November the 19th, 2010 Financial analysis Group project BAL-BIYA Karim, BERAS Lolita, CARUGO Ronald, CHERCHOUR Nabil, DEROCHE Lawry, KORYTNIKOVA EKATERINA, PODVARKO Oxana 2 Table of contents 1. Presentation of Nestle S. 3 1. Presentation of Nestle S. A. 1. 1. History Nestle is a Swiss company, founded in 1867 by Henri Nestle. Nestle means “little nest” in Swiss German. Its first customer was a premature infant who could not tolerate his mother’s milk and any other conventional substitute.

Then Henri’s aim was to fight against the problem of infant mortality dues to malnutrition for which he developed a product combining various cow’s milk, wheat flour, sugar and named it Farine Lactee Nestle, the first product of the company being marketed in Europe. 1. 2. Key facts in the historical development 1866 Company’s foundation 1905 Merger between Nestle and Anglo-Swiss Condensed Milk 1938-1944 Growing of the company during the two wars 1947 Merger with Maggi seasoning and soups, Crosse & Blackwell (1950), Findus (1963), Libby’s (1971) and Stouffer’s (1973) 1974

Diversification came with a shareholding in L’Oreal in 1974 1977 Second venture outside the food industry by acquiring Alcon Laboratories Inc. Nestle’s improved bottom line allowed the company to launch a new round of 1984 acquisitions, notably American food giant Carnation and the British confectionery company Rowntree Mackintosh in 1988, which brought the Willy Wonka Brand to Nestle. Several acquisitions: San Pellegrino (1997), Spillers Petfood (1998), Ralston Since 1996 Purina (2002), merging its U. S. ice cream business into Dreyer’s, and a US$2. 6 billion acquisition was announced of Chef America (both in 2002) 2005

Nestle bought the Greek company Delta Ice Cream for €240 million 2006 Full ownership of Dreyer’s, thus becoming the world’s biggest ice cream maker with a 17. 5% market share 2006 Nestle purchased the Medical Nutrition division of Novartis Pharmaceutical for $2. 5B 2007 Strategic partnership with a Belgian chocolate maker Pierre Marcolini 2007 Acquires the milk flavoring product known as Ovaltine 4 1. 3. Business description Nestle is a leading nutrition, health and wellness company. It is the holding company of the Nestle Group and operates through itssubsidiaries, associated companies and joint ventures across the world.

Page 2 Nestle’s Financial Analysis Essay

The company principally manufacturers and markets branded food and beverage products. It is also active in the pharmaceutical sector. Nestle’s has got 406 subsidiaries around the world. Many of these are operated in its own name, with exceptions such as the Israelifood company Osem. Its website lists company addresses in 104 countries. Nestle markets its products in 130 countries across the world. It manufactures around 10 000 different products, employs some 25 000 people and sells over a billion products every day. ? The vision: Being the best in everything they touch and handle. The mission: Achieve and maintain leadership position in the chosen businesses and delight all stakeholders by making economic value additions in all corporate functions. 1. 4. Major products and services linked to their brands The company’s product portfolio, whose products are sold under different brands, includes: Products Brands Baby foods Nestle Cerelac, NAN Breakfast cereals Nestle cereals Milk products Milkpak, NIDO, Nespray, Nestle yogurts, Everyday Ice-creams Movenpick, Dreyer’s Chocolate confectionary Kit Kat, Smarties, Toffo Beverages Nescafe, Milo, Nestle juices

Food services Nestle Jumbo Bottle Prepared dishes and cooking aids Maggi, Powered Soups Bottled water Nestle Pure Life, Nestle Aquarral Pet care Pro Plan, Purina, ONE, Fancy feast, Dog Chow, Cat Chow, Felix, Alpo Pharmaceutical products 5 2. SWOT Analysis Strengths Weaknesses Company: Industry ? Global food producer, located in over 100 ? Their LC-1 division was not as successful countries ? Growth in their organic food sales division ? One of the world’s largest producers of food was flat in 2008, even though the industry products grew 8. 9% ? Global sales in 2008 topped $101 billion. ?

Ranked as the world’s largest bottled water been under fire from the FDA and the company American Medical Association ? Product ? ? Since 2004: the breakfast cereal industry has General Mills: lack of innovation (in creating new niche products, especially in that are well-known ? Quality brands and products and line extensions their yogurt division, where Yoplait is the Professional brands sold to restaurants, colleges, only brand making a profit) hotels ? ? 2008: several of their ice cream brands, Ability to keep major brands consistently in the Dryer’s, Edy’s and Haagen-Dazs, were still orefront of consumer’s minds by renovating plagued with bad PR and loss of sales. existing product lines, keeping major brands from slipping into saturation/decline Customers ? products, as parent’s advocates groups Place ? Reduction of the amount of sugar in their claimed they were contributing to the superior access to distribution channels diabetes epidemic among American children Opportunities Threats Economic Economic ? ? Launch of a new premium line of higher cacao Raw chocolate ingredient prices are soaring; content chocolates dubbed Nestle Treasures Gold, in order to cash in on the “recession eavily into their profit margins and often economy” in which consumers cut back on gets passed on to consumers, by shrinking luxury goods, but regularly indulge in candy and the packaging in a way that is almost chocolate. ? dairy costs alone rose 50% in 2008, this cuts unnoticeable-therefore Opening of Nestle Cafe’s in major cities to paying the same prices for less product. feature Nestle products ? ? is (owned by Pepsi), Lindt… health conscious societies: introduction of more health-based products consumer High competition in the market: Hershey’s, Cadbury-Schweppes Social the Legal ?

Protection of the consumer: Any contamination of the food supply, especially e-coli 3. Financial structure 3. 1. Solvency and liquidity perspective Assets ranked by lifetimes Current assets Liquid assets Trade and other receivable Assets held for sale Inventories 9496 15 421 22 9272 Derivative assets 754 Prepayment and accrued income 805 Total current assets 35 770 Non-current assets Property, plant and equipment 22 065 Investment in associates 8 936 Deferred tax assets 2 224 Financial assets 4 213 Employee benefits assets Goodwill Intangible assets Total non-current assets Total assets 811 33 423 217 78 889 114 659 Liabilities classified in the order in which they fall due for repayment Current liabilities Trade or other payables Liabilities directly associated with assets held for sale Financial liabilities 14 179 7 24 541 Tax liabilities 856 Derivative liabilities 477 Accrual and deferred income 3 266 7 Total current liabilities 43 326 Non-current liabilities Financial liabilities Employee benefits liabilities Deferred tax liabilities 6 129 7 24 541 Other payables 856 Provisions 477 Accrual and deferred income 3 266 Total non-current liabilities 17 099 Total liabilities 60 425 Equity

Book value equity (2007) = 78889+35770-17099-43326 = 54234 Book value equity (2008) = 73167+33048-18076-33223 = 54916 Book value equity (2009) = 71046+39870-21202-36083 = 53631 During the first two years the book value equity doesn’t really evolved. That means that the total of the assets is higher than the total of debts every year. We can compare it with the debt ratio and the debt to equity, and see that situation of the firm is quite good. Liquidity Current ratio (2007) = 35770/43326 = 0, 8 Current ratio (2008) = 33048/33223 = 1 Current ratio (2009) = 39870/36083 = 1, 1 The current ratio in 2007 is below one.

Non-current assets are financed, in part, by borrowings or negative working capital. In 2008 and 2009, it is above one. Only one year on the three has a current ratio below one: 2007. The ratio increases every year. 8 Acid test ratio (2007) = (35770-9272)/43326 = 0, 6 Acid test ratio (2008) = (33048-9342)/33223 = 1 Acid test ratio (2009) = (39870-7734)/36083 = 0, 9 Acid test ratio indicates that Nestle hasn’t enough short term assets to cover its immediate liabilities, except in 2008. To cover these liabilities, the firm should selling inventories. Financial leverage Debt ratio (2007) = 60425/114659 = 0, 5

Debt ratio (2008) = 51299/106215 = 0, 5 Debt ratio (2009) = 57285/110916 = 0, 5 Every year, 50% of the assets are financed with creditor’s funds. In fact, the firm has more assets than debts. A low debt ratio is important concerning the company’s level of risk, indeed a low debt ratio provides more protection in case of liquidation. Debt ratio of Nestle is quite good since 2007. Debt to equity (2007) = 60425/53234 = 1, 1 Debt to equity (2008) = 51299/54916 = 0, 9 Debt to equity (2009) = 57285/53631 = 1, 1 Debt to equity is similar than debt ratio. 9 3. 2. Capital employed analysis 2007 Capital employed Fixed

Invested capital assets : Equity : 78889 Working 54234 capital : (17052) Debt : 7603 Total : Total : 61837 61837 Calculation: Working capital = 35770-6594-2902-43326 Debt = 17099-6594-2902 2008 Capital employed Fixed Invested capital assets: Equity: 73167 Working 54916 capital: Debt: (7306) 10945 Total: Total: 65861 65861 Calculation: Working capital = (33048-5835-1296-33223) Debt = 18076-5835-1296 10 2009 Capital employed Fixed Invested capital assets : Equity : 71046 Working 53631 capital : Debt : (1532) 15883 Total : Total : 69514 69514 Calculation: Working capital = (39870-2734-2585)-36083 Debt = 21202-2734-2585

We can see trough these spreadsheets that the working capital is negative in 2007, 2008 and 2009. That means Nestle generates a positive treasury. But during these years the working capital is decreasing. We can explain this decrease by the increase of current assets. Thus they use better their treasury every year. 11 4. Trend analysis Volume of sales, Growth change, in millions in millions of Growth change, Year of CHF CHF % 2006 98485 – – 2007 107552 9067 9,21 2008 109908 2356 2,19 2009 107618 -2290 -2,08 As we can see from the table in 2007 group sales reached CHF 107. 6 billion, an increase of CHF 9. 1 billion or 9. % from 2006. The major contributor was organic growth of 7. 4% which includes Real Internal Growth (RIG) of 4. 4% and pricing of 3%. Acquisitions added 2. 6%. Foreign exchange contributed 0. 4%. There were the acquisitions of two businesses from Novartis, its Medical Nutrition division and the baby food business and iconic brand, Gerber. The first makes Nestle the second largest, but only truly global Healthcare Nutrition Company, whilst the second enhances their undisputed worldwide leadership in Infant Nutrition. The Food, Beverages and Nutrition business, with sales of CHF 100. 3 billion, an increase of CHF 8. billion or 9. 2%, was the main contributor to growth. 2008 was remembered unprecedented and rapid changes in the economic environment, the sharply falling stock market, a global crisis of confidence, the rising unemployment and volatile currencies and raw material prices. Nestle was successful in managing its way through this period of cost pressure, reporting strong results in 2007. Organic growth was 8. 3%, with RIG of 2. 8% and pricing of 5. 5%. The impact of acquisitions (+2. 4%), net of disposals (–0. 7%) was +1. 7%. The main contributors to acquisitions were Gerber and Novartis Medical Nutrition, acquired in 2007.

The main disposals were the Family Frost ice cream distribution business in Germany and the Buitoni dried pasta business in Italy, as well as some other frozen and ambient culinary businesses. Foreign exchange reduced our reported Swiss franc sales by 7. 8%, reflecting another strong year for the Swiss franc, particularly against the US dollar and Euro. Overall, the Group’s sales increased 2. 2% in 2008 to CHF 109. 9 billion. 12 The resulting weak level of consumer demand as well as raw material cost pressure and related pricing, intense competition amongst branded and on-branded manufacturers, as well as currency depreciations and political uncertainty in different parts of the world all combined to make 2009 a particularly challenging year. Equally, the economic slowdown in many countries caused their currencies to fall in value compared with Nestle’s reporting currency, the Swiss franc. The strength of the Swiss franc relative to many other currencies had a –5. 5% impact on Nestle’s reported sales which, with a –0. 7% impact from divestitures, net of acquisitions, resulted in a fall of –2. 1% to CHF 107. 6 billion. Volume of sales, in millions of CHF 15000 110000 105000 100000 95000 90000 2006 2007 Volume of sales, in millions of CHF 2008 2009 Lineaire (Volume of sales, in millions of CHF) Therefore, having analyzed the main financial ratios and looking back at the Group’s performance during three last years, it is clear that their businesses all over the world rose to their challenges to deliver good results despite the uncertainties that they faced. We can notice positive trend line at the graph and stable increase in volume of sales from 2006 till 2008. In 2009 the level of sales was the same as two years ago.

We can explain this by the global financial crises and we also have to mention that in comparison with other companies this is not the worst result. 13 5. Comparative analysis Food Processing’s Top 5 (2010 year) This Last Year Year 1 1 2009 2008 Food Food Sales Sales 28000 Foods 25903 Company Nestle 2009 2009 2008 Total Net Net Company Income Income Sales (-loss) (-Loss) 26477 110954 10751 17089 26325 26704 (-537) 86 (U. S. & Canada) 2 2 Tyson Inc. (10/3/09) 3 4 Kraft Foods Inc. 23666 23956 40386 3028 2893 4 3 Pepsico Inc. 22000 25346 43232 5979 5166 5 5 Anheuser-Busch 15486 15571 36758 5877 126 InBev As we can notice from the table everyone’s food sales were down 1, 2, and 4 percent in 2009, and four out of five companies increased their net income also. ? Nestle is the world’s largest food and beverage company. ? Tyson Foods Inc. is the world’s second largest processor and marketer of chicken, beef, and pork only behind Brazilian JBS S. A. ? Kraft Food Inc. is the largest confectionery, food, and beverage corporation headquartered in the United States. ? in PepsiCo Inc. is the largest American multinational corporation with interests manufacturing and marketing a wide variety f carbonated and non- carbonated beverages, as well as salty, sweet and cereal-based snacks, and other foods. ? Anheuser-Busch InBev is a publicly traded company, based in Leuven, Belgium. It is the largest global brewer with nearly 25% global market share. A company’s performance depends primarily on its operating performance. It explains why EBIT and EBITDA are the focus of analysts’ attention. Earnings before interest and taxes (EBIT) (or operating income) is a company’s earning power from ongoing operations, 14 equal to earnings before deduction of interest payments and income taxes.

EBIT excludes income and expenditure from unusual, non-recurring or discontinued activities. EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income EBIT Margin is a key indicator: EBIT Margin = EBIT (t) / sales (t) This value is useful to comparing multiple companies, especially within a given industry, and also helps evaluate how a company has grown over time. This financial measure will be used in the analysis. Firstly, we will analyze the margin ratios of Nestle and compare these margins ratios with those of the major competitors of Nestle such as Kraft and PepsiCo.

To compare Nestle performance with how its competitors were operating we have to recalculate its results into U. S. $. Comparative table of three biggest competitors Nestle PepsiCo Kraft (millions of U. S $) (millions of U. S. $) (millions of U. S. $) 2008 2009 2008 2009 2008 2009 117324 111444 43251 43232 41932 40386 impairments 16733,7 16257,1 6959 8044 3843 5524 as % of sales 14,3 14,6 16,1 18,6 9,2 13,7 Sales EBIT Earnings Before Interest, Taxes, restructuring and Nestle’s sales reached U. S. $111, 4 billion in 2009, down 5 per cent on the U. S. $117,3 billion reported in 2008.

Despite of sales decrease (the impact of price increases), Nestle was well ahead of the rest of the industry. Sales of each company went down insignificantly in 2009 relative to the previous year. The figure to watch most closely is likely to be EBIT, however, with Nestle’s 2009 figure dropping slightly to U. S. $16, 3 billion (from U. S. $16,7 billion) mostly as a result of 15 increased marketing and research & development costs. EBIT measure increased around 15 per cent in PepsiCo and Kraft Inc. while decreased 2 per cent in Nestle. Percentage of sales shows how much money was spent per one unit.

We can notice the growth of this exponent in all of three companies. The growth of percentage of sales means either increase of product prices at fixed costs or decrease day-to-day expenditures on the production of goods at fixed prices. Percentage of sales for the year rose up in Nestle, PepsiCo and Kraft despite increased raw material costs for milk, coffee, sugar, energy and packaging materials, and negative impact from currency exchange rates. 16 6. Financial cash flow analysis For the analysis, we took the cash flow statements of three years: 2007, 2008 and 2009.

Overview of cash flows until 20091 2007 2 Profit Operating cash flow Investing cash flow (more invests made) Financing cash flow Change in cash flow Cash at the end of the period 1 2 According to the annual report 2009 Appendix 3: cash flow statement 2007 17 The strong operating performance and improved profitability are reflected in the group’s cash flow performance. Operating cash flow increased from CHF 11. 7 billion to CHF 13. 4 billion (respect to 2006) which represents 15. 1%. In 2007, more investments are made compared to 2006. The investing cash flow increased about CHF 5 000 million.

The strategy adopted by the company is a strategy of acquisition of new businesses. Besides, Nestle’s strategy is to invest in countries from which it sources commodities, rather than export raw materials. The major industrial investments in developing countries made in 2007 were Pakistan (CHF 90 million), Brazil (CHF 60 million) and China (CHF 20 million). All these facilities have been equipped with environmental technologies3. About the financing cash flow, more borrowings are made (for example to cover the inventories costs according to the balance sheet 2007). 20084 Operating cash flow Investing cash flow

Financing cash flow Change in cash The group’s operating cash flow decreased by 19, 9% despite the strong operating performance and improved the profitability of the group. This reflects the decline in the value of most currencies relative to the Swiss franc in 2008. Additionally, there was a higher level of working capital compared to last year, mainly in inventories as a result of the increased cost of certain raw materials and the decision to increase inventories of some products. The group made less invests during the year. A new strategy is adopted: there are fewer acquisitions of businesses.

Besides, in order to save money, the company sold non profitable businesses. In fact, according to the Nestle Management Report 2008, within the group’s investing activities, the major movement in 2008 was the CHF 10. 7 billion received from the 3 4 According to the Creating Shared Value Report 2007 Appendix 3: cash flow statement 2008 18 sale of 24, 8% share of Alcon to Novartis, whereas in 2007, it was the payment of the CHF 9. 5 billion from Novartis for the acquisition of Gerber and Novartis Medical Nutrition. The group’s financing activities comprise the Share Buy-Back programme5 in which CHF 8. billion was invested in 2008, an increase of about CHF 2 billion compared to the original plan in 2007 (according to shareholders returns). The company made a purchase of their treasury shares (redistribution to shareholders). 20096 Profit Operating cash flow Investing cash flow Financing cash flow Change in cash Cash at the end on the period The group’s operating cash flow increased by 67% or CHF 7. 2 billion. This was achieved despite the impact of the decline in value of most currencies against the Swiss franc. A key contributor to the increase in operating cash flow was the improvement in working capital.

There are also negative events in 2009 such as the impacts in 2008 of higher raw materials costs and the decision to increase inventories of certain raw materials (increase of the free cash flow). The investing activities represent CHF 5. 4 billion (4. 3% of the sales). There is a major movement: fewer disposals of businesses compared to 2008. About the financing cash flow, in respect of shareholder returns, the group’s financing activities comprise the Share Buy-Back Programme, in which CHF 7. 0 billion was invested in 2009 and prior-year dividends which increased to CHF 5. billion. 5 6 Appendix 6: press release share buyback programme Appendix 3: cash flow statement 2009 19 7. Assessment of the risks 7. 1. Financial risks In the course of its business, the Group is exposed to a number of financial risks: credit risk, liquidity risk, market risk (including foreign currency risk and interest rate risk). Credit risk Credit risk arises because a counterparty may fail to perform its obligations. The Group is exposed to credit risk on financial instruments such as liquid assets, derivative assets and trade receivable portfolios.

The Group avoids the concentration of credit risk on its liquid assets by spreading them over several institutions and sectors. Foreign currency risk The Group is exposed to foreign currency risk from transactions and translation. To avoid this they can make a forward and future contract with partners concerning currency and exchange rates. Capital risk The group’s liabilities and liquidities could potentially be impacted by any major event in the financial market (currency, interest rate…). The Group’s capital management is driven by the impact on shareholders of the level of total capital employed.

It could be solved by encouraging present investors to make a contribution and attracting new ones. Liquidity risk Liquidity risk arises when a company encounters difficulties to meet commitments associated with liabilities and other payment obligations. Such risk may result from inadequate market depth or disruption or refinancing problems. It could be solved by limiting exposures in instruments that may be affected by liquidity problems and by maintaining sufficient back-up facilities. The Group does not expect any refinancing issues and has successfully. 20 Interest risk

Interest rate risk comprises the interest price risk that results from borrowings at fixed rates and the interest cash flow risk that results from borrowings at variable rates. The objective is to manage its interest rate exposure through the use of interest rate forwards, futures and swaps. 7. 2. Operating risks Nestle is dependant of sustainable supply of a number of raw materials, packaging materials and services. Thus, change any change in macro-economic environment resulting in input prices volatilities or capacity constraints could impact on the financial results. 1 8. Recommendations In this part, we draw up some recommendations in order to improve the company’s management system. 8. 1. Financial recommendations ? To cover its liabilities, Nestle should improve its inventories management (decrease of inventories costs for certain raw materials for instance) ? Nestle should keep the good management of its treasury (the need in treasury is negative) 8. 2. General recommendations ? To introduce more health-based products ? To provide allergen free food items, such as gluten free and peanut free ?

To open Nestle Cafe’s in major cities to feature Nestle products 22 References Sites The global website of Nestle S. A. http://www. nestle. com/ PepsiCo official website http://www. pepsico. com Kraft foods official website http://www. kraftfoodscompany. com Reports Nestle financial statements Nestle creating shared value reports Nestle management reports 23 APPENDICES 24 Appendix 1: Balance Sheets Consolidated balance sheet as at 31 December 2007 before appropriations In millions of CHF Notes 2007 2006 Assets Current assets Liquid assets 18 Cash and cash equivalents 594 5 278 Short term investments 2 902 6 197 9 496 11 475 Trade and other receivables 8/18 15 421 14 577 Assets held for sale 25 22 74 Inventories 10 9 272 8 029 Derivative assets 9/18 754 556 Prepayments and accrued income 805 594 Total current assets 35 770 35 305 Non-current assets Property, plant and equipment 11 Gross value 49 474 (27 (26 409) Accumulated depreciation and impairment 47 077 847) 22 065 20 230 Investments in associates 6 8 936 8 430 Deferred tax assets 16 2 224 2 433 Financial assets 18 4 213 2 778 Employee benefits assets 14 811 343 Goodwill 12 3 423 28 513 25 Intangible assets 13 7 217 3 773 Total non-current assets 78 889 66 500 Total assets 114 659 101 805 In millions of CHF Notes 2007 2006 18 14 179 12 572 sale 25 7 — Financial liabilities 18 24 541 15 494 856 884 477 470 Accruals and deferred income 3 266 3 059 Total current liabilities 43 326 32 479 Liabilities and equity Current liabilities Trade and other payables Liabilities directly associated with assets held for Tax liabilities Derivative liabilities 9/18 Non-current liabilities Financial liabilities 18 6 129 6 952 Employee benefits liabilities 4 5 165 5 415 Deferred tax liabilities 16 1 398 706 1 091 366 3 316 3 039 Total non-current liabilities 17 099 16 478 Total liabilities 60 425 48 957 393 401 Other payables Provisions 17 Equity Share capital (a) 20 Share premium and reserves 26 Share premium (a) 5 883 Reserve for treasury shares (a) 7 839 Translation reserve (6 302) 4 550 52 285 (5 205) 59 705 49 963 (8 013) (4 644) parent 52 085 50 991 Minority interests 2 149 1 857 Total equity 54 234 52 848 Total liabilities and equity 114 659 101 805 Retained earnings (a) Treasury shares (a) 21 926 Total equity attributable to shareholders of the (a) At the Annual General Meeting on 19 April 2007, the shareholders approved the cancellation of 7 663 200 shares. 27 Consolidated balance sheet as at 31 December 2008 before appropriations In millions of CHF Notes 2008 2007 Cash and cash equivalents 19 5 835 6 594 Short-term investments 19 1 296 2 902 Trade and other receivables 10/19 13 14 442 890 Current income tax receivables 889 531 Assets held for sale 8 22 Assets Current assets Inventories 12 9 342 9 272 Derivative assets 11/19 1 609 754 627

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