GLOBE Jun2005 Johnson Transcript

NESTLÉ S.A.

GLOBETRANSCRIPT

Event: Nestlé Investor Seminar 2005

Presentation Date: 8 June 2005

Presenter: Mr Chris JohnsonResponsible, GLOBE programNestlé S.A.

Disclaimer

This is a transcript version which might not reflect all exact words of the live session.

This transcript 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.

Transcript of GLOBE NIS on 8 June 2005 Page 2

Roddy Child-Villiers - Nestlé Head of Investor Relations

Welcome back we're going to start. This is the one you've all been waiting for. For each of the last three years I've been asked why is there no GLOBE presentation. Finally there is a GLOBE presentation and the good news is it's still being made by Chris Johnson so something must be going right. Chris started in '83 he started with Carnation, he's worked in PetCare, Culinary, Beverages in Waters, he was market head of Nestlé Taiwan. And that's important because the first thing to remember about GLOBE is that it's being led by a business manager not by a techie OK, it's a business process. He took over running GLOBE in 2000 and it's the second time you've seen him you saw him in Montreux and there it was all a vision now it's reality. Chris.

Chris Johnson - Nestlé Responsible, GLOBE program

Thank you Roddy. Well good morning everybody it's good to be back. As Roddy said I'd like to spend the next hour giving you an update on where we stand with the GLOBE programme which I think all of you have heard a little bit about anyway. And as Roddy mentioned also, second time that I've spoken in front of this audience and a lot has changed in those four years. I must say I'm a lot more confident today than I was four years ago. At that time GLOBE was just a concept and really today it is a reality. So what we'll do is I'll briefly go through an update of why we're doing this, again just for introduction to some of you. What are the programme objectives, how we're doing against each of those objectives, what's going well and I'll be very transparent with you as well about those areas which need to be improved. I'll share some stories, some examples that we're getting from the markets where GLOBE is enabling benefits, talk a little bit about the future vision with GLOBE and then open it up for questions. So I hope to do slides for about a half hour and then Q&A for the balance. Before starting also as Roddy mentioned even after five years I'm still not an IS/IT expert, even after that time. So if you throw any technical issues my way I'm going to throw to Olivier Gouin who is in the back of the room who is the head of IS/IT our group CIO who can hopefully answer those.

So here we go. Why are we doing this? Again I presented this before and I think you're all aware to basically unlock our potential, leverage our size as a strength, and you can almost say to avoid it being a liability in the future unless we did something like GLOBE unite and align us on the inside to have more of a competitive focus externally. And I think you are also aware of Peter Brabeck's vision of turning our complexity the fact that we sell a wide range of products through multiple geographies and multiple channels and to turn that complexity into a competitive advantage. To turn really into operational efficiency.

There are three programme objectives which haven't changed since I started here in July 2000, that was my first day on the job I was handed a piece of paper with these three things and that hasn't changed at all. First objective to harmonise best practices across the Nestlé group, the second to establish data standards and data management and the third is to standardise the systems. So harmonise best practices, standardise data and standardise systems and I can tell you that across the Nestlé world I don't think you can find anybody who doesn't know these three objectives. The first two are the most important, the first two are those that really enable the benefits. The last one, the standardised systems are important because they support the best practices, they support the data and they also enforce them, the systems. And particularly the systems we've chosen with SAP have that sort of enforcing and disciplined effect.


I did a little bit of research before this meeting and learned that GLOBE and Nestlé is really not the first type of programme to try to unify through standardisation. The first one actually occurred, I'm not making this up, 2200 years ago. There was a Chinese ruler who ruled the Chin State who at that time through military force had defeated a number of warrior states in China. For those of you who know the Chinese system there was a warring states period. Each of these states had independent feudal lords and while I'm telling you this story I'm not going to make it but if you see any sort of correlations between Nestlé and the story I'm telling you I leave that up to you. But there were a number of independent states basically with their own ways of doing things, defeated them militarily but then one or two unify them and so military force on its own was not enough. He basically did it through standards. Now he didn't have a PowerPoint presentation I'm sure like this, but he did it, I swear to God, through three objectives. And each objective is very similar to the objectives we have in GLOBE. The first one he did was to implement a standardised written language because at the time each state had their own spoken language and written language. Now where the parallel to GLOBE is that GLOBE is about standardising, primarily the back office stuff. The stuff the customers and consumers don't see. It's not about standardising the products we make, it's not about standardising the way we deal locally with customers and consumers. That's not what GLOBE's about, GLOBE is about the back office stuff, so very similar. He allowed people to speak in their own language, just as GLOBE allows the markets to speak in their own language locally, but the back end stuff is standardised like the writing. The second one very similar to data standards. You're familiar with the round Chinese coin with the square hole in it, that was actually invented during that time. With a standardised coin they were able to trade better just like with standardised coding of our products which is something that comes out of GLOBE. Our inter-market supply our trading between Nestlé markets is easier. And your probably looking at the third one and saying what does that have to do with standardised systems, but it also is a very good analogy. At the time there were not paved roads, on the dirt roads these ox carts would travel and they'd be different sizes in different states. If an ox cart would go from one state to another the grooves in the road would be different and the ox cart would tip. Very similar to the situation before GLOBE where our information systems were not compatible. We couldn't share information across borders because the systems were so very, very different. Now it's not a perfect analogy, because it took Emperor Chin about 15 years to do this programme, and I sure as hell hope it won't take 15 years for us to this, and I'll share timetables later. And the second thing was that Emperor Chin publicly executed thousands of people who didn't follow the standards. He killed philosophers, he burned books, he did that sort of things and where not quite there yet in Nestlé, we're not quite there. But I have to be honest as well some people have lost their jobs already so far by failing to adopt to GLOBE.

The next one and Roddy asked me to do this just to be clear, what I'm responsible for and what the GLOBE programme is responsible for. I'm accountable to make sure that the markets put in the best practices, the zones and the markets are responsible for doing it, but I'm accountable to make sure that, that is done, I'm also accountable to make sure that the data standards and data management is in place. Again the zones and markets are responsible for putting that in. Also accountable to make sure that the GLOBE systems and we'll talk later about the timing of these, the GLOBE systems which are being rolled in over a period of time are put in, by the end of this year about 30% of our food and beverage sales is running on GLOBE processes data and systems. I'm also responsible to make sure that on a global basis we don't spend more than 1.9% of our food and beverage sales on IS/IT including GLOBE. So in other words total GLOBE IS/IT EBITA impact not to exceed 1.9%. I'll go


into a few more details on that as well. And they'd have to do it within the agreed scope, timelines and not just do it but also do it with acceptable quality. The benefits, this is the part we have to make clear, the benefits are tracked through the Nestlé Group initiatives. So Operation Excellence 2007 which you're aware the responsibility Werner Bauer, FitNes, the responsibility of Wolfgang Reichenberger will capture the benefit enabled by GLOBE.

A brief update then of where we stand with each objective. Remember first objective harmonise best practices. What we did in February 2001 was bring in over 400 individuals from Nestlé markets around the world, actually from 40 different countries. And we decided to document, validate and use this as the base then for how we would design the best practices and configure the system. We didn't try to use state of the art best practices, we didn't try to use consulting dreams, we used things that were tested and proven within Nestlé because we knew some markets did some things very well and some markets didn't do them very well. And we thought, if we could at least share the best of the best we'd be in a better shape. So that's the foundation of it. We have over 800 projects in progress worldwide. Most of these best practices do not require SAP systems, which you'll see later. These basically accelerate benefits, prepare the markets for smooth systems implementations. One of our key learnings is unless you put these in, in advance it's very troublesome when you put the systems in as well, as I mentioned just before not dependant on GLOBE SAP systems can use no systems in some cases, and existing market systems in others.

Later on I'll show you some of the enable benefits that come both from system related and non-system related best practices. These are stored in a single repository, it's called the Best Practice Library. It consists of three parts, you've got a repository of over 1000 best practices which have now been defined, we've grouped them together into solution sets. For example a solution set would be things like demand and supply planning. How to do demand supply planning or how to do asset and material maintenance, or how to do outlet classification. These are grouped together in different sets. We also have tied to this some best practice networks. So for example in data management, in control framework, technical and production, HR we have forms where people can exchange questions, learnings and so on about these best practices and we also use it as a tracking tool. This is where you see the number of implementation projects that are in progress so far.

Data standards, data management, second objective I also say is not the sexiest of the objectives but probably one of the most important. We've now established over 230 global data standards. Before GLOBE, and you may find this a bit hard to believe, but before GLOBE we didn't have standards for example for production batch codes. Batch codes would be coded differently market by market, or even within a market factory by factory. We didn't have key customers coded in the same way. So it would be Carrefour or Wal-Mart or Tesco, very difficult for aggregate information when all the customers are coded differently and even spend categories things like tinplate were coded differently. So this has been now established, we set up in 2003 a key exercise to clean data because before you can start to standardise and set up the management of the standardised data you have to clean up, and I'll show you a bit the mess we have but as of today we finally know how many products we sell. We really didn't know before we did this how many products we sold in Nestlé and by the way it's around 120,000 SKUs. We also know how many products we trade between Nestlé markets, in other words inter-markets supply products and there it's around 25,000. And we're seeing markets already coming back and saying we get benefits from just having cleaner data. For example Nestlé Waters North America home and office business, you can imagine a business like this it's critical to have good quality customer addresses and invoices


because if you're dropping off water at the wrong address or you're sending invoices to the wrong address it costs money and they figured just by doing this cleansing exercise they'd save $300,000 per year.

I think you've seen this chart before, it's just an example of how we used to code. Producing Kit Kat Chunky in the UK shipping it to ten European countries each with their own verbal description and number descriptions. And clearly when this can be straightened out it can have an impact on higher quality supply and ultimately then lower networking capital.

I also mentioned the cleansing exercise, we thought that we had over 6 million materials, customers and vendors in Nestlé, we thought we had, but after doing this exercise realised that a large number were obsolete, a large number also duplicate. About 56% or over half were garbage in the system. But that's not all, and it sort of understates it, in addition to that we found that probably 30% to 40% depending on the category were also not correct, information was wrong, addresses were wrong, phone numbers or maybe parts of the data were not correct. We had problems with about 70% of our data. By cleaning this up again we're seeing and getting good reports of benefits, markets saying I don't have salesmen anymore promoting products which have been discontinued. Oh you laugh, you laugh but I've been out there we've done that, I've done that as a salesman. We don't have anymore or less shipping to wrong addresses, or to customers who are no longer there, you don't have factories who are ordering raw materials which are no longer the right specification so there's a lot of benefits from just cleaning up. Now the trick is of course and where GLOBE comes in with assistance is to help sustain the clean up, because like cleaning your room, easy to clean but as you know very quick to get dirty again.

And the third objective of information systems and technology, we've established a GLOBE template. Now basically a template is the, primarily SAP application which we've configured or wired with the best practices and the data standards to make it very, very simple. That is then localised when you roll it in to each market, so each market will load in their own data and make any adjustments, fiscal legal adjustments required. But the customisation is fairly limited, it's truly a global approach and the second version has new functionality and it's also built on a new technology platform. Version 1.5 is the platform that we started rolling out really last year and we'll roll out for the coming years. Global infrastructure hardware and network is in place and we also have now put together and it's fully operational, a three tier support structure, because to manage this new IT approach requires a different set up. We have a, what's called Business Technology Centre, I think maybe last time I talked we called it a GLOBE Competence Centre but the name has changed a bit, the function is very similar, it's the heart of the programme management. It is also similar in some ways to a product technology centre, product technology centre looks after innovation and renovation of products and technologies. The Business Technology Centre looks after innovation and renovation of the supporting tools and process with respect to the business. GLOBE centres, we've established three GLOBE centres plus we have a central support centre here. The three GLOBE centres are aligned with the zones and they have two responsibilities. The first responsibility for them is to help the markets put in the best practices, put in the data standards and put in the system, so help implementation. And the second objective they have is once the markets have put this stuff in, to keep it going, to sustain it and to continuously improve it also. So they have a dual role which you can image as more and more go on the balance a bit shifted. And then we have local GLOBE organisations and we set these up actually very early. Every market in the Nestlé world has a GLOBE manager and a team. Every market in the world also has a data manager which is something quite new.


So this is the set up that we have today. So as we speak today we have 16 markets and they're listed there and I think you have it in your book as well. We have 18 countries, almost 17 billion in sales which if you look at our food and beverage sales for this project it's a little over 20%. About 52,000 users, over 200 factories both Nestlé and co-packers split about 50/50, over 200 distribution centres and over 170 sales offices. The implementation plan, because we have three objectives, there's also in a sense three streams for implementation. Starting in 2002 markets began already as I mentioned putting in these best practices in advance. Not waiting for the systems but putting them in, in advance. The same for data standards and data management, I mentioned 2003 was an important year for data cleansing. The systems implementations we've take a sequential implementation plan. In 2002 as originally planned, if you remember in 2001 I was talking about this and this is what's happened, we put in our first version of this template. I mentioned that we are now on 1.5. We put in the first version of the template into 3 markets which were medium sized markets big enough to be interesting, but not so big that if things went horribly wrong we'd be in big trouble and it worked, it didn't work perfectly. As a new pilot there's always bumps and learnings and so on. We took those learnings and rolled it out into three more in 2003 and I must say it went very, very smooth. In 2004 we then went to a new version of the GLOBE template and also rolled out into three big markets, UK, Philippines and Canada, much large than anything we had done to date, to see if we could use the new technology platform as well as roll out into some key markets.

And then 2005 and 2006 we're talking about really the accelerated implementation period. So that's where we are today we are 5 months, 6 months into this accelerated plan. We have 11 major go lives this year, we have 11 also planned in 2006, you will see that as a percentage of food and beverage sales about 30% by the end of this year and around 80% by the end of next year is the plan. Now also Roddy told me to be sure to make this clear, this is not a benefits line, this is simply an implementation line which shows the amount of Nestlé business which is running on these systems. As far as the timing goes there have been two major changes to this timing. Let me explain, there have been changes up and back and there will continuously be movement, some will move up some will move back, I've got change requests now impending where some markets want to accelerate, some markets want to go back a few months. That will always happen but there have been two significant shifts in timing. The first one you're not even aware of but I'll share it with you anyway. When I started in July 2000, when I started this programme I was given that piece of paper I showed you at the beginning, the three objectives, and I was told oh yes by the way we want to do this for all the key markets, in other words 80% of the world by the end of 2003. And I had just started I had no idea, I came from Taiwan, I said OK thank you very much yes, let me think about it. Well it took me about two weeks to figure out that was just not going to be possible. Talking to SAP, IBM other people who had done things like this, knew that, that was just not realistic. So my first executive board meeting, remember I came out and figured if you don't have good news it's better to put the bad news out early and the bad news went just like no way we can make the timetable you want but I think we can probably do the majority by the end of 2005. And that's what I talked about when we came in 2001. At the end of 2001 we also made a decision about how we would manage, this is after the meeting we had with you, how we would manage the budget in this programme, and we were really struggling with how to do that and we finally figured OK we will set an envelope of costs that I mentioned earlier, 1.9%of food and beverage sales to cover all the GLOBE plus IS/IT costs. In other words all the legacy, existing IS/IT costs plus GLOBE programme costs, put them all together cannot exceed 1.9%. To avoid any sorts of spikes we had to spread out a bit this


implementation plan, which in a sense pushed that end of 2005 to that 80% to run the end of 2006 basically. This is where we stand today, and like I've said some will be moving maybe slightly up and back but I'm pleased to say that we're on track so far and this is for 2005. Remember we did, 3, 3, 3 for the first 3 years now all of a sudden we've got 11 scheduled this year. When we go live with GLOBE, I think this is very important, we set as the criteria for success that when you turn the systems on you have to be able to take order, produce product, ship it, invoice it, collect money. Five things, so that was Peter Brabeck's I think, very sound target that he gave to us. The rest of the stuff OK figure it out later but that, basically the customer should not be able to tell the difference and that's the approach that we've taken.

Now the degrees of success have varied in 2005 and I'll be very transparent with you. Of all the implementations we done starting back form 2002 South Africa has been the worst, why? South Africa went live in January and at that time was in the middle of a labour strike, a strike in the factory and in the distribution centres. Two weeks before the go live. A decision was made to move ahead anyway and so you put the strike together with GLOBE on top of it, it wasn't an issue necessarily with the systems but clearly there was an issue with people knowing how to use the systems. So when people came back to work in the middle of January they hadn't been trained or they forgot a lot of the stuff they had been trained a month before and it's taken them actually a couple of months thereafter to get back up to speed. The good thing about South Africa now is that they seem on plan to make their annual target, they've been able to catch up. Of course the bad thing was that customers certainly felt that I was down in South Africa and I was with some retailers and they were not necessarily happy about it, but again they're on track now. Austria, very successful in January. Pakistan probably one of the smoothest we've had, actually came in I think it was seven or eight months total project time, the fastest project that we'd ever done so far and came in about 50% of the estimated budget. The Centre, again we don't manufacture anything here, we put in some back office support and it was fine. Russia was OK, some business issues completely unrelated to GLOBE exist, but the GLOBE part is fine. Germany, I must say is something I've been nervous about ever since I took this job. And I was nervous because, well, it was big, I knew also early on that we needed to do a big bang approach to implementing Germany because of this very much Frankenstein system of our legacy systems that they had stitched together to support their business. Germany went live in April and also was very, very smooth and I know that even the external world, the Lebensmittel with Zeitung, the trade was watching very carefully this one and was pleased to report that there were, it was a non-event. And I think that's probably one of the best signs that this thing is actually working is when you read about it in the press, you know that something is probably wrong, and Germany was a good success, six factories, 11 DCs (distribution centres), 6000 users basically cut over at once. So it's proven to us that we can do large scaleimplementations, that our approach and the solution itself is robust enough to handle it. India, very complex, completed, fine in May, Home and Office UK also completed, we have 180,000 direct customers using direct delivery, impressive achievement so far. Mexico and the UK and Ireland have already started to turn on their systems, but when I say major go live and I meant other chart as well, I talk about when the majority of the business is running on it. In Mexico we've got the confectionery business and some of their back office running, UK and Ireland is turn on back office and most of their factories, but their big go live really is in July and August respectively. And Oceania will be New Zealand in October and then at the end of December will be Australia. So that's our plan right now, I have full confidence that we will continue to make these go lives.


Now maybe some of you are wondering OK, that's fine, it's running in these different countries, but can the companies grow, can the markets continue to grow with GLOBE. Here is just a summary chart 2004, so they're not proprietary figures. RIG, and you can see of the basically 12 countries that we have listed here that we had live that 9 of the 12 were positive and if you took the weighted average of this, it's actually higher than the group average in 2004. And that's not to imply that well you put GLOBE and all of a sudden your RIG goes up immediately, it's not the case. But it does show that GLOBE, you can grow with GLOBE and it's also good to see that, you enter these markets like Canada or Switzerland who are also showing good results for 2005. Bolivia I think all of you know is perhaps a different story, I think their problems transcend GLOBE.

Key issues in live markets, again I want to be very open as well; things are working but things are not working perfectly and they never are with this and if anybody stands up in front of you and tells you everything's perfect I really question that. The biggest frustration and I tell you it's more a frustration because it's not getting in the way, I mean we can take orders, produce, ship, invoice, collect, customer facing stuff, it's all fine. We even get letters, unsolicited letters, from our customers in different countries saying you guys have done the best, the smoothest that we've seen. But what's driving the markets a little bit crazy are these issues we're having with decision support. And by decision support I mean at a higher level, let's say at management level having consolidated and aggregated reports, strategic and analytical reports to help run the business. And the reason why we're struggling a bit with this was because our focus has been really to make sure that all the transaction stuff is working well, so the information at the transaction level, in other words if you're working on a factory floor the information you get is great. If you're customer service and you want to track an order, no problem, the real time stuff is all OK, 400 or something real time reports they're all OK. We have a couple hundred, let's say analytical and strategic reports that we're still struggling with, we were late to design them, we didn't necessarily train correctly for some of these, we've had some hardware and software issues also. We're working with SAP, because if you heard any SAP talk before I think they'd even acknowledge that BW can be a bit problematic, BW is the support for this. So it's not that we're flying blind, but I think it's a frustration because everybody knows there's this great information there and they get a lot of it, but in some ways it could be easier to access. A second one is system management, but this is more just a different way of working. I don't think I mentioned but I mentioned three GLOBE centres, but in each GLOBE centre is attached a data centre. The data centre then provides the IT services to that zone. Before GLOBE each market had their own data centre and even multiple data centres in the markets, over 100 data centres across Nestlé, now it's four. This is a different way of working, the markets before, if something went wrong they go in and just call somebody up and they go in and fix it right away. Now it's a shared service in a sense and so the markets that are live sometimes complain and they don't feel like they're getting all the attention they need when they want to change something or upgrade something. And it's a bit of a balancing act right now as we're rolling more markets in, but the priority clearly is and this has been made throughout the programme, the priority is markets which are live get priority, because we cannot let the business suffer and we haven't been so far. And the last one, I mean I almost hesitated to put this up because it's basically been resolved, but we struggled in Canada with a special tool to help us, developped actually with SAP, a special project with SAP, to help manage trade promotion management. This is part of the CRM if you know SAP speak; the CRM offering of SAP. And Canada is a very sophisticated market with lots and lots of promotions, actually probably more promotions than they would want to have, had a struggle then when we put this tool in to manage, because the tool was new. The bugs now have basically been worked out, the reports are


now starting to come through and so it's looking positive, in fact we're so confident that we're rolling it out in the UK in August, it's already been decided, so clearly we're over the hump yet, but I leave it on here because there's still a few outstanding things we need to address, but to be honest with you that's about it, the rest of it is working pretty well.

What we've learned is to be successful, implementation and best practices in advance is absolutely necessary. Data has to be really, really good and even though you say this a million times and the markets know it, you still run into problems in some markets with bad data. Focus on testing and training is absolutely critical, I mean the South Africa example was one where we didn't do the training as we should (due to strike). Business ownership, this cannot be delegated to a GLOBE team or an IS/IT team to implement, the most successful ones have been those that own the project, best people and attitude. And by attitude I mean taking the position to adopt best practices, not try to fight them, rather than try to adapt them to fit your needs. And again attitude makes a huge difference here and those markets which have taken this project on really own it are enjoying themselves let's say with GLOBE.

The cost, which I hear you're also interested in and I mentioned during my first executive board meeting, I said OK, I don't think we can do this by 2003, I think we can do it by 2005. And I also said at that particular meeting that this thing probably to do would cost around CHF 3 billion which was perhaps a bit alarming, but the 3 billion wasn't all that figure, the 3 billion was again using external benchmarking we thought was a realistic figure to do something of this scope and this scale and this timing. And where we stand today that 3 billion is still about right, but I also said at that time that about half of it, about 1.5 billion we said would be incremental to the ongoing IS/IT costs. The reality is that probably if anything our costs would be higher if we did not do GLOBE. Let me show you a little bit of history here, '95 to '99 IS/IT costs, this is before GLOBE, 1.2% of sales a little bit less than CHF 600 million, increased an average of 16% per year, so you can imagine that it's going up as a percentage of sales, up to around 1.6% in 1999. GLOBE was announced and the first thing I did was to take an inventory of what are we planning to do out in the Nestlé world and found that literally there were over 1,000 projects, GLOBE-like projects in the works, hundreds of millions of Swiss Francs planned to be spent. A lot of big markets, 14 of them in fact who had SAP were going to either upgrade SAP or introduce SAP on their own, which you can imagine if they had done that we would wind up with something much more expensive and something that ultimately couldn't connect. In 2000 we purchased the SAP licence agreement. In 2001 we were getting things going, designing, constructing and it was at the end of 2001 I mentioned that to manage this project, was decided by the executive board, but we set a cap of 1.9% of sales for the balance of the programme. And that, you know eventually we would hope to see it decrease some time in the future, but we didn't want any sort of EBITA spikes. Again this bar here shows perhaps, I mean for sure, if the trend had increased 8% a year, not 16, but take half of that, 8%, if you factor in all the projects that were in the works, we're probably at the end of the same time period would have spent 1 billion more, with no benefits. Now 1.9% is the target, it's non-negotiable, it's again how we adjusted the implementation timing to make sure that that was smooth. Any depreciation is all included in here, this is all up EBITA impact cost.

Now I'll go through quickly because I don't want to take away too much time for questions, but just to highlight a few of the GLOBE enabled benefits. I mentioned before we don't track them separately. When we first started GLOBE we were trying to figure out do we track GLOBE benefits or not and we were starting to think about it but then we were fighting with


different areas, is it a GLOBE benefit, a non-GLOBE benefit. I think what we realised is that GLOBE basically is an underlier for how we do business and some of them will be captured through the group initiatives, they're in your book as well, and again I'll go quickly. Oceania, using basically purchasing best practices, using P-card with Amex have been able to save significant amounts of money in 2004 and 2005, again before any GLOBE systems have been put in. Russia, again before their GLOBE introduction we were able to reduce the number of raw materials, and a reduction in specifications means a reduction in complexity, it means a reduction in cost. And Nestlé Waters also has been able to reduce loading customer claims by about 90%. These sorts of GLOBE enabled benefits are tracked through Operational Excellence 2007.

FitNes also, the former Andean Region, I should also mention we put Chile, Peru and Bolivia as our pilot market after GLOBE, the Region was changed to the Austral America Region, so if you're wondering what that is. But current GLOBE systems, systems and best practices are running here, and allow them then to consolidate administration of their accounting and save about 500,000 per year, plus have better data and visibility. As I say the CFO in Chile was one of the more, I would say aggressive challengers, that's a nice way to put it of GLOBE. He's one of the biggest proponents today. South East Africa, accelerated close, year end book close able to reduce down from nine days, this was even before they put the systems in, and Greece already has restructured, they used to have customer service spread all over the place, were able to save basically 12 headcount by consolidating it. Again all best practices, with the systems and without.

But it also can enable profitable growth. Integrated commercial planning, for example in Israel where they've been able to increase market share, and by the way these examples all came from the market, I'm not making them up, these came from them. France was able to identify some new business opportunities by consolidating their databases, because they had customers by division but they never really shared between the divisions, so they cleaned it up and now they've identified some new opportunities and Turkey has been able to increase their customer service levels. Again by putting in better order to cash best practices which you have to put in if the systems are also going to be run smoothly.

And net working capital, real examples, Chile again, using both best practices and systems can improve their collection process. Mexico again, turned on the systems beginning of 2005, for finance and control and have seen a reduction in credit days which they think will realise about 3.5 million in 2005. And trade between North America and Europe for water has also realised some benefits, again not systems, just using the best practices.

So quickly Nestlé's future with GLOBE, and again this comes from visits I've made to the market as well as feedback we had from our market managers' conference we had here in April, we had all the market heads here in this room and they presented on what they felt was the future of harvesting the GLOBE investment I guess was their title, they're a working group and this is what they said. The speed to share new best practices, having a standardised platform, having a central repository enables basically new best practices to be shared quicker, better information for better decisions. I mean they know the information is there, yes we've got to work a bit on the analytical and strategic reporting but they're confident it will come. Enable shared services, clearly a big benefit and this is, you can imagine this, to be able to run their shared back office operations across regions. Organisation change, both acquisitions and divestitures, when you have a common template


approach, when you have common systems, is much easier to carve out a business, much easier to integrate a business. I think in Switzerland we integrated the Mövenpick business, it took something two days to do. It would have been impossible to do with former systems, and allow for focus on generating demand activities. This is probably one of the most important. Again it's the front line back line, by getting the back line standardised in a sense out of the way of the worry of a market head, because I remember when I was in Taiwan, I spent an enormous amount of time worrying about the back end stuff, and the focus on growing the business, on innovation, on renovation is a big benefit of GLOBE as well.

But to summarise, quickly, it's on time, it's on budget, it works, it doesn't work perfectly but it works well, it enables benefits with and without the systems, it's really become our way to do business and again I really see it as the only way to fulfil this vision Peter Brabeck has of this manage complexity as a competitive advantage, and for this vision then to move to a multi-focal company. And I must say my honest opinion, and I'm still fairly young, and I hope to spend many more years with this company, I can't imagine really working for this company if we didn't do something like this and I don't think, even today, we completely understand or even partially understand the potential that this program has. And it's exciting to go to markets and talk to market heads who maybe at the beginning were sceptical or worried, but now are true believers, and I think that we have a great potential with that and with that I'll open up to any questions if you've got them.

Questions & Answers

Question #1 IT/IS costs post GLOBE implementation and post 2008 & Lessons learnt from implementation & Interest from competitors, retailers, industry in similar projects

Post implementation of GLOBE and basically post 2008 do you expect IT and IS costs to fall as a percentage of sales? That's my first question, and secondly with the benefit of hindsight what would you do differently if you were to start again? And the third question for you, I think GLOBE was the largest ever SAP implementation in the world, ever undertaken and I was wondering to what extent you had received calls from competitors, retailers, from other industries about implementing such projects in the future?


Well I think on the first question, I did show that chart and I think it's in your books as well, that we estimate, certainly for the next two years it's not going to be going down as we're implementing, 2006 and 2007. Is there potential there from 2008, perhaps it could, well maybe, but what I think is the key direction that we're giving and I think we set up a platform is that we're not looking at increases as we had in the past. I mean we were on really a road to ruin and if we had continued with that, not centralising, not doing it in a harmonised way we would have been in big trouble. So the answer to your question is, no not in the next two years but you know I think who knows what sales will be, who knows this or that, but I think we'll probably be able to be around that level or slightly less. As far as what I do differently, I don't spend a lot of time thinking about that, but one thing I, two things probably come to mind. The approach to budgeting and cost, even when I talked to you in October I was talking about the CHF 1.5 billion incremental of the CHF 3 billion, and was trying to like figure out how do we consider what's a GLOBE cost and what's an existing IS/IT cost, by putting them altogether into a basket it gives an incentive for the markets, which they have to


do, because they have targets themselves, to reduce their local IS/IT costs, which they have to do anyway because a lot of its been done regionally and globally now, and that pressure has helped then get the total pressure of cost down. So I would say only at the end of 2001 did we come up with this 1.9%, that's been really nice, that's been really helpful to manage this programme as we've gone ahead. The second thing also was we spent probably almost a year, I mentioned also fighting or trying to figure out the benefit part, finally realising that again it's, since GLOBE touches really all parts of the organisation in the way we do business, very, very difficult to separate what's a GLOBE benefit and not. So those two things probably wasted some energy on. On your third question, I do spend time, almost everybody who is doing a large scale projects calls me, as I did when I started because I think that's very important and there's a certain openness and a certain camaraderie among us because our jobs are sort of special in a way. And one thing that I tell them, that it's very important to do, and one thing that I think underlies the success we've had in GLOBE has been the leadership from senior management, in particular the CEO. I think you'll hear this from Peter Brabeck if you haven't already, this is the big difference, this is where they're jealous. The fact that it is of top, not just priority but I think he's even been quoted to say he wants us to be his legacy. Well it takes a very bold person in the company to screw with somebody's legacy. So that is something that's very important. The fact that I was put on the executive board reporting to him gives it a certain profile. The fact that it's treated not as an IS/IT project, really as a business project and to put a business person in charge of it. To try to demystify it because I've seen presentations sometimes like on this and it becomes so technical it becomes so hard to understand. And I've had to in this programme and we've had to explain this across to Nestlé well why we're doing it. And it is very basic. It's three objectives and we'll roll it out this way. And that's been I think a key reason for the success.

Question #2 Tracking sales with GLOBE & Reporting advantages and disadvantages with GLOBE

Two questions if I can. We've just heard in the Wal*mart presentation that you can track the sales by SKU at every Wal*mart outlet around the world. Will GLOBE allow you to do that with your other customers? And secondly with the analytics reports that you said you can't do it's not easy to do, are any of those report things that you could previously, or have been able to do outside of GLOBE?


The good thing about GLOBE is we've got the foundation in where we can do that. Now how much and how often you want to pull up and aggregate this information, that's what needs to be decided. But the good thing is that the base, it's like building a house. The foundation is really good. We've tagged or coded basically materials at the lowest level so we're able to then aggregate information three dimensionally. By customer if we wished, down to, there we have to see about what level we want to go to but in principle down to a very low level. By geography which we do today - today our reporting is basically limited by geography-. Or by channel. So we can also aggregate a bunch of different customers into a channel. So that three dimensional reporting is something that we can develop. We have parts of it in place; I don't want to make it sound like we have nothing in this area. But again it's the impatience of the market who know that it's there and especially management who wants to get it. That said, the people who are most pleased when I go out to markets are people who work at the lowest levels of the company which is very interesting, I never


thought about this. But the majority of people who are touched by GLOBE are people who work in factories and work in distribution centres, that's where the majority of Nestlé staff is. And because of this programme these people now, their jobs have been upgraded to a certain extent. Before in a warehouse perhaps they were just pushing around boxes or on a line they're just sitting there watching jars go by. But now they have the responsibility to put information into the system because that's one of the tenets of GLOBE is that it captures the data at the source. They put the information in and they also have visibility to see what's happening. Before it was only their boss who got the reports. So these people, some of them who have never even used a mouse or a computer before have now upgraded their skills and so it's not something you capture on a balance sheet and it's not something that, I can't put a figure attached to it except that perhaps it will be good to retain people or better to retain people because people's jobs have become more interesting to them. We've in a sense upgraded. Now for some that's been a threat; some people just don't want to do that. But the majority of people, and also when I go to factories I also ask. And warehouses and head offices. I ask this, I'm not lying. I haven't had anybody go back to me and I ask them the question, if you could go back, do you want to go back to what you had before. And sometimes this is right after they've started that things are still, they're still learning how to use it and access things. And across the board with the exception of two people out of hundreds or maybe even thousands I'm not sure that I've talked to, have said that no they don't want to go back. And the two that did happened to be in Canada as I explained earlier that went from this very supped up system for trade promotion management to what they have now. That said they like, and I must say about the trade promotion management system and what we did with SAP, it's a really good tool. I'm not talking about the tool itself, the design is great, it allows great transparency and visibility of trade and consumer promotions. But as I mentioned we had some issues with just getting the thing to work and perform in a timely manner.

Question #3 Hidden costs of GLOBE

I noted the 1.9% cap. But obviously there are going to be many other members of personnel in lots of different departments that are doing things and doing more things as a result of GLOBE so to that extent there are going to be hidden costs. Now I know that there's absolutely no point in you guys measuring that because it doesn't help you but do you have a feel for what the incremental cost would be of other areas? And I'm presuming that this is implementational issues and that these costs would then go down afterwards.


When you're talking about people doing other things, maybe I'm confused. After the systems are in what we're finding, because as I mentioned you're capturing data at source, a lot of the, especially in the financing control area, a lot of the end of the month people who are just collecting pieces of paper from salesmen and so on, writing down their commitments, that sort of stuff is disappearing. We're seeing that you can really streamline your activities in the back office functions; customer services as well can be consolidated because you now have a global picture, you don't have to have teams in every division. So in reality I think that the hidden costs were really before GLOBE, that's my take on it. And that's what the markets are also coming back with. That said there are some areas, for example in the factories to ensure traceability it requires that you're scanning at all points, basically at many points throughout


the chain of the factory. Well you may have a few more people on the line but that means you can have a few less people in the back office who before were maybe keeping track of these things. So net net I think that this will result in fewer and more efficient. For the time being though during this implementation yes there are additional people involved in implementing GLOBE. But I think this is really smoking out a lot of the hidden costs that we had before. That's my take.

Question #4 Future costs of SAP

Can I just ask, from a recent conversation one of my colleagues had with SAP they implied that you had bought the R3 version of SAP as a licence. And that there would inevitably be a mySAP upgrade required. Could you just talk about whether that's true, whether it's included in the licence fee you've already paid and what the costs might be going forwards?


Yes and in fact we've made a ten year licence agreement and it includes upgrades, so I don't know if you want to comment on that?

Olivier Gouin - Nestlé Head of Information Systems

Yes I think basically what we have bought is the full suite of the SAP solution and that's basically for ten years and that includes mySAP, BWs and all the different modules that are sold today, or will be sold tomorrow by SAP so we have a full contract. And we are implementing the full suite.

Question #5 Savings from Excellence and FitNes programs

I wonder if you can just remind us what the savings of the other programs, the Excellence and FitNes are.

Wolfgang Reichenberger - Nestlé CFO

On the other initiatives, it's what we have told you already, it is about CHF 1 billion for Operational Excellence 2007 each year, this year, next year and 2007 and about CHF 200 million for Program FitNes. Part of those savings and I would say a growing part of these savings is enabled by GLOBE, but we are not trying to figure out is it now 600 or 700 million out of the 1 billion of operational expenses, you don't actually pinpoint what is GLOBE. But we have the evidence and you see it in the account that it is a rising part of the savings programmes.


Question # 6 Other potential benefits of GLOBE

And just from what you're saying it seems that you could strip out a lot more with this new GLOBE system, and I'm wondering if you can just elaborate maybe on what you do think.


To be honest with you I don't know at this stage. And I think it's something that we're learning as more and more markets, especially bigger markets are getting into it. We continually learn, actually we're a bit surprised by some of the potential benefits. The US in fact is doing a shared service initiative where they're combining their purchasing. And we thought in the US and the US thought that well it was really the systems that would help drive this, and we're putting in the system support for the US next year in April. But the reality is the US is saying no, actually the benefits are really coming from these best practices that we're using. And we're continually finding areas that the markets are learning and discovering about. At one point and it's already starting now, the focus is starting to tip already to how can we leverage GLOBE, not just put it in. Up until now it's been OK just put it in, put it in, that's been my job. But I think there's some exciting stuff actually if you can think creatively about what could be leveraged or enabled by GLOBE.

Participant

(Unable to hear)


OK on the first part there, yes you're right and maybe I didn't make it so clear but actually today we have in the ASEAN Region basically is running on GLOBE, the Thailand, Indonesia, Philippines, Malaysia. And that's a very large trading block within Nestlé. And we're seeing good benefits already from inter-market supply. Probably one of the biggest benefits will be really through better inter-market supply, through better planning and better tracking of these areas. On a global basis once we reach a larger critical mass, certainly from an information standpoint, all sorts of possibilities come up. I mean we talk about global businesses like nutrition, I think it would be very, very difficult without GLOBE to really leverage nutrition as a global business in the future, taking advantage of what's specific in the market and leverage them with global benefits of nutrition. So again I think that there's huge potential. Purchasing clearly we're already starting to consolidate spend categories so we're not waiting until we get 80% of the world before we start to realise cross-border benefits. But I think two key areas will be demand and supply planning and purchasing.

Question # 7 Cost benefit analysis

I was just wondering if you were satisfied with this sort of fuzzy measurement of what the GLOBE benefits are. I mean obviously there are benefits coming through these programs but don't you want to be more pinpointing what those benefits are from GLOBE? Has it got a cost benefit analysis?



Five years ago I was very uncomfortable with that when first putting this in and that's why I was struggling really for about a year to try to figure out how do we track these things. And again we had other group initiatives. At the time it was MH97 if you remember that was the initiative at the time. And then trying to figure out what's GLOBE, what's not. And I guess my comfort is that what we're doing touches so many aspects of the business and is so basic to how we will do business in the future that it's not a cost savings or an initiative like that, it is the way that we do business and will do business in the future. And it's very different. And what I'm comfortable about is that the senior management here in Nestlé has decided to go ahead with this. Some programs I know their budget is dependent upon showing particular benefits. It's like a drip feed. If you show me these benefits this quarter I'll give you this much more. That wasn't the case here which I think was right. It's that we have the commitment to move ahead, there's no turning back, we will do it this way, we're more and more convinced this is the right thing to do. And we're more and more confident it can bedone because remember five years ago, I'll be very honest with you, the concept at that time was pretty scary even for me. But the fact that especially this year and the fact that we can do big markets one month after another and roll this thing has given us good satisfaction. So I'm not as uncomfortable as I was but I used to be.


I think also, we do know that we don't deliver on the Operational Excellence and FitNes targets without GLOBE, and that's what we are measuring. And if you think about how small some of those savings were, 0.5 million here, and to get to 1 billion the amount of cost to measure all of those to get to those savings would be inefficient I think.


The way I try and explain to people also who ask me, how do you know if GLOBE works? If you don't have the benefit, how do you know if it works or not? And basically I say if we don't generate the benefits from FitNes, from Operational Excellence 2007, if we don't do that you can imply that GLOBE didn't contribute as we thought. So it's a bit of an indirect way to look at it but I think it's the right way, I really do.

Question #8 Correlation between GLOBE roll out and cost savings

Can I just follow up to Robin's question. Can you talk about why the roll out of GLOBE and the cost savings from GLOBE are not more linear? I think in '04 GLOBE went from being in 5% of the business to 10% and in '05 you're saying it's going to go from 10% roughly to 30%. That's a major step up yet your broad cost saving guidance in '05 is fairly similar to '04. My question is why should it not be much higher as that roll outs accelerates? And surely you get more benefits from being in the bigger markets?


I think the difference is that the roll out is the SAP roll out, it's not the GLOBE roll out. As Chris said earlier on a lot of these savings come from the first two objectives rather than the


SAP piece. So the point we're trying to make, when you look at that graph going from 30% to 80% it's not a savings graph, that's an SAP roll out graph. So that's why there's a disconnect. And we're already doing those first two objectives across the world.


I think the systems though, I mean I'm trying to understand what the guidance note says so I had an answer, but I think the important part to remember is that yes the systems are important in that with the best practices and the data centres on their own, I don't have confidence they can be sustained, unless you have a system to actually make you do it. One thing that we found in GLOBE and this what the market's come back with, they say it's kind of like handcuffs in a way to make you do the right thing. Best practices are fine, everybody knows the right thing to do just as we all know we should eat right and exercise regularly but we don't do it. But this is like a personal trainer who's on top of you and telling you you have to do this. And I think that's something that is important about having the systems go in soon but it's not the stuff that will generate or enable the benefits, it will sustain them though and that's important. So the systems are important.

Question # 9 Systems post the main GLOBE initiative, post 2007

You mentioned before that the systems you had in place prior to GLOBE were a kind of a mishmash of things and people not keeping their room tidy essentially. After the big initiative is over, '07 and beyond, what systems do you have in place to make sure people keep their room neat going forward?


We've got as I mentioned these local GLOBE organisations. It's their job to in a sense be the enforcers to make sure that best practices are followed. The GLOBE centres will also support them in that. And to manage the data we have a master data repository, we have actually a very disciplined approach to make sure that bad data is not entered into the system, we don't have duplicates and obsoletes. And in fact the system is so rigorous that if you put bad data in it won't work in a lot of cases. So the system enforces in some ways, the local GLOBE organisations do, but paying attention to data is something very new for Nestlé. We just haven't done this sort of thing in the past so we're still learning. And the markets at the beginning were finding this very cumbersome. I don't know how to do this stuff. But as they're working with it they now realise there's huge advantages to keeping the house in order. You have to to make the systems run.


Chris thank you very much.

END OF CONFERENCE

Documents

GLOBE Jun2005 Johnson Transcript