Good morning, good afternoon, everyone, and welcome to Nestle's 3 month conference call for investors and analysts. I am Stefan Kindler, the Head of Investor Relations. Here with me is our CEO, Mark Schneider and our CFO, Francois Roger. Before we start our official Q1 webcast, I would like to briefly talk about our press release for Q1. You might have noticed that we evolved the press release towards a simpler format and also with some additional information.
Our intention was to make it more relevant for you and easier to read. We would be very happy to receive your feedback on the changes and what else we could improve in the future. Now back to the official part of our call. As usual, we'll first present our numbers and afterwards, we'll open up for Q and A. I'll take the disclaimer and safe harbor statement as read.
And with that, I now hand over to Mark Schneider.
Thank you, Stefan, and a warm welcome to our Q1 2017 investor call. As always, we appreciate your interest in our company. Francois and I will be happy to take you through our Q1 presentation and answer your questions. Before turning it over to Francois, a few comments from my side. First, a brief word on our organic sales growth.
Given the challenging quarter the challenging calendar this quarter, it was clear that the start to the year 2017 would be subdued. Under the circumstances, we were pleased with our OG of 2.3%. Please note that the calendar affected different categories in a different way. Our large confectionery category was impacted stronger than others by the early timing of the Chinese New Year and the late timing of Easter. 2nd, we were pleased with the quality of our organic sales growth with fairly balanced contributions coming from volume and pricing.
And 3rd, let me take a slightly broader perspective. This past quarter saw a significant level of M and A transactions, attempted M and A transactions as well as activist investor activity in our industry. In this context of significant change, we would like to underline our commitment to improving growth and efficiency at the same time. We were encouraged by our investor meetings in February March. Many of you share our view that this balanced approach offers the best path forward to sustainable value creation.
Having said that, we do understand from these meetings that you want to see meaningful steps towards improved combinations of growth rates and margins. Bearing this in mind, we are pleased with the progress we're making on our growth and efficiency agenda. While this call focuses on the Q1 sales development, we will be happy to discuss our progress in more detail later this year. With this, let me hand it over to Francois.
Thank you, Marc. Good morning or good afternoon to all. Our sales in the 1st 3 months increased to CHF21 1,000,000,000 which is equivalent to 0.4% on a reported basis. Our organic growth was solid at 2.3% and will ended within the range of our full year guidance. Our OG was made up of 1.3 percent of real internal growth, which is a combination of volume and mix and 1% of pricing.
I will discuss the dynamics in details in the next slide. M and A and mainly disposals resulted in a reduction of 1.5% of reported sales mainly coming from Fronery. Foreign exchange had a mild headwind of 0.4%. Looking at the historical perspective, we can see that calendar effect had a meaningful impact on RIG in Q1. As you know, 2016 was a leap year, which means that we had one less day of consumption this year.
And the timing of holidays also impacted ourselves. The Chinese New Year fell earlier this year and Easter is falling later, which means that some preseason shipments impacted our rig negatively and this impact has been stronger for some categories like confectionery. Pricing overall increased slightly to 1% with selective price increases. Over the last few quarters, our pricing has increased steadily and we expect this trend to continue for the year in aggregate, but not necessarily for each and every single quarter. Looking at the geographic breakdown now, this slide is illustrate the combination of our sales for the zones and globally managed businesses.
And again, the quarter and more specifically RIG has been impacted by the leap year and the other seasonal factor. Consumer demand overall was soft and mainly in the U. S. Consumer confidence weakened in key markets in Latin America. We were encouraged that Europe remained resilient and AOA improved in both RIG and OG.
With the exception of China, our largest operations in AOA gained momentum. OG as you can see remained in positive territories in all three geographies. Looking now at the development between developed and emerging markets. Both geographies contributed positively to RIG and OG, even though both were affected by the calendar effects mentioned earlier. In developed markets, Europe and Japan remained soft, while in emerging markets, Asia and Africa drove the growth.
Moving to Zone AMS with sales of CHF6.4 billion. Our OG was slow at 0.4% owing to a decline in RIG of 1.4%. Pricing mainly came from LatAm although North America also saw slightly positive pricing. North America faced an environment of soft consumer demand and consequently our business had a challenging start of the year with lower organic growth. Coffee creamers and frozen food in the U.
S. Maintained a good momentum. Pet Care performance was below our expectation mainly in dried dog food where Benefool did not fully recover up to the plan. In Latin America, we had low single digit organic growth driven by pricing. RIG was slightly negative.
Brazil had a difficult quarter particularly in confectionery, which combined with overall fragile economic condition resulted in both negative rig and OG. Mexico's growth remained positive but decelerated. Pet Care in Latin America continued to sustain a good growth across the region. Moving now to Zone M and R with sales of CHF 4,000,000,000 Our OG was solid at 1.7% entirely rig driven. Pricing in M and R improved finishing the 3 months with a neutral pricing contribution.
We took pricing for Nescafe across the zone. We also raised prices across most of our portfolio in the U. K. Some of the pricing action that we took during the quarter put moderating pressure on RIG. Looking now at the 3 sub geographies, Western Europe grew slightly on an organic basis.
Most markets had a positive rig with the exception of the U. K. And Iberia. Pricing was negative, but the trend is showing some improvement. In Central and Eastern Europe, we had overall mid single digit organic growth with both positive rig and pricing.
Russia had a difficult start of the year affected by the local economic situation. The Middle East and North Africa regions saw mid single digit organic growth predominantly rig based. Turkey and North Africa performed well. However, the Middle East declined as political instability and deflation persisted. Pet Care in M and A has been the main growth contributor primarily driven by cat food.
Moving now to Zone AOA with sales of CHF4 1,000,000,000 during the quarter. Our OG was strong at 4.5 percent, made of 3% of rig and 1.5% of pricing. EWAY had the 4th consecutive quarter of accelerated organic growth. The zone saw a positive momentum despite a negative organic growth in China. China has been impacted by the earlier timing of Chinese New Year, particularly for our confectionery franchise at Tufu Chi.
Yinlu continued to weigh on growth, but we are encouraged as the pace of decline has reduced materially. Southeast Asia had a good organic growth and has been the largest contributor to the zones rig. The main growth driver in Southeast Asia have been ambient dairy, cocoa and malt beverages with Nido, Milo and Bear brand. India continued with a good performance driven by Maggie and we see progressive normalization after the demonetization process. South Asia continued to make sustained progress with high single digit organic growth.
Oceania and Japan had a solid organic growth with good rig partially offset with negative pricing. And finally, Sub Saharan Africa experienced a strong growth mainly coming from Maggi, Cocoa and Malt Beverages. Moving now to Nestle Waters with CHF1.8 billion of sales. Organic growth stood at 3.1 percent made of 2.6% of RIG and 0.5% of pricing. The growth that we experienced in Water is largely volume based as competitive intensity limits pricing mainly in developed markets.
Nestle Waters grew in all regions although with some deceleration partly because of challenging comps last year. In the U. S, which is our largest market, we delivered low single digit growth despite negative pricing. In Europe, we had a solid rig in OG with slightly negative pricing. And in emerging markets, the Middle East, Turkey and China slowed down while Southeast Asia had a double digit rig and LatAm a double digit organic growth.
Now moving to Nutrition with sales of CHF2.6 billion. We started the year with 1.1 percent organic growth, negative rig by 0.4% and positive pricing by 1.5 percent. Pricing improved as we put through some increases in some of our key markets, more specifically Brazil, U. S. And Mexico.
It had some impact on volumes. However, we do expect that to stabilize later in the year. We saw a moderate improvement in China and strong growth in Southeast Asia, India and Pakistan. Looking at China in more details, our organic growth in China recovered moderately as the category momentum gradually improved. The Stage 1 formula or startup formula grew nicely probably helped by the 2nd child policy.
The relaunch of NAND also showed some good growth and Illumina continued its growth trend leading the super premium category with now a run rate above CHF1 1,000,000,000 in sales. We are preparing for the introduction of new regulations and we feel that we are well positioned to meet all new requirements by the beginning of 2018. In other markets, more specifically the U. S, Brazil and Mexico, we took pricing which led to sell out volume contracting marginally. Southeast Asia, Pakistan experienced good growth supported by innovation in infant formula and cereals.
Moving now to other businesses. As you remember Nestle Professional has moved from a globally managed business to a regionally managed business. As a consequence, from the beginning of 2017, sales for Nestle Professional have been reported within the zones and not anymore in the other business category. We have restated sales accordingly and you can find them in the appendix on our website. Other businesses as a consequence includes Nespresso, Nestle Skin Health and Nestle Health Science.
For these categories combined, we had organic growth of 5.8%, RIG of 6.4% and negative pricing of 0.6%. Looking more specifically at Nespresso, we had the mid single digit organic growth fueled by double digit growth in North America. The retail network expansion and the rollout of new boutiques combined with increased distribution helped to drive growth in markets such as the U. K, Nordic and Canada. Moving now to Nestle Health Science.
We had mid single digit growth driven entirely by RIG. Medical Nutrition is experiencing high single digit organic growth led by strong brands and mainly in our allergy portfolio. Consumer Care has been driven by the growth has been essentially driven by Europe and Asia. To finish Nestle Skin Health, we had double digit growth in terms of organic growth and a strong rig. We benefited during the quarter from low comps last year, but we benefited as well from several new product launches in Consumer Care as well as in Aesthetic and Corrective.
We expect Nestle Skin Health growth to moderate in the coming quarters. Let's look now at the development by product category. Once again, rig overall has been impacted by the calendar effect that we mentioned earlier. I will start with powdered and liquid beverages, which is mainly coffee. Nescafe soluble coffee remains positive in terms of growth, but the rig has been slightly impacted by some pricing that we took during the quarter.
We had good results from innovation and more specifically with Nescafe Gold and Adera. And finally, Nespresso and Nescafe Dolce Gousto grew well. Waters, I won't cover because I talked about it earlier. Milk Products and Ice Cream, we had a soft start of the year. This category has been impacted by Yinlu and the difficult markets like Brazil and the Middle East.
In ice cream, we have different dynamics. If we look at the U. S, it has been a little bit challenging with difficult comps last year, while AOA has experienced a good level of growth. Nestle Skin Health and Nestle Health Science have already covered. We'll move now to Prepared Dishes and Cooking Heads.
We had strong growth mainly in ambient culinary in Southeast Asia and Sub Saharan Africa. Frozen food in North America is lapping high comps last year. But in spite of that, staffers did well during the quarter and we had good growth for Maggie in India. Confectionery, as you can see and as I mentioned earlier, we had a difficult start for the year. This is a category that has been the most impacted by the calendar impact, for example, for Tzu Fu Chi in China, In addition, the Easter category in Brazil has been under pressure.
That being said, for confectionery, we had some pockets of good performances with KitKat in Europe and in Japan. Finally, Pet Care. We had a strong performance in Europe and in LatAm. The situation is more challenging in North America, as I mentioned earlier. This is linked to a soft performance in drydough.
This takes me to the last slide. We confirm our full year guidance, which means organic growth between 2% 4%. We ended Q1 within our guidance range in spite of the headwinds coming from the calendar and seasonal effects. To support our future growth, we plan to increase restructuring costs to drive future profitability. As Marc indicated earlier, we are now entering into the execution phase and we will provide regular feedback on restructuring and cost saving progress.
As a result, we expect to reach stable trading operating profit margin in 2017. You remember that trading operating profit is after restructuring and we expect as well to achieve underlying EPS growth and improve capital efficiency. I'm now handing over to Stefan to manage the Q and A session.
Okay. Thank you, Marc. Thank you, Francois. We move now on to questions. And the first question in line comes from Celine Panuti from JPMorgan.
Good afternoon, Celine.
Yes. Thank you. Good afternoon, everyone. My first question is on the AOA momentum. You mentioned it's the 4th consecutive quarter of acceleration.
Can you pin down what you see in terms of the market itself, market demand And what has been Nestle performance against that? So trying to understand your own maybe ability to gain share, but as well growth in that market. Unilever as well this morning was talking about accelerating pricing in this market. And I see that your pricing accelerated there, but not that much. So if you could as well touch upon that.
My second question, in fact, I'll come back to the U. S. It seems that rig was negative. Can you mention what you've seen in terms of market performance, your performance in different category in terms of market share? And also, what is your outlook for the U.
S. For the remainder of the year? Thank you.
[SPEAKER JAIME SAENZ DE
TEJADA:] Okay. I will take the question on AOA. Maybe Martin will take the question on the U. S. In AOA, so we had the positive momentum, as I explained earlier, in spite of negative organic growth in China.
Overall, we improved our market share in AOA. As I indicated, this is the
AOA. As I indicated, this is the 4th consecutive quarter
of accelerated organic growth and you said it, this has been supported partly by pricing. China is still negative. It has been partly impacted as I indicated by the Chinese New Year impact, which had a significant impact on 2 Fuji for confectionery. Yinlu continues to be negative, but the pace of decline is reducing, has reduced basically by half. So it's we see some progress there.
We always said that we would need some time. We had a strong momentum in Southeast Asia with good organic growth. This has been the largest contributor to the zones rig. Sub Saharan Africa had the strong growth, which both in terms of pricing and in terms of volume. If you take a country like, for example, Nigeria, it's not only about pricing, but we have double digit growth by volume, so which is quite amazing.
And finally, in Oceania and Japan, we had a good rig and solid organic growth. So we have different configuration. Once again, the main issue we are facing is China. But the rest of AOA in emerging market, we have done pretty well.
Celine, this is Marc. On the U. S, I think there's a general observation here, and that is pretty weak consumer demand. And that's not a particular issue here for Nestle. I think that's all throughout.
That typical transmission belt that we've seen in the past between good economic performance as measured by GDP and then consumer spending, that doesn't seem to be working one for 1 this time. And so category by category, whether it's us or anyone else, what you're seeing is fairly soft demand, even in the face of pretty good fundamental economic data. The one area that does stand out a little bit, Francois pointed to it, is Pet Care. I think here we've seen a soft quarter. We have some issues, in particular, in TriDoc, and I think we're moving aggressively to fix those.
So I'm more optimistic for the rest of the year.
Next one in line is John Cox from Kepler. Good afternoon, John. And your two questions, please.
Good afternoon, guys. Thanks very much for taking the questions. Actually, I'm just trying to get an idea of the impact of that calendar. I think ahead of the results, you were talking maybe up to 150 basis points. Is that still the figure we should be thinking of?
And if that's correct, should we just be adding 150 basis points into the Q2 numbers? And then just on the second question, just a follow-up on the North America situation. Did you see actually the exit of the quarter things improving? Or is it just remain as subdued as the start of the quarter?
Let me take the second one first on North America. Think it's pretty hard to comment here on the exit of the quarter, in particular with the timing of the holidays now. So I can't help you on that. Again, with a full year perspective, we have a more positive view than what you've seen now in Q1.
On the second one, on the calendar, it's always difficult to measure the impact. So we know that there are 3 impacts. The main one is, obviously, is a leap year. The second one is Chinese New Year. And Easter had probably a smaller impact.
So it's difficult to quantify it. We believe that overall the impact is probably north of 100 basis points. I would not go as far as 150 basis points probably. It certainly impacted some categories more than others and confectionery is the one that has been by far the most impacted by the combination of these three events.
Okay. Thank you very much. Next one in line is David Hayes from Bank of America. David, good afternoon. Your two questions, please.
Good afternoon. Thank you. So just firstly on China for baby formula. You talked about the better trend and you mentioned the 1 child policy change. But I just wonder whether you could be any commentary that you've got on the destocking, the inventory destocking, whether that's subsiding, whether the discounting levels are perhaps less aggressive than they have been through the back end of last year and whether you've got any more visibility on whether that's a on whether that's a dynamic that persists all the way through this year or starts to maybe ease off as we move towards the regulatory change at the beginning of 2018?
And the second question, if I can take the liberty to touch on margin despite being just a sales call, we've obviously seen one of your peers step up its plans for margins towards 20% over the next few years. I just wonder whether that's something that you would say is the target that would be reasonable for Nestle to try and achieve as it looks to execute on the cost saving and implement more aggressive, but not ridiculously draconian cost saving initiatives across the business?
Thanks, David. This is Mark. Let me comment first on China. As Francois said, we've seen a good Q1 here for Nutrition, and that's giving us good hopes and in particular when it comes to that potential impact from the 2nd child policy. Nonetheless, I think for the remainder of the year, it is important that we stay on the lookout for potential destocking effect.
So this is still an item we need to watch as we go through 2017. And then I think it's going to be clearer sailing from 2018 onwards. So again, good quarter, but nonetheless, I think it is worthwhile to watch quarter after quarter how that destocking will take shape. In terms of the margin improvement, we don't have at this point anything to add to the targets that we laid out in February. We stand by those targets and fully confirm them.
The one for 2017, but also the ones that point towards the midterm, We'll work on those. We're encouraged by our progress towards those, and I think margin improvement is one of them. We emphasize growth and efficiency, but we have no specific new target to add at this point.
Next one in line is Jeremy Fialkow from Redburn. Jeremy, good afternoon. You have two questions, please.
Hi, Jeremy Fialco, Redburn here. So firstly, on Latin America, just a little bit more on your outlook for that one over the balance of the year? Clearly, it was a very difficult Q1 for you and everybody else. Do you see Brazil, in particular, getting better over the balance of the year? And then secondly, on Yinlu, do you think it's realistic that you can get that business back to rough stability by the end of the year?
On LatAm, so I would say we don't want to give any forward looking statement on that. The environment is quite volatile in all respect, I would say. First of all, I mean, we saw with some interest, but the fact that some of the currencies are actually revalued, for example, the Brazilian real has revalued by 25% in the quarter versus the same period of last year, which forced us to adjust a little bit our strategy. For example, we took some significant price increases last year at the end of June as we communicated before. We had to give back part of it because of the revaluation of the currency.
So there was less need for pricing as a consequence. On the other hand, we have been a little bit I would say maybe surprised by the fact that we were moving into negative territories where we had negative territories in some countries like Brazil. Mexico continues to do well. So we saw a little bit of a slowdown, but we had a nice level of growth last year and we are still positive in terms of growth. But I would be careful given the volatility of the environment in Latin America to make any forward looking statement.
And then on Yinlu, Jeremy, just to comment, I'm very encouraged by the progress that Wan Lin and her team are making with that. But nonetheless, we did caution right at the beginning that this would take time. And so I'm confident that we'll see relative improvement from where we are, but it's very hard to pinpoint a specific moment in time when it will come to exact plusminus0.
Good. Gets us to the next question from Alain Oberhuber from MainFirst. Alain, good afternoon. Your two questions.
Thank you, Marc. Good afternoon, everybody. Just two questions regarding the ice cream business in U. S. Could you elaborate a little bit more when you think it will come back again, in particular, given the competition you have from other players?
And then regarding the Fronier redevelopment, could you also highlight a little bit what the current development is in your joint venture there?
For ice cream in the U. S, we had slightly negative organic growth with different momentum by category. We had positive growth with Agendas and Snacks. Dryers was negative, but as I mentioned earlier, we had some we suffered a little bit from lapping comps, especially had we had the competitors recall last year. So it's a little bit of a one off issue.
We gained in terms of market share in snacks, but we lost with the on the premium side. So I would say we had different dynamics there. Fronery, we started this joint venture, I think, in October last year. So far, I mean, the integration of both original companies is working very well. And we had very attractive results so far.
As you know, we do not consolidate that business anymore because it's a joint venture, but we are extremely pleased with the early development both on the top line and the bottom line.
Next question is Vincent Barron from ODDO. Vincent, good afternoon. Your question please.
Yes. Hello. Good afternoon. I have a question about the U. S.
Market and regarding the price competition between Walmart and Amazon. It seems that these guys are asking strong discount to their suppliers. So are you affected by this situation in the U. S. Market?
Vincent, it's a little hard to comment specifically on 2 important customers of ours here, but I think what applies to the entire retail channel in the U. S. Is that there is significant competition. And yes, that makes it, of course, harder to roll forward any price increases and improve pricing. But nonetheless, we'll work with all of those in a very constructive fashion to be sure that everyone meets the objectives.
That gets us to the last question and that is from Jonathan Feeney from Consumer Edge Research. Jonathan, your question please.
Good morning. Thanks very much for the question. You mentioned that a change in that one to one return on spending in market surprise, given improved economic fundamentals. Can you give us a little bit more detail on what you think is driving that? How much of that is maybe transient?
How much of that is maybe more structural? And secondly, one of your competitors highlighted basically growth in e commerce in China being a little bit cannibalistic to other channels like declines elsewhere. Can you just comment about the migration of your business, not just infant feeding, but other places in China to e commerce? Thank you very much.
Thanks, Jonathan. I guess with the U. S, I mean, there's probably different theories out there. But I think what we're seeing in spite of good economic data is a very large amount of uncertainty and that of course translates into somewhat subdued consumer spending. So that's my best theory and explanation.
As and when that uncertainty subsides, I think that will be good news then because it might lead to improved consumer spending going forward. But again, this is one of several theories. That's my view of the situation right now. In terms of e commerce, yes, I think at the end of the day, whether you look at China or other markets, a sale that gets done through one channel is very likely to come at the expense of a sale through another channel. That's all the more important then to be sure that we are part of that e commerce trend.
I'm very encouraged by the progress we are making in China, close collaboration with the leading e commerce companies out there. And hence, it's important to be really one of the front runners in this trend and I think we are in that market.
Okay. So we have got another question. It's from Alex Smith from Barclays.
Just a quick
one on pricing in the Americas. It seems to have softened a little bit. In Latin America? Or is it something more promotional around North America? And can we expect that to therefore pick up during the course of the year as per the guidance for pricing at the group level?
And then just quickly on Pet Care in North America, do you want to talk a little bit more about what's really happened at Benefal? The impact there seems quite dramatic. I mean, we're kind of used to seeing Pet Care grow 4% to 6% very consistently. It's up just 1a bit. And you talked about good growth in LatAm and Europe.
So it feels like North America Petco was down quite significantly. Thanks.
Thanks for your question, Alex. Regarding pricing in the Americas, we are positive in pricing in North America, no specific issue there. We were positive in pricing in LatAm as well, but less than in the past. The main reason is what I mentioned earlier. The fact that in Brazil, we had to give back some of the price increase that we took last year as a consequence of the significant revaluation of the currency locally.
Pricing for the group overall, we expect it to continue to increase as it has been the case over the last couple of quarters. Once again, we don't it does not it will not necessarily increase each and every single quarter, but we expect to see some increase further increase during the year. I think there was a question on Pet Care in the U. S. So Pet Care, we had a soft start of the year.
Benefool and Dog Show are still difficult. The drydock category has slowed down as well. So a part of it is linked to the category. As Marc mentioned earlier, we are not we are below our expectation clearly there especially in terms of recovery on Beneful and we are aggressively working on it.
Okay. Then we have another question from John Cox. John?
Yes. Thanks, Stefan, for letting me have a second bite of the cherry as it were. Mark, you gave a little sort of a teasing comment at the start just talking about you're aware of the M and A going on in the space and shareholder activism. And just following on from what David was asking you earlier and also our breakfast meeting we had in London, are you tempted to actually introduce targets in terms of margin expansion targets? Maybe you'd give them out later in the year at that Capital Markets Day, just falling on from what Unilever and others are doing in the space, given the sort of the threat posed by 3 gs, Kraft Heinz, etcetera?
Yes. Look, fair question. Let me say 1st and foremost, it was not a teasing comment. It was a fair observation of what's going on around us, and that is a significant amount of change that's clearly somewhat unprecedented in the fast moving consumer goods area. And so I think it was very meaningful after the February conference call to meet a lot of our investors and analysts in London and elsewhere and get their input.
And we listened very carefully to what you have to say. So for now, for this moment, we have little to add to what we laid out to you February 16. But let me also underline that this past quarter until basically 2 weeks ago was a period that was focused on one significant item and that is a smooth handover and leadership of this company. So we have a new CEO and that's me starting from January 1 and then we completed the leadership handover with our shareholders meeting 2 weeks ago and we elected new Board and new Chairman and now that transition process is complete. And as Francois mentioned, now it's basically rolling up our sleeves and getting to the execution stage.
So I think it's a little early at this point to commit specifically to anything over and above what we laid out in February, but we got the message and I think I could acknowledge that in my opening remarks very clearly that you are looking for improved combinations of organic growth and margin, and we're certainly determined to move in that direction.
That gets us to the end of today's call. Thank you very much for attending our call today. And as usual, if you have more questions, Investor Relations is available for you via telephone or e mail. And we see you again at the occasion of a half year conference call. Thank you very much, and goodbye.