bliss brought to market a number of all‑natural plant‑based innovations and flavours, including almond milk and coconut milk. In the U.S., Coffee Mate Liquid developed a more premium range for the brand. Our ice cream and frozen desserts ranges include local brands such as Dreyer’s, Outshine, 5Rams, Extrême and Mövenpick, as well the premium brand Häagen‑Dazs in North America. In 2017, Häagen‑Dazs opened its first ever pop‑up shop in Canada, while in the U.S. it launched four non‑dairy products. These offer indulgent, dairy‑free flavours with a creamier texture and an authentic taste. 2017 was the first full year of operation of our newly‑created ice cream joint venture, Froneri. We have successfully developed the business partnership and started to realise operational and commercial synergies. Froneri is continuously investing in priority brands and further driving confectionery brand extensions into ice cream. This year, we launched a refreshing stick under the Mövenpick label in Switzerland, made with 100% natural ingredients. It combines a mango and passion fruit coating with an indulgent, creamy ice cream. We know healthy cows make healthy milk. Through the Dairy for You programme, our agronomists work on quality assurance with more than 350 000 farmers to provide the best‑quality milk. Together with farmers, we continuously improve animal welfare practices on dairy farms. 20 Nestlé Annual Review 2017 1 2 3 4 1 Coffee Mate natural bliss almond milk 3 Bear Brand Yogu From 100% natural ingredients, Coffee Mate natural bliss is made with real almonds, pure cane sugar and natural vanilla flavour that includes extracts from Madagascar vanilla beans. Bear Brand Yogu is a fortified ready‑to‑drink solution made with milk, yoghurt and fruit juice. 2 Nido Nature’s Benefits 4 Häagen‑Dazs non‑dairy frozen dessert Nido Nature’s Benefits is made from 100% organic whole milk. It provides the essential nutrients children need to grow. Häagen‑Dazs offers a range of non‑dairy frozen desserts including coconut caramel flavour. It blends coconut with ribbons of caramel for the ultimate creamy non‑dairy treat. 21 Nestlé Annual Review 2017 PetCare Nestlé Purina continues to bring to market new innovations for pets and their owners that strengthen both our brands and our commitment to the best nutrition for pets. Responding to the trend of natural products, we continue to update our portfolio through including more recognisable ingredients and simpler ingredient lists. The most recent example of this includes the global expansion of the Beyond range of dog and cat foods. In Asia, Oceania and Africa, the reposition and expansion of the Supercoat brand continued to show strong regional results in both dog and cat ranges. Merrick is driving growth as Nestlé Purina’s lead exclusive natural brand of dog and cat foods in the U.S. This year, Merrick launched the Castor & Pollux Pristine dog and cat subranges – the first complete line of pet food positioned around providing responsibly‑sourced ingredients, animal welfare and responsible farming assurances. In dog snacks, the successful global expansion of Dentalife continued in 2017. We also introduced two premium offerings in the U.S from Beggin’ that feature real meat as the number one ingredient. Our Felix cat food brand continues its successful expansion globally in both wet and dry product lines, with Felix ‘As Good as it Looks’ as the primary offering. Production of cat food has also expanded globally with capacity investments in Poland, Russia, Hungary, Brazil, Mexico and the U.S. 1 2 1 Purina Pro Plan Veterinary Diets NeuroCare NeuroCare is the first and only diet to nutritionally manage dogs with canine epilepsy as an accompaniment to veterinary therapy. 2 Purina One Bifensis Bifensis is a unique nutritional formula scientifically proven to strengthen your cat’s natural defences on the inside by supporting natural antibody production, and on the outside by maintaining healthy skin and coat. 22 Nestlé Annual Review 2017 Prepared dishes and cooking aids We continue to transform our food portfolio to capture the ‘naturality’ trend for consumers who are looking for tastier and healthier options. Our ‘kitchen cupboard’ approach means we are removing ingredients such as artificial colours, flavours and taste enhancers, while adding ingredients that consumers recognise and desire for better nutrition. To this end, we are bringing new products to market that include simple, transparent ingredients for main meals and dishes. Around the world, the Maggi range has been improved with more natural and locally sourced ingredients. The Naija Pot bouillon cube was launched in Nigeria. It includes recognisable local ingredients inspired by the taste and aroma of southern Nigerian dishes. Maggi continues to lead the portfolio in micronutrient fortification and salt reduction, supporting our 2016 commitment to reduce sodium by 10% by 2020. In frozen pizza, we are delivering winning taste and better nutrition through product renovations. Di Giorno, CPK, Buitoni and Wagner were relaunched with less salt, less saturated fat and simplified ingredients. For consumers looking for more artisanal, locally‑crafted options, we launched Outsiders in the U.S. We have also increased the number of gluten‑free, high‑protein and organic products in our portfolio to meet the increasing adoption of free‑from diets. Stouffer’s Fit Kitchen Bowls were launched in 2017, featuring at least 20g of protein in every meal. Plant‑based ranges offer growth opportunities as more people adopt vegetarian and flexitarian lifestyles. Winiary Kaszotto was launched in Poland as a meal kit with grains. For those looking for meat‑free alternatives, we launched Garden Gourmet Vegane Filet across Europe. The acquisition of Sweet Earth brings a wide range of quality vegetarian frozen foods to the portfolio. Sweet Earth will be launching new lines in early 2018, combining Nestlé and Sweet Earth know‑how on plant‑based proteins and bold, global flavours. 1 2 1 Maggi Marketplace Maggi Marketplace is a premium range of products including Pak Choi Beef Teriyaki seasoning paste. Our ‘Simply Good’ commitment to tastier and healthier foods means we are increasing the use of simple, recognisable ingredients, including more vegetables, herbs, spices and grains. 2 Sweet Earth Sweet Earth’s range of organic, plant‑based frozen foods offers vegetarians, flexitarians and vegans a wide range of frozen meal choices in line with modern health trends. 23 Nestlé Annual Review 2017 Confectionery Confectionery is focused on driving both our strong local chocolate brands and our global brand KitKat, while building a broader portfolio of healthier on‑the‑go snacks. We continue to improve market share in important markets such as Brazil, Russia, the Middle East and China, while the UK has started its turnaround. In 2017, we made the strategic decision to sell our U.S. retail business. We will concentrate on Nestlé Toll House, the leading chocolate baking brand in the U.S. KitKat continued its premiumisation journey with several new KitKat Chocolatory boutiques, enhancing the KitKat break experience for consumers worldwide. This provided an opportunity to launch premium retail versions inspired by the best‑selling Chocolatory range. These complement the rich innovation and renovation agenda KitKat has brought across segments and markets, and helped the brand grow at twice the rate of the total chocolate market. Our premium chocolate platform, Les Recettes de l’Atelier, captures artisanal flair with visible ingredients, whole nuts and natural chunks of fruit, making each piece unique. Currently sold in 15 countries, it has become the third largest premium tablet in Europe, driving growth in our local chocolate brand portfolios. In cereal‑based snacks, we are concentrating on developing healthier, on‑the‑go wholesome snacks. The Fitness brand continues to grow rapidly and leads the adult wellness biscuit market in Brazil. It is now present in more than 11 markets across Latin America and Israel. For children, we are reformulating our popular children’s snack treats like MilkyBar, Galak and Trencito, using milk as the first ingredient and reducing added sugar. 24 1 2 1 KitKat The successful global relaunch of KitKat’s improved recipe with extra milk & cocoa, combined with strong added value innovations across markets, contributed to its accelerated growth. KitKat is our first global brand made with 100% sustainable cocoa, supplied through the Nestlé Cocoa Plan. 2 Les Recettes de l’Atelier The growing trend toward premium confectionery is reflected in the success of the new super‑ premium chocolate tablet Les Recettes de l’Atelier. Launched in 2014, this premium range is Nestlé’s fastest‑growing confectionery brand. Nestlé Annual Review 2017 Water Nestlé Waters is leading a fast‑growing category, with a unique brand portfolio including the world’s largest water brand, Nestlé Pure Life. By addressing consumer needs, providing access to water and preserving water resources where we operate, we are enhancing quality of life through healthy hydration. Bottled water replaced carbonated drinks as a preferred beverage in the U.S., proving that people are more concerned than ever before about what they consume. The U.S. continued to be a focus for the development of our premium range, including the international and heritage brands Perrier and S.Pellegrino. We also increased premiumisation of local brands around the world. This includes Poland Spring in the U.S., Buxton in the UK, Vittel across Europe and Erikli in Turkey. In the U.S., our Ready Refresh direct delivery offers individuals, as well as small and large businesses, a wide variety of beverage options. We encourage and support healthy hydration through innovations in flavoured and functional waters. Campaigns such as Nestlé Pure Life ‘Water Buddies’ inspires children to drink water, making it fun and enjoyable. Environmental sustainability is a vital component of our business. Around the world, we are investing for the future in environmentally friendly bottling plants, including nearly CHF 230 million in the Perrier bottling site in France. In 2017, three of our factories received Alliance for Water Stewardship (AWS) certification for water conservation and water stewardship. We have also strengthened our collaboration with the AWS to certify 20 factories by 2020. In the U.S., we formed the California Water Action Collective to help protect California’s water future. Across North America, Nestlé Waters sustainably manages nearly 50 spring sites, as well as over 5600 hectares of watershed as open space. 1 2 1 S.Pellegrino S.Pellegrino is a fine‑quality mineral water that flows from natural spring at the foothills of the Italian Alps. It surfaces perfectly sparkling and naturally enriched with mineral salts. 2 Nestlé Pure Life The Nestlé Pure Life ‘Planet of Possibilities’ global campaign raises awareness of the importance of quality drinking water for future generations. It aims to make water a conscious choice for consumers today and in the future. 25 Nestlé Annual Review 2017 Creating Shared Value We believe that our company will be successful in the long term by creating value for both our shareholders and for society as a whole. This approach, called Creating Shared Value (CSV), is the principle for how we do business. It enables us to bring our purpose to life: enhancing quality of life and contributing to a healthier future. Further information Find details of our management approach and governance structure, as well as performance data, case studies and additional content, in our annual Nestlé in society – Creating Shared Value online report and the Nestlé in society section of our corporate website (www.nestle.com/CSV). 26 Nutrition, water, rural development, our focus areas Protect the future Laws, business principles, codes of conduct Creating Shared Value Sustainability Compliance Nestlé Annual Review 2017 Maximising value creation Through our CSV approach we aim to create value not only for shareholders but also for society. Our CSV priorities are those areas of greatest intersection between Nestlé’s business and society. These include: nutrition, rural development and water. Our aim is to have a positive impact on society while we grow our business. We enable healthier and happier lives for individuals and families, we help develop thriving and resilient communities, and finally, we steward the planet’s natural resources for future generations. To guide us, we have developed long‑term ambitions and specific commitments, against which we report our progress transparently each year. Essential to achieving our goals is a robust approach to sustainability, human rights and compliance. Our values Underpinning all our efforts are our values, which are rooted in respect: respect for ourselves, respect for others, respect for diversity and respect for the future. Guided by these values, we work alongside our partners and stakeholders to ensure that our approach to CSV continues to inform all our behaviours, policies and actions. The business case for CSV A long‑term approach to business has always been part of Nestlé’s DNA. Through CSV, we integrate sustainable development into business activities. This is increasingly important to long‑term investors. CSV brings business and society together by generating economic value in a way that also produces value for society. Foods and beverages with a nutrition, health and wellness dimension perform better. Rural development programmes for farmers offer commercial differentiation to consumers, while responsible stewardship of water reduces costs and secures supplies for our businesses. Stakeholder engagement Engaging others on important issues lies at the heart of how we do business. We seek the advice of experts and advocates to develop our New York, 18 September 2017 – Nestlé Chairman, Paul Bulcke, receives the Concordia Leadership Award 2017 for leading the company’s ongoing commitment to CSV and supporting the UN Sustainable Development Goals. corporate policies and commitments, strengthen our business and target our investments. Stakeholder convenings and CSV events provide opportunities to intensify that dialogue and increase our understanding of the intersection between business and society. They facilitate collective action, and promote trust and mutual respect. In March 2017, our Chief Executive Officer, U. Mark Schneider, participated in our stakeholder convening in London, which was attended by 66 representatives from a wide number of organisations. Our material issues Every two years, we invite an independent third party to conduct a formal materiality assessment. It helps us to identify the issues that matter most to our business and our stakeholders, and to better support our strategic decision‑making and reporting. Issues of concern are evaluated to determine both risks and opportunities for our reputation, revenues and costs. Our most material issues are: – over‑ and undernutrition – water stewardship – human rights – food and product safety – responsible marketing and influence – business ethics – resource efficiency and (food) waste – responsible sourcing and traceability – climate change – rural development and poverty alleviation 27 Nestlé Annual Review 2017 Nestlé. Enhancing quality of life and contributing to a healthier future. Driven by our company purpose – enhancing quality of life and contributing to a healthier future – our 2030 ambitions align with those of the United Nations 2030 Agenda for Sustainable Development. Focused on impact We recognise that we live in an interconnected world in which our futures are inextricably linked. Hence, our work in our three main impact areas is supported by 41 public commitments, many of which target our efforts towards meeting our three 2030 ambitions. Having helped to shape the 17 Sustainable Development Goals (SDGs), we – and many companies like Nestlé – are now contributing towards delivering them. Working towards our ambitions We have integrated the SDGs into our CSV approach. In 2017, we took a number of steps to drive progress towards meeting our 2030 ambitions, as well as contributing to the 17 SDGs. These included strengthening Nestlé for Healthier Kids, extending our Nestlé needs YOUth initiative and further developing our responsible water stewardship activities. 28 For individuals and families Enabling healthier and happier lives Food is not just a source of nutrition, it also brings us together as families and friends. It is part of every culture. But food also presents one of the largest public health challenges: obesity has doubled since 1980, while hunger and malnutrition affect millions. We support individuals and their families with tastier and healthier choices, with information programmes that inspire people to live healthier lives, and through helping millions of children develop good eating habits and to enjoy exercise. Our 2030 ambition is to help 50 million children lead healthier lives Related CSV impact area – Nutrition Committed to healthier kids We enhance quality of life and contribute to a healthier future, by offering healthier products and by helping families to eat and drink better and move more. We have developed Nestlé for Healthier Kids to bring together all our efforts that support parents and caregivers. This includes research, product formulation, education and lifestyle services. Supporting the SDGs: No poverty Zero hunger Good health and well‑being Quality education Gender equality Reduced inequalities Responsible consumption and production Climate action Life below water Life on land Partnerships for the goals Nestlé Annual Review 2017 For our communities For the planet Helping develop thriving, resilient communities Stewarding resources for future generations 1.2 billion people live in extreme poverty, many of them in rural areas and dependant on agriculture. Our ambition is to help improve livelihoods and develop thriving communities. Our global reach allows us to improve rural development through better incomes, fostering education, respecting human rights, and supporting women and young people. Our 2030 ambition is to improve 30 million livelihoods in communities directly connected to our business activities Natural resources are becoming more constrained. Biodiversity is rapidly declining and forests are still disappearing. Water is increasingly scarce. Moreover, climate change will exacerbate all the challenges that we are currently facing. In addition, one third of the food produced is either lost or wasted every year. To grow sustainably, we must use the planet’s resources wisely and draw on our global influence to effect positive change. Our 2030 ambition is to strive for zero environmental impact in our operations Related CSV impact areas – Rural development – Our people, human rights and compliance Related CSV impact areas – Water – Environmental sustainability Supporting our youth Our ambition for our global youth initiative, Nestlé needs YOUth, is to help 10 million young people around the world have access to economic opportunities by 2030. This global initiative combines and coordinates all our activities, and those of our partners, that support young people around the world. Improving our environmental performance We act on climate change by further reducing greenhouse gas (GHG) emissions along our value chain. We continue to reduce withdrawals of water per tonne of product and help increase access to safe water and sanitation. Reducing waste is a priority: we reuse and recycle wherever possible. We help the farmers we work with to adopt sustainable practices. Supporting the SDGs: Supporting the SDGs: No poverty Reduced inequalities Good health and well‑being Quality education Gender equality Decent work and economic growth Responsible consumption and production Peace, justice and strong institutions Partnerships for the goals No poverty Zero hunger Good health and well‑being Sustainable cities and communities Responsible consumption and production Clean water and sanitation Climate action Affordable and clean energy Industry, innovation and infrastructure Life below water Life on land Partnerships for the goals 29 Nestlé Annual Review 2017 Enabling healthier and happier lives Inspired by our founder, Henri Nestlé, and with nutrition at our core, we work closely with partners to offer foods and beverages that enable healthier and happier lives. We have set commitments and objectives to make our portfolio even healthier and tastier, inspire consumers to lead healthier lives, and develop and share our understanding of the connection between nutrition and health. Added value for investors The market for healthier foods and beverages is growing. Products with a nutrition, health and wellness dimension perform better. Through our broad portfolio, covering needs from babies to old age, and our constant investment in product innovation we are well placed to seize this opportunity. Nestlé foods and beverages with an above average NHW benefit achieve 1.8x higher growth rates than other products and are 1.5x more profitable. This is clearly an opportunity for increased financial impact. Furthermore, our health and wellness work helps us stay ahead of regulations, possibly avoiding major costs of non‑compliance. 30 Uncle Tobys, Australia’s leading brand of oats, has launched Nature’s Mix, a no‑added sugar range that is naturally sweetened with dried fruit and nuts. Offering tastier and healthier choices Nutrition is the area of greatest intersection between Nestlé’s business and society, where we can help tackle the global public health issues of over‑ and undernutrition. It is important that consumers have tasty, convenient options containing the nutrients they need, so that they can maintain a healthy diet. We are launching more nutritious foods and beverages, simplifying ingredient lists and removing artificial colours, while adding micronutrients where they are deficient in the local population. A scientific breakthrough will allow us to reduce the total amount of sugar in confectionery by up to 40% without compromising on taste. The first products will be launched in 2018. We have also reinforced our commitment to further reduce sodium by an average of 10% by the end of 2020, in support of the WHO recommended intake levels. 7% reduction in sugar content of KitKat, which we achieved by using more milk and cocoa 174 billion servings of fortified foods and beverages in 66 countries with higher vulnerability to micronutrient malnutrition Nestlé Annual Review 2017 Every year, over 22 million children benefit from Nestlé Milo’s programmes promoting physical activity. A new partnership with FC Barcelona signed in 2017 will inspire millions more children to participate in sport. In 2016, we announced a new way to structure sugar particles that allows us to reduce the sugar in some of our confectionery products. We scaled up our technology in 2017 and 2018 will see our first launches. Inspiring people to lead healthier lives We are committed to improving access to nutrition to help reduce non‑communicable diseases. We work with partners to promote balanced diets, healthy cooking and hydration, and regular physical activity. We encourage people to lead healthier lives by providing nutritional information and portion guidance, and through responsible marketing. Nestlé for Healthier Kids celebrated International Chefs’ Day by conducting cookery workshops with Nestlé Professional chefs and children from over 50 countries. In Thailand, Milo launched a low‑sugar ready‑to‑drink beverage, and the Milo sports programme reached over one million children in 1000 schools. 89.4% of our foods and beverages display Guideline Daily Amount labels on the front of pack 81 countries participating in Nestlé for Healthier Kids Building, sharing and applying nutrition knowledge Our scientists examine the link between nutrition and health across generations. From maternal and children’s health to healthy ageing, we adopt a holistic approach. It focuses on nutrition and physical activity and their combined impact on metabolic health. We use our findings to improve our own foods and beverages. Our Feeding Infants and Toddlers Study (FITS) and Kids Nutrition and Health Study (KNHS) continued to research the eating habits of infants and children. FITS in the US, for example, found that 30% of older infants and toddlers eat very few or no vegetables each day. In 2017, as a result of our research, we launched Gerber Grabbers Strong Veggies Squeezable Puree, a nutritious snack providing one serving of vegetable (the first ingredient) and three‑quarters of a serving of fruit. 1.724 billion Swiss francs invested in research and development 313 Our scientists shared nutrition knowledge by publishing 313 research papers 31 Nestlé Annual Review 2017 Help develop thriving, resilient communities In addition to our own employees, we work with hundreds of partners, thousands of suppliers and millions of farmers around the world. Our collective aim is to help develop thriving and resilient communities as part of a secure, long‑term supply chain. Our programmes and commitments are designed to support rural development, promote and respect human rights, and ensure fair employment and diversity. Added value for investors Consumers increasingly want to know where their foods and beverages come from and that human rights are respected during their production. Our responsible sourcing activities, such as our Nespresso AAA Program, Nescafé Plan and Nestlé Cocoa Plan, help us to ensure the resilience of our supply chain and offer commercial differentiation to the consumer. 32 As part of Nestlé’s Cocoa Plan, we have developed the Child Labour Monitoring and Remediation System. Detailed in our first Tackling Child Labour report, it is the most comprehensive programme yet to help children working in cocoa production, according to the organisation STOP THE TRAFFIK. Enhancing rural development and livelihoods We have over four million farmers in our supply chain and we work directly with approximately 700 000 of them. To help secure a long‑term supply of high‑quality raw materials for our foods and beverages, we need to understand where and how our ingredients are produced, support the farmers who supply us and drive rural development. We include in this process our commitment to continue to improve animal welfare and, in 2017, we set new goals in this regard. Our agripreneurship programme supports the next generation of farmers by providing essential skills training. We offer training to improve agricultural practices, develop alternative income streams and improve dietary diversity. Through our partnership with the International Federation of the Red Cross and Red Crescent Societies (IFRC), we support access to water, sanitation and hygiene, and women’s empowerment in selected areas where we source our products. 57% 2025 of the volume of our 12 priority categories of raw materials and paper are responsibly sourced Our aim is to source all our eggs from cage‑free hens for all our food products globally by 2025 Nestlé Annual Review 2017 Responsible sourcing in pet food: in partnership with the Thai Government and a supplier, we have developed a showcase vessel. It is used in trainings to address labour rights abuses in the seafood industry. Nestlé with other partnering companies have offered young people over 95 000 jobs and training opportunities since 2014. Respecting and promoting human rights in our business activities Human rights abuses have no place in our supply chain, which is why we promote human rights at global and local levels across our business operations and value chain. We continually strive to meet the highest ethical standards, and insist that our partners and suppliers uphold the same high criteria. This requires commitment and work over time. We will always be open and transparent about our efforts to address issues, from forced labour and gender inequality to corruption. Through our responsible sourcing activities, we take concrete actions, based on our 11 salient human rights issues identified in 2015. As part of this effort, in 2017 we published our Labour Rights in Agricultural Supply Chains: A Roadmap. It has enabled us to identify and prioritise 11 countries that present known higher levels of labour risks and from which we source our 12 priority commodities. Through this process, we can better target our remediation efforts on labour rights. 13 human rights impact assessments completed in countries where we have significant business operations 96 599 employees trained in human rights since 2011 Promoting fair employment and diversity Fair employment, diversity and inclusion are integral to Nestlé’s culture. We aim to provide a safe, rewarding workplace that inspires employees to fulfil their potential. We provide people with equal development opportunities and treat each other with dignity and respect. We place a particular focus on the challenge of youth unemployment. In 2017, we announced the extension of our Nestlé needs YOUth initiative to our entire value chain. Its aim is to help 10 million young people around the world have access to economic opportunities by 2030. By doing so, we support the development of the communities where we live and work, while ensuring our talent pipeline. This brings diversity and new skills to the organisation and supports local innovation and entrepreneurship. 30 157 jobs and 11 710 traineeships or apprenticeships provided to young people under 30 in 2017 97% of our markets have a health and wellness programme in place 33 Nestlé Annual Review 2017 Steward resources for future generations We are working, with partners and stakeholders, towards our ambition to strive for zero environmental impact in our operations. We have set clear commitments and objectives to use sustainably-managed and renewable resources, operate more efficiently, aim for zero waste for disposal and improve water management. We also continue to participate actively in initiatives that reduce food loss and waste, and that preserve our forests, oceans and biodiversity. Added value for investors By offering consumers more sustainable foods and beverages, we provide them with more reasons to choose our brands, generating additional revenue. We bring savings through improved operational efficiency, better resource management and less waste. Investing in climate change adaptation and mitigation, as well as responsible water stewardship, helps secure a more sustainable supply of resources for our business. 34 The Nestlé Pakistan water plan was unveiled in October 2017, in collaboration with Lahore University of Management Sciences and WWF. It promotes water resources conservation, introduces sustainable agricultural techniques, and provides access to clean and safe water. Caring for water Water is a shared and precious resource that we need to manage sustainably. We unequivocally believe access to water is a basic human right. Everyone, everywhere in the world, has the right to clean, safe water for drinking and sanitation. Caring for water is a key part of achieving our ambition to strive for zero environmental impact in our operations. Water is essential for our business. The ingredients we source need water to grow. We need water to run our factories and consumers use water to enjoy many of our foods and beverages. Our initiatives continue to look for ways to further reduce withdrawals per tonne and reuse water in our operations. We also work with others on water stewardship initiatives, and increase access to safe water, sanitation and hygiene. 38.1% reduction in our water withdrawals per tonne of product since 2007 20 Nestlé Waters announced that it will strengthen its collaboration with the Alliance for Water Stewardship (AWS) to certify 20 factories by 2020 Nestlé Annual Review 2017 Our Nescafé Dolce Gusto factory in Montes Claros, Brazil, achieved a triple‑zero milestone: zero water withdrawal, zero waste for disposal and zero net GHG emissions. Nespresso continues to extend its global recycling scheme and invested CHF 25 million in 2017. Acting on climate change Climate change is a major global challenge, with shifting weather patterns threatening food security and changes in consumption putting pressure on natural resources. Our size and scale means we can show real leadership on climate change, and find ways to further reduce the emissions of greenhouse gases (GHGs) and use more renewable energy. We have set ambitious targets to reduce GHGs, in line with the Paris Agreement on climate change. We have doubled the amount of renewable energy we procure compared to 2016. More than 100 sites are now powered with renewable electricity, including from spent coffee grounds or wood chips. These are just some of the many initiatives that have helped us earn a place in the annual CDP Climate A List and become No.1 in the food products industry in the 2017 Dow Jones Sustainability Index. 25.7% 33.2% of our electricity now comes from renewable sources. In markets such as Germany, UK & Ireland and Brazil, we procure 100% from solar, wind and hydropower sources reduction in our GHG emissions (scope 1 and 2) per tonne of product since 2007 Safeguarding the environment The basic ingredients of all of our food products come from plants and animals, forests, farms, and oceans. Protecting the natural environment where those ingredients grow and live is essential. We aim to develop our business while improving our environmental performance, to ensure that a more sustainable supply of natural resources and raw ingredients goes into making our products. We continue to play our part in helping to reduce food loss and waste. In our sites, we reduce, reuse and recycle with the ultimate goal of achieving zero waste for disposal. On an agricultural level, our team of over 1000 agronomists and other support staff provides training to help our farmers improve their methods, reduce losses and keep their land healthy and productive. 253 100% factories achieved zero waste for disposal in 2017 Nestlé Waters joined the Natur’ALL Bottle Alliance in striving to create a fully recyclable plastic bottle made from 100% bio‑based material 35 Nestlé Annual Review 2017 Our 2020 commitments Our impact areas – individuals and families, our communities and the planet – are interconnected, and our efforts in each of these areas are supported through our 41 public commitments. These hold us publicly accountable for our performance and we report our progress against them every year. All our public commitments are directly aligned with our corporate purpose, our 2030 ambitions and the UN SDGs. The majority of these commitments are supported by specific objectives for 2020. The table below shows our current progress against our 2020 commitments, including those achieved by the end of 2017, as indicated by a tick. Our full online report provides more detailed information and updates on progess. Our performance in leading indices Although we are not driven by awards and recognition, we remain proud to have our sustainability efforts and achievements acknowledged by world‑leading rating and ranking agencies: First breast‑milk substitute manufacturer to be included in the FTSE4Good Index, and we have retained our place for six years. Second out of 22 global food and beverage manufacturers in the 2016 Access to Nutrition Index™ (ATNI). First in the foods products sector of the 2017 Dow Jones Sustainability Index (DJSI) with an overall score of 89 out of 100. Topped the list of global companies in 2017 CDP climate change, earning a place in CDP’s Climate A list. Ranked top scorer within the packaged food industry at Ceres’ Feeding Ourselves Thirsty an analysis comparing the water risk management performance of 42 global companies. 36 For individuals and families Offering tastier and healthier choices Launch more nutritious foods and beverages, especially for mothers‑to‑be, new mothers and children Further decrease sugars, sodium and saturated fat Increase vegetables, fibre‑rich grains, pulses, nuts and seeds in our foods and beverages Simplify our ingredient list and remove artificial colours Address undernutrition through micronutrient fortification Inspiring people to lead healthier lives Apply and explain nutrition information on packs, at point of sale and online Offer guidance on portions for our products Market to children only choices that help them achieve a nutritious diet Empower parents, caregivers and teachers to foster healthy behaviours in children Leverage our marketing efforts to promote healthy cooking, eating and lifestyles Support breastfeeding and protect it by continuing to implement an industry‑leading policy to market breast‑milk substitutes responsibly Inspire people to choose water to lead healthier lives Partner for promoting healthy food environments Building, sharing and applying nutrition knowledge Build and share nutrition knowledge from the first 1000 days through to healthy ageing Build biomedical science leading to health‑promoting products, personalised nutrition and digital solutions Nestlé Annual Review 2017 For our communities For the planet Rural development and enhancing rural livelihoods Caring for water Roll‑out rural development baseline assessments to understand the needs of farmers Work to achieve water efficiency and sustainability across our operations Improve farm economics among the farmers who supply us Improve food availability and dietary diversity among the farmers who supply us Implement responsible sourcing in our supply chain and promote animal welfare Continuously improve our green coffee supply chain Advocate for effective water policies and stewardship Treat the water we discharge effectively Engage with suppliers, especially those in agriculture Raise awareness on water conservation, and improve access to water and sanitation across our value chain Roll out the Nestlé Cocoa Plan with cocoa farmers Acting on climate change Respecting and promoting human rights Provide climate change leadership Assess and address human rights impacts across our business activities Improve workers’ livelihoods and protect children in our agricultural supply chain Enhance a culture of integrity across the organisation Promoting decent employment and diversity Roll‑out our Nestlé needs YOUth initiative across all our operations Provide training on Corporate Business Principles, Nutrition and Environmental Sustainability Enhance gender balance in our workforce and empower women across the entire value chain Advocate for healthy workplaces and healthier employees Provide effective grievance mechanisms to employees and stakeholders Promote transparency and proactive, long‑term engagement in climate policy Safeguarding the environment Assess and optimise the environmental impact of our products Improve the environmental performance of our packaging Reduce food loss and waste Provide meaningful and accurate environmental information and dialogue Preserve natural capital, including forests Commitments achieved by the end of 2017 37 Nestlé Annual Review 2017 Financial review 38 Nestlé Annual Review 2017 Key figures (consolidated) In millions of CHF (except for data per share and employees) Results Sales Underlying Trading operating profit * as % of sales Trading operating profit * as % of sales Profit for the year attributable to shareholders of the parent (Net profit) as % of sales Balance sheet and Cash flow statement Equity attributable to shareholders of the parent Net financial debt * Ratio of net financial debt to equity (gearing) Operating cash flow as % of net financial debt Free cash flow * Capital expenditure as % of sales Data per share Weighted average number of shares outstanding (in millions of units) Basic earnings per share Underlying earnings per share * Dividend as proposed by the Board of Directors of Nestlé S.A. Market capitalisation, end December Number of employees (in thousands) 2016 2017 89 469 14 307 16.0% 89 791 14 729 16.4% 13 693 13 233 15.3% 8 531 9.5% 14.7% 7 183 8.0% 64 590 13 913 21.5% 61 504 17 875 29.1% 15 582 13 486 112.0% 10 108 4 010 4.5% 75.4% 8 509 3 934 4.4% 3 091 3 092 CHF CHF CHF 2.76 3.40 2.30 2.32 3.55 2.35 226 310 256 223 328 323 Principal key figures (a) (illustrative) in CHF, USD, EUR In millions (except for data per share) Sales Underlying Trading operating profit * Trading operating profit * Profit for the year attributable to shareholders of the parent (Net profit) Total CHF Total CHF Total USD Total USD Total EUR Total EUR 2016 89 469 14 307 13 693 8 531 2017 89 791 14 729 13 233 7 183 2016 90 796 14 519 13 896 8 658 2017 91 236 14 966 13 446 7 299 2016 82 055 13 121 12 558 7 824 2017 80 690 13 236 11 892 6 455 Equity attributable to shareholders of the parent 64 590 61 504 63 156 62 965 60 075 52 675 Market capitalisation, end December 226 310 256 223 221 287 262 309 210 490 219 440 Data per share Basic earnings per share 2.76 2.32 2.80 2.36 2.53 2.08 Certain financial performance measures are not defined by IFRS. For further details, see Foreword on page 40. * (a) Income statement figures translated at weighted average annual rate; Balance sheet figures at year‑end rate. 39 Nestlé Annual Review 2017 Group overview Foreword The Financial review contains certain financial performance measures, that are not defined by IFRS, that are used by management to assess the financial and operational performance of the Group. They include among others: – Organic growth, Real internal growth and Pricing; – Underlying Trading operating profit margin and Trading operating profit margin; – Net financial debt; – Free cash flow; and – Underlying earnings per share (EPS) and EPS in constant currency. Management believes that these non‑IFRS financial performance measures provide useful information regarding the Group’s financial and operating performance. The Alternative Performance Measures document published under https://www.nestle. com/investors/publications defines these non‑IFRS financial performance measures. Introduction Our 2017 organic sales growth was within the guided range but below our expectations, in particular due to weak sales development towards the end of the year. Sales growth in Europe and Asia was encouraging while North America and Brazil continued to see a challenging environment. Our cost‑reduction initiatives delivered margin improvement ahead of 2017 expectations, in spite of considerable commodity price increases. During the past months, we have completed initial portfolio adjustments with very favourable results. We will continue this active portfolio management approach in a disciplined manner and fully in line with our strategy. Regarding our core portfolio, accelerating our growth through product innovation and renovation is high on the agenda. Organic sales growth is expected to improve in 2018 and we are firmly on track for our 2020 margin improvement target. Group sales Organic growth (OG) of 2.4% was at the low end of our expectations, following slow growth of 1.9% in the fourth quarter. Real internal growth (RIG) 40 Sales by geographic area Differences 2017/2016 (in %) By principal markets United States Greater China Region France Brazil Mexico United Kingdom Germany Philippines Canada Italy Japan Russia Australia Spain India Switzerland Rest of the world Total (a) Not applicable. in CHF – 0.1% + 0.6% – 1.2% + 4.8% + 4.9% – 0.7% – 6.7% – 6.2% + 2.8% – 4.1% + 0.2% + 15.7% + 3.3% – 9.7% + 11.6% – 14.4% + 1.6% + 0.4% in local currency 0.0% + 2.3% – 3.2% – 2.7% + 6.2% + 4.0% – 8.6% – 0.4% + 0.9% – 6.1% + 3.5% + 1.8% + 0.4% – 11.6% + 8.2% – 14.4% (a) (a) in CHF millions 2017 26 678 6 578 4 426 4 317 2 722 2 708 2 681 2 571 1 947 1 784 1 751 1 620 1 569 1 525 1 457 1 262 24 195 89 791 was 1.6% for the full‑year and remained at the high end of the food and beverage industry. Pricing of 0.8% was consistent with the prior year. Organic growth was 0.7% in developed markets and 4.8% in emerging markets. Net divestments reduced sales by 1.9%, largely related to the creation of the Froneri joint venture. Foreign exchange had a minimal negative impact of 0.1%. Total reported sales were CHF 89.8 billion, a 0.4% increase for the year. Organic growth in Zone AMS was subdued and decelerated in the back half of the year. Excluding the confectionery business, growth in the United States was flat, reflecting soft consumer demand and challenging category dynamics. Brazil maintained solid RIG in a difficult trading environment, but pricing was negative due to deflationary pressures. Nestlé Annual Review 2017 Mexico was resilient and other parts of Latin America sustained good momentum. Growth in Zone EMENA increased following a significant improvement in the second half of the year, with two consecutive quarters in excess of 3%. This was largely driven by strong results in petcare and coffee. Zone AOA saw its highest growth in four years, with positive RIG and pricing. This was based on a return to positive growth in China, which was achieved despite difficult comparables in the fourth quarter due to the timing of Chinese New Year. There was continued good growth across the other sub‑regions. Nestlé Waters posted high single‑digit growth in the international premium brands. The regional brands in North America faced weak demand and pricing pressure. Growth remained soft in Nestlé Nutrition as sales were subdued in North America and declined in Brazil. There was modest improvement in China, driven by new organic offerings. Nespresso reported consistent mid single‑digit growth, with positive momentum in all regions and sustained mid‑teen growth in North America. Nestlé Health Science maintained solid growth and Nestlé Skin Health improved slightly. All categories reported positive growth, led by coffee, petcare and Nestlé Health Science. Underlying Trading operating profit Underlying Trading operating profit increased by 2.9% to CHF 14.7 billion. The Underlying Trading operating profit margin was up 50 basis points in constant currency and up 40 basis points on a reported basis to 16.4%. This improvement puts us on track to meet our 2020 target. Margin expansion was supported by operating efficiencies and successful execution of ongoing restructuring initiatives. These cost savings largely offset the increase in commodity costs of around CHF 900 million. Restructuring expenditure and net other trading items increased by CHF 900 million to CHF 1.5 billion due to the acceleration of restructuring projects. As a consequence, Trading operating profit decreased by 3.4% to CHF 13.2 billion. The Trading operating profit margin decreased by 60 basis points on a reported basis to 14.7%, in line with our guidance. Underlying Trading operating profit and Trading operating profit In millions of CHF In % of sales 14 307 14 729 13 693 13 233 16.0% 15.3% 16.4% 14.7% 2016 2017 2016 2017 P Underlying Trading operating profit P Trading operating profit Underlying Trading operating profit by operating segment In % of sales Trading operating profit by operating segment In % of sales % 3 . 0 2 % 1 . 0 2 % 1 . 8 1 % 0 . 3 2 % 9 . 5 1 % 7 . 2 1 % 2 . 9 1 % 2 . 9 1 % 7 . 6 1 % 0 . 2 2 % 9 . 1 1 % 5 . 1 1 P Zone AMS P Zone EMENA P Zone AOA P Nestlé Waters P Nestlé Nutrition P Other businesses (a) (a) Mainly Nespresso, Nestlé Health Science and Nestlé Skin Health. Effective as from 1 January 2017, Nestlé Professional (NP) is no more reported as a Globally‑Managed Business but as a Regionally‑Managed Business included in the Zones. 2016 comparatives have been restated. 41 Nestlé Annual Review 2017 Group overview Impact of the United States Corporate Tax Reform As a result of the United States Tax Reform, we expect a reduction in our United States corporate tax expenses of around CHF 300 million per year, as from January 2018. This equates to a reduction of the Group underlying tax rate of around 200 basis points from 2018 onwards, assuming no other changes. In addition, the tax rate reduction triggered a one‑time deferred tax gain in 2017 of around CHF 850 million. Net profit and Earnings per share Net profit decreased by 15.8% to CHF 7.2 billion and earnings per share decreased by 15.8% to CHF 2.32. This was mainly due to an impairment of goodwill related to Nestlé Skin Health, which was taken to reflect the current prospects of the business. Underlying earnings per share increased by 4.7% in constant currency and by 4.6% on a reported basis to CHF 3.55. Cash flow Free cash flow declined from CHF 10.1 billion to CHF 8.5 billion. This was driven by working capital development, which saw a slower rate of improvement following the exceptionally large reduction in the prior year. Financial position The Group’s net debt increased from CHF 13.9 billion to CHF 17.9 billion in 2017 mainly due to the share buy‑back programme launched in the second half of 2017. 42 Evolution of the Nestlé S.A. share in 2017 In CHF 85.00 80.00 75.00 70.00 115.0% 110.0% 105.0% 100.0% | | | | J F M A M J | | | | | | J A S O N D | | P Nestlé S.A. share P Nestlé relative to Swiss Market Index Earnings per share in CHF Operating cash flow in billions of CHF 2.76 2.32 15.6 13.5 2016 2017 2016 2017 Dividend per share in CHF 2.20 2.15 2.30 2.25 2.35 2013 2014 2015 2016 2017 Nestlé Annual Review 2017 Return on invested capital The Group’s return on invested capital including goodwill and intangible assets decreased by 230 basis points to 8.9% mainly due to the impairment of goodwill of Nestlé Skin Health. Return on invested capital before goodwill and intangible assets decreased by 10 basis points to 31.6%. Dividend The Board of Directors is proposing a dividend of CHF 2.35 per share, up from CHF 2.30 last year. Outlook In 2018, we expect organic sales growth between 2% and 4%, and Underlying Trading operating profit margin improvement in line with our 2020 target. Restructuring costs * are expected at around CHF 700 million. Underlying earnings per share in constant currency and capital efficiency are expected to increase. * Not including impairment of fixed assets, litigation and onerous contracts. Sales, employees and factories by geographic area AMS EMENA (a) AOA Sales Employees Factories 2016 44.9% 30.0% 25.1% 2017 45.3% 29.1% 25.6% 2016 33.2% 33.2% 33.6% 2017 33.5% 33.9% 32.6% 2016 158 151 109 2017 158 146 109 (a) 10 133 employees in Switzerland in 2017. Employees by activity In thousands Factories Administration and sales Total 2016 168 160 328 2017 164 159 323 43 Nestlé Annual Review 2017 Product category and operating segment review 2016 * 2017 Proportion of total sales (%) RIG (%) OG (%) 9 072 9 277 10 720 11 131 19 792 20 408 4 270 4 129 4 461 4 302 7 414 7 455 950 906 968 905 10 540 10 767 3 791 2 680 14 331 13 447 2 759 2 649 2 509 2 326 15 038 15 257 2 900 2 775 2 961 2 425 6 512 5 636 6 139 5 818 12 148 11 957 1 940 1 838 2 103 1 933 6 267 1 111 1 301 8 679 1 237 1 192 6 366 1 099 1 340 8 805 1 387 1 237 12 067 12 462 2 554 2 535 2 678 2 626 45.5% 54.5% 21.9% 21.1% 13.0% 12.1% 80.1% 19.9% 18.7% 17.3% 19.4% 15.9% 51.3% 48.7% 17.6% 16.2% 72.3% 12.5% 15.2% 15.8% 14.0% 21.5% 21.1% + 2.1% + 3.6% + 2.1% + 2.4% + 0.4% + 2.0% + 1.9% + 2.1% + 1.0% + 2.2% + 1.4% + 0.3% + 2.5% + 3.0% In millions of CHF Powdered and Liquid Beverages Soluble coffee/coffee systems Other Total sales Underlying Trading operating profit Trading operating profit Water Total sales Underlying Trading operating profit Trading operating profit Milk products and Ice cream Milk products Ice cream Total sales Underlying Trading operating profit Trading operating profit Nutrition and Health Science Total sales Underlying Trading operating profit Trading operating profit Prepared dishes and cooking aids Frozen and chilled Culinary and other Total sales Underlying Trading operating profit Trading operating profit Confectionery Chocolate Sugar confectionery Biscuits Total sales Underlying Trading operating profit Trading operating profit PetCare Total sales Underlying Trading operating profit Trading operating profit * 2016 figures have been restated – see note on page 41. 44 Nestlé Annual Review 2017 Zone Americas (AMS) Sales Organic growth Real internal growth Underlying Trading operating profit margin CHF 28.5 billion + 0.9% + 0.2% 20.3% Underlying Trading operating profit margin + 60 basis points Trading operating profit margin 19.2% Trading operating profit margin + 20 basis points – 0.9% organic growth: 0.2% RIG; 0.7% pricing. – North America saw slightly negative organic growth with positive pricing. – Latin America had positive RIG and pricing but organic growth for the region decelerated due to lower pricing in Brazil. – The Underlying Trading operating profit margin increased by 60 basis points to 20.3%. Organic growth was subdued at 0.9%, with RIG of 0.2%, following a slowdown in North America. Softer pricing of 0.7% reflected a lower contribution from Latin America, mainly Brazil. Net divestments reduced reported sales by 0.5%, but foreign exchange increased reported sales by 0.8%. Reported sales in Zone AMS increased by 1.2% to CHF 28.5 billion. Zone AMS In millions of CHF United States and Canada Latin America and Caribbean Powdered and Liquid Beverages Milk products and Ice cream Prepared dishes and cooking aids Confectionery PetCare Total sales Underlying Trading operating profit Trading operating profit Capital expenditure * 2016 figures have been restated – see note on page 41. 2016 * 19 212 8 918 2017 19 138 9 341 3 314 7 176 5 630 3 451 8 559 3 366 7 292 5 618 3 507 8 696 28 130 28 479 5 537 5 356 1 083 5 791 5 459 1 200 Organic growth in the United States was slightly negative, as weak consumer demand persisted throughout the year, resulting in stagnant food and beverage category growth. The coffee creamer and petcare categories generated growth in North America, offset by declines in confectionery and ice cream. Excluding confectionery, growth in the United States was flat. In Brazil, RIG was solid but organic growth was negative as deflationary pressures led to lower pricing, particularly in dairy. Mexico maintained resilient mid single‑digit growth, mainly coming from pricing. This was achieved in a volatile economic environment and despite some impact from natural disasters. PetCare had another strong year in Latin America, with double‑digit growth across the region. The professional business also achieved high single‑digit growth driven by successful product launches. The Zone’s Underlying Trading operating profit margin improved by 60 basis points, as ongoing restructuring projects reduced structural costs. Operational efficiency savings helped to offset cost increases from commodity inflation and foreign exchange. Proportion of total sales (%) RIG (%) OG (%) 67.2% 32.8% 11.8% 25.6% 19.7% 12.3% 30.6% 20.3% 19.2% 4.2% + 0.2% + 0.9% 45 Nestlé Annual Review 2017 Zone Europe, Middle East and North Africa (EMENA) Sales Organic growth Real internal growth Underlying Trading operating profit margin CHF 16.5 billion + 2.3% + 1.7% 18.1% Underlying Trading operating profit margin + 80 basis points Trading operating profit margin 16.7% Trading operating profit margin + 10 basis points – 2.3% organic growth: 1.7% RIG; 0.6% pricing. – Western Europe maintained positive organic growth with balanced contributions of RIG and pricing. – Central and Eastern Europe achieved mid single‑digit organic growth, driven entirely by RIG. – Middle East and North Africa saw mid single‑digit organic growth, both RIG and pricing were positive. – The Underlying Trading operating profit margin grew by 80 basis points to 18.1%. Organic growth increased to 2.3% as the Zone finished the year with good momentum, reporting two consecutive quarters in excess of 3%. RIG remained solid at 1.7% and pricing improved to 0.6%, driven by a return to positive pricing in Western Europe. Net divestments reduced reported sales by 8.0%, mainly reflecting the transfer of the ice cream business to the Froneri joint venture. However, foreign exchange effects increased reported sales by 0.6%. Reported sales in Zone EMENA decreased by 5.1% to CHF 16.5 billion. Zone EMENA saw positive growth across all sub‑regions and categories, with PetCare and coffee the main contributors. PetCare’s performance was supported by very strong growth in Russia and other emerging markets. Nescafé had good growth in Western Europe, the Middle East and North Africa, following price increases taken during the year. Confectionery, culinary and dairy all delivered improved growth, helped by successful product launches. The United Kingdom returned to solid growth after a challenging start to the year, with positive RIG and pricing. The Zone’s Underlying Trading operating profit margin increased by 80 basis points, despite higher commodity costs. This improvement was driven by price increases, portfolio management, operational efficiencies and structural cost savings. Zone EMENA In millions of CHF Western Eastern and Central Middle East and North Africa Powdered and Liquid Beverages Milk products and Ice cream Prepared dishes and cooking aids Confectionery PetCare Total sales Underlying Trading operating profit Trading operating profit Capital expenditure * 2016 figures have been restated – see note on page 41. 46 2016 * 11 567 2 843 3 018 4 989 2 095 4 208 3 156 2 980 2017 10 665 3 053 2 817 5 136 1 061 3 885 3 226 3 227 17 428 16 535 3 020 2 888 791 2 990 2 768 725 Proportion of total sales (%) RIG (%) OG (%) 64.5% 18.5% 17.0% 31.1% 6.4% 23.5% 19.5% 19.5% 18.1% 16.7% 4.4% + 1.7% + 2.3% Nestlé Annual Review 2017 Zone Asia, Oceania and sub‑Saharan Africa (AOA) Sales Organic growth Real internal growth Underlying Trading operating profit margin CHF 16.2 billion + 4.7% + 2.9% 20.1% Underlying Trading operating profit margin + 20 basis points Trading operating profit margin 19.2% Trading operating profit margin – 20 basis points – 4.7% organic growth: 2.9% RIG; 1.8% pricing. – China returned to positive growth despite difficult comparables due to the timing of Chinese New Year. – South‑East Asia and South Asia maintained good organic growth, with strong RIG and positive pricing. – Sub‑Saharan Africa saw strong double‑digit growth with positive RIG and pricing. – Developed markets remained solid, with good RIG partially offset by negative pricing. – The Underlying Trading operating profit margin increased by 20 basis points to 20.1%. Organic growth was strong at 4.7%. RIG was consistent at 2.9%, while pricing improved to 1.8%. Net divestments and foreign exchange reduced reported sales by 0.4% and 2.3%, respectively. Reported sales in Zone AOA increased by 2.0% to CHF 16.2 billion. Organic growth in Zone AOA had a good balance of RIG and pricing. The Zone achieved its highest growth in four years despite difficult comparables in the fourth quarter due to the timing of Chinese New Year. There was a return to slightly positive growth in China, helped by the stabilisation of Yinlu and solid contributions across coffee, ice cream and culinary products. Growth was broad‑based across the Zone, with a notable acceleration in Nestlé Professional and PetCare. There was good growth in sub‑Saharan Africa, South‑East Asia and South Asia, despite some impact on organic growth from the implementation of the Goods and Services Tax (GST) in India. Developed markets saw strong RIG, especially Japan. This was partially offset by negative pricing. The Zone’s Underlying Trading operating profit margin improved by 20 basis points, as pricing, operational efficiencies and structural cost savings more than offset an increase in commodity costs. Zone AOA In millions of CHF ASEAN markets Oceania and Japan Other Asian markets Sub‑Saharan Africa Powdered and Liquid Beverages Milk products and Ice cream Prepared dishes and cooking aids Confectionery PetCare Total sales Underlying Trading operating profit Trading operating profit Capital expenditure * 2016 figures have been restated – see note on page 41. 2016 * 4 878 2 956 6 159 1 911 5 841 5 214 2 305 2 016 528 2017 4 924 2 979 6 304 2 017 5 956 5 262 2 453 2 014 539 15 904 16 224 3 171 3 085 574 3 265 3 123 539 Proportion of total sales (%) RIG (%) OG (%) 30.3% 18.4% 38.9% 12.4% 36.7% 32.5% 15.1% 12.4% 3.3% 20.1% 19.2% 3.3% + 2.9% + 4.7% 47 Nestlé Annual Review 2017 Nestlé Waters Sales Organic growth Real internal growth Underlying Trading operating profit margin CHF 8.0 billion + 2.1% + 1.8% 12.7% Underlying Trading operating profit margin + 20 basis points Trading operating profit margin Trading operating profit margin 11.9% 0 basis point – 2.1% organic growth: 1.8% RIG; 0.3% pricing. – North America had slightly positive organic growth driven entirely by RIG, with negative pricing. – Europe maintained low single‑digit organic growth on a full‑year basis. – Emerging markets overall delivered high single‑digit growth. – The Underlying Trading operating profit margin increased by 20 basis points to 12.7%. Organic growth slowed to 2.1% following a challenging second half of the year. RIG decelerated to 1.8%, reflecting softer growth across both North America and Europe. Pricing remained limited at 0.3% in a deflationary environment. Net divestments and foreign exchange reduced reported sales by 0.5% and 1.4%, respectively. Reported sales in Nestlé Waters increased by 0.2% to CHF 8.0 billion. Nestlé Waters saw high single‑digit growth in the international premium brands. The regional brands in North America faced weak demand and pricing pressure. RIG was solid in the developed markets but pricing remained negative. Growth remained strong across Latin America and solid in AOA. Nestlé Waters faced higher commodity costs in 2017. The Underlying Trading operating profit margin improved by 20 basis points, driven by efficiencies and increased structural cost savings. The strong growth of the international brands also drove improved profitability through premiumisation. Nestlé Waters In millions of CHF Europe United States and Canada Other regions Total sales Underlying Trading operating profit Trading operating profit Capital expenditure 2016 1 966 4 385 1 575 2017 1 980 4 417 1 558 7 926 7 955 990 946 496 1 012 948 545 Proportion of total sales (%) RIG (%) OG (%) 24.9% 55.5% 19.6% 12.7% 11.9% 6.9% + 1.8% + 2.1% 48 Nestlé Annual Review 2017 Nestlé Nutrition Sales Organic growth Real internal growth Underlying Trading operating profit margin CHF 10.4 billion + 1.1% + 0.9% 23.0% Underlying Trading operating profit margin – 10 basis points Trading operating profit margin 22.0% Trading operating profit margin – 70 basis points – 1.1% organic growth: 0.9% RIG; 0.2% pricing. – In China, organic growth remained soft but saw some improvement in the back half of the year. Growth in China remained soft but did improve compared to the prior year, driven by new organic offerings for NAN and illuma. The United States was subdued with slightly positive growth in the context of ongoing weak category dynamics. The comprehensive re‑launch of Gerber’s baby food range is in progress, including new organic and natural lines. Growth of Nestlé Nutrition was impacted by negative results in Brazil, especially in the back half of the year. Significant deflation in Brazil’s dairy market resulted in negative pricing and demand remained weak. South Asia and the Middle East made strong contributions with mid single‑digit growth. – The United States had slightly positive organic Nestlé Nutrition’s Underlying Trading operating profit margin decreased by 10 basis points, mainly due to lower profitability in Brazil, where pricing was significantly impacted by deflationary pressures. growth driven by price increases. – Brazil had negative growth, reflecting price decreases and soft demand. – The Nestlé Nutrition Underlying Trading operating profit margin decreased by 10 basis points to 23.0%. Organic growth was soft at 1.1%, comprised of 0.9% RIG and 0.2% pricing. Net divestments and foreign exchange reduced reported sales by 0.4% and 0.2% respectively. Reported sales in Nestlé Nutrition increased by 0.5% to CHF 10.4 billion. Nestlé Nutrition In millions of CHF EMENA AMS AOA Total sales Underlying Trading operating profit Trading operating profit Capital expenditure 2016 1 978 3 751 4 597 2017 1 977 3 724 4 660 10 326 10 361 2 389 2 342 414 2 384 2 282 331 Proportion of total sales (%) RIG (%) OG (%) 19.1% 35.9% 45.0% 23.0% 22.0% 3.2% + 0.9% + 1.1% 49 Nestlé Annual Review 2017 Other businesses Sales Organic growth Real internal growth Underlying Trading operating profit margin CHF 10.2 billion + 4.8% + 4.5% 15.9% Underlying Trading operating profit margin + 50 basis points Trading operating profit margin 11.5% Trading operating profit margin – 290 basis points – 4.8% organic growth: 4.5% RIG; 0.3% pricing. – Nespresso posted good organic growth, with sustained mid‑teen momentum in North America. – Nestlé Health Science maintained mid single‑digit growth with positive RIG and pricing. – Nestlé Skin Health saw slightly improved growth. – The Underlying Trading operating profit margin of Other businesses increased by 50 basis points to 15.9%. Organic growth of 4.8% was driven by strong RIG of 4.5% and pricing of 0.3%. Net acquisitions decreased reported sales by 0.8% and foreign exchange had a positive 1.0% impact. Reported sales in Other businesses increased by 5.0% to CHF 10.2 billion. Nespresso reported consistent mid single‑digit growth, with positive growth in all regions and sustained mid‑teen momentum in North America. Nespresso continued to expand its global footprint throughout the year, opening 80 new boutiques. The business also introduced its Vertuo system in the UK and in Australia, building on previous successful launches in the USA, Canada and France. Nestlé Health Science maintained solid growth driven by Medical Nutrition. Nestlé Skin Health had slightly improved growth, however, this was still materially below the initial business plans. The Underlying Trading operating profit margin of Other businesses increased by 50 basis points. This was mainly driven by an improvement in Nestlé Skin Health, however, the profitability of this business remained substantially below its historical level. Other businesses (a) In millions of CHF Total sales Underlying Trading operating profit Trading operating profit Capital expenditure 2016 * 2017 9 755 10 237 1 503 1 407 451 1 625 1 174 421 Proportion of total sales (%) RIG (%) + 4.5% OG (%) + 4.8% 15.9% 11.5% 4.1% 2016 figures have been restated – see note on page 41. * (a) Mainly Nespresso, Nestlé Health Science and Nestlé Skin Health. 50 Nestlé Annual Review 2017 Principal risks and uncertainties Group Risk Management The Nestlé Group Enterprise Risk Management Framework (ERM) is designed to identify, communicate and mitigate risks in order to minimise their potential impact on the Group and ensure the achievement of Nestlé’s long‑term goals. A top‑down assessment is performed at Group level once a year to create a good understanding of the company’s mega‑risks, to allocate ownership to drive specific actions around them and take any relevant steps to address them. A bottom‑up assessment occurs in parallel resulting in the aggregation of individual assessments by all Markets and Globally‑Managed Businesses. Additionally, Nestlé engages with external stakeholders to better understand the issues that are of most concern to them. For each issue, the materiality matrix (included in the Nestlé in society report) rates the degree of stakeholder concern and potential business impact. These different risk mappings allow the Group to make sound decisions on the future operations of the company. Risk assessments are the responsibility of line management; this applies equally to a business, a market or a function, and any mitigating actions identified in the assessments are the responsibility of the individual line management. If Group‑level intervention is required, responsibility for mitigating actions will generally be determined by the Executive Board. The results of the Group ERM are presented annually to the Executive Board, half‑yearly to the Audit Committee, and reported annually to the Board of Directors. The factors identified below are considered the most relevant for our business and performance. Many of the long‑term mitigation strategies are expanded on in our Nestlé in society report. Factors affecting results Nestlé’s reputation is based on consumers’ trust. Any major event triggered by a serious food safety or other compliance issue could have a negative effect on Nestlé’s reputation or brand image. The Group has policies, processes, controls and regular monitoring to ensure high‑quality products and prevention of health risks arising from handling, preparation and storage throughout the value chain. The success of the Nestlé Group depends on its ability to anticipate consumer preferences and to offer high‑quality, competitive, relevant and innovative products. Our Nutrition, Health and Wellness strategy aims to enhance people’s lives at all stages through industry‑leading research and development to drive innovation and the continuous improvement of our portfolio. Prolonged negative perceptions concerning health implications of processed food and beverages categories could lead to an increase in regulation of the industry and may also influence consumer preferences. The Group has long‑term objectives in place to apply scientific and nutritional know‑how to enhance nutrition, health and wellness, contributing to healthier eating, drinking and lifestyle habits, as well as improve the accessibility of safe and affordable food. Changing customer relationships and channel landscape may inhibit our growth if we fail to maintain strong engagements or adapt to changing customer needs. Our strategy is to maintain and develop strong relationships with customers across the world to help them win in their respective prioritized categories where we operate. Nestlé is dependent on the sustainable supply of a number of raw and packaging materials. Longer‑term changes in weather patterns; water shortages; shifts in production patterns; economic and social inequality in supply chains, etc., could result in capacity constraints, as well as reputational damage. The Group has long‑term commitments to promote better agricultural practices, support rural development in line with local priorities, and address supply chain issues from gender inequality to deforestation. Progress against these commitments is monitored to ensure positive social and environmental impacts along with delivering our own growth strategy. Nestlé manages risks related to climate change and water resources. Our long‑term commitments and strategies on climate change and water are available in Nestlé’s response to the CDP Climate Change report and Water questionnaires in the Nestlé in society report. The Group is subject to environmental regimes applied in all countries where it operates and has controls in place to comply with legislation 51 Nestlé Annual Review 2017 solutions, services and models, both internal and external. Disruption impacting the reliability, security and privacy of the data, as well as the IT infrastructure, is a threat. Contingency plans along with policies and controls are in place aiming to protect and ensure compliance on both infrastructure and data. The Group’s liquidities/liabilities (currency, interest rate, hedging, cost of capital, pension obligations/retirement benefits, banking/ commercial credit, etc.) could be impacted by any major event in the financial markets. Nestlé has the appropriate risk mitigation measures in place with strong governance to actively manage exposures and long‑term asset and liability outlook. Nestlé has factories in 85 countries and sales in 189 countries. Security, political instability, legal and regulatory, fiscal, macroeconomic, foreign trade, labour and/or infrastructure risks could potentially impact Nestlé’s ability to do business in a country or region. Major events caused by natural hazards (such as flood, drought, infectious disease, etc.) could also impact the Group’s ability to operate. Any of these events could lead to a supply disruption and impact Nestlé’s financial results. Regular monitoring and ad hoc business continuity plans are established in order to mitigate against such events. The Group‑wide geographical and product category spreads represents a tremendous natural hedge. Principal risks and uncertainties concerning the protection of the environment, including the use of natural resources, release of air emissions and waste water, and the generation, storage, handling, transportation, treatment and disposal of waste materials. Nestlé is reliant on the procurement of materials, manufacturing and supply of finished goods for all product categories. A major event impacting input prices, or in one of Nestlé’s key plants, at a key supplier, contract manufacturer, co‑packer, and/or warehouse facility could potentially lead to a supply disruption. Active price‑risk management on key commodities and business continuity plans are established and regularly maintained in order to mitigate against such events. The investment choices of the Group evolve over time and may include investments in emerging technologies; new business models; expansion into new geographies; and creation of, or entry into, new categories. This may result in broader exposures for the Group, e.g. a more highly‑regulated environment for the healthcare segment, etc. The Group’s investment choices are aligned with our strategy and prioritised based on the potential to create value over the long term. The Group, as part of the strategy, undertakes business transformations such as large scale change management projects, mergers and acquisitions. To ensure the realisation of the anticipated benefits of them, these transformations receive executive sponsorship with aligned targets, as well as appropriate levels of resource to support successful execution of them. The ability to attract and retain skilled, talented employees is critical to achieving our strategy. Our initiatives and processes aim to sustain a high‑performance culture, supported by a total awards approach and people development that emphasises diversity, innovation and growth. Nestlé is subject to health and safety regimes in all countries where it operates. Nestlé has procedures in place to comply with legislation concerning the protection of the health and welfare of employees and contractors, as well as long‑term initiatives to promote safe and healthy employee behaviours. The Group depends on accurate, timely data along with increasing integration of digital 52 Nestlé Annual Review 2017 Europe, Middle East and North Africa (EMENA) Factories Americas (AMS) Argentina Bolivia Brazil Canada Chile Colombia Costa Rica Cuba Dominican Republic Ecuador Guatemala Mexico Nicaragua Panama Peru Trinidad and Tobago United States Uruguay Venezuela 6 P L P L P L P L P L 1 L L L L P L Algeria L P L L Bahrain 22 P L P P L P L P L P L P L 7 P L P L P L P L P L P L P L 7 P L 4 P L 1 L P L P L P L P L P L L P L P L P L P L L L L L L L L L 3 L P L P L L L L 2 L L L P L L P L L P L P L P L P L L 3 P L 2 P L L 12 P L P L P L P L P L P L P L 1 P L 2 L P L L P L L P L L P L L L L L L L L L L L Belgium Bulgaria Czech Republic Denmark Egypt Finland France Germany Greece Hungary Iran Iraq L 1 P L 1 P L 1 P L 5 P L L P L P L P L P L L Ireland L 77 P L P L P L P L P L P L P L L P L L L L Israel Italy L L L P L L L Jordan L P L P L P L P L P L Lebanon Morocco Netherlands Poland Portugal Qatar Republic of Serbia Romania Russia Saudi Arabia Slovak Republic Spain Sweden Switzerland Syria Tunisia Turkey Asia, Oceania and sub‑Saharan Africa (AOA) Angola Australia Bangladesh Cameroon Côte d’Ivoire Ethiopia Ghana 1 L 8 P L 1 P L 1 P L 2 P L 1 1 P L P P L L L L L P L P L P L P L P L P L P L P P L L P L L L L P L P L P L L P L Greater China Region 30 P L P L P L P L P L P L P L India P L P L P L P Indonesia Japan Kenya Malaysia Myanmar New Zealand Nigeria Pakistan Papua New Guinea Philippines Republic of Korea Senegal Singapore South Africa Sri Lanka Thailand Vietnam Zimbabwe 7 P L 4 P L 3 P L 1 P L 7 P L 1 P 2 L 3 P L P 4 P L P 1 P L 5 P L 1 L P L P L L P L L P L P L P L P L L P L P L P L L L P L P L P L P L L L L P L L L P L P L P L Ukraine P L P L P L P United Arab Emirates P L P L P L L P L United Kingdom Uzbekistan L P L P L L P L L L L L 1 L P L L P L L P L P L P L L 2 P L 6 P L 1 P L L P L P L P L 8 P L P L P L P L P L 6 P L P L P L 1 P L P L P L P L L P L L P L P L P L P L L L L L L L L L L L L P L L 2 P L P 1 L P L 1 1 3 1 L P L L L L L L L P L L L L L L L L L L L L L L L L L P L L P L P L L P L L L L L L L L 2 P L P L P L P L P 2 L P L P L 19 P L P L P L P L P L L P L 13 P L P L P L P L P L P L P L P L L L L 2 P L P L 2 P L 2 L P L L L L L L P L 1 L P L L L L L L L P L P L L L L L L L L L L 1 L 9 P L L P L P L L P L P L P P L 10 P L P L 1 2 L P L L P L L L L L P L P L P L L L L L L L L L L L L P L P L P L L L L L P L 5 P L P L P L P L P L P L P L 3 P L 1 L P L P L L P L L L L L L L L L L L L L L P L P L L L L P L L L L P L P L P L P L P L 1 P L 1 1 L 1 P L 6 P L 7 L P L L L L L L 1 L L 10 P L P L P L P L P L P L P L L P L L L L 2 P L L 11 P L P L 1 L P L L L L P L P L P L L L L L P L L 1 P L 2 P L P L 3 P L L 3 P L P L P L 9 P L P L P L P L 2 L P P L L L L L L P L L P L P L P L L P L P L L P L P L L L L L L L L The figure in black after the country denotes the number of factories. P Local production (may represent production in several factories). L Imports (may, in a few particular cases, represent purchases from third parties in the market concerned). P Powdered and Liquid Beverages P Water P Milk products and Ice cream P Nutrition and Health Science P Prepared dishes and cooking aids P Confectionery P PetCare 53 Nestlé Annual Review 2017 Corporate Governance and Compliance 54 Nestlé Annual Review 2017 Corporate Governance Our Board of Directors is highly engaged in our long‑term, sustainable value creation based on strong principles of governance and an appropriate tone from the top. It ensures the long‑term health of our company so it can continue to deliver dependable value over time. We invest in our future as others have done for us in the past. In 2017, our Board of Directors facilitated the transition to a new Chairman and CEO. At the same time, it rearticulated the company’s purpose and values to confirm our mission and basic values in times of change. Nestlé’s purpose remains enhancing quality of life and contributing to a healthier future. Culture changes, values stay. The Board also reconfirmed Nestlé’s value creation model delivering both top and bottom line growth, as well as capital efficiency to drive continuous long‑term shareholder value creation. It stated our commitments to margin expansion, streamlining the portfolio and a prudent approach toward capital allocation and M&A. It approved a share buyback programme of up to CHF 20 billion subject to strategic opportunities. Our Board’s recent actions to create sustained value also included adding four new independent directors in the past three years; expanding the mission of our Nomination and Sustainability Committee and strengthening risk oversight by our Audit Committee. Intense engagement with our shareholders and other stakeholders allowed us to take into account their views through our Chairman’s Roundtables, roadshows, investor meetings, analyst and engagement calls, as well as stakeholder convenings. Our Chairman’s and Corporate Governance Committee liaises between the Chairman and the full Board and provides advice to the Chairman and CEO. It regularly reviews all aspects of our governance, as well as the company’s asset and liability management. Our Nomination and Sustainability Committee puts a strong focus on Board composition, structure and succession planning. It evaluates candidates for nomination to the Board in the coming years. It reviews all aspects of our environmental and social sustainability. It is chaired by our Lead Independent Director. Our Compensation Committee sets our remuneration principles and submits the proposals for remuneration of the Board and the Executive Board to the Board and the AGM. It ensures the alignment of our values, strategies and performance management. Our compensation budgets and our compensation report are submitted to annual votes by our shareholders. Our Audit Committee oversees internal and external audit, financial reporting, compliance and risk management. In 2017, our internal audit function was strengthened, and our risk and compliance reporting was enhanced. We further integrated our public reporting on our financial and non‑financial performance by including the highlights from our Nestlé in society report in our Annual Review. We recognize that for our company to be successful over time and create sustainable value for shareholders, we must also create value for society, i.e. ‘Create Shared Value’. Share capital distribution by geography P Switzerland P United States P Germany P Belgium P United Kingdom P Canada P Japan P Luxembourg P France P China P Others 34.5% 32.3% 5.2% 4.5% 3.8% 2.5% 2.3% 2.1% 1.8% 1.7% 9.3% Share capital by investor type, long‑term evolution (a) 100% 75% 50% 25% 0% Institutions 80% Private Shareholders 20% 2001 2005 2009 2013 2017 (a) Percentage derived from total number of registered shares. Registered shares represent 57.2% of the total share capital. Statistics are rounded, as at 31.12.2017. 55 Nestlé Annual Review 2017 Board of Directors of Nestlé S.A. Helmut O. Maucher Honorary Chairman Peter Brabeck‑Letmathe Chairman Emeritus David P. Frick Secretary to the Board KPMG SA Geneva branch (1) Independent auditors Paul Bulcke Beat Hess Andreas Koopmann U. Mark Schneider Naïna Lal Kidwai Henri de Castries Board of Directors of Nestlé S.A. at 31 December 2017 Paul Bulcke (1, 2, 4) Chairman U. Mark Schneider (1, 2) Chief Executive Officer 56 Andreas Koopmann (1, 2, 3) Vice Chairman Chairman, Georg Fischer AG Henri de Castries (1, 2, 4, 5) Lead Independent Director Former Chairman and CEO, AXA Beat Hess (1, 2, 3) Chairman, LafargeHolcim Ltd Former Group Legal Director, Royal Dutch Shell plc. Renato Fassbind (1, 2, 5) Vice Chairman, Swiss Re AG Steven G. Hoch (1, 4) Partner, Brown Advisory, LLC Naïna Lal Kidwai (1, 5) Former Chairperson, HSBC Group of Companies in India Jean‑Pierre Roth (1, 3) Former Chairman, Geneva Cantonal Bank Nestlé Annual Review 2017 Renato Fassbind Ruth K. Oniang’o Steven G. Hoch Ursula M. Burns Eva Cheng Jean‑Pierre Roth Ann M. Veneman Patrick Aebischer Ann M. Veneman (1, 4) Former Secretary, U.S. Department of Agriculture, and Executive Director, UNICEF Eva Cheng (1, 5) Former Chairman and CEO, Amway China & Southeast Asia Ruth K. Oniang’o (1) Professor of Food Science and Nutrition Patrick Aebischer (1, 3) President Emeritus of the Swiss Federal Institute of Technology Lausanne (EPFL) Ursula M. Burns (1) Former Chairwoman and CEO, Xerox Corporation (1) Term expires on the date of the Annual General Meeting 2018. (2) Chairman’s and Corporate Governance Committee. (3) Compensation Committee. (4) Nomination and Sustainability Committee. (5) Audit Committee. For further information on the Board of Directors, please refer to the Corporate Governance Report 2017. 57 Nestlé Annual Review 2017 Executive Board of Nestlé S.A. 11 10 1 2 4 7 5 2 Laurent Freixe 5 Wan Ling Martello 8 François‑Xavier Roger EVP, CEO Zone Asia, Oceania, sub‑Saharan Africa 6 Stefan Catsicas EVP, Innovation Technology, Research and Development 7 Marco Settembri EVP, CEO Zone Europe, Middle East, North Africa EVP, Chief Financial Officer 9 Magdi Batato EVP, Operations 10 Peter Vogt Deputy EVP, Human Resources 11 Heiko Schipper Deputy EVP, Nestlé Nutrition 12 Maurizio Patarnello Deputy EVP, Nestlé Waters Executive Board of Nestlé S.A. at 31 December 2017 1 U. Mark Schneider EVP, CEO Zone United States of America, Canada, Latin America, Caribbean Chief Executive Officer 3 Chris Johnson EVP, Nestlé Business Excellence 4 Patrice Bula EVP, Strategic Business Units, Marketing, Sales, Nespresso 58 Nestlé Annual Review 2017 9 12 8 3 13 14 6 13 Greg Behar CEO, Nestlé Health Science S.A. 14 David P. Frick SVP, Corporate Governance, Compliance and Corporate Services Yves Philippe Bloch Corporate Secretary EVP: Executive Vice President SVP: Senior Vice President CEO: Chief Executive Officer For further information on the Executive Board, please refer to the Corporate Governance Report 2017. 59 Nestlé Annual Review 2017 compliance culture and grievance mechanisms, and our anti‑corruption policy framework. An annual compliance risk assessment was performed by the Corporate Compliance Committee. Transparency and eagerness to improve are key principles of the program to remain effective and trusted by all stakeholders. Therefore, our compliance commitments and efforts are externally shared in the Nestlé in society report. Compliance Compliance is the foundation of how we do business and a condition for creating shared value. Compliance at Nestlé not only refers to applicable laws but to Nestlé policies across all our Corporate Business Principles and our commitment to integrity as explained in our purpose and values and our Code of Business Conduct. Our clear commitments are fundamental to the success of our company. Our Board of Directors and our Executive Board oversee and promote good practices throughout the company and oversee our corporate compliance program. Line management is supported by our dedicated corporate compliance function, which provides guidance and functional leadership, as well as by all other functions engaged in our holistic, risk and principles based compliance program. Our Corporate Compliance Committee defines the framework and coordinates assurance processes. Market Compliance Officers and Committees ensure a consistent approach across the Group and help identify local compliance priorities. We monitor compliance through our corporate functions, our internal audit function and our external auditors. Through our CARE program, which relies on independent external auditors, we regularly assess specific aspects of our compliance. In 2017, 145 CARE audits were conducted and gaps addressed. The necessary training is provided in our internal Management School, at in‑person trainings in the Markets, as well as through our e‑learning tools. 79 157 employees performed our Code of Conduct training in 2017. Our Integrity Reporting System and our ‘Tell Us’ system allow us to address complaints from employees and external stakeholders. 1725 complaints from employees and 613 complaints from suppliers and other third parties were investigated and remedial action taken this year. Markets were supported with investigative guidelines and best practices. Following an assessment of all Markets’ compliance programs all Markets worked on closing gaps to ensure a consistent approach across the Group. Our Nestlé Continuous Excellence program supported this goal. Specific focus areas included further enhancing our 60 Nestlé Annual Review 2017 Shareholder information Stock exchange listing At 31 December 2017, Nestlé S.A. shares are listed on the SIX Swiss Exchange, Zurich (ISIN code: CH0038863350). American Depositary Receipts (ISIN code: US6410694060) representing Nestlé S.A. shares are offered in the USA by Citibank, N.A., New York. 12 April 2018 151st Annual General Meeting, Beaulieu Lausanne, Lausanne (Switzerland) 13 April 2018 Last trading day with entitlement to dividend 16 April 2018 Ex-dividend date 18 April 2018 Payment of the dividend 19 April 2018 2018 First quarter sales figures 26 July 2018 2018 Half-yearly Results 18 October 2018 2018 Nine months sales figures 14 February 2019 2018 Full Year Results 11 April 2019 152nd Annual General Meeting, Beaulieu Lausanne, Lausanne (Switzerland) Registered Offices Nestlé S.A. Avenue Nestlé 55 CH-1800 Vevey (Switzerland) tel. +41 (0)21 924 21 11 Nestlé S.A. (Share Transfer Office) Zugerstrasse 8 CH-6330 Cham (Switzerland) tel. +41 (0)41 785 20 20 For additional information, contact: Nestlé S.A. Investor Relations Avenue Nestlé 55 CH-1800 Vevey (Switzerland) tel. +41 (0)21 924 35 09 fax +41 (0)21 924 48 00 e-mail: ir@nestle.com As to information concerning the share register (registrations, transfers, dividends, etc.), please contact: Nestlé S.A. (Share Transfer Office) Zugerstrasse 8 CH-6330 Cham (Switzerland) tel. +41 (0)41 785 20 20 fax +41 (0)41 785 20 24 e-mail: shareregister@nestle.com The Annual Review is available online as a PDF in English, French and German. The consolidated income statement, balance sheet and cash flow statement are also available as Excel files. www.nestle.com © 2018, Nestlé S.A., Cham and Vevey (Switzerland) The Annual Report contains forward looking statements which reflect Management’s current views and estimates. The forward looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements. Potential risks and uncertainties include such factors as general economic conditions, foreign exchange fluctuations, competitive product and pricing pressures, and regulatory developments. This Annual Report is published in German, English and French. The English version is binding for the content of the Annual Report of Nestlé S.A. The brands in italics are registered trademarks of the Nestlé Group. Visual concept and design Nestec Ltd., Corporate Identity & Design, with Gavillet & Cie Photography Anoush Abrar, Jeremie Bouillon, Céline Clanet/Interlinks Image, Deco Cury, Dan Darius/Freepik, Harald Eisenberger, Peter Ginter, Felipe Gombossy, Gilles Leimdorfer/ Interlinks Image, Jonas Marguet, Caspar Miskin, Francesca Moscheni, Remo Naegeli, Riccardo Savi/Getty Images, Tobias Schult, Aude Sirvain/ Interlinks Image, Jackie Sobon, Kevin Wolf Nestlé Annual Review 2017 61