Presentation Werner Bauer

Innovation and Renovation

Consumers at the heart of Nestlé's R&D

Werner Bauer

1 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

Good morning Ladies and Gentlemen, I am Werner Bauer, Nestlé's Head of

Technical, Production and R&D. As such, the subject of innovation and
renovation is very close to my heart, and I am glad to have this opportunity to
give you the broader framework of today's conference.

Every day of the year, over one billion consumers choose to buy a Nestlé
product. I say choose because this is a purely voluntary act - they could be
buying from a competitor. It therefore comes as no surprise that consumers
are very much front-of-mind when it comes to Nestlé R&D: its mission is to
find ideal solutions to help consumers improve the quality of their lives.

Nestlé is in the midst of a strategic transformation into a nutrition, health and

wellness company, and R&D will increasingly drive and contribute to the
acceleration of this process as we go forward. Indeed, I will become Chief
Technology Officer next February, so that I can devote my full and undivided
attention to broadening and speeding up the innovation process throughout
the company.

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 Responsibilities of the CTO

Science & 17 Intellectual Regulatory Innovation

Research Research & Property Acceleration
• Lausanne Development Teams
• St Louis Centres

Basic ƒ Product ƒ Intellectual ƒ Innovation ƒ Accelerate

Research in property claims innovation &
ƒ Packaging
management renovation
ƒ Nutrition ƒ Substantiation
ƒ Technology launches
ƒ Protection
ƒ Food
ƒ Quality strategies ƒ Benchmark
Science
best
ƒ Safety practices

Innovation Partnerships

Packaging and Design

2 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

As CTO, I will continue to have global responsibility for R&D, from

fundamental research here at NRC to other research and product technology
centres around the world. I will also be in charge of innovation acceleration
teams, technological intellectual property and its protection, innovation
partnership management, packaging and packaging design and, finally,
regulatory, which is becoming increasingly important as we need to
substantiate more and more claims as we go forward.

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 Nestlé R & D

275
Application 1,300 R&D Investment
Markets Groups people CHF Billion

2005 1.50
Suppliers 17
Research & 2004 1.43
Development
Centres 2003 1.21

Corporate Biotech 2,400 2002 1.21

people
R&D Start-ups 1 2001 1.16
Research
Centre 2000 1.04

Universities 1999 0.90

Research Institutes
1998 0.81

3 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

Ladies and Gentlemen, we spent 1.5 billion Swiss francs on R&D in 2005,
equivalent to 1.6% of our yearly turnover. This is the largest amount spent
on R&D in the food industry. We have 2,400 people working at the NRC and
the 17 research and product development centres worldwide, and 1,300 in
the 275 application groups which adapt product ideas to local market
conditions. However, even if we do have the best R&D set-up in the world,
by the sheer law of numbers there are potentially more good ideas for new
products outside Nestlé than inside the company.

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 Partnering in Basic Research

4 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

Today, we are on a permanent look-out for new ideas. This is why we are
increasingly working in open partnership with many of our suppliers, with
start-up companies through our venture capital funds, and with a wide array
of research institutes across the world: the number of such partnerships has
trebled over the last five years. Indeed, the agreement with EPFL we are
signing here today is typical of this approach.

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 Innovation runs through the
whole company

ƒ Integrated cross-functional
teams
Research Development
ƒ Value-adding, profitable
Strategic innovation and renovation
Business Units Regulatory
ƒ Use of global platforms
Market Intellectual ƒ Relevance to local consumers
Research Innovation Property
Renovation
Competitive
Analysis Supply
Chain
Marketing
Manufacturing
Sales
Consumer
Services

5 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

Furthermore, within Nestlé, the innovation and renovation process underway

is by no means limited to R&D, it is very much a network involving most
functions across the company. We use integrated cross-functional teams for
each project – these are the previously-mentioned acceleration teams –
forming global platforms while ensuring relevance to local consumers. In this
context, I would like to point out that the innovation process is very different
for each product category: for example, culinary products tend to be highly
influenced by local culture and traditions, while healthcare nutrition is often
more a case of science-driven, globally-similar needs.

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 The Nestlé Innovation Model

What is
What do technically
consumers possible ?
need ?

What is
commercially
achievable ?

6 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

If you look at the Nestlé innovation model, I have largely covered the R&D
side. But there are two more aspects which are at least as important as
R&D, and which are fully integrated into our model: major market trends and
consumer insight.

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 Major Market Trends

A new premium light ice cream offerring

everything that Haagen-Dazs stands for,
with no compromise except half the fat

A new, first-to-market premium wet dog food

Premium
created with proprietary new product +8.7%
and packaging technology

-5.7%

Superior value for money chocolate Value

enrobed wafer.
# 1 brand in rural India +4.2%

Growth in tier relative to market average, CAGR 1999-2004

7 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman
November 2006

One very important trend is market polarisation: middle-of-the road products

are being squeezed. According to a recent McKinsey study of 25 industries
and product categories all over the world, the middle ground has trailed the
market average by nearly 6% a year between 1999 and 2004, while the
premium and value segments have been showing healthy growth. In other
words consumers are either trading up to premium and super premium
products, or they are trading down to value for money.

Indeed, hard discounters and private label are continuing to grow in Europe
and are now worth over 100 billion euros. Market polarisation is already clear
in Nestlé's existing product range: from premium light ice cream and premium
wet dog food in North America and Europe, to our number one brand in rural
India, a superior value-for-money chocolate wafer.

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 Popularly Positioned Products

6 2.5 billion people

earn more than
5 1’500 USD per year
Billion People

4
Addressing nutrient deficiencies,
3 improving the lives of millions of
consumers with relevant and
2 4 billion people nutritious products
earn less than
1 1’500 USD per year

8 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

In other words, it is not enough to address the needs of the 2.5 billion
consumers who earn more than 1,500 US dollars per year, we also have to
think about the 4 billion people who earn less than 1,500 dollars per year,
providing them with products relevant to their nutritional needs. A recently-
launched programme of Popularly Positioned Products, or PPPs, is providing
products with high nutritional value to the less well-off in the north-east of
Brazil. I expect we will see many more such initiatives in future in other parts
of the world.

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 Most consumers see a strong link
between food and their health

9 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

And this brings me to the third leg of the Nestlé innovation model: consumer
insight. In all our major markets, it is perfectly obvious that the vast majority
of consumers see a strong link between food and their health.

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 Consumer trends

"Natural"
• Bio
• Organic
• Freshness
• Natural

Nutrition, Health & Wellness

• Enhanced
• Enriched
• Reduced
• Invent

Liquification
• Convenience / On the Go
• Wholesome / Fresh
• Functional Benefits
• Innovation / New Occasions

10 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

Not only that, but this fact can be broken down into three distinct sub-trends:
(1) food has to be natural and fresh; (2) it has to contribute to nutrition, health
and wellness in a tangible way, either by adding new benefits such as
vitamins or fiber, by boosting existing benefits, or by reducing certain
substances such as sugar, fat or salt; and (3) people are increasingly
consuming liquid products as this is often more convenient, and because
liquids are excellent vectors for functional benefits.

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 Nutrition, Health and Wellness

Nestlé products and brands

at each life stage fulfilling
different nutritional needs

Mainstream Specific nutritional needs

Source: AC Nielsen/GNPD Mintel

11 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman
November 2006

All these factors will be central to our innovation and renovation drive as we
renew Nestlé's entire product range over the next four years.

All mainstream products, which consumers buy mainly because of the pleasure
their taste provides, will have to go through the 60/40+ process. This means that
no new or renovated product will be put on the market if it does not achieve
consumer preference of over 60% in blind tasting, and if its nutritional properties
are not superior to those of the nearest competitor's product, either because it
has added benefits or because the amount of certain existing ingredients have
been reduced.

On the other hand, the products of our newly-created Nutrition Division – infant,
healthcare and performance nutrition with sales of around 5.2 billion last year –
are bought because of their nutritional properties rather than because of their
taste. These products, ranging from advanced immune protection and allergy
prevention in infants to immune system reinforcement after chemotherapy, are
especially reliant on top-of-the-range R&D.

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 Adding health to our products

12 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

At Nestlé, highly specific nutritional benefits addressing such issues as heart

health, cholesterol control and bone strength are usually provided by adding
Branded Active Benefits, or BABs, to existing products. These Branded
Active Benefits are the result of proprietary scientific research, they are
clinically tested along the lines of what is done in the pharmaceutical industry
and, obviously, they cannot be used by our competitors. Sales of Nestlé
products containing BABs amounted to just under three billion Swiss francs
last year and continue to grow fast. This demonstrates that consumers are
prepared to pay a premium for products which provide them with a clear,
recognisable and relevant health benefit.

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 Adding nutritional value:
Branded Active Benefits

Bone Health

Bone Mineral Density

(% / year)

4
Calci-N
2
Placebo
0

8 years old girls (n=150) - Calci-N enriched nutrition versus placebo for 1 year
4 years later : Calci-N group had significant higher bone mineral density – still higher than
control
Bonjour JP et al (1997) J Clin Invest 99:1287-94, Bonjour JP et al (2001) Lancet 358:1208-12
13 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman
November 2006

Let me just give you a couple of examples: clinical tests of Nesquik enriched
with Calci-N showed that, over a period of four years, the bone mineral
density of 8 year-old girls who had consumed the product was significantly
higher than those who hadn't.

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 Adding nutritional value:
Branded Active Benefits

Lowering Blood Cholesterol

% Change in Blood LDL-Cholesterol

Control 1.2g/day 1.6g/day
0
ƒ Inhibits cholesterol
absorption inside the
intestine -4

ƒ Clinical trials have

demonstrated efficacy -8

-12

14 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

Another good example is the enrichment of NesVita, a low-fat filled milk sold
in Asia, with ActiCol. Clinical trials clearly demonstrated the effectiveness of
this added health benefit, which inhibits the transfer of cholesterol from the
intestine into the blood.

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 Our science helps to optimise
nutritional profiles

15 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

However, as already mentioned, the nutritional qualities of food are not

improved by enrichment alone. Reducing the quantity of certain ingredients
can also contribute to nutritional improvement, although this can be a
dangerous exercise: consumers are understandably very conservative when
it comes to their favourite tastes and, indeed, they may stop buying a product
if the recipe is changed. Nevertheless, Nestlé is committed to reducing the
quantity of sugar, fat and salt used in its overall product portfolio. Since
2002, Nestlé has reduced the use of sugar in its product portfolio by more
than 100,000 million tonnes of sugar, more than 25,000 tonnes of trans-fatty
acids and more than 5,000 tonnes of salt.

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 Science Alignment with
Consumer Benefit Areas

Health Benefits

• Protection
• Growth & Development
• Digestive comfort
• Weight management
• Performance
• Healthy ageing
• Skin Health & Beauty

16 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

I am often asked, particularly in relation to Branded Active Benefits, whether

Nestlé is getting closer to the pharmaceutical industry. The answer is a clear
no, as all our scientific research very much concentrates on prevention rather
than cures. And, because the field of scientific research is almost limitless,
we have aligned our resources with the following, clearly-defined consumer
benefits: protection; growth and development; digestive comfort; weight
management; performance; healthy ageing; and skin health and beauty.

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 Obesity: A major concern in growing
number of countries

By 2015, 1.5 billion people

worldwide will be
obese or overweight
– a rise of 50% from 2005.

17 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

There is no doubt, however, that obesity, a major societal concern in many

countries the world over, will be a strong focus point for Nestlé in years to
come. In 10 years time, some 1.5 billion people worldwide will be obese or
overweight. That is an increase of more that 50 percent over today. A rise in
obesity leads to more metabolic diseases, most notably diabetes, and a
corresponding rise in health care costs. These problems also point to
opportunities, especially for a company serving consumers' needs.
So how are we responding ?

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 Metabolic health perspectives
in nutrition

Drug intervention
nutritional and
lifestyle landscape
Risk Management
Health
management Onset of Diagnostic
disregulation markers

Prognostic
markers

Changes in pathway dynamics

to maintain homeostasis

18 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

If you look at this graph, the green part is where nutritional and lifestyle
problems can basically be managed through appropriate nutrition. As soon as
you get into this yellow zone here, before you reach the red zone which
means you require medical treatment, there is an intermediary zone where the
situation can be approached through a judicious mix of goods – value-added
food products – and services, that is to say nutritional and lifestyle advice.

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 Weight Management
Personalising nutrition & lifestyle

• One-on-one solutions
– programme tailored to client's
lifestyle
– personalised counselling on
nutrition & lifestyle
– nutritionally balanced, portion-
controlled dishes

• 600+ branded centres

– US & Canada
– Australia & New Zealand

19 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

Nestlé has now truly started down this path, first with the acquisition of
Proteika, a small company in France, and the creation of the Nutrition Home
Service there, which offer a combination of goods an services to consumers.
Then, earlier this year, Nestlé Nutrition entered the strategic weight-
management market in a bigger way with the acquisition of the Jenny Craig
company and brand.

Founded in Australia in 1983 by a woman called Jenny Craig, the US-based

company offers consumers personalised weight-management programmes
tailored to their specific needs. Through a local Jenny Craig centre,
consumers receive one-on-one advice on weight management and lifestyle
from trained consultants. Each individual programme includes a range of
nutritionally balanced and portion-controlled prepared food products designed
to meet the consumer's lifestyle and nutritional needs. The Jenny Craig
business includes more than 600 branded Jenny Craig centres, which
operate today in North America and Oceania, and gives us access to the
strategic US market, which is valued at 30 billion US dollars a year and
accounts for 70% of the global weight-management market.

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 Nestlé Nutrition Council

External Members Nestlé Members

Nutrition & food safety
Dominique Belli MD Werner Bauer PhD (Chairman)
policies & general Geneva Children Hospital, CH Executive Vice President

guidance Bruce Bistrian MD Richard Laube

Harvard Medical School, USA Deputy Executice Vice President

Günter Blobel MD PhD Peter van Bladeren PhD

Examples: The Rockefeller University, NY, USA Vice President

• Food Fortification Michael Gibney, PhD Thomas Schweizer PhD

Trinity College Dublin Vice President
• Trans Fatty Acids
Robert Kroes PhD Ferdinand Haschke MD
• Salt University of Utrecht, NL Vice President

• Sugar Demetre Labadarios MD PhD Edward Fern PhD

University of Stellenbosch Assistant Vice President
• Iron
Tadashi Noguchi PhD
• Obesity Chubu University, Japan

• Glycemic Index Irwin Rosenberg MD,

Tufts University Boston
• Whole grain
Bruno Vellas MD
• Low-Carbohydrate Diets University of Toulouse

20 CORPORATE TECHNICAL PRODUCTION AND R&D Name of chairman

November 2006

Ladies and Gentlemen, ever since Henri Nestlé invented the farine lactée
Nestlé to save the lives of malnourished children over 140 years ago, science-
based research and development has been part of the DNA of this Company.
So before I give the floor to Bruce German and Sandrine Andrieu, I have to
say a few words about the Nestlé Nutrition Council, a consultative body
established 28 years ago. The NNC is made up of world-class scientists
providing Nestlé with general guidance on nutrition and food safety. As such,
the NNC is an integral part of the overall scientific research resources at the
Company's disposal.
One of its members, Professor Günther Blobel, a Nobel prize winner in
medicine, is also a member of Nestlé's Board of Directors. Furthermore, a
wide range of specialized or local bodies also advise us both on general and
specialised nutrition in area such as infant, healthcare and performance.
These Councils and the Nestlé Nutrition Institute are closely interlinked through
overlapping participants: for example, the vice chairman of the Japan Nutrition
Council, Peter van Bladeren, is also a member of the NNC.
I also have to mention the cycle of annual International Nutrition Symposia we
launched three years ago, having realised there was no proper world-class
scientific forum to discuss food and health. The first of these events dealt with
genomics and personalised nutrition, the second with metabolism and the third
– which has just taken place – with the brain. But more on that from the other
speakers.
Ladies and Gentlemen, thank you for your attention, and I am ready to answer
any questions you may have at the end of the presentations. Bruce German,
you have the floor. 20