Annual Review 2016 N e s t l é – A n n u a l R e v i e w 2 0 1 6 Contents 2 Letter to our shareholders 10 The strategy 14 The highlights 34 150 years 42 44 48 55 57 58 59 60 62 64 65 Financial review Group overview Product category and operating segment review Principal risks and uncertainties Factories Corporate Governance and Compliance Corporate Governance Board of Directors of Nestlé S.A. Executive Board of Nestlé S.A. Compliance Shareholder information Accompanying reports Nestlé in society Creating Shared Value and meeting our commitments 2016 Corporate Governance Report 2016 Compensation Report 2016 Financial Statements 2016 Nestlé in society Creating Shared Value and meeting our commitments 2016 Corporate Governance Report 2016 Compensation Report 2016 Financial Statements 2016 Our business For 150 years, Nestlé has created products that enhance quality of life and contribute to a healthier future. Across the globe we provide safe nutritious products for individuals and families. We have seven categories in our product portfolio, offering tastier and healthier choices for every life stage, at all times of the day. What we sell (in CHF billion) Powdered and Liquid Beverages Nutrition and Health Science Milk products and Ice cream Prepared dishes and Cooking aids 19.8 15.0 14.3 12.1 Our continued growth has enabled us to help improve the lives of millions of people through the products and services we provide, creating value for both our business and the communities where we operate. PetCare Confectionery Water 12.1 8.7 7.4 Where we sell (in CHF billion) EMENA 26.8 AOA 22.5 AMS 40.2 Number of employees Number of countries we sell in 328 000 191 Total group salaries and social welfare expenses (in CHF) Corporate taxes paid in 2016 (in CHF) 17 billion 3.4 billion Our commitments Our 42 commitments featured in the Nestlé in society report guide our collective efforts to meet specific objectives. On the right is a selection of key achievements, illustrating the progress we have made across our Creating Shared Value focus areas. Nutrition, health and wellness 8856 207 billion Renovated 8856 products for nutrition and health considerations Delivered 207 billion micronutrient-fortified servings of foods and beverages Rural development 129 million 363 000 Distributed 129 million coffee plantlets (cumulative since 2010) to farmers, against a target of 200 million by 2020 Farmers trained through capacity- building programmes Water 25% 3.7 million m3 Reduced our water withdrawal per tonne of product by 25% since 2010 Saved 3.7 million m3 of water through 516 water-saving projects Environmental sustainability 39% 182 Reduced our emissions per tonne of product by 39% (cumulative since 2006) Achieved zero waste for disposal at 182 sites (39% of total) Our people, human rights and compliance 15 666 9573 Trained 15 666 women in business and entrepreneurial skills 9573 employees trained on human rights across the FTSE4Good Countries of Concern Our performance Our performance is driven by our Nutrition, Health and Wellness strategy, the engine of our value creation. Our 2016 growth was at the high end of the industry. We saw a solid trading operating profit margin improvement and our cash flow grew significantly. On the right is a summary of the results we achieved during the year. Group sales (in CHF) Organic growth Real internal growth 89.5 billion 3.2% 2.4% Trading operating profit (in CHF) Trading operating profit margin Trading operating profit margin 13.7 billion 15.3% +30 basis points Constant currency Earnings per share (in CHF) Underlying earnings per share 2.76 +3.4% Constant currency Operating cash flow (in CHF) Free cash flow (in CHF) 15.6 billion 10.1 billion 112.0% of net financial debt Proposed dividend (in CHF) Proposed dividend increase 2.30 +2.2% 1 Nestlé Annual Review 2016 Letter to our shareholders Dear fellow shareholder, 2016 was an exceptional year in exceptional times. We reached a milestone, our 150th anniversary, a celebration of a century and a half of passion for nutrition and for quality. But this achievement comes as our industry is at a crossroads. Expectations of Nestlé are changing substantially as consumers embrace new trends, habits and lifestyles. We see a reshaping of the competitive environment. We are on the brink of a ‘fourth industrial revolution’; a transformation of society that will be unlike anything we have experienced before, presenting us with challenges but also great opportunities. We are responding by sharpening our focus and strengthening our efforts to create value. We are investing in science and innovation, and building new capabilities and platforms to secure our long-term prospects while at the same time delivering the sustainable, profitable growth you expect from us. Organic growth was 3.2%, with real internal growth reaching a three-year high of 2.4%. Pricing was limited at 0.8%, with some improvement in the second half of the year. Sales increased by 0.8% to CHF 89.5 billion, with a foreign exchange impact of –1.6%. The Group’s trading operating profit was CHF 13.7 billion with a margin of 15.3%, up 20 basis points on a reported basis and up 30 basis points in constant currency. We achieved this margin improvement while increasing investment in brand support, digital marketing, Research and Development, and in the new nutrition and health platforms. Net profit of CHF 8.5 billion was impacted by several items, the largest being a one-off non-cash adjustment to deferred taxes. Reported earnings per share decreased by 4.8% to CHF 2.76 for the same reasons. Underlying earnings per share in constant currency increased by 3.4%. Operating cash flow improved by CHF 1.3 billion to CHF 15.6 billion. Free cash flow improved by CHF 200 million to CHF 10.1 billion or 11.3% of sales. Based on these results, the Board of Directors is proposing the 22nd consecutive dividend increase, underlining our commitment to continuity, up from CHF 2.25 last year to CHF 2.30 this year. During the year we confirmed our Nutrition, Health and Wellness strategic direction with a newly articulated purpose that echoes the motivation of our founders: enhancing quality of life and contributing to a healthier future. Those who started our company were pioneers and entrepreneurs who were motivated by the needs of society and overcame the challenges they faced with expertise and determination. We share their values and their passion, passed down through the generations. Over the last 150 years your company has faced constant change. Today is no different. This is the moment to put in place measures to ensure Nestlé thrives in this new environment. So, in this anniversary year, we made choices and investments that will shape the future and ensure your company’s continuing success. 2 Nestlé Annual Review 2016 Paul Bulcke, Chief Executive Officer (left), and Peter Brabeck-Letmathe, Chairman (right). As part of our 150 years celebration, the original site of Henri Nestlé’s factory in our home town of Vevey was refurbished and opened to the public as a discovery centre. 3 Nestlé Annual Review 2016 Letter to our shareholders Henri Nestlé had a vision of a better world thanks to nutrition, an idea which is still pertinent today. Through innovation we can help people to live healthy and fulfilling lives. Innovation is our heritage, the foundation on which our brands are built, but also a key enabler of future success. The strength and depth of our Research and Development differentiates us from the competition, and helps us respond to the major changes we see in society. We are constantly acquiring a deeper understanding of nutritional science, and developing products and services with the potential to help people to live healthier lives and to address rising healthcare costs globally. One good example is our research collaboration with Samsung, which will explore the potential of nutrition science and digital sensor technology to provide new insights into healthy living. We continue to further extend the boundaries of our Nutrition, Health and Wellness strategy with Nestlé Health Science and Nestlé Skin Health. With their innovative pipelines of products designed to make a major contribution to the health needs of large parts of the population, they offer the promise of further growth and value creation. We are well aware of how fundamentally digital is transforming society and for some time now we have been building the knowhow and talent to respond effectively and efficiently. Digital is changing not just how companies operate but also our relationships with partners, suppliers and the people who buy our products. It requires attention and investment to enable us to seize opportunities. Among others, we have enlarged our ‘Silicon Valley Innovation Outpost’ in San Francisco with staff drawn from the company’s marketing and technology functions. During the year, we launched the Henri@Nestlé open innovation platform, enabling start-up entrepreneurs to work with Nestlé as collaborative partners on projects that matter both to the company and to the millions of people who buy our products. We are creating a digital-first culture. This bold ambition will shape the next 150 years of the company’s progress. We have always balanced investing for the long-term with delivering against our current financial commitments to drive growth in today’s challenging trading environment. We have increased investment behind our brands and sustained it. Our long-term commitment to operational excellence delivers savings that benefit both growth and margins. During the year, we committed to further structural savings beyond those delivered annually by our continuous improvement initiative Nestlé Continuous Excellence. Leveraging our size and scale offers further opportunities to maximise efficiency. Nestlé Business Excellence is driving efforts to simplify, standardise and share support functions, and as such to leverage our scale. Here too digital contributes: delivering new capacity or routes-to-market 4 Nestlé Annual Review 2016 without the need to construct ‘bricks and mortar’ infrastructure, or new possibilities to concentrate investment on projects that create more value. We continue to adapt our structure and organisation, finding the right balance between local focus and global scale to ensure we are best placed to exploit the fast-changing environment. The Board of Directors took steps to ensure Nestlé’s continuing success after the transition necessitated by our changing roles. Peter Brabeck-Letmathe steps down in April having reached the mandatory age of retirement after 12 years as Chairman and before that 11 years as Chief Executive Officer. Paul Bulcke resigned as Chief Executive Officer at the end of 2016 after more than 8 years in the role, after the Board put him forward for election as Chairman of Nestlé at the upcoming Annual General Meeting. The Board appointed Ulf Mark Schneider to succeed him as Chief Executive Officer, a role he took up on January 1st 2017. Mr. Schneider was formerly Chief Executive Officer of the Fresenius Group, a company that offers products and services for dialysis, hospitals and outpatient treatments. This concludes a process that the Board began more than two years ago to appoint a strong leadership team to deliver the company’s short-term and long-term performance goals. In September, it was announced that Luis Cantarell, Executive Vice President and Head of Zone EMENA, would retire at the end of the year after a long and distinguished career with the Group. Luis was one of the architects of the company’s Nutrition, Health and Wellness strategy and his contribution to its success cannot be overstated. The Board of Directors appointed Marco Settembri, Executive Vice President and Head of Nestlé Waters, to succeed him. Maurizio Patarnello, Market Head of Nestlé Russia and the Eurasia region, was appointed Deputy Executive Vice President and Head of Nestlé Waters. The Board also decided to change the business structure for Nestlé Professional from a globally managed business to a regionally managed business supported by a Nestlé Professional Strategic Business Unit from January 1st 2017. As a result of these changes, the Head of Nestlé Professional, Martial Rolland, left the Executive Board to become Market Head in the Russia and Eurasia region. We would like to thank Luis and all of those who retired in 2016 for their contribution to Nestlé’s success over the years and extend our best wishes to them as they begin this next chapter of their lives. During the year, in addition to the succession planning, the Board reviewed the Nespresso business, Nestlé Nutrition and Nestlé Health Science. It examined our talent development strategy and appraised the company’s portfolio management and the performance of the acquisitions of recent years. The Board also reviewed how we track the external image of the company and travelled to China in order to better understand the dynamics of our second largest market. 5 Nestlé Annual Review 2016 Letter to our shareholders In 2016, Nestlé partnered with R&R, a leading ice cream company based in the UK, to create Froneri, a new ice cream, frozen food and chilled dairy business in 22 countries across the globe. Building on each company’s achievements, Froneri brings together decades of business and manufacturing expertise to create a new global player in the ice cream industry. In this fast-changing world it is more important than ever that Nestlé is consistent, reliable and respected, in order to build trust. The consistency of our purpose: enhancing quality of life and contributing to a healthier future, has led us to act throughout our history as a responsible member of society. We strongly believe that the private sector is more than just an engine for economic growth and job creation. We are part of the fabric of society with its challenges and opportunities. As a global company we can make a substantial, positive impact in society, and inspire and work with others to achieve even more. Creating Shared Value describes what this means in practice; creating value for our shareholders with projects or business opportunities that at the same time benefit the communities in which we operate, and furthermore, society as a whole. This Creating Shared Value approach to doing business was started at Nestlé ten years ago. We are heartened to see others in our industry and beyond embracing the concept of shared value today. A good example of our determination to make a difference is the Nestlé Global Youth Initiative which we started in Europe three years ago. During 2016, we pledged to offer to under-30 year olds thousands of jobs, apprenticeships and traineeships in each of our three geographical Zones over the coming years, on top of those already created. We believe that through these efforts to promote readiness-to-work we can make a significant contribution towards addressing the social cost of youth unemployment. Through the ‘Alliance for YOUth’, which Nestlé founded, we are creating an even bigger impact, working with more than two hundred partner companies to provide training and jobs. Each day we touch billions of lives worldwide, from the individuals and families who enjoy our products, to the communities where we live and work, and the natural environment upon which we all depend. Our 42 public commitments provide the framework for our efforts in these areas, and our progress towards meeting them is detailed in the Nestlé in society report published alongside this Annual Review. They are fully aligned with the United Nations’ 17 Sustainable Development Goals (SDG’s) which set out a vision for ending poverty, hunger and inequality, and protecting the earth’s natural resources. The SDG’s help to guide our actions around a common agenda: an agenda to create a better world that we fully endorse and actively contribute to. 6 Nestlé Annual Review 2016 For 150 years we have adhered to a set of values rooted in respect: respect for ourselves, for others, for diversity and for the future. All of us at Nestlé live these values with passion, determination and discipline. They have withstood the test of time. They are integral to our success. It is our respect for future generations that compels us to act with responsibility and courage, even when times are difficult. So while we continue to take care of the short term, we are building and investing for the long term. We are well aware of the intensely competitive context in which we are operating today and are taking the steps necessary to further develop and strengthen your company. We are investing in the capabilities we need, the know- how and the talent to continue to create value for you, our shareholders. This is the approach which we have followed successfully for 150 years. We would like to thank our 328 000 employees for their commitment to Nestlé. It is their hard work, alignment behind our strategy and dedication that enables us to deliver on our promises. We also want to thank you, our shareholders, for your continuing support, your confidence and above all for your trust. Rest assured that our passion for nutrition, health and wellness, and our passion for quality will continue to generate the sustainable, profitable returns you rightfully expect from us. Peter Brabeck-Letmathe Chairman Paul Bulcke Chief Executive Officer 7 Nestlé Annual Review 2016 Nestlé. Enhancing quality of life and contributing to a healthier future. The strategy Nutrition plays a profound role in everyone’s life. Our strategy focuses on delivering distinct benefits to people through the food and beverages, products and services we provide. Over 150 years we have built a successful business by understanding and anticipating the needs of society, and continuously adapting ourselves to seize the opportunities presented to us. The fast-evolving needs and expectations of society today reconfirm the validity of our Nutrition, Health and Wellness strategy. The world is at an inflection point. The speed, intensity and the breadth of change is unprecedented. Digital disruption is reshaping our industry, our relationships with our suppliers and retailers, and with the people who buy our brands. Advances in science and technology are opening up new opportunities for us to play a role in addressing the challenges society faces. In a world where hundreds of millions of people are under-nourished, malnourished or over-weight we are well positioned to help contribute solutions. Through our brands, our products and the services we offer, we are helping and inspiring people to live healthier lives. We are building, sharing and applying nutrition knowledge, and empowering people to make informed decisions about what they eat and what they feed their families. Our Start Healthy Stay Healthy programme helps parents and caregivers provide their children with the best start in life. In partnership with other stakeholders, our United for Healthier Kids programme helps establish healthier eating, drinking and lifestyle habits, and 10 The strategy the Nestlé Healthy Kids Programme is teaching nutrition and encouraging physical activity. do that efficiently, effectively and responsibly. It drives internal alignment behind our goals. We want our products to be the healthiest and It is more important than ever to ensure that the tastiest choices in each and every category we compete in. We use quality ingredients people know and trust, adding nutrients where appropriate. We are substantially reducing sugar, saturated fat and salt. By communicating clearly about the contribution each product makes to a healthy diet, we are helping people make informed decisions about what to eat and drink. Our new nutrition and health platforms, Nestlé Health Science and Nestlé Skin Health, allow us to apply the knowledge we have developed with the most advanced Research and Development network in the industry. They enable us to develop products and services that meet specific needs of different parts of the population, to help address issues the world faces, for example rising healthcare costs. By keeping ourselves relevant in this fast- changing world, we can deliver industry-leading growth. We work with agility, creativity and discipline, constantly innovating and renovating our portfolio. Our Research and Development capability ensures we maintain our leading positions in the categories we compete in, driving growth throughout the portfolio. The innovation is broad-based across all categories, brands and markets. It comes in many forms – from blockbusters like Nespresso, to renovating products to keep them fresh and relevant as we have done with brands like Nescafé and Nescafé Dolce Gusto, Nido, Milo and Maggi. Digital innovation is a strong competitive advantage and a cornerstone of the company’s future development. For some time now we have been creating a digital-first culture that enables us to manage and to benefit from the disruption digital is bringing. As the ‘fourth industrial revolution’ takes hold, we are confident that we can capitalise on the efficiencies and the opportunities digital brings. The Nestlé Strategic Roadmap guides us in these turbulent times. The glue is our purpose and values, and our culture. The roadmap says what we want to be as a company, what we want to leverage as competitive advantages to fuel growth, where we want to grow and how we will 12 resources are dedicated to the right projects, maximising the effectiveness of what we spend. We have a strong cost control culture. Through Nestlé Continuous Excellence we continuously improve our operations and deliver savings. With Nestlé Business Excellence we simplify, standardise and share. This is creating back- office efficiencies, helping us to leverage our size and scale to deliver competitive advantage, and unlocking resources. These are the fuel for growth, brand support, Research and Development, innovation and renovation. We challenge ourselves continuously to look for new opportunities and for areas where we can make a contribution to the issues society faces. This creates shared value for the communities where we operate and for our shareholders. We are contributing to society while growing our business. Trust is fundamental to our success. Trust helps deliver growth, creating shared value for our shareholders and for society. Quality and compliance underpin that trust, and are the best way to ensure the long-term success of our business. Our strategy helps achieve our purpose: enhancing quality of life and contributing to a healthier future. Nestlé is always anticipating and adapting to the changing world, guided by our purpose and our values, as we have since the company started 150 years ago. Our purpose defines why the world is a better place with Nestlé, better for those who enjoy our products and services, and for those who are affected by our business. It is the inspiration for each and every one of us in the company. It aligns our actions and creates a common language. It is the compass for our decisions and for everything we do. It helps ensure we remain a ‘long-term’ company delivering with ‘short-term’ intensity, investing for future success while ensuring that we meet the needs of the billions of people we touch every day, and the expectations of our shareholders. Nestlé Annual Review 2016 Operational pillars Innovation and renovation e – Sustain a b ilit y c n a i l p m o C Whenever, wherever, however Operational efficiency Growth drivers Out-of-home consumption Premiumisation Nutrition, Nutrition, Health and Health and Wellness Wellness Emerging markets and Popularly Positioned Products C r e a t i n g S h a r e d V a l u e Our objective is to be the Our objective is to be the leader in Nutrition, Health and leader in Nutrition, Health and Wellness, and the industry Wellness, and the industry reference for financial reference for financial performance, trusted performance, trusted by all stakeholders by all stakeholders Consumer engagement N e stlé culture, values a n d p r i n c i p le s Unmatched product and brand portfolio People, culture, values and attitude Unmatched geographic presence Unmatched research and development capability Competitive advantages 13 Nestlé Annual Review 2016 The highlights Ever since Nestlé was founded we have provided quality products and services that help shape a better world. Henri Nestlé created an infant cereal that saved the life of a child. We share his belief that through innovation we can enable healthier and happier lives. We share his passion for creating the tastiest and healthiest products, building, sharing and applying our nutritional knowledge, enhancing quality of life and contributing to a healthier future. 14 Nestlé business portfolio ® Nestlé Health Science Nestlé Skin Health Nestlé Nutrition Milk products and Ice cream 16 Nestlé Annual Review 2016At Nestlé we offer products and services for all stages of life, every moment of the day, helping people care for themselves and their families. Our portfolio includes over 2000 brands from global icons like Nescafé to local favourites like Ninho. Powdered and Liquid Beverages Prepared dishes and Cooking aids PetCare Confectionery Water 17 Nestlé Annual Review 2016 Nestlé Health Science Nestlé Health Science produces almost a billion science-based nutritional solutions per year across its portfolio. Its Consumer Care range is designed for people who want to live active lives but struggle to get the right nutrition. The Medical Nutrition range helps address a wide range of health conditions from paediatric allergies to inborn errors of metabolism, from obesity to malnutrition amongst older people. Novel Therapeutic Nutrition is investing, through partnerships, in the development of nutritional therapies, aiming to bring forward clinically proven innovations in brain and gastrointestinal health, supported by diagnostics solutions. As more infants are recognised to be intolerant to cow’s milk, Nestlé Health Science has developed a comprehensive range of formulas for infants with Cow’s Milk Protein Allergy (CMPA). These include Alfamino, Althéra and Alfaré. To complement the range, it has also developed an awareness tool to help doctors recognise the allergies earlier and invested in the development of a patch-test to diagnose CMPA. As part of our commitment to advance the therapeutic role of nutrition, Nestlé Health Science provides nutritional solutions for healthy aging. The product ranges include Boost in North America, Mexico and Asia; Meritene in Europe; Nutren Senior in Brazil, and Sustagen in Australia and New Zealand. With digestive sensitivities becoming increasingly common, Nestlé Health Science launched ProNourish, the first nutritional drink of its kind for people suffering from digestive sensitivities. An online resource hub (www.lowfodmapcentral.com) provides information, dietary advice and recipes. 18 ProNourish is a low FODMAP* nutritional drink for people with digestive discomfort, like irritable bowel syndrome. * FODMAP = Fermentable Oligosaccharides, Disaccharides, Monosaccharides And Polyols Nestlé Annual Review 2016Nestlé Health Science aims to advance the therapeutic role of nutrition in health management for consumers and healthcare professionals. Its portfolio focuses on addressing key health issues, from food allergies in infants to healthy aging. Nestlé Skin Health Nestlé Skin Health provides prescription drugs, aesthetic and corrective solutions, and consumer skin health products. These include innovative components from moisturisers to sunscreen, medical aesthetic procedures to medicines used to treat serious conditions such as skin cancer. 2016 was a year of expansion, with new product launches and the roll-out of flagship brands. Nestlé Skin Health announced a global licensing agreement with a new partner, Chugai, for Nemolizumab, a new treatment being developed for atopic dermatitis. Epiduo Forte acne treatment was given a ‘Positive Opinion’ by 16 European regulatory agencies and, in the US, Differin Gel became the only over-the-counter product with a prescription-strength retinoid, giving people access to this acne treatment without a doctor’s prescription. In creating The Proactiv Company, Nestlé Skin Health placed its expertise in skin health behind one of the world’s leading non-prescription acne brands, Proactiv. Skin health research and innovation is at the core of the business. The newly established New York flagship Skin Health Investigation, Education and Longevity Development (SHIELD) centre is leading the way. Nestlé Skin Health is working to promote skin health education and advance key health issues, like aging or the rise of antimicrobial resistance. Promoting good skin health, it also announced an exclusive global sun-care partnership with the men’s professional tennis body, the ATP, for the Daylong brand. Nestlé Skin Health’s science-based innovation and expertise will support the further growth of Proactiv, one of the world’s leading non-prescription acne brands. Nestlé Annual Review 2016 19 Nestlé Annual Review 2016Nestlé Skin Health seeks to enhance people’s quality of life by providing science-based products that meet their need for healthy skin, hair and nails over the course of their lives. Nestlé Nutrition Sales Organic growth Real internal growth Trading operating profit margin CHF 10.3 billion + 1.5% +0.9% 22.7% Trading operating profit margin +10 basis points Good nutrition in the first 1000 days from conception through pregnancy and up to a child’s second birthday has a profound impact on long-term growth and development, providing a unique window of opportunity to set the foundation for a healthy future. We support and promote breastfeeding as it is the best start a baby can have in life. In cases when breastfeeding is not possible due to medical or physical conditions, infant formula is the only breast-milk substitute recognised by the World Health Organisation. Nestlé Nutrition provides high-quality, innovative, science-proven nutrition for mothers and infants to help them start healthy and stay healthy during the critical first 1000 days. We are committed to the highest standards of responsible marketing of breast-milk substitutes. We provide a wide range of infant formulas and complementary foods such as infant cereals, meals and drinks, and growing-up milks. Our BabyNes system, now available in five countries, is the first advanced nutrition system for infants and toddlers that offers age-specific, single-serve formulas for children up to the age of three years. Our products contain high-quality, carefully selected ingredients fortified with nutrients to meet the specific needs of infants and young children. NAN Optipro infant formula contains superior protein quality in lower quantity that supports optimal growth of infants and is available in more than 100 countries. 20 NaturNes is an ideal healthy snacking option for small children on-the-go, with a range of organic offerings. Nestlé Annual Review 2016 Cerelac is a highly-nutritious infant food, full of nutrients to complement breastmilk or formula when it is no longer sufficient to satisfy baby’s needs after 6 months. 21 Nestlé Annual Review 2016 Milk products and Ice cream Sales Organic growth Real internal growth Trading operating profit margin CHF 14.3 billion + 1.6% +0.5% 18.4% Trading operating profit margin +150 basis points Dairy is a key contributor to delivering our Nutrition, Health and Wellness promise. We leverage our scientific and nutritional expertise to provide individuals and families with dairy products to support healthy diets for all stages of life, from early childhood to old age. Our wide portfolio offers a range of formats from nutritionally- enhanced milk products to dairy treats. Our range of children’s milks provides the energy, protein and micronutrients children need. Growth in the category is led by our heritage brand Milo. Innovation this year included a new Milo to Go ready-to-drink, as well as the Milo Champions pack to help families inspire health and fitness throughout their child’s life. Responding to a growing need for products for specific dietary needs, Nido/Ninho low lactose powders and ready-to-drink bottles were launched in Brazil, and Carnation low lactose evaporated milk in Mexico. In Brazil, Nesfit introduced two new low-calorie rice-based smoothies for people seeking non-dairy options. For people on low incomes we continue to provide affordable dairy ranges. These micronutrient fortified products, including Nestlé Bear Brand, NutriRindes and Ideal, provide extra vitamins and minerals to help meet the nutritional requirements of children in developing countries. In the Ice cream category, our premium range Mövenpick continued to grow in Europe. Its signature sticks are made of 100% natural ingredients, including full cream and Swiss chocolate. With demand growing from Chinese consumers for more ice cream products, a new brand ChenZen meaning ‘Real’ was also launched in 2016. 22 Mövenpick sticks are available in 3 flavours, including Vanilla Dream with Caramel. They contain 100% natural ingredients, including Swiss cream, vanilla seeds and Swiss chocolate. Nido powders are fortified with vitamins and minerals to help provide vital micronutrients that children need. Nestlé Annual Review 2016 Our ready-to-drink Milo is a healthy and portable option. It contains 50% of the daily recommended calcium intake and is fortified with 8 vitamins and minerals. The Milo Champions pack offers kids a fun way to track their activity while giving parents detailed information on their child’s nutritional intake and activity levels. 23 Nestlé Annual Review 2016 Powdered and Liquid Beverages Sales Organic growth Real internal growth Trading operating profit margin CHF 19.8 billion + 4.6% +3.7% 20.8% Trading operating profit margin – 50 basis points Nestlé, the world’s largest coffee producer, is uniquely positioned in the world with our brands Nescafé and Nespresso offering a complete range of products, systems and services across all channels. Both brands continue their pioneering efforts in coffee sustainability, working directly with coffee farmers through the Nescafé Plan and the Nespresso Positive Cup programmes. Nescafé is the world’s favourite coffee brand, with close to half a billion cups served daily. Recent innovations included the global roll-out of Nescafé Original double filter, fuller flavor delivered through a breakthrough in coffee technology, further expansion of the Nescafé to Go refreshing ready-to-drink portfolio of cold coffees, and Nescafé Blend&Brew range of single-serve coffee mixes. Nescafé Dolce Gusto, now available in over 80 countries, continued to strengthen its appeal to younger consumers though successful digital campaigns and adverts featuring musician will.i.am. In its 30th year of innovation and growth, Nespresso continued to expand the global network of Nespresso boutiques. Following a successful United States launch, we made the VertuoLine system, delivering exceptional long- cup coffee, available in Europe. Several Grands Crus coffees were launched including limited edition Cafecito de Cuba, the first Cuban product to be sold in the USA since the 1960s, and Suluja ti South Sudan – launches exemplifying our commitment to helping social and economic redevelopment in challenging markets. Nestlé Coffee Mate continues to grow by expanding the natural bliss range with exciting new flavours. All Nestlé Coffee Mate natural bliss products contain simple, all-natural ingredients and, as consumers seek more plant-based solutions, two new varieties were launched, Almond milk and Coconut milk. 24 Nespresso’s Limited Edition Cafecito de Cuba was the first Cuban coffee to be sold in the US for over 50 years. The natural bliss range comes in 6 flavours including Vanilla and Sweet Cream. All natural bliss products are made with just a few simple ingredients. Nestlé Annual Review 2016 Nescafé Gold Barista blends pure Arabica coffee with finely ground beans. It offers exciting innovation in the premium category for the quality-conscious consumer. The Nescafé Gold Blend Barista system offers full-bodied coffee with crema or layered cappuccinos and lattes with fresh milk or creamer at the touch of a button. 25 Nestlé Annual Review 2016 Prepared dishes and Cooking aids Sales Organic growth Real internal growth Trading operating profit margin CHF 12.1 billion + 2.7% +2.0% 15.0% Trading operating profit margin +130 basis points Our portfolio offers a range of products that are part of healthy and nutritious meals for families and individuals. By making food tastier and more balanced, we help people lead happier and healthier lives. We empower consumers to make informed food choices, ensuring our packaging and communication provides clear nutritional information and portion guidance. We continue to drive growth through portfolio renovation, increasing the use of ingredients people know and trust while simplifying labels. This is a key part of our efforts to provide tastier and healthier products while responding to changing consumer demands. In the United States Stouffer’s and Lean Cuisine are leaders in the frozen food category. Lean Cuisine Marketplace range offers organic ingredients along with gluten-free, high-protein, and no-preservative options. Our Stouffer’s FitKitchen range offers great taste and features 25g or more of healthy protein, garden vegetables and complex carbohydrates. In Europe, consumers are demanding a wide range of products for alternative diets. We introduced both gluten free pizza and a range of vegetarian products under the Garden Gourmet, Herta & Buitoni brands. We recognise the role that we can play in tackling under-nutrition in developing markets. Fortified products like Maggi bouillon cubes and soups help reduce the effects of micronutrient deficiencies by providing iron and iodine. These efforts helped Nestlé become the #1 food company in Fortune magazine’s list of ‘Companies that Change the World’ in 2016. 26 The Garden Gourmet range of alternative proteins, and our organic and vegetarian ranges appeal to those seeking to reduce the amount of animal protein they consume. Lean Cuisine is a leading brand in healthy eating, delivering great tasting recipes balanced with modern health benefits. Nestlé Annual Review 2016 Maggi noodles was re-launched successfully in India, regaining its position as the leading noodle brand in the country. 27 Nestlé Annual Review 2016 PetCare Sales Organic growth Real internal growth Trading operating profit margin CHF 12.1 billion + 5.3% + 4.4% 21.0% Trading operating profit margin +20 basis points Our commitment to nutrition, health and wellness extends to our PetCare range too. The Nestlé Purina portfolio includes some of the world’s best known brands of dog and cat foods. PetCare is a driver of growth worldwide for Nestlé, and continues to grow with the addition of a new premium brand, Merrick Backcountry. We are ensuring the best nutrition for pets and focusing on product innovation in response to consumer desire for simpler ingredients. The Beneful line of dry dog food has been renovated with new recipes to support dogs’ overall health, while we brought new flavour combinations of Friskies Cat Concoctions wet cat food to the market. To support dogs’ overall health, we also launched Purina Dentalife, a new range of snacks which clean dogs’ teeth while providing them a treat. The range gives Purina a strong position in the fast-developing pet oral care market. Felix cat food continued expanding internationally this year, growing successfully in Australia and launching in Japan. The Felix range includes both wet and dry products including the popular Felix ‘As Good As It Looks’ line of wet cat food. Production of Felix was expanded in Europe, with the enlargement of a factory in Hungary, including more efficient, sustainable technology. The newly expanded facility will be Nestlé’s largest pet food production centre in Europe when it is completed in 2017. In Europe, Purina also announced a new set of commitments to help improve the health and well-being of pets, people and the environment. The 10 ‘Purina in Society’ commitments are the first of their kind by a petcare company. 28 Felix became a worldwide brand with its introduction in Asia, along with expanded production in Europe. Purina Dentalife was launched to deliver oral care solutions for dogs and position Purina as a leader in the growing oral care segment. Nestlé Annual Review 2016 Merrick Backcountry is an all-natural, grain-free ancestral diet with added proteins for dogs and cats. Each Backcountry recipe is a combination of protein-rich, grain-free kibble with whole pieces of raw, freeze-dried meat, fish, or poultry. 29 Nestlé Annual Review 2016 Confectionery Sales Organic growth Real internal growth Trading operating profit margin CHF 8.7 billion + 1.8% –0.5% 13.7% Trading operating profit margin –30 basis points KitKat, the world’s third largest chocolate brand, continues to perform well. In 2016, to reinforce the brand’s iconic status, whilst responding to consumers’ demands for personalised, interactive experiences, we opened KitKat Chocolatory boutiques in key cities including Melbourne and Kuala Lumpur. This is a concept which was first launched in Japan in 2014 and which offers people the opportunity to build their own personalised KitKat from a range of over 10,000 possible combinations. New boutiques will continue to open globally in 2017. KitKat also became the first global confectionery brand sourced 100% from certified sustainable cocoa under our Nestlé Cocoa Plan. Our premium Swiss chocolate brand Cailler was launched internationally, focusing on China and the US. We also made a significant investment behind Baci Perugina to drive the international expansion of this famous Italian premium chocolate brand. In Europe, the successful launch of Les Recettes de l’Atelier chocolate tablets was expanded to new markets and complemented in France with a dark chocolate range. At Nestlé, recognising that confectionery is a treat, we are committed to offering the tastiest and healthiest choices so people can feel better about enjoying their treat. In 2016, one example of making this ambition a reality was the improvement we made to the recipes of our brands for children, particularly Passatempo and Baton in Brazil, and Milkybar in the UK, increasing their milk content and reducing added sugar. In Australia, we reduced sugar and increased the amount of wholegrain in Uncle Tobys cereal bars, while a new range based on nuts and whole oats was successfully introduced. This focus on providing tastier and healthier treats will continue in 2017, including KitKat. 30 The Kitkat Chocolatory Moleson is exclusive to KitKat Chocolatory boutiques in Japan, and features a luxury combination of cranberries and almonds. Uncle Tobys became the largest range of muesli bars in Australia to receive a 4 ‘health star’ rating. The range has 50% more wholegrains, and 40% less sugar in the yoghurt bars. Nestlé Annual Review 2016 Les Recettes de l’Atelier is a range of chocolates made with artisanal spirit. With 8 flavour combinations, including blueberry with almond and hazelnut, it features whole nuts and chunks of fruit combined with strong, smooth chocolate. Callier chocolate has been produced in Switzerland since 1819. It is made in the foothills of the Swiss Alps, using milk from local farms, sustainable cocoa and select ingredients. 31 Nestlé Annual Review 2016 Water Sales Organic growth Real internal growth Trading operating profit margin CHF 7.4 billion + 5.0% +5.0% 12.2% Trading operating profit margin +100 basis points consumption. Around the world several sites have been either opened or renovated in 2016, including one in the Italian town of Castrocielo. This new Nestlé Vera Natura bottling plant has zero greenhouse gas emissions thanks to a combination of solar panels, LED lighting, heat recapture and recycling technologies. Nestlé Waters is core to the company’s Nutrition, Health and Wellness strategy with 52 water brands in its portfolio, including the world’s largest bottled water brand, Nestlé Pure Life, delivering quality, healthy hydration for individuals and families. In 2016, our premium international brand Perrier completely reviewed its visual identity. It expanded its ‘Extraordinaire’ communications strategy, creating its first campaign dedicated to a new Perrier mineral water with a touch of flavour. The brand continued its long-standing sponsorship of the French Open tennis tournament. Our other premium international brand, the Italian mineral water S.Pellegrino, supported the development of new talent in gastronomy with its competition ‘S.Pellegrino Young Chef 2016’. Its new consumer and digital activation ’Itineraries of Taste’ associated the brand with the best of food, fashion and lifestyle. In North America, bottled water is set for the first time to outsell carbonated soft drinks by the end of the year. Poland Spring is leading the bottled spring water market, with Nestlé Pure Life and other brands actively contributing to this strong category growth. We are developing new e-commerce capabilities like the ReadyRefresh platform, offering people the convenience of home and office deliveries for their water and beverage purchases. Nestlé promotes sustainable water practices throughout its operations. For Nestlé Waters, this starts at the source with engagement activities with local communities to ensure the sustainability of our shared public water resources. In 2016, a dedicated engagement programme was launched to ensure good relations and measure sentiment in our communities. Nestlé Waters strives also to operate the most efficient bottling plants. These ‘smart factories’ aim to reduce water and energy 32 The spring from which Perrier water is sourced has a unique balance of minerals and effervescence. This combination has made the Perrier brand the world leader of natural sparkling mineral water. Nestlé Annual Review 2016 Nestlé Pure Life celebrated the company’s 150 years with an anniversary logo. It is the world’s largest bottled water brand, available in over 40 countries across 5 continents. From a source in the Italian Alps, S.Pellegrino is a 100% natural sparkling mineral water. It combines a perfectly balanced salinity and acidity with effervescent bubbles. 33 Nestlé Annual Review 2016 150 years Our 150th anniversary celebrations were an opportunity to honour the vision of our founders: a better world through nutrition. That passion for nutrition is echoed today in the efforts of our employees, working with our partners, to create products and services that enhance quality of life and contribute to a healthier future. 34 150 years We should not underestimate what it takes to grow a business for 150 years. Our longevity is due in part to the fact that we have always clearly understood and anticipated the needs of society. We have combined this with the ability to adapt and to deliver products and services that respond to those needs, and also with our passion for quality. This approach has enabled us to grow continuously while creating shared value for our shareholders and for society. Henri Nestlé understood that good health is linked with good nutrition. Products like his farine lactée, the infant cereal that saved the life of a child, or Maggi, developed for consumers who had moved to cities from the countryside, were the result of that ability to innovate to meet the needs of the communities in which we operated. Today, innovation is still one of the pillars on which this company is built. In June, in the presence of the President of the Swiss Confederation, Johann Schneider- Ammann, we inaugurated nest in our hometown of Vevey. nest is a place where visitors can discover our history, our work, our creativity and our ideas for the future. It tells the story of the 328 000 employees we are today, and of those who came before. Sitting on the site where Henri Nestlé built his first factory and offices, nest showcases the extraordinary expansion of his early entrepreneurial efforts into the company we are today. It highlights Nestlé’s capacity to invent and innovate, and to adapt to the changing world. It underlines the importance of science and investment in Research and Development as we define our future. Passion is at the heart of nest. It is the true face of Nestlé. It shows how over the years our people have delivered our success. Our values, based on respect, have ensured we can deliver 150 years of growth. Our shared history can be found there and it offers a view of the future too, laying out how we will help address the challenges the world faces. Sharing our knowledge on diet and nutrition has always been part of our vision. This is why for more than 30 years Nestlé has supported the Alimentarium, the world’s first food-themed interactive space, also in Vevey. It plays an important role in society: promoting a better 36 Nestlé China launched a 6 month e-commerce and marketing campaign with Alibaba featuring over 150 products from around the world, many of which were available to Chinese consumers for the first time. Nestlé Brazil celebrated the anniversary through sport, including a volleyball tournament featuring ‘150 years’ commemorative uniforms. Nestlé Annual Review 2016 Employees of Nestlé Portugal celebrated by forming a giant 150 on the lawn of the company’s headquarters. Asia, Oceania and sub-Saharan Africa Zone Head Wan Ling Martello and Alibaba Group CEO Daniel Zhang came together for the launch of Nestlé China’s unique e-commerce campaign celebrating the Swiss roots of the company. 37 Nestlé Annual Review 2016 150 years understanding of nutrition. The Alimentarium aims to be a worldwide reference for food and nutrition, combining exploration, digital interactive learning and expertise. In 2016, it was transformed into a fully interactive online and offline experience, meaning its doors are always open, its contents always accessible. Its evolution into a centre of competence and learning about nutrition with a strong digital presence was marked at a ceremony in June, also as part of our anniversary celebrations. In our 150th year, the Alimentarium is a space which can satisfy the growing public curiosity about food, the role it plays in the health of our bodies and at the centre of our communities and social interactions. Today, we are present in so many countries across the world. This global footprint gave us the opportunity to mark the anniversary in many different places with the people who buy our products and services, and to thank our employees whose hard work and commitment to our company deliver our success. For example, in the United States of America, Nestlé’s biggest market, we underlined our commitment to society. The company organised our largest ever single day of community service in the USA, honouring the 120 hometowns across the country where you will find a Nestlé business. During the event, around 6000 employees worked with non-profit organisations, building on Nestlé USA’s partnership with the Boys and Girls Clubs of America’s National Fitness Challenge. In China, the company’s second biggest market, we shared our passion for nutrition with millions of people in a unique e-commerce event. The ‘Superbrand Day’ emphasised the Swiss roots of the company and also our determination, through digital, to find new ways to connect with the people who want to buy our products. In Belgium, at an event in Brussels, we reinforced our commitment to Europe at a conference that brought together more than 400 external stakeholders. These included Euro- parliamentarians, officials from the European Commission, non-governmental organisations and industry representatives. There were also a number of events around the world celebrating the important contribution from our employees to the company’s continuing 38 Nestlé inaugurated its new discovery centre, nest, on the site of founder Henri Nestlé’s original factory in Vevey, Switzerland. Designed by architect David Linford, the modernist design incorporates parts of the original structure into the new building. CEO Paul Bulcke (L) and Chairman Peter Brabeck-Letmathe (R) welcomed the President of the Swiss Confederation, Johann Schneider- Ammann, (C) at the opening of nest in June. Nestlé Annual Review 2016 11 500 employees from across Switzerland were invited to celebrate 150 years of passion for nutrition on June 24th. CEO Paul Bulcke and Chairman Peter Brabeck-Letmathe welcomed employees from around Switzerland to the 150th celebrations in Lausanne. 39 Nestlé Annual Review 2016 150 years growth. In Switzerland, in addition to the events highlighted above, we held a party in Lausanne. It was the first time the company’s 11 500 employees from around the country were invited to come together in one place. We also brought the global Nestlé family closer together with a social media campaign encouraging employees around the world to share their pride in working for Nestlé. The initiative, the first of its kind in our company on a global scale, reflects our determination to encourage our people to act as ambassadors for the company, as we work together to deliver future success. This anniversary was not only a moment to celebrate our past, but also a chance to look to the future, and what we are doing to shape the next 150 years of our company. One of our core values is respect for the future, and this year was a good opportunity to consider how we will continue to care for future generations. We live in times of immense challenge, unprecedented change and extraordinary possibility. The world has changed considerably in the last century and a half, and will continue to do so. We are well-positioned to continue to deliver sustainable growth because we constantly adapt, innovate and change. Our success is based upon our ability to continuously reinvent ourselves and our determination to seize opportunities to help address the challenges the world faces. 40 Nestlé’s discovery centre nest offers visitors an immersive discovery of the company’s past, present and future. For the celebration, the company produced a new edition of the official history of Nestlé. It includes the historical development of 20 key brands within the Nestlé family. Nestlé Annual Review 2016 The newly refurbished Alimentarium Museum of Food was inaugurated by CEO Paul Bulcke (L) and Chairman Peter Brabeck-Letmathe (R) in Nestlé’s home town, Vevey. The Musée Jenisch in Vevey welcomed a special exhibition of the Nestlé Art Collection, featuring works by both international and local Swiss artists. At the inauguration of the Alimentarium Museum of Food, Chairman Peter Brabeck-Letmathe highlighted the importance of nutrition in supporting an active, healthy lifestyle. 41 Nestlé Annual Review 2016 Financial review 42 42 Nestlé Annual Review 2016 Nestlé Annual Review 2016 Key figures (consolidated) In millions of CHF (except for data per share and employees) Results 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 (a) 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 (b) Dividend as proposed by the Board of Directors of Nestlé S.A. Market capitalisation, end December Number of employees (in thousands) 2015 2016 88 785 13 382 15.1% 9 066 10.2% 89 469 13 693 15.3% 8 531 9.5% 62 338 15 425 24.7% 64 590 13 913 21.5% 14 302 15 582 92.7% 112.0% 9 945 3 872 4.4% 10 108 4 010 4.5% 3 129 3 091 CHF CHF CHF 2.90 3.31 2.25 2.76 3.40 2.30 229 947 226 310 335 328 (a) Operating cash flow less capital expenditure, expenditure on intangible assets, investments (net of divestments) in associates and joint ventures, and other investing cash flows. (b) Profit per share for the year attributable to shareholders of the parent before impairments, restructuring costs, results on disposals and significant one-off items. The tax impact from the adjusted items is also adjusted for. Principal key figures (c) (illustrative) in CHF, USD, EUR In millions (except for data per share) Sales 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 2015 88 785 13 382 9 066 2016 89 469 13 693 8 531 2015 92 143 13 889 9 409 2016 90 796 13 896 8 658 2015 2016 83 153 82 055 12 533 12 558 8 491 7 824 Equity attributable to shareholders of the parent 62 338 64 590 63 012 63 156 57 651 60 075 Market capitalisation, end December 229 947 226 310 232 434 221 287 212 658 210 490 Data per share Basic earnings per share 2.90 2.76 3.01 2.80 2.72 2.53 (c) Income statement figures translated at weighted average annual rate; Balance sheet figures at year-end rate. 43 Nestlé Annual Review 2016 Group overview Introduction Our 2016 organic growth was at the high end of the industry but at the lower end of our expectations. We saw a solid trading operating profit margin improvement and our cash flow grew significantly. In 2017, we expect organic growth between 2% and 4%. In order to drive future profitability, we plan to increase restructuring costs considerably in 2017. As a result, the trading operating profit margin in constant currency is expected to be stable. Underlying earnings per share in constant currency and capital efficiency are expected to increase. Sales by geographic areas Differences 2016/2015 (in %) By principal markets United States Greater China Region France Brazil Germany Philippines United Kingdom Mexico Canada Italy Japan Spain Australia Switzerland Russia Rest of the world Total (a) Not applicable. in CHF + 5.6% – 7.4% – 7.6% + 5.0% – 1.9% + 3.6% – 9.3% – 5.6% + 2.5% – 0.3% + 21.3% + 1.3% + 1.3% – 4.8% + 5.2% – 0.1% + 0.8% in local currency + 3.2% – 4.4% – 9.5% + 6.5% – 3.9% + 5.7% + 0.4% + 8.7% + 3.5% – 2.4% + 6.8% – 0.8% – 0.8% – 4.8% + 11.9% (a) (a) in CHF millions 2016 26 704 6 536 4 478 4 120 2 874 2 741 2 725 2 596 1 893 1 861 1 747 1 690 1 519 1 475 1 400 25 110 89 469 Geographic sales and organic growth OG (%) 6 4 2 0 P AMS +4.5% CHF 40.2 billion P EMENA +1.9% CHF 26.8 billion P AOA +2.8% CHF 22.5 billion Sales 22.5 27.5 32.5 37.5 CHF billion Each region includes sales of the corresponding Zones, as well as Nestlé Waters, Nestlé Nutrition, Nestlé Professional, Nespresso, Nestlé Health Science and Nestlé Skin Health. Broad-based growth Sales (in billions of CHF) Real internal growth (RIG) % Pricing % Organic Growth (OG) % Group 89.5 + 2.4% + 0.8% + 3.2% EMENA 26.8 + 2.4% – 0.5% + 1.9% AMS 40.2 + 2.0% + 2.5% + 4.5% AOA 22.5 + 3.0% – 0.2% + 2.8% Developed Markets Emerging Markets 52.1 + 2.3% – 0.6% + 1.7% 37.4 + 2.4% + 2.9% + 5.3% 44 Nestlé Annual Review 2016 Group results In 2016, sales increased by 0.8% to CHF 89.5 billion, with a foreign exchange impact of -1.6%. Acquisitions net of divestitures reduced sales by 0.8%. Organic growth was 3.2%, with real internal growth reaching a three-year high of 2.4%. Pricing was limited at 0.8%, with some improvement in the second half of the year and we expect pricing to improve further for the full year 2017. Organic and real internal growth were broad-based, highlighting the strength and resilience of our diversified portfolio. Innovation supported volume growth, with 30% of sales coming from products introduced or renovated in the last 3 years. E-commerce accounted for 5% of sales, up 18% year-on-year. Trading operating profit Trading operating profit was CHF 13.7 billion with a margin of 15.3%, up 20 basis points on a reported basis and up 30 basis points in constant currency. We achieved this margin improvement while increasing investment in brand support, digital marketing, Research and Development, and in the new nutrition and health platforms. Consumer-facing marketing spend increased by 6.3% in constant currency. Restructuring costs doubled to CHF 300 million in 2016 to support structural cost-saving initiatives. Net profit Net profit of CHF 8.5 billion was impacted by several items, the largest one being a one-off non-cash adjustment to deferred taxes. Reported earnings per share decreased by 4.8% to CHF 2.76, for the same reasons. Underlying earnings per share in constant currency increased by 3.4%. 15.3% 15.3% 13 693 13 382 15.1% Trading operating profit 14 000 13 000 12 000 2015 2016 P P P P In millions of CHF In % of sales Operating segments: trading operating profit In % of sales Zone EMENA Zone AMS Zone AOA Nestlé Waters Nestlé Nutrition Other businesses (a) (a) Mainly Nestlé Professional, Nespresso, Nestlé Health Science and Nestlé Skin Health. 15.0% 14.7% 16.7 19.3 19.0 11.9 22.7 15.2 45 Nestlé Annual Review 2016 Sales by geographic area Employees by geographic area Factories by geographic area AMS EMENA (a) AOA 44.9% (2015: 44.1%) 30.0% (2015: 30.9%) 25.1% (2015: 25.0%) 33.2% (2015: 32.5%) 33.2% (2015: 34.7%) 33.6% (2015: 32.8%) 158 (2015: 161) 151 (2015: 166) 109 (2015: 109) (a) 10 046 employees in Switzerland in 2016. Employees by activity In thousands Factories Administration and sales Total 2015 170 165 335 2016 168 160 328 46 Nestlé Annual Review 2016 Cash flow and working capital Operating cash flow improved by CHF 1.3 billion to CHF 15.6 billion (17.4% of sales) due in part to the reduction of working capital. Free cash flow improved by CHF 200 million to CHF 10.1 billion (11.3% of sales). This demonstrates our ability to generate strong cash flow consistently even in a challenging foreign exchange environment. Average working capital decreased by 190 basis points from 4.7% to 2.8% of sales (average of last five quarters). Financial position The Group’s net debt decreased from CHF 15.4 billion to CHF 13.9 billion in 2016. Our strong free cash flow of CHF 10.1 billion more than offset the payment of the dividend of CHF 6.9 billion. Return on invested capital The Group’s return on invested capital including goodwill and intangible assets improved by 30 basis points to 11.2%. Return on invested capital before goodwill and intangible assets improved by 180 basis points to 31.7%. Dividend The Board of Directors is proposing a dividend of CHF 2.30 per share, up from CHF 2.25 last year. Outlook In 2017, we expect organic growth between 2% and 4%. In order to drive future profitability, we plan to increase restructuring costs considerably in 2017. As a result, the trading operating profit margin in constant currency is expected to be stable. Underlying earnings per share in constant currency and capital efficiency are expected to increase. Evolution of the Nestlé S.A. share in 2016 in CHF 75.00 70.00 65.00 60.00 105.0% 100.0% 95.0% 90.0% 85.0% | | | | 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 2.90 2.76 15.6 14.3 2015 2016 2015 2016 Dividend per share in CHF 2.20 2.15 2.05 2.30 2.25 2012 2013 2014 2015 2016 47 Nestlé Annual Review 2016 Product category and operating segment review 2015 2016 Proportion of total sales (%) RIG (%) OG (%) 8 880 9 072 10 365 10 720 19 245 19 792 4 100 4 111 7 112 7 414 796 906 10 686 10 540 3 951 3 791 14 637 14 331 2 471 2 640 14 854 15 038 2 909 2 775 6 984 5 595 6 512 5 636 12 579 12 148 1 724 1 817 6 365 1 130 1 375 8 870 1 246 6 267 1 111 1 301 8 679 1 190 11 488 12 067 2 386 2 535 45.8% 54.2% 100.0% + 3.7% + 4.6% + 5.0% + 5.0% 20.8% 12.2% 73.5% 26.5% 100.0% + 0.5% + 1.6% + 1.6% + 2.0% 18.4% 18.5% 53.6% 46.4% 100.0% + 2.0% + 2.7% 15.0% 72.2% 12.8% 15.0% 100.0% – 0.5% + 1.8% 13.7% 21.0% + 4.4% + 5.3% Leading positions in dynamic categories In millions of CHF Powdered and Liquid Beverages Soluble coffee / coffee systems Other Total sales Trading operating profit Water Total sales Trading operating profit Milk products and Ice cream Milk products Ice cream Total sales Trading operating profit Nutrition and Health Science Total sales Trading operating profit Prepared dishes and cooking aids Frozen and chilled Culinary and other Total sales Trading operating profit Confectionery Chocolate Sugar confectionery Biscuits Total sales Trading operating profit PetCare Total sales Trading operating profit 48 Nestlé Annual Review 2016 Brazil, we had high single-digit organic growth. Significant price increases at the end of the first half of the year impacted volumes in the short term. Nescafé Dolce Gusto and KitKat continued to grow in double digits. In Mexico, there was another year of good growth, which was broad- based across dairy, coffee creamers, soluble coffee, Nescafé Dolce Gusto and chocolate. PetCare continued to deliver strong growth across the region. The trading operating profit margin decreased by 10 basis points, due to an increase in restructuring costs. The profitability improved in North America, but Latin America was largely affected by high cost inflation caused by currency depreciation and commodity prices. Zone Americas (AMS) Sales Organic growth Real internal growth Trading operating profit margin CHF 26.4 billion + 4.2% + 1.3% 19.3% Trading operating profit margin – 10 basis points The Zone reported good and consistent organic growth. In North America growth accelerated year- on-year. In PetCare, innovation supported good growth across the cat food range. In dog food, the premium portfolio performed well as Merrick, Purina ONE and Pro Plan all delivered double-digit growth. Beneful stabilised as there was progress in restaging the brand. Coffee Mate sustained good momentum through innovations such as 64 oz. and new flavours in natural bliss. Lean Cuisine and Stouffer’s Fit Kitchen delivered strong organic growth supported by new line extensions. The performance of Confectionery in the US was disappointing, impacted by the competitive environment and low growth in the mainstream chocolate market. In Latin America strong organic growth was led by price increases following currency depreciation, as real internal growth slowed. In 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 2015 2016 17 187 17 974 8 657 8 382 2 860 6 609 4 833 3 454 8 088 2 771 6 764 4 922 3 340 8 559 Proportion of total sales (%) RIG (%) OG (%) 68.2% 31.8% 10.4% 25.7% 18.7% 12.7% 32.5% 25 844 26 356 100.0% + 1.3% + 4.2% Trading operating profit Capital expenditure 5 021 1 038 5 074 1 030 19.3% 3.9% 49 Nestlé Annual Review 2016 Zone Europe, Middle East and North Africa (EMENA) Sales Organic growth Real internal growth Trading operating profit margin CHF 16.2 billion + 2.0% + 2.7% 16.7% Trading operating profit margin + 100 basis points The Zone delivered strong real internal growth, accelerating for a fourth consecutive year and gaining market share, showing the ability to innovate. In Western Europe, positive organic growth was due to solid real internal growth. Pricing was negative, affected by sustained low commodity prices, trade pressure and intense competition. PetCare, Nescafé and pizza continued to be the key sources of growth across most markets. In Germany and France, we had solid real internal growth, while there was good organic and real internal growth in Southern Europe. In the UK, on the other hand, it was a particularly challenging year with both volume and pricing declining slightly. Central and Eastern Europe continued to deliver strong organic growth on the basis of good real internal growth and positive pricing. In Russia, we achieved double-digit organic growth with positive real internal growth. This included strong growth in Nescafé soluble coffee, especially Barista. Russia was Nestlé’s strongest performing market in PetCare globally, led by Felix cat food. Inflation in Russia and Ukraine drove positive pricing in the region, whilst all other markets experienced deflationary pricing. Business remained resilient in the Middle East and North Africa with positive organic growth, but the unstable environment and deflationary pressure slowed momentum. Events in Iraq, Yemen, Libya and Syria continued to have an effect. There was also deflationary pressure on dairy in the region. In Turkey, Nescafé and Confectionery drove double-digit growth. The North Africa market also did well. The trading operating profit margin improved by 100 basis points even as restructuring costs and marketing investment increased. Profitability improved across most categories as a result of premiumisation, volume leverage, efficiency savings and favourable input costs. Portfolio management also contributed positively with the creation of the Froneri joint venture in ice cream. 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 2015 2016 11 022 10 828 2 629 2 752 4 366 2 171 3 853 3 124 2 889 2 704 2 717 4 477 1 992 3 757 3 043 2 980 Proportion of total sales (%) RIG (%) OG (%) 66.6% 16.6% 16.8% 27.6% 12.3% 23.1% 18.7% 18.3% 16 403 16 249 100.0% + 2.7% + 2.0% Trading operating profit Capital expenditure 2 572 710 2 712 738 16.7% 4.5% 50 Nestlé Annual Review 2016 Zone Asia, Oceania and sub-Saharan Africa (AOA) Sales Organic growth Real internal growth Trading operating profit margin CHF 14.5 billion + 3.2% +2.9% 19.0% Trading operating profit margin + 60 basis points The Zone saw real internal growth and organic growth gain increasing momentum throughout the year, with market shares recovering and almost all markets contributing. The Zone’s emerging markets had a good year overall with growth accelerating in most businesses. Yinlu was the main exception, decreasing the Zone’s organic growth by 260 basis points. In China, the double-digit decline of Yinlu affected overall growth. Several initiatives to turn around the business are in place and stabilisation is expected in 2017. Dairy (excluding Yinlu) and Confectionery grew positively and Nescafé performed well. South East Asia was strong with double-digit growth in Vietnam and Indonesia, especially from dairy and Milo. The Philippines also performed well with high single- digit growth, particularly due to Bear Brand in dairy. There was good growth in sub-Saharan Africa. Real internal growth remained positive despite price increases to offset currency depreciation. There was double-digit growth in Central and West Africa (including Ghana, Côte d’Ivoire and Nigeria) and in Equatorial Africa (including Angola), with Maggi and Nido doing well. Our business in India grew strongly despite some disruptive impact from demonetisation at the end of the year. Maggi noodles continued to regain market share. Confectionery also did well with KitKat. There was also strong growth in Pakistan from dairy, ready- to-drink and other categories. In the developed markets there was good growth in Japan and solid real internal growth in Oceania. Japan’s organic growth was above the Zone and Group averages, balanced evenly between real internal growth and pricing. This was based on innovation and premiumisation across Nescafé and KitKat. In Oceania, there was solid real internal growth in line with the Group, which was largely offset by continuing deflationary pressure. The Zone improved its trading operating profit margin by 60 basis points while also increasing marketing investment. Positive gross margin development was helped by favourable input costs, particularly in dairy, as well as cost efficiencies and improved volumes and product mix. The effect of an increase in restructuring spend was more than offset by lower one-off costs related to Maggi in India. 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 2015 4 260 2 494 5 692 1 892 4 979 4 932 1 969 1 947 511 2016 4 492 2 726 5 464 1 811 5 223 4 710 2 052 1 980 528 Proportion of total sales (%) RIG (%) OG (%) 31.0% 18.8% 37.7% 12.5% 36.0% 32.5% 14.2% 13.7% 3.6% 14 338 14 493 100.0% + 2.9% + 3.2% Trading operating profit Capital expenditure 2 632 482 2 756 512 19.0% 3.5% 51 Nestlé Annual Review 2016 The flagship international brand Nestlé Pure Life made a good contribution, with organic growth above the Nestlé Waters average. There was a strong trading operating profit margin improvement of 110 basis points while marketing investment also increased. This was possible due to a combination of volume growth, positive product mix through premiumisation, operational cost efficiencies and favourable input costs. Nestlé Waters Sales Organic growth Real internal growth Trading operating profit margin CHF 7.9 billion + 4.5% + 4.5% 11.9% Trading operating profit margin + 110 basis points Nestlé Waters maintained its good organic growth momentum based on real internal growth. Pricing remained flat. In the US, international premium brands saw another year of dynamic growth and there were contributions above the Group and Nestlé Waters averages from regional brands Poland Spring, Ice Mountain and Deer Park. The shutdown of a factory in Texas following a tornado in April had a negative impact. In Europe, the majority of markets maintained growth after 2015 had been a strong year due to the heatwave. There were good contributions from the UK, Spain and Germany. Of the other markets, South East Asia, Mexico and North Africa did well. Further strong growth came from the international premium sparkling brands Perrier and S.Pellegrino, which grew twice as fast as the mainstream portfolio. 2015 1 949 4 131 1 545 2016 1 966 4 385 1 575 7 625 7 926 825 432 946 496 Proportion of total sales (%) RIG (%) OG (%) 24.8% 55.3% 19.9% 100.0% + 4.5% + 4.5% 11.9% 6.3% Nestlé Waters In millions of CHF Europe United States and Canada Other regions Total sales Trading operating profit Capital expenditure 52 Nestlé Annual Review 2016 Mucilon Iron Plus cereals in Brazil and NAN Optipro in Mexico. Growth in South East Asia was also solid with the Philippines doing well. The improvement in trading operating profit margin was broad-based across infant formula, as well as baby food, due to sustained low dairy prices. At the same time, marketing investment behind brands increased. Nestlé Nutrition Sales Organic growth Real internal growth Trading operating profit margin CHF 10.3 billion + 1.5% + 0.9% 22.7% Trading operating profit margin + 10 basis points Nestlé Nutrition grew in the context of changed category dynamics, particularly in China, and deflationary pressure owing to sustained low milk prices. Market dynamics in China were weak ahead of the implementation of new regulation, resulting in adjustments of trade inventory levels in both mainland China and Hong Kong. Low dairy prices and intense competition had an impact on pricing, particularly in the premium segment. At the same time, illuma had another strong year of growth, gaining share to become the leading brand in its category in China. We also strengthened our capabilities in e-commerce, winning market share in this important channel. Growth in the US was slow during the year. We started to renovate the Gerber brand and made improvements to product packaging and recipes, including many organic offerings. Latin America saw strong momentum led by innovations such as Nestlé Nutrition In millions of CHF EMENA AMS AOA Total sales Trading operating profit Capital expenditure 2015 2 062 3 688 4 711 2016 1 978 3 751 4 597 10 461 10 326 2 361 489 2 342 414 Proportion of total sales (%) RIG (%) OG (%) 19.2% 36.3% 44.5% 100.0% + 0.9% + 1.5% 22.7% 4.0% 53 Nestlé Annual Review 2016 Other businesses Sales Organic growth Real internal growth Trading operating profit margin CHF 14.1 billion + 3.7% + 3.4% 15.2% Trading operating profit margin – 50 basis points Nestlé Professional continued to grow, led by mid-single-digit growth in emerging markets with strong growth in Russia and Mexico, and solid growth in China. The US also had good organic growth while business in Canada and Western Europe declined. As from 2017, Nestlé Professional is integrated into the Zones due to increasing demand for more customised products and services on a local and regional basis. Nespresso continued to grow in its 30th year. The US and Canada saw strong momentum from the continued success of the VertuoLine system. Sales in France also benefitted from the launch of VertuoLine at the end of the year. The UK saw strong acceleration following brand investment and the launch of a subscription model. In Asia, both China and Korea performed well. Nestlé Health Science maintained a good pace of growth. Consumer Care was once again the key source of growth including the Boost range of products, Carnation Breakfast Essentials and, in Europe, Meritene. Medical Nutrition benefitted from strong contributions from the allergy portfolio (especially in China), Vitaflo and oral nutritional supplements in key markets. Nestlé Skin Health performed well in consumer care. However, we adjusted inventory levels in the trade at the end of the year. Increased competition and pressure from generics affected the US prescription business. The trading operating profit margin of this segment was impacted by Nestlé Skin Health. Adjustment of trade inventories and higher restructuring and litigation costs affected profitability. Nestlé Health Science also absorbed higher restructuring costs. Nestlé Professional and Nespresso both improved their profitability, helped by favourable input costs. Other businesses (a) In millions of CHF Total sales Trading operating profit Capital expenditure 2015 2016 14 114 14 119 2 221 518 2 144 619 RIG (%) + 3.4% OG (%) + 3.7% 15.2% 4.4% (a) Mainly Nespresso, Nestlé Professional, Nestlé Health Science and Nestlé Skin Health. 54 Nestlé Annual Review 2016 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. The food and beverage industry is faced with the global challenge of increasing obesity. The Group has long-term objectives to apply scientific and nutritional know-how to enhance nutrition, health and wellness, contributing to healthier eating, drinking and lifestyle habits, as well as accessibility of safe and affordable food. Nestlé is dependent on the sustainable supply of a number of raw and packaging materials. Longer-term changes in weather patterns; water shortages; shift 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 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. Changing customer relationships and 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 manages risks related to climate change and water resources. Our long-term commitments and strategies on climate change and water are 55 Nestlé Annual Review 2016 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. available in Nestlé’s response to the CDP Climate Change report and Water questionnaires also in the Nestlé in society report. The Group is subject to environmental regimes applying in all countries where it operates and has controls in place to comply with legislation 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 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 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. The Group depends on accurate, timely data along with increasing integration of digital 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 86 countries and sales in 191 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 56 Nestlé Annual Review 2016 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 1 P L P L P L L P L L L 22 P L P L P L P L P L P L P L L P L L L L P L P L P L L P L P L P L P L L Bulgaria L P L P L P L P L P L 7 P L P L P L 7 P L 4 P L 1 L L L P L 3 L P L P L L L L L L L L L L L P L L P L L P L P L P L P L L 11 P L P L P L P L P L P L P L L P L L L L L P L L L L P L L P L L L L P L P L P L P L L L L L 77 P L P L P L P L P L P L P L L P L L L L 1 P L 5 P L L L L P L L L Italy L P L P L P L P L P L Jordan 2 L 3 P L 3 P L 1 P L 2 L 1 P L 1 P L Asia, Oceania and sub-Saharan Africa (AOA) Angola Australia Bangladesh Cameroon Côte d’Ivoire 1 L 9 P L 1 P L 1 P L 2 P L L P L L L L L P L P L P L P L P L P P L P L P P L L P L Democratic Republic of Congo (DRC) Ethiopia Ghana 1 1 L L P L L P L L P 1 P L 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 Indonesia Japan Kenya Malaysia 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 2 L P P L P L P L 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 L L L P L P L P L 3 P L P 4 P L P 1 P L 5 P L 1 L P L P L P L P L L P L P L P L L L L L L P L P L P L P 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 5 P L P L P L 1 P L P L P L P L L P L L L P L L L L L L L L L L L Europe, Middle East and North Africa (EMENA) Algeria Austria Bahrain Belgium Czech Republic Denmark Egypt Finland France Germany Greece Hungary Iran Iraq Ireland Israel Lebanon Morocco Netherlands Poland Portugal Qatar Romania Russia Saudi Arabia Slovak Republic Spain Sweden Switzerland Syria Tunisia Turkey Ukraine United Kingdom Uzbekistan 2 P L P 1 P L 1 L P L L 1 1 3 1 L P L L L L L L L P L L L L P 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 L 2 P L P L P L P L P 2 L P L P L 20 P L P L P L P L P L L P L 15 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 1 L 9 P L L P L P L L P L P L P P L 11 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 L L L L L P L P L P L 1 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 P L P L L P 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 L 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 57 P L P L P L P United Arab Emirates L L L P Republic of Serbia Nestlé Annual Review 2016 Corporate Governance and Compliance 58 Nestlé Annual Review 2016 Corporate Governance Our Board of Directors sets our long-term strategy and provides oversight on the basis of strong principles and an appropriate tone from the top. It ensures the long-term success of our company based on a clear strategy and good corporate governance. Its focus on corporate culture helps us align the interests between our business, our wider stakeholders and society. In 2016, our Board of Directors announced its succession plans for the Chairman and the CEO. The proposed solution will help ensure the long- term strategic direction of the company set by the Board of Directors and concludes a process that the Board had started two years ago. Also in 2016, we created a new Nomination and Sustainability Committee. This Committee prepares the succession planning of the Board and periodically reviews other measures which ensure our company’s sustainability and how its long-term strategy relates to our ability to create shared value. Nestlé’s purpose is enhancing quality of life and contributing to a healthier future. Beyond a strong focus on board composition, structure and processes, our Board ensures that the company’s purpose and its values, strategies and business model are aligned. Performance management and rewards are consistent with this approach. Our Chairman’s and Corporate Governance Committee liaises between the Chairman and the full Board, acts as a consultant body to the Chairman and CEO, and regularly reviews all aspects of our Governance. It also advises on financial matters. Our Compensation Committee sets our remuneration principles and prepares the proposals for remuneration to the Board and the AGM. Our Compensation Report is submitted annually to an advisory vote of our shareholders. In 2016, all proposals received strong support. Our Audit Committee oversees internal and external audit, financial reporting, compliance and risk management. Our strategy, as set by the Board and enshrined by our shareholders in our Articles of Association, aims for long-term, sustainable value creation. Transparency and reporting on a wide range of financial and non-financial commitments ensure our accountability. Through our Chairman’s Roundtables, roadshows, investor meetings, analyst and engagement calls, as well as stakeholder convenings, we actively engage with the providers of capital and other stakeholders to ensure our sustainable long-term growth. We recognize that for our company to be successful over the long term and create value for shareholders, we must also create value for society. Share capital distribution by geography P Switzerland P United States P United Kingdom P Germany P Belgium P Canada P Japan P Luxembourg P France P China P Others 35.68% 30.37% 4.94% 4.69% 4.16% 2.31% 2.29% 2.23% 2.14% 1.86% 9.33% Share capital by investor type, long-term evolution (a) 100% 80% 60% 40% 20% 0% Institutions 79% Private Shareholders 21% 1999 2003 2007 2011 2016 (a) Percentage derived from total number of registered shares. Registered shares represent 58.73% of the total share capital. Statistics are rounded, as at 31.12.2016. 59 Nestlé Annual Review 2016 Board of Directors of Nestlé S.A. Helmut O. Maucher Honorary Chairman David P. Frick Secretary to the Board KPMG SA Geneva branch (1) Independent auditors Board of Directors of Nestlé S.A. at 31 December 2016 Peter Brabeck-Letmathe (1, 2, 4) Chairman Paul Bulcke (1, 2) Chief Executive Officer Andreas Koopmann (1, 2, 3, 4) Vice Chairman Chairman, Georg Fischer AG 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) Chairman, Geneva Cantonal Bank Ann M. Veneman (1, 4) Former Executive Director, UNICEF, and Secretary, U.S. Department of Agriculture Henri de Castries (1, 5) Former Chairman and CEO, AXA Eva Cheng (1, 5) Former Chairwoman and CEO, Amway China & Southeast Asia Ruth K. Oniang’o (1) Professor of Food Science and Nutrition Patrick Aebischer (1, 3) President of the Swiss Federal Institute of Technology Lausanne (EPFL) Peter Brabeck-Letmathe Paul Bulcke For further information on the Board of Directors, please refer to the Corporate Governance Report 2016. Andreas Koopmann (1) Term expires on the date of the Annual General Meeting 2017. (2) Chairman’s and Corporate Governance Committee. (3) Compensation Committee. (4) Nomination and Sustainability Committee. (5) Audit Committee. 60 Nestlé Annual Review 2016 Beat Hess Renato Fassbind Steven G. Hoch Naïna Lal Kidwai Jean-Pierre Roth Ann M. Veneman Henri de Castries Eva Cheng Ruth K. Oniang’o Patrick Aebischer 61 Nestlé Annual Review 2016 Executive Board of Nestlé S.A. Executive Board of Nestlé S.A. at 31 December 2016 1 Paul Bulcke Chief Executive Officer 2 Luis Cantarell EVP, Europe, Middle East, North Africa 3 Laurent Freixe EVP, United States of America, Canada, Latin America, Caribbean 4 Chris Johnson EVP, Nestlé Business Excellence 5 Patrice Bula EVP, Strategic Business Units, Marketing and Sales 6 Wan Ling Martello EVP, Asia, Oceania, sub-Saharan Africa 7 Stefan Catsicas 8 Marco Settembri EVP, Nestlé Waters 9 François-Xavier Roger EVP, Chief Financial Officer 10 Magdi Batato EVP, Operations 11 Peter Vogt Deputy EVP, Human Resources 12 Martial Rolland Deputy EVP, Nestlé Professional 13 Heiko Schipper Deputy EVP, Nestlé Nutrition 14 David P. Frick SVP, Corporate Governance, Compliance and Corporate Services EVP, Innovation Technology, Research and Development Yves Philippe Bloch Corporate Secretary Ulf Mark Schneider CEO as of 1 January 2017. EVP: Executive Vice President SVP: Senior Vice President For further information on the Executive Board, please refer to the Corporate Governance Report 2016. 62 Nestlé Annual Review 2016 12 11 10 7 9 14 3 13 8 2 6 1 4 5 63 Nestlé Annual Review 2016 and provides guidance and best practices. Market Compliance Officers and Committees ensure a consistent approach across the Group and help identify local compliance priorities. In 2016, we assessed the consistency of our Compliance program in all Markets through our local Compliance Committees on the basis of Market compliance maturity profiles. Specific focus areas included further enhancing our compliance culture and grievance mechanisms and our anti-corruption policy framework. An annual compliance risk assessment was performed in the Group Compliance Committee. Our efforts were recognized by the renewed joint best industry score for Compliance in the 2016 Dow Jones Sustainability Index. Compliance We are driven by purpose and guided by values. Integrity, personal responsibility and fairness are important aspects of the respect that we have for ourselves. Mutual trust, quality and living up to our own commitments form the base for our respect for others. Compliance at Nestlé includes not only following applicable laws but also our own principles and values. It helps us build trust with our employees, as well as with our shareholders and our other stakeholders. Strong governance and compliance underpin our company’s culture, which reflects our values and drives the right behaviors. Our Board oversees and promotes good practices throughout the company. Risk and control functions are appropriately empowered to assess and reinforce our culture and values effectively. Our Corporate Business Principles and our Code of Business Conduct include our commitments to integrity. This Code includes our three golden rules: to avoid any conduct that could damage Nestlé or its reputation; to act legally and honestly; and to put the company’s interests ahead of personal interests. We thereby aim to provide guidance to our people to do the ‘right’ thing even in situations which are not specifically regulated. Through our CARE program, which relies on independent external auditors, we regularly assess specific aspects of our compliance. We provide the necessary training in our internal Management School, at in-person trainings in the Markets, as well as through our e-learning tools. We monitor compliance though our corporate functions, our internal audit function and our external auditors. Our Integrity Reporting System and our ‘Tell Us’ system allow us to address complaints from employees and external stakeholders. In 2016, 235 CARE audits were conducted and gaps addressed. 1650 complaints from employees and 642 complaints from suppliers and other third parties were investigated and remedial action taken. Line management is supported by our dedicated Corporate Compliance function, which provides guidance and best practices, and all functions engaged in our holistic, risk and principles based compliance program. Our Compliance Committee defines the framework 64 Nestlé Annual Review 2016 Shareholder information Stock exchange listing At 31 December 2016, 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. 6 April 2017 150th Annual General Meeting, Beaulieu Lausanne, Lausanne (Switzerland) 7 April 2017 Last trading day with entitlement to dividend 10 April 2017 Ex-dividend date 12 April 2017 Payment of the dividend 20 April 2017 2017 First quarter sales figures 27 July 2017 2017 Half-yearly Results 19 October 2017 2017 Nine months sales figures 15 February 2018 2017 Full Year Results 12 April 2018 151st 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 © 2017, 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 Maurice Schobinger (wrapper) Interlinks Image with Aude Sirvain (consumers) and Studio des fleurs (products) Alberto Venzago (Board of Directors and Executive Board), Nestlé S.A. Production brain’print GmbH (Switzerland) Paper This report is printed on Lessebo Smooth White, a paper produced from well-managed forests and other controlled sources certified by the Forest Stewardship Council (FSC). Nestlé Annual Review 2016 65