5
Corp.HR/VL
13.10.2006
NECIC STEERING COMMITTEE MEETING
Friday September 15th, 2006
Hotel Crowne Plaza, Geneva
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Participants Messrs L. Cantarell Messrs S. Battalia
P. Broeckx I. Kapus
A. Silva F. Schmidt
L. Dereux
Mrs V. Loertscher
Mr. J. Lindner NGG
Mr. H. Wiedenhofer EFFAT
Mrs. M. Guggisberg UNIA
Mrs J. Baroncini IUF
Mrs J. Banfi Nestlé France
Mrs I. Drotar Nestlé Hungaria
Mr. B. Golding Nestlé UK
Mr K. Hoffmann Nestlé Deutschland
Mrs C. Torre NPP España
Mr Lindner welcomed the participants and opened the meeting.
Half-year Results 2006 - Business Outlook 2006
Mr. Cantarell provided an overview of the mid-year performance of the Group and of Zone Europe (presentation attached). Good results in Europe in terms of internal growth and organic growth, however profitability not at the level expected. Favourable impact of the exchange rate. The results include all businesses in Europe (Nestlé in Europe). Considering the difficulty to increase prices in Europe, overall performance is below that reached in the other Zones. Priceability will be a key element in the future in Europe. Regarding the markets, France reached a good performance, same in Spain and in Germany except in the culinary business, NPP has shown good growth in dry products but slight decrease in wet products, UK and Ireland suffered in the confectionery area - therefore the need to consider corrective measures -, the new management in Russia and the resolution of the distribution issues lead to a good double-digit growth in the market. Good growth overall in the medium and small markets, except in Portugal due to the economic situation and in Austria where there is a need to consider the product strategy. Nestlé can also be proud of its presence in Kosovo after the difficult political and economic situation. Internal and organic growth on track thanks to the efforts deployed in the markets.
Regarding the Water business, there is tough competition from low-priced products – priceability is key in this area.
Ice Cream and confectionery categories (particularly in the UK) are still in difficulty.
Although we grow in Europe while our main competitors are suffering, we have an important problem in EBIT where we lost 90 bps.
The evolution of the hard discounters points to the fact that the consumer is more interested in simplified points of sale. The number of SKUs (stock-keeping units) needs to be reduced.
General management is now putting the emphasis on increased discipline and execution as Nestlé seems to be better in strategy than in implementation.
M. Cantarell also commented on the recent announcement of the investment in Avenches/Switzerland for a new Nespresso Production and Distribution Centre which will create some 300 jobs.
J. Baroncini asked about the situation regarding the Delta acquisition.
L. Cantarell : The Delta acquisition is strategic for Nestlé, with its presence in Greece, Serbia, Bulgaria and Romania. A manager will be appointed to manage the entire Ice Cream business in that region and ensure the integration process. The factories in Romania and Bulgaria are not up to standard. The main objective is the expansion of the brand in these countries and likely in some other countries.
Mr. Lindner raised his concern on the fact that the company still moves slowly and the decision making process takes time. He also raised his concern on the functioning of GLOBE where there are still problems to be resolved.
Mr. Cantarell agreed overall. He also mentioned that Globe is a big effort. Problems are followed up on a monthly basis. A lot is also based on "attitude" and no doubt the complexity of European structures and set up makes Globe even more difficult to implement.
J. Banfi emphasised the fact that Globe does not function in France and that there are many gaps.
L. Cantarell ensured that this is in no way neglected. On the other hand, although there are apparently a lot of issues linked to Globe, there was good growth in France at the end of July as well as at the end of August. Of course, people suffer and each and every one is in a difficult situation. The customer is also suffering but the company is moving in the right direction.
J. Lindner: Globe is on the agenda at every meeting. The company is spending more and more money and there is a need to compensate through savings in other areas. It is now time to resolve the situation.
L. Cantarell: Globe is not only spending money, this is an investment and it is a huge programme which in the future will help in being quicker and simpler.
K. Hofmann raised some concern regarding the business situation in Maggi Germany. He asked about the company's strategy regarding the Maggi range and how it intends to tackle the attacks of the competition in order to bring Maggi back into the black.
L. Cantarell: one should not exaggerate – there are relaunch plans and a specific R&D group works focusing on the concept and on innovation that will help put Maggi on the right track. Failures in product innovation have indeed been noticed.
M. Guggisberg asked for information on the new packaging of the Cailler brand.
L. Cantarell: This is a local issue. There has been a big relaunch of Cailler. There has basically been a problem with Denner which affected the performance. There are mixed results, i.e. good results in pralinés which have been well accepted by the consumer and, on the other hand, some problems encountered in the Femina and Ambassador range, as well as in tablets. Managers are putting every effort to find the right solutions, to find an easier way to handle the packaging and to reduce the use of pet. On the other hand, there are good results in the Nescafé brand, there is a relaunch of mixes in culinary products, the Mövenpick range is a success, Frisco has a good performance and overall we see good results.
Lactalis/Nestlé – update
L. Dereux provided an update on the situation and recalled the issues last July in France and Italy in terms of domination of segments (dessert aux oeufs in France and Mio brand in Italy). In the new file submitted to the European Commission on August 19th, it was decided that the Mio brand - that was initially foreseen to be transferred to the Joint Venture - will be maintained within Nestlé Nutrition. The Flor de Esgueva business in Spain – which was initially supposed to be transferred to the Joint Venture – will be transferred to Lactalis ensuring the respect of the 60/40 shareholding split and compensating for the fact that Mio cheese will no longer be transferred to the Joint Venture. Feedback from the European Commission is expected to be positive and should be provided by September 20th. In the meantime, in accordance with French legislation, the employee consultation process started again. Important to note that the new plan does not affect the French business at all. The procedure should be completed by the end of September so that the new company can operate as of November 1st, 2006 which is now the targeted date and teams are showing a strong commitment.
J. Lindner reminded of the need to hold an ad hoc meeting in the course of October.
C. Torre mentioned that workers are well informed of the new proposal to the European Commission. They are however very worried about their social conditions and of the fact that they still do not have any information about future business plans.
A. Silva reminded that the current labour agreements have been extended for 2 more years in the sites concerned in Spain.
L. Cantarell added that the fact that the Flor de Esgueva business is transferred to Lactalis will lead to the possible further development of that business bearing in mind that Lactalis has a large experience in that business and will no doubt be ready to expand it in the future with the appropriate investments.
P. Broeckx mentioned that it is not possible to elaborate business plans until the green light is received from the European Commission.
Confectionery
J. Lindner asked about the situation of the Confectionery business.
L. Cantarell mentioned that the business in Europe needs a lot of attention and that the industrial set up is in difficulty. There are plans that will be deployed. UK management is today concentrating on the 7 key brands. Streamlining the product portfolio will of course have effects on products and on innovation / renovation. In Switzerland, there is a desire to create a super premium and to launch the Cailler brand in the UK and Russia. France has tough times with specific distributors and is suffering in some product ranges. Indeed, the whole confectionery business in Europe is not bringing the growth that was expected.
B. Golding asked about the future of the York factory and the possible rationalisation projects.
J. Lindner asked about the countries which will possibly be affected.
P. Broeckx reminded that it is not possible to disclose any information before information is provided at national level. This is foreseen in the course of next week. Subsequently and should there be any need, an ad hoc committee can of course be convened.
J. Lindner asked whether the countries to be involved in an eventual ad hoc consultation would include the UK, Germany, Spain, Italy, the Czech Republic and Bulgaria.
S. Battalia and L. Cantarell confirmed this.
J. Banfi also asked about possible European projects in terms of confectionery, about the situation of Dijon, investments carried out in the UK, possible innovations in France. Some criticism was raised on the way SBU is handling the strategic issues in Europe and on the fact that there are a lot of management changes in the marketing teams in France.
L. Cantarell mentioned that mistakes can of course be made. There was a need to redefine the strategy in France over the 4 pillars and there are now good professional teams on which we can count. There is a real capacity problem in Dijon which has already been mentioned and that needs to be addressed.
Nutrition
L. Cantarell provided an overview of the Nutrition business which is managed globally. At European level, the business is improving. The iodine problem in China still makes the market suffer. There are overall new concepts deployed with good success and growth, providing good market shares. There are new product launches which are showing good results. In terms of baby foods, there is a relaunch of the brand in Germany. Poor results however in the Performance Nutrition Business (Powerbar). A decision has been taken to move the headquarters from Munich to Frankfurt. The business in Infant Formula is in good shape.
J. Lindner wondered if there were any investment plans in Epinal.
L. Cantarell mentioned that there is a growth in France in the baby food business in plastic containers. This has been accepted as a premium product in some European countries (development in Epinal). The company is still producing baby food in jars in Weiding (Germany) and Sevares (Spain). We look forward to see the impact on the consumer.
Petfood
L. Cantarell : The situation of Quimperle factory is currently under discussion. Move of the business from the wet to the dry. The set up in the factory is not the ideal one for dry products and therefore there is a need to try and find the right solution and an alternative plan.
J. Banfi : What about the situation in Aubigny ?
L. Cantarell did not have any information regarding this site.
C. Torre made a special reference to the fact that some local issues can have a global impact.
Operation Excellence 2007 (charts attached)
A. Silva mentioned that the objective of Operation Excellence 2007 is a savings of some EUR300mio- related to Technical and Production (manufacturing and purchasing) and Supply Chain (distribution, bad goods, working capital, inter-market supply and restructuring). As at mid year, there has been an achievement of EUR167mio., 65% from Technical/Production and the rest from Supply Chain. Some problems faced in Russia, Italy and Switzerland but it is expected to achieve the target at year end.
Aramis / Charlemagne (charts attached)
A. Silva provided an update of the situation in those 2 projects and the implementation plan foreseen. Regarding Charlemagne, after the signature with Hewlett Packard, we are in the process to investigate possibilities to move towards Shared Services.
GNBS
P. Broeckx mentioned that in line with the projects Aramis, Charlemagne, NBS, Purchasing, there are processes and plans to streamline certain activities. All similar initiatives need to be under one roof in order that they are managed in a coherent way. Therefore the GNBS Unit has been created, providing a common management approach to all those initiatives.
Temporary Workers
P. Broeckx reminded that the "Care" project has already been presented. This is a project conducted in view of ensuring that the rules in force in the Group and the code of conduct are well respected in all our companies. The same applies to the question of temporary workers which is already strongly regulated in some countries.
J. Banfi questioned on the social consequences of GNBS and other Shared Services, leading in some cases to redundancies or early retirement
P. Broeckx mentioned that Nestlé's conditions in this respect go well beyond legal requirements in some countries, with comfortable solutions for the employees concerned, including in France.
Equal Opportunity
J. Baroncini requested the possibility of a direct contact with HR managers in the countries regarding this question.