...Welcome, and thank you for standing by. I would like to inform all participants that this conference call is being recorded and will be available to clients of J.P. Morgan. Parts of this conference call may also be reproduced in J.P. Morgan research. If you have any objections, you may disconnect at this time. Press participants are not permitted on this call and should disconnect now. Unless otherwise permitted by internal J.P. Morgan policy, members of J.P. Morgan Investment and Corporate Banking are not permitted on this call and should disconnect now. I would now like to turn the call over to Celine Pannuti from J.P. Morgan.
Thank you, and good morning, good afternoon, everyone. Thank you for joining me today. I am Celine Pannuti, and I head Consumer Staples Research at J.P. Morgan. As part of our CEO Fireside Chat series, I am delighted today to be at Nestlé with CEO Mark Schneider. Mark, thank you so much for your time today. We have an hour long of discussion, but I think you wanted to have some introductory remarks, so the floor is yours.
Celine, thank you so much for joining us today, and to all of our investors joining us today, thanks for your interest. While we want to devote the maximum time of this call to Q&A, I felt it was useful to start it off with a few framing overview comments, and wanted to reassure you that after the expected slow start into the year in Q1, we're now noticeably picking up pace. This is not so much a macro observation. This really comes down to some of the things that happen under our own steam, most notably now, the consistent brand support kicking in, the higher rate of innovation renovation, with significant innovation hitting the shelves this quarter. Then also the on track recovery in our supply chain on VMS, in our Nestlé Health Science business.
So with all these things underway, I think we are well positioned to make good on what we laid out to you in our Q1 call, and that is that swing over to noticeable, positive, strong RIG growth in the second quarter and then consistent delivery thereafter.
So thank you for that introduction, Mark, and in fact, it was really playing on the first question I wanted to ask you around the 4%. I think I remember, so that's part of your outlook for the year. I remember in January you were mentioning that you plan to usually beat your guidance. How do you -- should we feel around the, around 4% guide, is... I think consensus is shy of four, is I think 3.9. Are you comfortable with that? And you mentioned about your cadence of innovation and initiative. Could we... So that means that we'll be looking at 5% growth throughout the year? Maybe if you could give us a bit of beyond. I think you mentioned frozen food and and NHS.
That's what really would drive such a high growth, because those businesses still are not big enough in the grand scheme of things.
Sure. So coming back to the profile of the year, I think we laid out a somewhat backloaded nature, and Q2 being the one where we swing then from negative to RIG to positive RIG. There around 4% was meant to be exactly that, centered on 4%, but not centered in a way, and I think I mentioned this in the full year call, that's supposed to mean a backdoor 3%-5%, but rather narrowly centered around 4%, and that's still our best estimate at this moment.
Right. Maybe if we can touch upon the RIG. So you mentioned RIG coming back to positive in the second quarter. What we have seen, in terms of volume, to start with, of across the last couple of years, some pressure on total demand after a very high consumption during Covid, and obviously the impact of elasticity as prices have been risen. Nevertheless, it seems that at, when we look at macro data, that food volume are still, underwhelming. So, if you could comment on, you know, what, how you view that, and whether from a Nestlé specific standpoint, some of the initiative you did in terms of SKU reduction are also, helping.
And then maybe also on the mix side, if you could comment on what you see in terms of your mix delivery. Are you seeing a bit weakness on the mix, which would potentially give you some downtrading from a consumer standpoint?
Yeah. So let me start maybe with that last one. So on mix, I'm not so concerned. I think it's really volume where the issue lies. And yes, it's not surprising that after these two years with significant inflation, 2022 and 2023, in vast parts of the world, there have been, at some point, a volume reaction from the consumer, and it came in many different shapes and sizes. People downtrading, people trading towards private label , or maybe from the convenience of a prepared meal to scratch cooking because they had time available but no cash. So finally, there was a reaction, and I think that reaction was noticeably felt in the entire industry.
I think it got exacerbated in the North American market, and as you know, U.S. is a major part of our business, by the reduction in SNAP food support payments as from Q2 last year. That was certainly strongly felt in the second half of last year and also in the first quarter of this year, where you compared quarters without that support against prior year quarters with that support. Starting from the second quarter now, at least that year-over-year comparison begins to clean up again, and so at least you don't have a drag from that. The underlying consumer sentiment, that is something that doesn't vary from one quarter to another. And it's important for me to point out to our investors that when we here exude confidence on the second quarter and the second half of the year-...
This is not built on an overly positive view on how the consumer confidence all of a sudden magically reappears. It's built on what we do under our own steam, on innovation, renovation, brand support, and in particular, fixing the VMS supply issues, and that really then makes that difference.
So talking about initiative and brand support, I think you mentioned at Q1 that your market share you were gaining a winning share or holding share, 55% of the business. That number has been, I think, weaker in the past couple of years. So can you talk about the initiatives that you are making in terms of innovation, in terms of investment, in order to get ahead in terms of share and competitiveness?
Yeah. And so maybe to talk about results first, compared to December last year, what we're seeing now, especially around our billionaire brands, is some green shoots on market shares. And there has been about a 5% increase in the sales that shows positive development. And as you mentioned, it's mostly driven by innovation renovation, and then also now benefiting from a full year of stepped up brand support. We started the step-up brand support spring last year. As you know, there's always latency, so when you start stepping it up, there's some time lag till you see the benefits. But now we're essentially lapping that time frame, and we're seeing the benefits. And then on innovation renovation, what you saw is going into COVID, for a while, innovation renovation held up.
Then 2022 was a year where there was a toll, because the company clearly, you know, between supply chain issues, inflation, and many other issues, got distracted. And also something, by the way, that we saw across the industry, that finally, you know, after all of these extraordinary burdens, innovation renovation activity was dipping. And then starting from 2023, it pointed up again. And then specifically, for the all-important U.S. market, we do have significant new items on shelf now, that came on shelf late Q1, beginning of Q2, so most notably around functional waters, pet care, and also frozen food.
Yeah. Definitely, I will come back to the US, but maybe I would like to tackle a question that has been in investor front of mind of late. That question is around Nestlé defensiveness or what has been perceived maybe of a bit more of a prone to accident in the past couple of years, be it some, you know, numbers or RIG that has come below expectation, the issues you mentioned with the NHS, and the vitamin integration, food safety. Now, a lot of that we will discuss and are unrelated, but investors are asking, you know, Nestlé is a big company, should be defensive, and has been the beacon of operational excellence. How do you view—I mean, what do you explain that it has been more accident-prone?
Investors are asking about culture, asking about, is it too big to manage? And so I would like to hear from you and how you and the board of directors are thinking about that, and whether, in such a big company, and I think you have an extended executive board of 16 members, a COO could as well be a part of that, team.
So, Celine, fair question, and important to spend some time on it. It's important to separate between the market-related items. So the fact that after two years of significant inflation, virtually everyone in our industry had paid a penalty on volumes. I mean, clearly, you had to react to the food price inflation with price increases, and then at some point, there was that consumer reaction. No one was really immune from that. So that side, and the fact that RIG delivery, as a result of that, over the last five to six quarters, have been somewhat unsteady, that is something that's part of the industry. And, given that this was literally a one in 50 years event, I think it's important to not take that as an argument against the company or the industry, for that matter.
I think we've good reason to believe that it won't reoccur on a frequent basis. And then you're right, there were a number of one-off issues that were specific to our company, and, that question about, is there some underlying connective logic that ties them together, has come up a few times. It's understandable. I think, we have laid out, the timeline and the reasons behind each and every one of them, and it becomes very clear that, relating to timelines and reasons, that they're not connected. I mean, it's, it's truly coincidental that, they were occurring at the same time, just like you enjoyed a remarkably long stretch of time, between 2017 and 2021 without any of these issues.
So it's not that all of a sudden something is structurally wrong or culturally wrong with the business. So we do take them very seriously. The management team and, of course, the board of directors spends a lot of time in understanding the root causes, you know, what gets done to address the issues, and also what gets done to be sure they don't reoccur again. And we are also committed to full transparency to you, our investors, on where we are with them, what progress we're making, and also reassuring you that that focus on operational excellence and getting the basics right is not lost. And obviously, it's our job now to convince everyone among our investors with good, solid delivery on RIG, and also then an accident-free period that that's the case.
Just wanted to assure everyone that, I think we are focused on this. The size of the company, I think, you know, we're structured in ways and we're operationally minded, that we can handle it, and, so that is not my major worry.
Good. Thank you for that, Mark. Maybe coming back to, you just mentioned RIG focus. I would like the other side of the equation being pricing, which, you know, we've gone through an unprecedented, unprecedented inflation period with high pricing. More and more, we are hearing whether, you know, the absolute price point level may have gone too far. I think some of your retailers as well are talking about trying to push their own private label in a more meaningful way. The question really here is, how should we look at your pricing going forward, with, on one side, maybe further selective pricing, and on the other hand, will you see some pressure to give back to consumers?
And with that, could it be that in some regions, like I'm thinking North America or Western Europe, we could see negative pricing?
Yeah. So wide range of questions, and, let me focus on a few of them. So generally, I think the inflation spike on commodities and energy costs and labor was large enough you couldn't ignore it. So the strategy of just sitting it out and not reacting, in our own roll forward pricing, was not available. And, no one's done that. So clearly, you had to price. And, at the same time, what made this inflation spike so unusual is that literally all cost items were trending up, whereas now we're entering a phase where it's a much more nuanced picture. So you still have individual commodities, cocoa, of course, making the headlines or, coffee, trending up. But then what you don't have is this groundswell of all commodities and energy and labor heading up.
And, so that differentiates 2024 from where we were at the beginning of 2022, and I think that's good news. What that means going forward is that we'll be much more nuanced and targeted in where we take pricing. And you do have usually very rational conversations with retailers about that. As you mentioned, many retailers these days are engaged in private label and store brands, so through that, they have a good sense of, you know, how commodity costs and other input cost increases are impacting product price. And, so usually it's quite a rational conversation. And, when it comes to the comeback of private label, it's important that we don't overinterpret it and relate it to the inflation spike only.
I think if you look at that same movie two years before, the years 2020 and 2021, you've seen a significant retreat of private label in the face of COVID. And so what you've seen then in 2022 and 2023 is private label making a comeback. On the one hand, you know, repairing their supply chains, so simply product availability allowing for more market share, and then on the other hand, on top of that, of course, some of the price sensitivity among consumers. To your question on absolute or relative price points, it depends on the category, and geography. So clearly there's some where, yes, absolute price points do matter, so the so-called magic price points in emerging markets that are sometimes linked to daily cash earnings are a good example.
We've also seen renewed focus on absolute price points among U.S. consumers, the lower income spectrum, where clearly there has been pain towards the end of 2023, early 2024. And so people go shopping with a fixed cash budget, and so they don't just only judge your product price on how it relates to competition, but rather does it fit into their budget, which is either determined by the cash they have on hand or whatever spending limit they have left on their credit cards.
Right. So that I think it's a good way to go into frozen food, because that probably has been a category where consumer has been a bit more sensitive to price points, and it has been one drag that you have had in the first quarter. So can you talk about how you are addressing that? I saw CNBC today, you were talking about some of these innovations. So innovation, but as well, price points, to which extent you have to manage both. And maybe, you know, stepping back, and this is a question that even predates you as CEO, the relevance of that frozen food in that in your portfolio. I know it's a good cash generator. It's 20% of the Zone America sales, but does it really fit with Nestlé overall portfolio?
Yeah. So maybe we'll start with that more fundamental question, and I wanted to ensure our investors that, obviously, we know there has been pain on that business in 2023. And, it's important to look at it in a multi-year perspective over several years, where I think we've also seen outsized performance. And that outsized performance was not only driven by COVID. I think it was also driven by some of the renewed interest we've seen among younger consumers in the U.S. Because the sheer convenience and affordability of a frozen meal is pretty hard to beat. And at the same time, I think there's a growing awareness, especially, you know, in the wake of the processed food debate, that frozen is actually a very sensitive way of handling a food item.
So you preserve the essential good nutrient properties of the food. You make it available with minimal processing, and available then to the time when the meal is prepared. So with all of that affordability, portion control, minimal processing, I think people began to rediscover this category... even before the onset of COVID, then, of course, you had the huge spike driven by COVID. You had a post-COVID normalization, and now you have an inflation issue, especially with lower income consumers. But as you look through that cycle, in the U.S. market, where essentially our frozen food business happens, I think we are having the scale, and we are having, you know, the ambition to succeed, and you see that with some of the key innovation here.
Now, in frozen food, it's important when it comes to price, and also what happened last year, and the growth dynamics for this year, to dissect between the prepared meals on the one hand, and then specifically, pizza and snacks on the other hand. I think on meals now, we have significant innovation hitting the shelves. This is an area that is very sensitive, to innovation. People want choice. They want new things to try out. And in that context, I think our new Vital Pursuit brand and many other new innovations, for example, for the air fryer, that we're hitting the aisles, I think that's really, really important.
Air fryer is one of these new trends, you know, here's a household device that's becoming more and more ubiquitous, and it allows you so much more range on what can be prepared with a frozen meal. So clearly, this is a trend that the team has capitalized on. A lot of the innovation that we're sitting on the shelves now, Q1, Q2, is exactly built around the air fryer and its potential. On pizza and snacking, this is clearly where you had seen some volatility related to pricing, and this is where some competitive gaps had built up that really held us down, and I think this is where we sharpened our price points, and I think that also bodes well then going forward.
This is where we adjusted the pricing in a way to advance RIG going forward, and we're quite confident on that.
Thank you. Another point you mentioned earlier is how you are mending the supply chain in the U.S. VMS business. And you are, for NHS as a whole, looking for mid-single digit growth, so effectively a reacceleration into the second half. Can you talk about, how your market share are trending from a sellout, basis versus, where you were a year ago, and how you, plan to address, through activation, through innovation, the recovery of, the level that you have lost because of these issues? And maybe if you allow me to step back, because I know NHS is a business that you have built up, over the past couple of years.
We have had these temporary issues that you're fixing, but as we look ahead, 2025 and forward, what kind of growth, NHS as a whole, what kind of margin profile, can we expect from this business?
Let me offer, again, my regrets over this integration issue. This is not what you, as our investors, expect from Nestlé, and I think we stressed that many times ever since it reoccurred. I hope you're also taking confidence for how energetically we were taking care of it, basically making all the resources of the Nestlé U.S. market available to fix this issue, and we're now perfectly on top of it. In Q2, we're absolutely on track along the lines that we laid out as part of our full year in Q1 call, and we're seeing a strong recovery. The priorities are clear. First is to make the product available again. Second, to be sure that we're regaining the shelf space that's ours and that we used to have.
And then the third one is also to be sure that the repurchase rates are holding up and, that consumer interest is there. What we've seen ever since last summer is that, market growth, as per our projections, have completely normalized, so no more post-COVID, headwind. And, so the market pull is there, and we saw that exemplified with the one brand, that had not been subject to these integration issues, and that's Pure, which had seen continuous double-digit growth. For, the products, that got now back to shelf, again, very constructive, very good consultations and discussions with the retailers, so actually healthy amount of interest in putting us back on shelf. And then for the few ones that now have been out there fast, I think we've also seen a very healthy consumer interest.
So Osteo Bi-Flex, one of our brands that recovered a little bit more quickly, doing very well. And then Solgar, which is a wonderful brand, everything that we ship internationally is also doing very well on that. So very much reassured that we are, in fact, you know, putting this issue behind us to then capture the full strategic benefit that high-level, high-value VMS products can offer and what they can offer to the company. So then segueing to Nestlé Health Science overall, I mean, with that interruption now that came from the supply issues and integration issues, we are trending exactly to the targets that we had laid out for 2025 and beyond, and that is mid- to high single-digit organic growth.
You'll see a very strong second half, which of course, is against the backdrop of a weak second half last year. But then once everything normalizes, you will see that this will be one of our higher growth categories going forward. And then also with that, you will see the steady margin recovery. We had pointed at the time to a UTOP margin at the end of 2025 of around 18%. You'll have now a few months of delay due to the situation that we were sort of disrupted here with the supply chain issues, but we'll be getting towards the target level as we look at 2026 and beyond.
... So talking about high growth business, let's go into pet care. So it has been a phenomenal journey, double-digit growth, I think, for the past four years, and, you know, I think, a business with strong fundamentals. At the same time, what we have seen is that probably, pet adoption is slowing, and we have also seen that you yourself and a lot of your competitors have invested a lot into capacity. So question mark from investors is, like, what does that mean, in terms of the level of supply? I think even yourself, you were mentioning 100+ innovation into or new products hitting the shelf in the U.S. So could you talk about the shape of normalization? I mean, clearly, double digit, you said, was not sustainable, but what does it mean to normalize in that market?
How should we think about volume, mix, and price, given that effectively mix the question about down trading and, you know, pricing has also been quite elevated in that category?
Sure. Look, we continue to be super excited about the pet care category, and, obviously, we always made it clear that this will not be a permanent double-digit grower. But, we also made it clear that, even after normalization, this will continue to be one of our highest growth category, because globally, the two main growth drivers, and that is continued premiumization in advanced markets and continued higher, what we call caloric conversion, so feeding household pets with more dedicated pet food and not household food waste. Both of these continue without any signs of slowing down. Now, if we start with pet adoption, this is now looking at the U.S. market, the fifth consecutive year of positive pet adoption growth.
And so when you compare that to some of the fears that people had in 2020 and 2021 against these monster growth rates on pet adoption, well, you know, at what point will this come down? It hasn't. And so clearly, the majority of new pet owners enjoyed being pet owners, and then they apparently convinced other people to adopt pets as well, as well. And, so our slogan, Better With Pets, it seems like it's catching on with consumers, and we're quite excited about that. And so, clearly, the growth rates have come down. They tend to continue to be positive when it comes to pet adoption. Then you had, after these very strong growth rates, you had inflation take over for 2022 and 2023, and, that, of course, is normalizing now.
But still, when you put together the underlying pet adoption rates, plus the emerging market growth, plus then the continued opportunities around mix and the residual pricing we're seeing, it's still a fairly exciting growth cocktail, and that is what we're excited about. We had to add capacity. As you know, we were capacity constrained. Like everyone, we were somewhat surprised about this huge surge in pet adoption, which I think is understandable. This was on no one's radar screen. As that capacity now fully comes on stream in the US in 2024 and early 2025, I think our ability to meet supply is gonna be much better. We already benefited from some of the international capacity that has come on stream as from last spring, last summer, and now we'll see some of the US benefits kick in.
And then, when it comes to promotional activity, I wouldn't see that so much only as a warning sign, because there are segments of the pet care business that are quite expandable for us. So think about convincing consumer about the benefits of wet as opposed to dry pet food or treating. I think this is where promotions are not just only a sign of competitive intensity, but also a way of connecting with the consumer and convincing them of the benefits of those subcategories. So overall, very positive. On the capacity that other people may be building, of course, our visibility is limited, but from what we're seeing, there's no sign of overbuilding in the industry, and given that the fundamentals are so positive, even if there was, I think within a few years, people would grow into it.
So this is very different from overcapacity and stagnating categories or shrinking categories. Again, no sign of overcapacity now, but even if there was, I think it'll equalize fairly quickly.
Another, star or big category of yours is coffee. So I have one question on Nespresso, but first, I wanted to look at the first, the bigger, division, so coffee and other liquid beverages. A category that did very well during COVID, now we have had two years of flat RIG because pricing has been quite elevated. And as you were mentioning earlier, coffee prices, be it, Robusta, but even Arabica, continue to go up. So I wanted to understand how you feel about, the potential to further raising prices and how you are, willing to maybe, trading margin versus, RIG performance. And if you could also update us on the performance of, Starbucks and Nescafé brand, please.
Sure. So as you mentioned, I'm a big fan of our coffee category, and I think coffee has been a very steady top-level performer of ours on the categories through thick and thin. We had seen particular outperformance, of course, during COVID. Then there was a period of post-COVID normalization, which kind of came to an end last spring. And since then, I think we have seen a recovery on RIG, albeit a somewhat more muted one because of the high coffee prices. Now, the high coffee price is important to see it in perspective. They're high compared to a year before, two years before. But you know, when it comes to historical levels, you know, unlike the current cocoa prices, I mean, this is not something that's unheard of.
So that's why I don't believe that we are at coffee price levels that are reducing demand. I think it's more about gaining consumer attraction through meaningful innovation. And I think this is where we have a pipeline chock-full of new items that are currently being rolled out. One of the key trends where I think we've been heading, the at-home trend, is cold coffee. So whether it's Nescafé Ice Roast, that allows you to prepare that at home, or, for example, Nescafé Liquid Concentrates, that make the preparation of a cold coffee beverage so much easier. So I think there's lots of exciting innovations out there that resonate, in particular, with the younger consumers that are interested in creative coffee beverages.
So with that, I do believe that there is an exciting path ahead for coffee. On Nescafé and Starbucks in particular, I think we have seen solid, positive development, and it is fueled exactly by innovations like these. So we're not waiting for the macro conditions all of a sudden to miraculously improve or consumer sentiment to improve or coffee commodity prices to decrease to ramp up growth. I think here, the key unlock is a continuous flow of innovative products.
Maybe going into Nespresso, I remember a year ago, we were having this discussion, and at the time, you said, you know, rig will come back, and it did. It did come back in the second half of last year. Now, I think there's been some phasing issue in the first quarter, which you may want to address, but overall, how do you see the Nespresso franchise opportunity in terms of top line and margin? And, you know, we've been hearing from some of the out-of-home consumption, where maybe consumers have been a bit more cagey about price points and down trading within out-of-home. Is it something that could impact, as well, Nespresso consumers?
Yeah. So as you said, Nespresso has recovered after that post-COVID normalization, exactly in line with our forecast, and almost to the month, exactly from the point where we you know pinpointed it to you, and that was around April, May, June last year. So pretty much you know pretty much a good sign of how a direct-to-consumer business you know that has all the data can be very much you know informed real-time about its business prospects. So Q1, in that regard, as we discussed on the Q1 call, that to me is more like a one-quarter phasing, timing type of issue. It doesn't take away from the continued recovery we're seeing at Nespresso. And here, again, just like with Nescafé and Starbucks, a lot of it has to do with good, meaningful innovation that captures consumers' interest.
We have seen, as always, some interest from competitors in Original Line coffee capsule products, and there, I think it's important—when you look at our Nespresso business, it's important to keep in mind that you only see one fraction of it, and that is what gets sold under the Nespresso brand name. The way we look at it is, you have the Nespresso small capsule Original Line business, but then you also have Nescafé Farmers Origins, and you have Starbucks. And so the Nespresso system sales, those posted, for example, for Q1, positive RIG as well. And so you see that with that brand flotilla, all three of them, at different price points and with different propositions, I think we continue our good growth.
Now, it's easy to transition to my next question, because the CEO of Nespresso is going to take over the role in Europe. So as he steps into that role, I wanted to hear from you what you think are the priorities for that zone. I think it's a zone that has been the hallmark of Nestlé doing quite well in what is supposed to be or was seen as a pedestrian market. That said, obviously, that zone as well has been impacted by the inflation, lower rig, and I see that margin has been, I think, 250 basis points below where it was pre-COVID. So how do you think that, Mr. Le Cunff, should be managing that region going forward?
Sure. And look, I mean, what we are seeing here, taking place effective July 1st, is a scheduled leadership change. Marco Settembri, who has been heading Zone Europe, taking well-deserved retirement, after more than 30 years of service to the company. Very grateful to what he's done to Zone Europe, and especially seeing the benefits of our category-focused model in Zone Europe. And I think with Guillaume Le Cunff, we have a fantastic successor. He's done amazing things to the Nespresso business in North America, which was his prior posting before he took over the global CEO job. And then, of course, in the global CEO role since 2020, I think also, you know, outsized development.
Here you have someone who, by nature of his experience at Nespresso, is digitally quite savvy, and I think that will benefit our other categories as well. And someone who combines deep category expertise with a strong set of marketing accomplishments and strong marketing background. So I think very well positioned to take Europe to the next level. And in Europe, of course, when you look at the recent performance, it is important to keep in mind, this is where a lot of the global gyrations and the issues were bearing themselves out. So think about the Ukraine, think about supply chain issues. We also had our share of issues, like, for example, some of the limitations on Perrier supply, our Buitoni issue in 2022.
So I think all of them, in addition to the inflation, spiking up, were taking a toll on European performance. But it's important to look at it more on a multi-year basis and to see how even before COVID, Europe was continuously improving its performance with a stronger category focus and and some categories really turning into growth locomotives, like confectionery, for example. And so with that, preserving the best of this category focused model, and then putting his kind of signature and handwriting on the business with a strong focus on marketing and digital expertise, I think Guillaume will do spectacularly well.
Great. You were mentioning capacity issue at Perrier, so that brings me to waters. I'm gonna ask you a bit of frozen food-like question. Of course, you did some cleanup in the portfolio by selling the low value part of the US early on when you started. But nevertheless, this is a business where we continue to see issues, food safety, supply chain, which invested capital has been, is lower than the rest of the group. So it's difficult to see, you know, why would you continue to allocate capital there and top line, no margin have done great. So, what's the future of that business within the Nestlé group?
Well, look, it's a fair question, and obviously, as a snapshot, the question is quite justified. But it's important that, especially when you judge a business from a capital allocation point of view, that you don't just take the snapshot, especially when it's burdened by certain one-off issues, but rather that you take more of a longitudinal kind of view and see what it can deliver. And it is true that, I mean, most of our investors applaud the fact that we separated with our U.S. side of the business in 2020 and focused on premium and functional water brands. And then what happened is, with some of the supply chain issues we had and food safety issues, that we were delayed in putting that strategy in place.
And so I think it's important now that we take care of these operational issues first, make sure that we see the full normalized potential the business has, and then from there, basically make our strategic choices going forward.
We talk about potential disposal. Let's talk about M&A. Obviously, there's been a lot of concentration of M&A in Nestlé Health Science, which, you know, we discussed earlier. I wanted to understand what you see, the M&A, looking like for Nestlé in the rest of the business in terms of category and regions. Whether the current valuation that have come down from very high level are making the pipeline making, looking a bit more interesting. I also remember your words about, you know, mid-sized deal being a bit the place you want to go. But, I mean, is it still the case, or do you think that there are area or pockets of portfolio that could deserve a bigger deal?
Yeah. So look, valuations certainly have come down over the last two years and have certainly come more in range. In hindsight, then obviously, let me also point out, it validates the fact that we were more focused on divesting in the years between 2017 and 2021, when it came to giving our portfolio more focus. And we did that at a time when valuations were very strong, and so we, I think, did our investors a favor, sort of doing that part first, and then also being quite selective at the time when it comes to acquisitions. Going forward, we're open for business across the full spectrum of our categories, we'll be selective when it comes to valuations and prudent on that. And that sweet spot of mid-size acquisitions, I think that continues to apply.
They should be large enough to move the needle, but obviously something that you can still handle from an integration point of view. I believe that's usually pointing towards mid-size acquisitions as a very grateful target range. Across the spectrum, look, I mean, I do have a strong mantra that we had discussed on earlier occasions, and that is, you have to earn the right to acquire. So business shouldn't acquire to buy its way out of the problem, but rather a business should be in good shape from an operating perspective, and then, you know, it qualifies to actually take on more. That's the same kind of healthy priority attitude that we'll apply when opportunities come up.
The core priority is always make sure that from an organic growth point of view and margin point of view, the business is in good shape. If on top of that, you can build then on the business by adding to it through selective M&A, wonderful, and we're open for that.
We spoke sometime already on U.S. and Western Europe, so I'm gonna ask quite a big question on emerging market, and it's a bit unfair because they are so diverse. But maybe if you could comment on the Latin America, Brazil, Mexico. I think I was a bit surprised that you didn't do better, given that this part of the world is still holding quite well from a consumer standpoint. And then you did quite well in China. Obviously, there was as well timing of Chinese New Year that helped. But if you could comment about how you see China, India, and Southeast Asia as a whole performing for you.
Yeah. Yeah, so let's do a little 100,000-foot flight altitude, kind of tour of the world. And Latin America, I do believe it's important to appreciate that we're coming out of several years of very significant good and above par flow. And, so here also, it's important not to overinterpret the first quarter. So Mexico, in particular, for example, had a bit of a soft start to the year, but then looks well positioned to accelerate later in the year. Brazil, on the other hand, did have a good start in the year, especially driven by a very buoyant confectionery business. And, so the fundamentals are a little bit different market by market, but with these two in particular, I'm very confident going forward we're well positioned there.
Both of them are not just large, meaningful markets for us as a group, they're also among the digital thought leaders, for example, and also category thought leaders. Mexico, for example, on coffee and Brazil on confectionery. Generally, very optimistic there, and again, there's always minor fluctuations here quarter by quarter, but generally feeling very confident here. On China, it's important to note in 2022, 2023, we did not have the same food inflation problems as in other parts of the world. China, in 2023, was hence one of the very few geographies that saw continued good, positive break. I think the story of China is one where after COVID, people had expected a very rapid recovery, and the recovery is coming, but it is more muted than what had been expected at the time.
And, we're basically, sort of seeing that play out in our sector as well. We are in a very diligent way, fixing some of the category issues we had in China. So when it comes to the on-the-ground progress that we're making, category by category, from infant formula to some other parts of the business, and working on coffee opportunities, for example, to maximize this significant strategic opportunity for us going forward, I feel very confident about the team and its work, and so we're well positioned here. India, a strong consumer environment for the last several years, and also expect that to continue to grow quite well going forward. Here, again, a market that has not suffered so much from inflation.
I mean, they have a very diversified set of energy sources and very diverse set of energy policy that allowed them to keep inflation within acceptable limits. And we have a fantastic team there that I think has done really well over the last few years and will continue to do well, so quite excited here. And then Southeast Asia depends a little bit market by market, so hard to see a pattern here. There were some market that were impacted on a temporary basis by some of the unrest in the Middle East. Others continue to grow very strongly. But overall, you know, I mean, Southeast Asia, India, India, and China continue to be a part of the world, but it's definitely good news when it comes to Nestlé growth.
Great. Maybe I would like now to go to P&L. So, if I think about last year, we saw a good gross margin recovery in the second half of the year, and that was helpful. Still, I think your gross margin is quite like 350 basis points from the around 50% that you had pre-COVID. So I wanted to understand what you think is the path to recovery. And you mentioned earlier, cocoa, coffee, aluminum, you know, some of those commodities that are creeping up. To which extent you are, you feel you are able to price for next year, and, you know, whether next year gross margin can continue to improve?
So the most important observation is we are in the middle of this period of gross margin recovery. And when you look at the numbers for last year, it was a recovery to the tune of 70 basis points, round about. When you then factor in also distribution costs, which some of our peers put under gross margin, we don't, the recovery would have been as high as 130 basis points. So I do feel, you know, there's generally relief coming to the P&L from the fact that the worst of the inflation wave is behind us, and I think that's the reassuring news to our investors, and we see that continue.
Obviously, in select categories, we may opt to go slower here and there so that we are keeping affordability in mind and the state of the consumer, and that we have a stronger performance. But the fundamental direction that the gross margin continues to improve, that applies. And going forward then, as mentioned, it's not so much about broad-based, across-the-board price increases, but rather very nuanced, category by category, market by market reactions to select price increases that we're witnessing, that are well documented and that are understandable to our retail partners and also to the consumer.
The flip side of that is that, we have seen, thanks to your gross margin delivery, you really step up the A&P, last year, I think by the tune of 80 basis points. And you mentioned that earlier in terms of, how this is helping your initiatives. What is the path to A&P, investment over the coming years? I think if I look back over the past five years, SG&A has been down 250. Some of that were structural savings. So if you could comment on how much is structural and how much you think you still need to reinvest. And, maybe you're tying up, gross margin and investment. You are targeting 17.5-18.5 margin bracket by 2025.
Can you talk about what you think is the structural opportunity of the business from a margin standpoint, given that you are ever-focusing on better mix and stronger profitability, stronger profit, category?
... Yeah. So first and foremost, let me confirm the 17.5-18.5 bracket for 2025. I think when it comes to our midterm goals, that we issued for that year at the end of 2022, those stand. Specifically then, it is about, on the one hand, ongoing relief on the administrative cost side, and on the other hand, improving our A&P spend. You know, in the past, by lumping both of these positions into one, I know it was sometimes hard to read for our investors where exactly we stand, and it was hard to interpret that number.
I think starting from last year, by separating it out, people see, you know, the progress we're making on administrative costs, but then they also can appreciate the investments we're taking in A&P and brand support, where, of course, people will wanna see a recovery over time. We're not guiding specifically on how much higher spend we're targeting for 2024, but let me reassure you, in line with what we mentioned at the full year, that will increase from 2023 levels. It's also important to note that the profile in the year is a lot more front-loaded compared to 2023.
So clearly, from last year, what you're seeing is an uninterrupted path upwards when it comes to A&P spend, and, as mentioned, with some latency that has started now to deliver benefits and will continue to give growth benefits going forward. So overall, when I look at the 17.5 to 18.5 bracket, you have a number of puts and takes. So clearly there's relief coming from better gross margin on the one hand, with some of the inflation wave behind us. On the other hand, you do have a higher rate of investments into innovation and renovation, the brand support we just discussed, and also, as you know, in the background, our rate of sustainability spend is stepping up year after year.
So with that, as you put all these puts and takes together, we feel confident about the 17.5-18.5 bracket.
Moving on to your cash performance, I think last year we are back to a free cash flow of CHF 10 billion. Nevertheless, the CapEx level, a step up from around 4-4.5% to 5%-6%, and you mentioned some of this investment. What is your visibility, or where do you think you will be done with that step up in CapEx? And that comes back to me as well, to the leverage. So your net debt will be 2.7 times. What do you feel confident or comfortable? What's the comfortable zone for that leverage?
Yeah. So I think on free cash flow generation, that was one of the bright spots for last year. It had also a lot to do with continued improvements now in working capital after a period when we ran higher inventory levels with all that supply chain uncertainty around the world. CapEx, which temporarily was elevated, as you mentioned, because we were putting in extra capacity, I think over time will come down to around 5%, as per the algorithm that we put forward for the year 2025. So I think pretty much everything on track there. And then when it comes to balance sheet and debt levels, I think we're very comfortable with a range of two to three times net debt to EBITDA to maintain our rating.
That range is very much in line with what you're seeing among industry peers, and I think it's a good compromise between taking advantage of debt as a lower cost form of capital on the one hand, but then on the other hand, also preserving financial headroom, financial flexibility in case growth opportunities do come up. So I believe it's a good range that's time-tested and proven in the industry.
Since you came, Mark, there's been a few major share buyback program. The latest one finishing this year, I think there is CHF 5 billion to go for out of the CHF 20 billion that you had announced. I would like to understand, what is the outlook for share buyback? And obviously, that comes back as well to the question of L'Oréal, where you have lowered your stake to 20%. Is there an opportunity for further sell down? I think, you know, without losing your equity accounting methodology, like, is there an opportunity for you to use that? Or you think that is such a, not a strategic word, but yeah, strategic stake that would be better off to be reinvested in a acquisition that would be cash and EPS accretive?
Yeah. So let me take a bit of a wider angle approach here and assure you about our focus on proper, thoughtful, and also sustainable capital allocation. And first priority is always to do what's needed to grow and expand our base business, to be sure that from an innovation spend and brand support spend you know all of our businesses have what it takes to succeed going forward. Then obviously, as we discussed earlier in this conversation, the next layer would be to be sure when there are opportunities for M&A to build on what we have. Always keep in mind the focus on food and beverage and the category focus we have, but in a disciplined way than to add through M&A to what we have that certainly is another priority.
And then the third one is also to then share the cash proceeds through very visible, dependable and consistent programs. You see, you know, our long-term practice on dividends, you know, steadily rising dividend, and also the highly visible and disciplined share buyback programs. So wanted to assure our investors that all of this gets a lot of attention from management team and also board of directors. And, as you've seen now, we're in the middle of our third buyback program, and all three of them have been implemented basically to the letter of what had been announced at the time. And on dividends also, it's been a very much no surprise policy and steady increases at a time when, in the industry, you're seeing here and there dividend growth leveling off or even reducing.
So I think maximizing that dependability and sustainability around the capital allocation policy is key for us. And so at the right time, we'll then decide about, you know, our next steps going forward. We are now finishing that buyback program in line with what had been laid out at the end of 2021. And on the L'Oréal stake, obviously not gonna talk about future steps here, but I wanted to be sure that the 20% is not seen as a black or white dividing line. So to those people where equity consolidation is important, 20% is one data point that goes into judging that, but there's also other yardsticks that auditors would use to determine whether equity consolidation is available or not. And beyond that, we prefer not to comment.
Excellent. Mark, thank you so much. There is one last question that came from an investor. The question was about share price performance of Nestlé, excuse me, that has probably not been as strong as expected by your shareholder base. First of all, how you view that, but also, given what we have just been discussing for the last hours, how do you think about value creation at Nestlé in order to approach that performance?
Yeah. So let me assure you, first and foremost, that the value creation model at Nestlé is fully intact and, fully at work. And it basically starts with, consistent organic growth performance along the lines of, mid-single digit. Yes, you'll say, that, when it comes to volume and mix, we've had, disappointing quarters, but let me also point out that for the last three years in a row, we've been north of our mid-single digit corridor, and it was not only driven by, inflation, it was also driven by a very healthy volume and mix development in the early innings of that stretch. Before that, and before some of the additional COVID tailwinds, you've also seen us making steady progress towards the mid-single digit target.
And I think we confirmed many times in between that we believe that aside from some of the short-term fluctuations we're seeing now, that the company is well geared towards delivering that mid-single digit organic growth on a sustainable and a repeated basis. And that is a bedrock for our value creation. In addition to that, it needs to be complemented by steady and moderate margin improvements. I think here also, it's noteworthy that when it comes to the reduction in margin as a result of inflation, it was a lot more limited than with some of our industry peers, and we're now in a period again where we're repairing it. So I think people have taken confidence that on margin, we are a steady performer.
And then obviously, cash performance and cash conversion is another key aspect, and there, I think you've seen this strong progress in 2023. So I think some of the core tenets here, value creation, coupled then with a thoughtful capital allocation policy that we discussed earlier, are either fully remaining in place or are on the mend. And hence I do have confidence in that going forward. On the share price, look, obviously, yes, it has been a disappointing share price development. We've fully acknowledged that. Let me just, on a personal note, assure everyone, we are also highly incentivized on that. As you know, from our annual report, I own more than 1,000 shares myself, and so with every minute movement here, the share price up and down, I feel it.
This is by far the most valuable asset I own. So clearly, the focus of the team on making sure that we're acting also in the best interest of our shareholders is clearly there, and I wanted to assure everyone about that.
Excellent. Thank you, Mark, for your insight and for the discussion. Thank you everyone for joining us today. Bye-bye.
Thank you.