Good afternoon and good morning to everyone. Welcome to the Nestlé First Half 2021 Results webcast. I am Luca Borlini, head of Nestlé Investor Relations. Today, I'm joined by our Chief Executive Officer, Mark Schneider, and our Chief Financial Officer, François-Xavier Roger. Mark will begin with key messages and discuss the full year 2021 guidance. François will follow with a review of the first half 2021 sales and profit figures. We will then open the lines for your questions. Before we begin, please take note of our disclaimer. And now I hand over to Mark.
Thank you, Luca, and a warm welcome to our conference call participants today. As always, we appreciate your interest in our company. In all modesty, it has been an exceptionally strong first half, with organic growth beyond our expectations. Continued strong at-home consumption, recovering sales in the out-of-home setting and in China, as well as market share gains in several categories were behind this stellar performance. My sincere thanks go out to the Nestlé community around the world for truly rising to the challenge. It took strong efforts to deliver this growth in a period that still saw significant COVID restrictions and daunting supply chain challenges due to major transportation and logistics problems worldwide. We've managed to navigate those challenges, neutralize unexpected transportation, packaging, and commodity price increases, jack up spending behind our brands, and still deliver a constant underlying trading operating profit margin compared to H1 last year.
Meanwhile, our portfolio transformation continued. Significant growth steps are taking our Nestlé Health Science business to the next level, and the expansion of our Starbucks partnership into ready-to-drink coffee in Southeast Asia, Oceania, and Latin America will add to the outstanding success story of our global coffee alliance with Starbucks. Our sustainability agenda continues to advance with new projects and commitments in our waters business, which I will outline later. I would like to spend a bit of time on the expansion of our Nestlé Health Science business, which has seen tremendous growth in recent years. The headline grabber this year was certainly our acquisition of the core brands of The Bountiful Company. There's a lot more at work here, and I would like to ensure that you have the full picture.
The Nestlé Health Science business has three main pillars, which are all focused on nutrition and metabolism and which are highly synergistic with regards to the underlying science and technology. The first and oldest pillar is medical nutrition, a well-known and established category where we are one of the leading companies worldwide. We cover special nutritional needs for pediatrics, specific diseases, and the elderly population in hospital, long-term care, and home care settings. The second pillar has seen the most significant expansion in recent years. It is our consumer care segment, which includes nutritional health products such as BOOST, and which has increasingly focused on the attractive vitamins, minerals, and supplements space. Our Vital Proteins collagen business and Nuun, our recent electrolyte hydration acquisition, are also part of this pillar. The third pillar is novel therapeutic nutrition, which we also refer to as pharma.
It includes true nutritional specialties in the RX or prescription area. They focus on gastrointestinal and food processing disorders, as well as food-borne allergies. While regulatory hurdles are higher, the technologies are well within the scope of our capabilities. With our recent acquisitions, Nestlé Health Science has now reached an annual revenue run rate of CHF 5 billion-CHF 6 billion and continues to enjoy a very attractive organic growth profile. The Bountiful transaction makes us a global market leader in the vitamins, minerals, and supplements space. We initially expanded in this segment with premium priced specialty offerings such as Garden of Life, Pure Encapsulations, and Persona. The business acquired from Bountiful will build on these highly successful investments and add major leading brands such as Nature's Bounty, Solgar, and Puritan's Pride, giving us a broad-based leading presence across products and channels.
We will also benefit from state-of-the-art manufacturing capacity, which will create synergies for all of our brands. Finally, our extensive international presence will help the acquired brands to advance their global growth journey. We welcome the accomplished Bountiful executive leadership team in our group and are confident that we will take their and our business to amazing places. As indicated in our press release, we expect this transaction to close in August. Under the business as a force for good section, I would like to focus today on our recent water management announcement. As you know, we have refocused our Nestlé Waters business to position it for profitable growth from a smaller and more attractive base.
The new growth strategy includes an accelerated approach to improving the environmental footprint of this category. A key aspect is the carbon footprint, and we already started to address that with last year's commitment to make our international premium water brands carbon neutral by 2022. Another one is packaging, and we're seen as a leader in the ramping up of recycled PET material for our bottles. In June, we announced enhanced water stewardship plans at the 48 sites where we operate. Through more than 100 projects at or near these sites, we will help to manage water resources sustainably and help regenerate local water cycles. As of 2025, these measures will help nature near each of our sites to retain more water than the business currently uses in its operations. Water is life, and these projects will have plenty of positive impacts, such as improved biodiversity and soil quality.
Before turning it over to François, I would like to cover our updated guidance for this year. Based on the strong first half, we now expect organic sales growth in the range of 5%-6%. As indicated before, we will start to lap two strong 2020 quarters in the second half of this year. We remain optimistic and see continued strength in our market share and growth prospects. While the pandemic has made the evaluation of our true current run rate for organic revenue growth harder, I would like to confirm that we have now what it takes to deliver consistent mid-single-digit organic sales growth going forward. Regarding our underlying trading operating profit margin, we have been able to avoid a decline in the first half, despite significant input cost increases and strong marketing investments. In the second half, we will face two additional items.
One is an even stronger impact from input cost inflation. The second one is one-time integration costs related to the acquisition of core assets of The Bountiful Company, which we had flagged already as part of the deal announcement in April. While our efficiency gains and structural cost savings continue to progress, these two items will temporarily reduce our underlying trading operating profit margin in H2. We're taking a cautious view here and now expect a margin of around 17.5% for the full year 2021. I would like to point out that we consider this as transitory. We are all facing a surprising uptick in inflation this year, and it takes a few months for pricing to catch up with input cost increases. For 2022 and beyond, we expect to return to steady and moderate increases in our underlying trading operating profit margin.
Finally, we would like to confirm our previous guidance regarding underlying earnings per share and capital efficiency for this year. With this, I would like to hand it to François, and I look forward to answering your questions later.
Thank you, Mark. And good morning, good afternoon to all. Let me start with the highlights for the first half of 2021. Organic growth was 8.1% in the half. RIG was strong at 6.8%, and pricing increased to 1.3%. Mix remained solid and consistent with prior years. Acquisition net of divestitures reduced sales by 3.1%, largely related to the divestment of the Nestlé Waters brand in North America, the Herta charcuterie business, and the Yinlu peanut milk and canned rice porridge businesses. Foreign exchange reduced sales by 3.5%, reflecting the appreciation of the Swiss francs versus most currencies. Total reported sales for the first six months were CHF 41.8 billion, a 1.5% increase versus last year on a reported basis.
Overall, strong organic growth in the first half was driven by three key factors: continued momentum in retail sales and a return to growth in out-of-home channels, increased contribution from pricing, reflecting input cost inflation, further market share gains across most categories. At the end of June, we were gaining or holding share in more than 60% of business sales. These slides illustrate the development of our sales by geography and includes both our zones as well as our globally managed businesses. Organic growth was strong in all geographies. Pricing improved, particularly in the Americas and MENA, reflecting our ability to offset input cost increases and currency appreciation. In both developed and emerging markets, we saw an acceleration of RIG and increased pricing. Organic growth in developed markets increased to 6.7%, reflecting positive contribution from most regions.
Growth in emerging markets was 10%, with particularly strong contributions from BRIC markets and Mexico. Let's now look at the breakdown of sales by channel. Organic growth for retail sales was 7.3%, moderating to a mid-single-digit rate in the second quarter due to a high base of comparison in 2020. Within retail, e-commerce saw sustained growth of 19.2%. E-commerce now accounts for 14.6% of total sales. Most categories saw strong momentum, particularly coffee, Purina PetCare, and culinary. Sales growth in out-of-home channels accelerated to 21.3%, helped by a low base of comparison and the easing of movement restrictions in some geographies. Going forward, we expect a continued recovery in out-of-home channels. Growth in retails is expected to moderate. However, sales should remain at higher levels than in 2019.
We believe that some changes in consumer behavior are here to stay, such as increased working from home, pet parenting, and the search for health and immunity benefits. Since the start of 2021, we have seen significant input cost inflation related to agricultural commodities, packaging material, and freight cost. In the first half, the inflationary impact on the P&L was still moderate given hedging and forward buying in place. However, there was already some effect in the second quarter for costs that cannot be hedged, such as packaging materials and freight. Since we last talked in April, the full-year impact of input cost inflation has materially increased. We now expect our cost of goods sold to increase by around 4% for full year 2021. This is based on what we know at the end of July, and the situation may evolve.
We are proactively addressing inflationary pressures and have already materially increased prices over the last three quarters. We expect to step up pricing progressively and in a responsible manner over the remainder of 2021 and 2022, with different trends by geography and category. At the same time, we are strengthening the development of affordable offerings, particularly those that meet nutritional needs in emerging markets. These efforts help to soften the effect of inflation for those most impacted. Beyond pricing, we are also using other levers such as product mix, discipline cost management, and the rollout of strategic revenue management tools. We have also benefited from increased centralized procurement. While we expect to offset input cost inflation over time, its impact may not be fully compensated in the same quarter or same semester. In some cases, there will be a lag between inflation headwinds and our actions taking effect.
Let's now look at the results of our operating segments, beginning with Zone AMS, where we saw high single-digit growth with a high base of comparison in 2020. Sales were CHF 16.2 billion, with organic growth of 7.6% based on strong RIG of 5.3%, supported by volume and mix, and a significant step-up in pricing to 2.3%. Growth was based on new product launches, continued momentum in e-commerce, and a recovery in out-of-home channels. The zone also reported broad-based market share gains led by coffee, pet food, dairy, and infant nutrition. North America grew at a mid-single digit rate, with particularly strong growth in Purina PetCare and beverages. Sales in frozen and chilled food grew at a mid-single digit rate, with double-digit growth for Stouffer's, Lean Cuisine, and Freshly. During the first half, Freshly expanded its production capacity with new manufacturing operations in California.
Pizza posted a sales decrease following elevated demand in 2020. Nestlé Professional, water, and Starbucks out-of-home products returned to positive growth in the second quarter. Latin America reached double-digit growth with broad-based contributions across geographies and categories led by Brazil and Mexico. The zone's underlying trading operating profit margin increased by 40 basis points. The increase was driven by operating leverage, structural cost reduction, and product mix, which more than offset input cost inflation and increased consumer-facing marketing expenses. Shifting to Zone EMENA, sales were CHF 10.2 billion. Organic growth was 7.3%, based on strong RIG, supported by volume and mix. Pricing in the semester turned positive for the first time in four years, contributing 0.6%. Growth was supported by successful innovation and continued strong momentum in e-commerce. The zone continued to see broad-based market share gains, particularly for pet food, coffee, plant-based food, and water.
Each region posted positive growth, with strong sales development in Russia, Turkey, the United Kingdom, and Italy. The key growth drivers were coffee and Purina PetCare, which grew at a double-digit rate. Sales growth in Nestlé Professional and water turned strongly positive as movement restrictions eased. Sales in confectionery reached a mid-single digit rate based on improved demand for impulse and gifting products. The zone continued to focus on opportunities in plant-based offerings. Within food, sales in Garden Gourmet grew by 40% with market share gains. Within milk alternatives, we launched Wunda, a new pea-based beverage across a number of European markets. The product's neutral taste and high protein content allows it to be fully versatile for many different uses. Peas are also one of the most environmentally friendly sources of plant-based protein. The zone's underlying trading operating profit margin increased by 50 basis points.
Operating leverage, structural cost reduction, and product mix more than offset increased consumer-facing marketing expenses and commodity inflation. Moving next to Zone AOA, with sales of CHF 10.2 billion. Organic growth was 6.8%, showing resilience in a difficult environment. Most categories gained market share, particularly pet food, coffee, confectionery, and culinary. China posted double-digit growth, supported by a recovery in out-of-home channels and the timing of Chinese New Year. The largest growth contributor was Nestlé Professional, with sales exceeding 2019 levels. Nescafé, Totole, Dairy, and Purina PetCare all grew at strong double-digit rates. Infant Nutrition saw a sales decrease impacted by challenging market dynamics. We continue to focus on our turnaround initiatives, particularly in the lower tier cities. While still losing market share, the level of market share losses is slowly stabilizing. In Hong Kong, we continue to gain share.
Outside of China, the zone reported mid-single-digit growth led by South Asia, sub-Saharan Africa, and Japan. Southeast Asia saw slightly negative growth in a difficult economic environment. Overall for the zone, culinary, coffee, confectionery, and ice cream posted double-digit growth. Within culinary, Harvest Gourmet, a plant-based food offering, was launched in China and Malaysia. Sales in dairy grew at a mid-single-digit rate, led by strong demand for adult milks. Infant Nutrition posted negative growth, but continued to gain market share in South Asia and Africa. Growth in Nestlé Professional was double-digit and positive across all regions. The zone's underlying trading operating profit margin decreased by 40 basis points. Commodity inflation and product mix more than offset operating leverage and structural cost reductions. Next is Nespresso, which saw sales of CHF 3.2 billion. Organic growth was 14.6%, based on strong RIG of 13.8% and pricing of 0.8%.
The Vertuo system continued to grow strongly, with further extension in new markets, including a launch in Brazil in March. The original system also saw robust consumer demand. Overall, growth was fueled by new customer adoption, a return to positive growth in boutiques and out-of-home channels, as well as innovation. New products included a new range of iced coffees and Kahawa ya Congo, the first organic coffee in the Reviving Origins range. Nespresso also rolled out Momento, a versatile touchless machine that creates specialty coffees with fresh milk for out-of-home channels. By geography, the Americas, EMENA, and AOA all grew at a double-digit rate. Overall, Nespresso gained market share across most markets. Underlying trading operating profit margin increased by 10 basis points. Operating leverage and structural cost reduction more than offset increased consumer-facing marketing expenses.
Following an exceptional first half of the year, we expect growth to moderate in the second half of 2021 as we cycle a high base of comparison. It should also be noted that margin in the second half is traditionally lower, given higher marketing spend linked to seasonal events. Finishing with Nestlé Health Science, which reported sales of CHF 1.9 billion, the business grew at a double-digit rate with a high base of comparison in 2020. Growth was driven by sustained momentum in e-commerce, new product launches, and geographic expansion. E-commerce grew by 31% and now represents 21% of sales. Consumer care posted double-digit growth. Vitamins, minerals, and supplements that support health and the immune system continue to see strong demand. Vital Proteins and Persona more than doubled their sales. Pure Encapsulations, mainly sold through healthcare practitioners, posted strong double-digit growth in the U.S.
Garden of Life saw continued trends in e-commerce channels. Healthy aging products grew at a double-digit rate, with market share gains for BOOST in North America, Nutren in emerging markets, and Meritene in Europe. Medical Nutrition saw mid-single- digit growth, with robust demand for complete and adult medical care product, as well as for Althéra, Alfaré, and Alfamino pediatric care products. The underlying trading operating profit margin of Nestlé Health Science decreased by 580 basis points. As expected, investments in Aimmune and consumer-facing marketing expenses more than offset operating leverage. Aimmune's margin dilution reflects initial commercial investments behind Palforzia. The rollout of this peanut allergy treatment has been impacted by the pandemic, but it is expected to ramp up as visits to allergists resume and schools reopen. Increased consumer-facing marketing expenses included the highly successful celebrity campaign for Vital Proteins.
Looking now at product categories, we saw strong growth in all segments, with the exception of infant nutrition. Most categories saw market share gains, with particular strength in coffee and pet food. Within powdered and liquid beverages, coffee grew at a double-digit rate, supported by Nescafé, Nespresso, and Starbucks products. Coffee at home continued to grow strongly while out-of-home and on-the-go channels improved. Sales of the Nespresso system, including Starbucks by Nespresso, grew by 17%, and sales of Starbucks products also grew by 17% to reach CHF 1.4 billion across 79 markets. We have captured close to 20% share of the Nespresso-compatible capsule market globally over the last two years. Cocoa and malt beverages grew at a mid-single-digit rate, led by increased demand for ready-to-drink formats. PetC are continued to see outstanding growth globally. Most segments grew at a double-digit rate with market share gains.
Purina's performance was driven by continued strong momentum in e-commerce and increased demand for premium products. The rollout of Pro Plan LiveClear, the first allergen-reducing cat food, continues to gather pace, and we have now expanded into 23 markets. Nutrition and Health Science grew at 1%. Organic growth in infant nutrition was -4%, reflecting a sales decrease in China and a slowdown in birth rate across geographies in the context of the pandemic. Outside of China, we continue to gain market share. We have already discussed Nestlé Health Science. Prepared dishes and cooking aids saw 8% growth, with double-digit growth in ambient culinary and chilled, driven by Maggi and the recently acquired D2C businesses Freshly and Mindful Chef. Plant-based food products continued to deliver strong double-digit growth. Milk products and ice cream grew at 8.2%. The key growth driver were fortified milks, coffee creamers, and ice cream.
Dairy culinary products saw high single-digit growth. But moderated in the second quarter following exceptional sales in 2020. Waters returned to positive growth, helped by a recovery in out-of-home channels. Market share gains were broad-based across all three zones, with strong contributions from international premium brands and the newly acquired functional water brand Essentia. Growth in confectionery rebounded sharply, reflecting a recovery in impulse and gifting products, which more than offset reduced demand for baking products in the United States. Innovation supported growth with new product launches such as KitKat V, a vegan KitKat, and Shark Wafer in China. Moving now to profit margin by product categories. As a word of caution, we see contrasted dynamics by category versus 2020, as the base of comparison had been impacted by the pandemic. Powdered and liquid beverages saw a significant increase, reflecting strong sales growth and the benefit of operating leverage.
Purina PetCare posted a decrease as higher commodity and distribution costs more than offset operating leverage. Prepared dishes and culinary products saw a decline reflecting increased consumer-facing marketing expenses and investments behind recently acquired D2C businesses. Nutrition and Health Science saw a margin decline in both infant nutrition and Nestlé Health Science. We have already discussed Nestlé Health Science. In infant nutrition, the margin decline reflected reduced sales as well as higher commodity and freight costs. Margin in milk products and ice cream increased materially, reflecting the benefit of strong sales growth and portfolio management, more specifically Yinlu and U.S. ice cream. Confectionery and waters saw improvements as sales recovered following a low base of comparison in 2020. Moving next to underlying trading operating profit margin. In the first half, gross margin increased by 20 basis points.
Distribution costs as a percentage of sales decreased mainly as a result of the disposal of the Nestlé water brands in North America. We continued to deliver the structural cost reduction across the P&L, leading to a strong operating leverage. COVID-19 related costs were also materially lower. Consumer-facing marketing expenses increased by around 80 basis points over 2020, when we could not fully activate in-store promotions. On a like-for-like basis, we are now slightly above 2019 levels. We increased media spend to support brand building and consumer engagement, including in digital media, which now accounts for 48% of total media spend. R&D expenses also increased, mainly in Nestlé Health Science, as a result of investments in Aimmune.
The impact of portfolio management was slightly positive as the divestitures of Yinlu, Herta, and the Nestlé water brands in North America more than offset investments behind new growth platforms such as Aimmune and Freshly. Overall, for the first half, our underlying trading operating profit margin was unchanged at 17.4%. In the second half of 2021, the impact of input cost inflation will be significantly larger, and as a result, pricing is expected to increase further. The possible time delay between both factors could put more pressure on our margins. In the second half, we will also absorb one-off items related to the acquisition of the core brands of The Bountiful Company. These one-off items are mainly related to the inventory step-up. This will have a 10 basis points impact for the full year, for the group, and will largely fall in the second half.
This is reflected in our revised guidance and our midterm outlook for moderate margin improvement remains unchanged. Our guidance is cautious given the ongoing macro volatility. Moving to underlying EPS, underlying earnings per share increased by 10.5% in constant currency and 8.3% on a reported basis to CHF 2.17. The main driver of the underlying EPS improvement was organic growth, combined with lower finance costs and underlying tax rates, as well as the benefit of share buybacks. Given our midterm ambition of sustainable mid-single-digit organic growth and moderate margin improvement, we can expect that going forward, organic growth will be the main driver of underlying EPS growth, as we see in this first half. Our average cost of net debt has decreased from 2.6% to 2%. The line others in the chart largely relates to income from associates and joint ventures, particularly L'Oréal. Cash flow generation is a priority.
In the first half, it remained strong, as illustrated by the fact that cash generated from operation, which means before CapEx, was almost unchanged at CHF 5.8 billion. This is equivalent to 14% of sales, a level consistent with previous years. Free cash flow, which means including CapEx, decreased from CHF 3.3 billion to CHF 2.8 billion, mainly due to a temporary increase in capital expenditure to meet strong volume demand, particularly for Purina PetCare and coffee. The slight increase in adjusted EBITDA reflect improved operating performance, which more than offset the negative impact of exchange rate and divestitures. We continue to make progress on working capital management with a further reduction of net working capital by 52 basis points on a five-quarter average basis. Let me now hand over to Luca, who will monitor the Q&A.
Thank you, François. With that, we move to the Q&A session. We open the lines for questions from financial analysts. The first question comes from Patrik Schwendimann at Zürcher Kantonalbank. Please go ahead, Patrik.
Yeah, thanks a lot, Luca. Hi, Mark. Hi, François. Congrats from my side, very impressive growth. I couldn't find actually a higher RIG in my spreadsheet since 89. My question, outstanding growth for PetC are and coffee. You have mentioned, there are more pet owners and more premium products, et cetera. What is the new normal of growth for the Purina PetCare division and coffee category for the next couple of years? What's your assumption here? That's my first question. Second question regarding Aimmune. This was a drag as expected on your margin. What was the margin impact on the group level stemming from Aimmune, and what are your expectations for Aimmune for the next couple of years? Thank you.
Patrik, thank you. Let me start with the first one and then hand over to François for Aimmune. Look, I mean, it's very clear that in the aftermath of COVID, both of these categories, which were high growth categories to begin with, will see improved dynamics. So, I can't point you to a specific number, but it's better than before, and it's different reasons. I think with PetC are, it's the higher rate of pet adoptions that we have seen all throughout the COVID crisis. I think I have discussed this on previous occasions. Everyone has to work from their own assumptions, how long these pets will stay with their owners, how many of them will actually like having a pet and go for a follow-up pet as well. But there's going to be a long, long, long positive tail to this and we'll benefit from it.
In coffee, I think it's fair to assume, as most of you look at your own work-life arrangements, that we will spend a larger part of our time going forward, even after the pandemic, working remotely. Remote for most people means working from home. And hence, this is exactly our wheelhouse, the at-home consumption of coffee. This is where we're strongest, we stand to benefit with cups consumed at home.
Patrik, François speaking. Good afternoon. The margin of Nestlé Health Science decreased by 580 basis points in the semester to 13.5%, and a large part of it was coming from Aimmune. This is fully in line with what we expected. These investments in Aimmune are margin dilutive, but there is no issue at all. Part of what we have been seeing at Aimmune is linked to the fact that the pandemic impacted the rollout of Palforzia, the peanut allergy treatment. Overall, the business of Palforzia is in an early investment phase, and given the nature of the business and the development of new products, we are fully comfortable with that.
As you know, we expect Palforzia over time to become a blockbuster, a product with more than $1 billion in sales. We are clearly in an investment position up front. This is fully in line with what we expected.
Next question is from Martin Deboo at Jefferies. Please go ahead with your questions, Martin.
Yeah. Good morning, everybody. I think there are many ways of conceptualizing your strong top-line performance, but I think the way I'm thinking about it is brought out very nicely on your slide 35 on quarterly retail and out-of-home sales progress. It shows, I think that what's striking is that retail growth is holding up much better than you would expect given the swing back to out-of-home growth. I'd like to ask a question, I think it was asked on the previous call, but I think it's worth asking again. What is your view of why this is happening? Is it that people are actually consuming more calories in aggregate and you're benefiting and taking a fair share of that? Or is there something in the relative mix of your in-home versus out-of-home categories that's driving it? Or is it something to do with relative price points, in-home/out-of-home?
But the question is just why are we seeing this resilience of in-home as out-of-home comes back so strongly? That's the essential question.
Martin, this is Mark. Let me take a stab at this and maybe François can also build on it. I don't think people are consuming more calories. I think the answer is simply that while we're seeing a strong recovery in out-of-home, we're not back yet to pre-COVID levels. So, you know, either because of remaining fears over COVID or because simply people are enjoying that new, more flexible remote working style, people still spend more time at home and hence they consume more at home. Our market shares across the various products we sell in-home and out-of-home are always larger for the in-home part. There's no question about that, and hence we stand to benefit from that trend. That's my best crack at it. All I can tell you, judging from most people's waistlines, I don't think that there's more calories being consumed.
If anything, people are more health conscious, which, of course, playing into another strength of ours, offering products that cater to health and boosting the immune system. That's another one that's right going into our direction.
Maybe François speaking to complement what Mark said. For out-of-home channel, the growth will benefit from a low base of comparison, but at the same time, we expect growth in retail to moderate, but it will stay at a higher level than what we have experienced in the pre-COVID levels in 2019, given that structural changes in consumer behavior, and I would mention three, for example, are here to stay, such as increased working from home, pet parenting, as well as a search for health and immunity benefits. I think that will stay and will help us to maintain a strong level of at-home consumption.
Next question is from Celine Pannuti at J.P. Morgan. Please go ahead, Celine.
Yes. Good afternoon, everyone. My first question is on the margin target for the year. Could you say what kind of raw material inflation you are looking in H2 and what kind of pricing you are assuming to get to the 17.5% margin? While I'd appreciate guiding for next year, you did say that from next year we should go back to moderate margin increase. I just want you, if you could explain what visibility you have that the raw mat and pricing equation will be balanced, in 2022. And then, my second question is on infant milk formula. We calculated that it was down 3% in Q2. Could you say what was the number? You said that China was negative.
What was infant milk ex China performance and why the margin in that specific business was down a lot, I think around 500 basis point in the first half? Thank you.
Celine, good afternoon. Let me take the first question. The impact of increased input cost will be certainly much stronger in H2 than it was in H1. In H1, it was still relatively moderate because we had some hedging in place, actually we saw a very strong acceleration in input cost inflation coming in Q2, especially on items that we could not hedge, like transportation cost and packaging material. Much larger impact in H2. We will have more pricing as well. What is important to understand as well is that in H1, we could have a benefit of pricing combined with mix, combined with cost efficiencies, combined with other items like strategic revenue management that allowed us to exceed, in terms of benefit, the input cost inflation. We will even do more in pricing. We will do more in mix.
We will do more in cost efficiencies as well in H2. We may not be necessarily in a position to fully compensate, as we have indicated all of this input cost inflation in H2, but we are working on it and still early to conclude at this stage, but certainly much stronger impact in H2. On the second question was on the impact of the margin on nutrition. The margin on nutrition is obviously significantly down. This is largely linked to the fact that we have lower sales to start with, combined with an input cost that has increased as well. As you know, dairy is one of the categories where we have seen the largest cost increase.
Celine, this is Mark. Maybe I can add one high-level thought on inflation and our way of thinking about it. I think the issue this year is simply that we have experienced a turning point on inflation where we didn't see much of inflation before, and then starting from March, April, we've seen this tremendous acceleration. I think it's this turning point that's posing the problem because some of these cost items, as François explained, are hitting us straight on, and basically from one day to another, especially around transportation, which has seen very chaotic situations all throughout the spring. And we in turn, as we look at our pricing towards our retail partners, we usually, depending on the contractual arrangements we have in place, there is a lead time until pricing becomes effective. Hence, this is where you take some temporary hit.
Even if inflation is here to stay going forward, if there's a regular pattern, you can much better adjust to it. It's not that inflation per se is an automatic hit to our profitability. It's just that when you are at a turning point or when it's pointing up, certainly, it is a headwind for a limited period of time. When it comes to 2022, I think this is anyone's guess whether this is a one year to two year blip or whether this is something that's here to stay. This is where we need to stay flexible. But either way, either through continued pricing or through the normal operating and structural cost improvements, we feel confident about the underlying mid- to longer-term guidance that we had given you before, that is to expect these moderate margin improvements.
Next question is from Bruno Monteyne at Bernstein. Please go ahead, Bruno.
Hi. Good afternoon, Mark and François. My first question is again on the margin guidance and whether that is effectively a double margin guidance. You have your usual medium-term outlook, I guess about 10 basis points to 20 basis points per year, but you also have the temporary nature of this inflation impact. You're effectively saying when you've had time to pass through the pricing, we should have a bigger step up in underlying margin next year because you combine the usual increase plus the recovery of the temporary cost. The second question is around the progress other than China. I just want to isolate where the market share losses are. Is it only in infant milk, or do you have market share losses in brands like Gerber or in baby food or other categories as well? Thank you.
Bruno, good afternoon. So, the margin guidance, as we have indicated for 2021, we will be around 17.5% due to the timing difference between input cost inflation and pricing. Going forward, we maintain our indication for the medium term, which is for a moderate margin improvement, and that remains absolutely valid from 2022 onwards. No change at all there. Coming back to the second question now in infant nutrition, the market share losses that we have seen are essentially our infant formula. We have seen a little bit of pressure on Gerber as well, but this was for a totally different reason. As you know, we had some marketing issues, not marketing issues, but some issues in the U.S. that had some effect as well in China. Looks like we are recovering as we progress over time.
The main market share losses were essentially in infant formula in China.
Following the congressional inquiry into some of the baby foods in the U.S., which of course these days, through the internet, also made its way to China. That led to temporarily a fairly strong hit. As François said, we are recovering from that. Mainly, as he said, it's infant formula.
Next question is from John Ennis at Goldman Sachs. Please go ahead, John.
Hi. Good afternoon, everyone. My first question is on Nespresso. I wonder if you could give us an indication of machine growth over the half. I guess if we break down the 15% growth in H1, how much would be attributed to increased usage per existing customer versus new machine registration? Any kind of rough steer there would be helpful. My second question is to come back to, I guess, the margin reduction in Nestlé Health Science. Was Aimmune more than 50% of the margin reduction in that segment? If not, can you give us a bit of a rough steer in terms of percentage contribution? And should any of the consumer-facing investments reverse into the second half, or should we expect them to largely persist? Thank you very much.
Thanks, John. Let me try and take a crack at the first one and then hand it to François for the second one. Look, we're trying to be as helpful and transparent with Nespresso as possible, but I would prefer to stay away specifically from machine growth park numbers. I think it's fair to assume during the pandemic that the usage per machine was more of a driver than the machine park growth, because this was usually not the best time to go out and get advice on which machine exactly to buy. Again, as much as we're trying to open up here on Nespresso, I think for whatever involves competitive signaling, we would prefer to stay away from that.
John, your question was on margin was for the group or for NHS? Sorry, I missed it.
Sorry, it was for Nestlé Health Science.
Okay. For Nestlé Health Science. Okay. We have increased significantly consumer-facing marketing expenses in H1, and we had a low base of comparison last year in the same first semester because we could not activate quite a lot of activities in store. So, the increased consumer marketing expenses included as well in H1, this very successful campaign that we have for Vital Proteins, and Vital Proteins is doing actually extremely well. Sales have more than doubled over last year.
Next question is from Guillaume Delmas at UBS. Please go ahead, Guillaume.
Good afternoon, Mark, François, and Luca. First question is very much a housekeeping question. Apologies if I missed it, but tax rate was lower than anticipated in the first half. François, does it change your assessment for your full year guidance for the tax rate and even potentially for your medium-term guidance for the tax rate? And then, my second question is on the VMS category. Nestlé is now becoming a global leader here with the acquisition of Bountiful. I appreciate it's early stage, but your business today is very much skewed towards North America. So, where do you see the biggest opportunity in the short term? Is it about expanding your reach, offering innovation in the region, or do you think geographical rollout could rapidly be a meaningful contributor to your growth there? Thank you.
The question on tax. What happened is that we have seen a decrease of the corporate income tax rate in two countries which are significant for us, namely France and the Philippines. This is what it was about in H1. Obviously, since it has decreased, we will benefit from it in H2 as well.
Thank you. Let me comment on the VMS space. I think the first priority for us, of course, given the size of the business that we acquire here, is a picture-perfect integration. That's step one and something that the entire Nestlé Health Science team is very much focused on. I think you're right. There is a significant international opportunity because these brands, that's both our existing brands and the new ones that we acquire, are having a very strong global appeal, and we see significant inbound interest from all four corners of the world to do more with that. Think about brands like Solgar, which I think has a very devoted international following already. If you couple that now with our stronger global footprint, clearly there's upside there down the road.
And we're doing the same already on some of our existing brands, such as Garden of Life and Pure, which are making their way into Europe and select Asian markets. So yeah, that will give strong upside going forward. Obviously, you can imagine, as the pandemic subsides, there may be a period, and I think we flagged that from the beginning, of one or two quarters or three quarters where the year-over-year growth will not be as stellar as usual. When you look at the fundamental underlying usage of VMS around the world, it has been very steadily increasing. It's a strong growth category as people become more aware of which vitamins, minerals, or supplements they may be lacking. As part of the whole immune-boosting and self-medication trend, we believe we're right on the trend here.
Next question is from Tom Sykes at Deutsche Bank. Please, Tom, go ahead.
Yeah. Good afternoon, everybody. Two questions. One, just on e-commerce growth. E-commerce growth, it looks like, obviously, that's slowing down somewhat. Maybe could you give some view on the stickiness of habits in e-commerce? Is it a little bit harder as maybe some of those ease back a little to continue to get the same level of share gains and operational leverage that you had while that was growing more quickly, please? Then just on coffee, obviously, we've seen sort of exponential rise in the coffee price on our screens over the last few weeks and days. Could you maybe just help us with a little bit more detail of how you will build that and how you will compensate for that through the different parts of your coffee business, and the different parts of the price ladder that you have there, please?
Okay, Tom. François-Xavier Roger speaking. I will take the first question. It looks, indeed, that we see a slowdown in e-commerce growth. It's not really the case. What happened is that we had an exceptional growth last year in Q2 at the beginning of the pandemic. It was actually 67% in Q2 last year. So, this is mainly due to the fact that the comparison base was very high. We continue to be very happy with e-commerce. We have, as you know, a higher market share online than offline, and we continue to gain market share as well. No issue whatsoever. It accounts now for, as you know, almost 15% of our total sales, and there is no dilution impact on the bottom line as far as e-commerce is concerned.
Tom, let me comment here on coffee prices. Obviously, as the world's largest producer, we watch this very carefully. And as you can imagine, we do pursue a very careful hedging policy in this area so that the increases you've seen here are not immediately translating into like-for-like bottom line hits or pressures for pricing. For 2021, we're certainly quite well covered, and some of the cover also stretches into 2022. I think what needs to happen now is we need to track this very carefully and then see how and if we should take appropriate pricing action. Unlike some of the other items that were hitting us literally without any warning and had an impact on the bottom line right away, I think here in coffee, this being one of our signature commodities, we are having a good degree of protection through hedging.
So we'll look at this going forward and then where needed, adjust the pricing. Do keep in mind for growth category that has a large share of premium products, usually that type of pricing action is easier to take than for some of the others.
Next question is from Jeremy Fialko at Redburn. Please go ahead, Jeremy. Well, sorry, it's HSBC now.
Hi, good afternoon, everybody. Just one question from me is, can you clarify the sort of pricing that you're going to be expecting? Because I know there's a comment on Bloomberg from earlier where Mark talked about getting 2% pricing for the full year to fully offset the commodity. Would that imply that the pricing would be approaching 3% in the second half? Or you're saying it's going to be a little bit lower than that because of the fact you don't expect to fully offset this year? Just a little bit more color on that point, please. Thanks.
Yeah, Jeremy, happy to comment. Just to be sure that the Bloomberg interview is not misunderstood, I wasn't trying to give a 2% target for the pricing because I think you know, it's in our best interest not to give a specific target pricing here, given that this is all subject to negotiations with our retail partners. All I was trying to do is I was trying to explain if you have or if you're expecting a 4% increase to your cost of goods sold at about a 50% gross profit situation, then that means you would need 2% pricing to offset that. As François explained earlier in his comments, this is not the only angle we're looking at. We're looking at centralized purchasing, revenue management, structural cost reductions, operational efficiency improvements.
Where the Swiss franc is coming from to offset it is not so important as long as it helps to offset it. So, we will see stronger pricing action in the second half than the first half. In the interest of our own commercial strategies here, it's important that we're not targeting how much pricing exactly we will do.
Next question is from Jon Cox at Kepler. Please go ahead, Jon.
Thanks very much. A couple of questions. Just wondering on the free cash flow for the year, what we should think about that after maybe some unusual activity in the first half of the year. Second question, just on the M&A line. A lot of stuff moving in and out. I wonder if you can just give us a best guess what you think the M&A impacts will be this year and next. At the moment, I've got negative two points this year and next year a positive 50 basis points. Do you think that's sort of in the right ballpark? Just the last question. I know Starbucks is not included in the Nespresso reporting. Just wondering how Starbucks developed in the period.
As a bit of an add-on, just wondering why you're going into a joint venture with Starbucks in Asia on the ready-to-drink rather than going it alone, or is it just the wording of the document was just being polite to Starbucks and they won't really have much to do with it? Thank you very much.
Good afternoon, Jon . François speaking. I'll take the first question on the free cash flow. We value obviously cash flow, and this is an area where we have made strong progress over the last two years. If we start by talking operating free cash flow, which means before CapEx, we were in H1, and we expect to be probably around that level as well for the full year. At the same level as where we were over the last two years, which is around 14% of sales. That's a strong level that showed that we are really using all the levers from growth to margin, and the cost discipline as well. Free cash flow will be lower this year as a percentage of sales than it was last year.
For one single reason is that as you saw in H1, we are ramping up our CapEx investment mainly around coffee and pet care to meet increased demand and the fact that we are gaining market share as well. So, you can expect a little bit of a higher level of CapEx this year, 2021, on 2022 as well. This is to a large extent, good news. On the M&A impact, you saw that it was about a little bit more than 2% negative this first half. It will be lower in the second half because we will have the same headwind coming from North American Water and Yinlu for the full year, we will have the benefit of The Bountiful Company because we are just confirming now that we expect that transaction to close in the month of August. We'll get some benefit from that asset.
Jon, this is Mark. Let me briefly comment on Starbucks. Look, we couldn't be more pleased with how this partnership is going. The sales of Starbucks products in the first half of this year increased by 16.7%, very solid, very strong performance. We also have a very exciting pipeline here to keep refreshing that product line-up for years to come. It's a wonderful partnership where I think the coffee expertise of both companies is really building upon each other, excellent personal relationships and a very constructive, smooth execution here from both sides.
And hen it comes to ready-to-drink in Southeast Asia, we have been, of course, active in this space already under some other brands, most notably the Nescafé brand, does have a number of very exciting ready-to-drink offerings in Southeast Asia because this is a way of consuming coffee there, and we had catered to it early on. Starbucks, I think, is one other way to approach that market, usually at a much more premium positioning. We're building on the iconic strength of that brand name that really resonates around the world, including Southeast Asia. We've also seen very strong success with our Starbucks retail offerings there. I think it really shows that the consumer is ready for that brand. I think one doesn't exclude the other.
We're having a thriving ready-to-drink business there already, and now we're having one more exciting tool in the tool shed here, and that is the Starbucks rollout.
Next question is from James Targett at Berenberg. Please go ahead, James.
Hi. Good afternoon, everyone. Two questions from me. Firstly, just on the CapEx increase that you just referenced. Following your extra investments in pet care and coffee, do you have enough capacity to support demand now if current growth rates continue? With the growth you're experiencing at the moment generally, are there any other categories where capacity is tight or where there's material supply disruptions? My second question's on the Bountiful acquisition. I was just wondering, given Nestlé's experience in dairy and plant-based proteins, why you didn't include the sports nutrition brands in the transaction? Thanks.
James, François speaking. I'll take the first question. We have enough capacity to meet the demand in pet care. It has not been an easy one, especially last year, because we saw a lot of volatility in terms of demand by SKU and so forth. Congratulations, by the way, to our teams, because they have been really able to do that. We had to use a little bit of co-packing as well to support the demand, overall, we have been able to meet the demand. It is necessary given the growth rate that we have, which is largely volume led as well, that we invest in CapEx. This is what we are doing, both in North America and in Europe.
This is Mark. Could you repeat the second question? I'm not sure I totally got it.
On the Bountiful acquisition. I think you mentioned that you weren't going to include the sports nutrition brands in the acquisition. I just wonder, considering you have good expertise in dairy and plant-based proteins, why you didn't want to have those brands as part of the transaction.
Look, we were very much focused on these three brands that we believe are the most synergistic ones to the Nestlé Health Science business that is going to be running this company going forward. That is the ones I mentioned. That's why we felt carving it up into different categories here was probably not the best way going forward. We appreciate the seller's flexibility in handling this in a way that we were able to focus on the brands that we were most interested in.
Next question is from David Seyfrat at Societe Generale. Please go ahead, David.
Thank you. Hello all. Two questions from me, connected, I guess, in a way. The first one on price versus inputs, the second one on the margin guidance again. On the first one, price versus inputs, the way you're talking about it sounds like it's a case of inputs have gone up, contract negotiations take a while, but eventually it catches up. But I guess beyond that, are there any markets today where you'd like to take pricing but you're delaying it because of consumer weakness, maybe retailer reactions connected to that and/or competitor reactions? You're seeing smaller players, local players getting back up to speed post-COVID, it's just not the right time to take pricing for those reasons. It's a conscious decision rather than the mechanics.
Related to that, I fear the answer might be it's too soon to talk about this in some ways. If I go back to the guidance pre and post the results today, you are looking at 17.8, let's say roughly this year, up again, we assume modestly next year, which would have got you to 18. You're talking about 17.5 now, up again modestly to 17.6. The point being, you're kind of guiding in effect to about 40 basis points lower for next year if you just put the two statements together. Is that a fair representation of what's going on? Is there a step drop down or should we start to assume that next year you have modest increase plus a bit because you catch up on the dynamics that I just mentioned? Thanks so much.
Thanks, David. Let me try and take a stab at both. I think on pricing, as you can imagine, this has dominated the conversation in the industry ever since the inflation accelerated so much in the spring. So, I think this is by and large understood and accepted because people see and they have transparency here that input costs are increasing. The only area where we may have acted a little slower in the spirit of pricing responsibly is in particular in emerging markets and developing countries. I'm sure you've heard, for some of the extremely affordable products in the poorest of the countries, there are what's called magic price points, like price points beyond which people simply cannot afford the product anymore.
It's important to really keep those in mind and act responsibly there, because you're essentially providing a part of the daily nutrition there, and especially at this time of economic stress, you don't want to price it out of reach. That's also a good reason why in Zone AOA, you're seeing a bit less pricing action than in the two other zones. Other than that, I think the conversations here with our retail partners are very straightforward, and they're hearing a very consistent message here from everyone, and it reflects the facts on where input costs are going. No particular issue there. When it comes to 2022, yes, you are right. It's too early to talk about that in detail. When it comes to the math you were setting up, what I would want to point you to is caution here on our side.
So, rather than saying it's one or the other, let's give us that time. Let's see where we land the year 2021, and based on that, we would then articulate our guidance expectations for 2022. The one thing I can certainly confirm is that, as François said, the 10 basis points that refer to the inventory step-up at the Bountiful brands, that's clearly something that's strictly related to 2021 and will not be recurring in 2022. On everything that's pricing related, I think we're learning so much more here month by month, where it's headed, and how our hedging position looks like. Let's revisit that as we go through the year and then enter next year.
Next question is from Jean-Philippe Bertschy at Vontobel. Please go ahead, Jean-Philippe.
Thanks, Luca. Good afternoon. The first one is on your recent acquisitions. It looks like Vital and Persona were really super performing. We saw very strong acceleration in the second quarter in Nestlé Health Science. The question is how much you have of the acquisition in the organic growth in the second quarter. Maybe as well, it looks like the fit with Nestlé is fantastic. What can you learn from those acquisitions, the smaller add-ons you made and what you can replicate in the network? The second one is probably more like a remark focusing on this margin and pricing. As you're taking some pricing action to offset the cost inflation, this is kind of a net zero game from a cash point of view, as it is just like a time lag. Then you will recover cash.
Just wanted to have your view here. Thanks.
Jean-Philippe, good afternoon. You were referring, I'm sure I got the name, to Vital Proteins?
Vital Proteins, yes.
Okay. No, indeed, the Vital Proteins is doing extremely well. We are very happy with this acquisition because this is a leading company in collagen in North America. Collagen is a category that is not very developed for the time being in Europe, for example, so we are currently leveraging on our presence in Europe, obviously, and our global footprint in order to roll out the success of this product in other geographies. Very happy with it, that is the reason why we continue doing other acquisition that in the same spirit as what we did with Nuun as well. Very happy with what we have seen so far. Interesting base of business in the U.S. with a possibility to expand it in the U.S. to start with and expand it to other geographies as well.
Jean-Philippe, we didn't break out the specific contribution of Vital Proteins, but you're right, it's been a strong growth year for that company. But all the other brands, especially including those latest acquisitions in the VMS space for us, have performed really well. I think the pattern is one that we intend to apply to the Bountiful brands as well, and that is in the leading market for these VMS products, and that is the U.S., acquire some of these leading companies, continue to run them well with most of the existing management team in place, then go for the global opportunity and the global appeal of these products. Vital Proteins now is taken internationally in a very rapid clip. The celebrity campaign that François had mentioned is helping with that a lot, it becomes a household name.
As François mentioned, in Europe, for example, the use of these products per capita is still way below what it is in the U.S. I think there's some catching up to do here, and we intend to take that. I think that pattern has worked really well for us, and I think the Nestlé Health Science leadership team has also been able to create a very good cohesive consumer care team out of these various executives that came to us with that acquisition.
Next question is from Pinar Ergun from Morgan Stanley. Please go ahead, Pinar.
Thanks for taking my question. If inflation persists and Nestlé responds with further pricing, which of your categories would be more at risk of losing share to private label, and how would you respond in that scenario? Thank you.
Yeah, Pinar, maybe François and I can both take a stab at this. I guess my first reaction would be with the kind of input cost inflation we're seeing here, it's not that private label is spared from that. So, you know, these were real input cost increases that hit everyone, which is also why the conversations with our retail partners on this were pretty straightforward because, I mean, no one can deny that something has gone up. So obviously, the categories that allow for more differentiation by brand and product, coffee and PetC are being, again, the best examples here. I think in those categories, it's easier to escape any share loss as prices go up. Again, generally, I think it is not so much a question of elasticity that people switch to another brand or private label.
It's more like maybe that some people at some point would consume less because the products get more expensive and become less affordable. I'm not so sure that anyone is escaping right now that inflation hit that's been taking hold.
Pinar, François speaking. Just to complement what Mark is saying, I think beyond the categories, it is maybe more a matter of positioning of our products. So for example, if we look at premium products, obviously we are far less exposed. The good news as well is that premium products now account for almost a third of our total sales. Just as a reminder, it was 11% in 2012. That is a very good positioning that we have there in the premium segment, especially in the context of higher inflation for this year or next year. At the other extreme, I mean, when we talked about affordability earlier, that is something that we want to develop further offerings into affordable segment as well.
This is important, as we said, because some people will suffer from inflation. We need to make sure that we are offering affordable products to them, especially nutritional products and especially in emerging markets. This is a reason why we have increased our offering there. Affordable products for us have grown by 9% in H1, so very happy with that. Just as a side comment, affordable products are not dilutive margin wise. No issue whatsoever there. We are really pushing at the two extremes, affordables and premium.
Mark.
I see no further questions here. I also wanted to conclude with one point that I briefly touched upon in the intro and that I wanted to drive home, and that is, I hope you're seeing the underlying strength with which we handled the situation, and especially all the good work that has gone into boosting our organic growth. Clearly, we're seeing tailwinds here related to COVID. I wanted to draw your attention to what I said in my section of the prepared remarks, and that is we believe now from a portfolio setup, innovation rate, marketing spend point of view, that we have what it takes to consistently deliver mid-single digit growth. That is not a COVID statement. That's basically a statement on us and the engine here that supports the growth.
And as you know, that was an important milestone we have been working towards for several years. We had told you before COVID in the beginning of 2020 that we weren't quite there yet, close, but not quite there yet. We can tell you now we're there, and I think that is an important growth driver for us and of course also an important value driver down the road. On that note, thanks for joining us. Have a great summer, and we look forward to talking to you as part of Q3.