Good morning, everyone, and welcome to Nestle's Half Year Results Conference and Webcast. I'm Stefan Kindler, Head of Investor Relations. I'm here with Francois Roger, the Nestle CFO. First of all, sorry for the delay. Apparently, there was a technical issue with the line, and I hope everyone can hear and follow us now well.
We'll add the time at the end so that we make sure we keep enough time for everybody to ask questions. Now let's start. As usual, we'll start with the presentation, and then we'll open up for Q and A. I will take the Safe Harbor statement as read. And with that, I now hand over to Francois.
Please.
Thank you, Stefan, and good morning to all. In the first half of twenty sixteen, we continued our strong real internal growth momentum and with limited pricing. Our sales reached CHF 43,100,000,000 with organic growth at 3.5 percent and real internal growth at 2.8%. These results are broadly in line with our expectations and leave us well positioned to achieve our full year guidance. Our trading operating profit increased by 30 basis points both on a reported and constant currency basis.
Our underlying earnings per share increased by 5.7% and our free cash flow is one of the highlights of the 1st semester with CHF 3,300,000,000 of free cash flow, an increase of 41% over the same period of last year. Now I would like to show you the historical perspective of our growth over the last 10 quarters. As you can see, we consistently delivered a strong real internal growth that led to further market share gains. In Q2, for example, we increased or maintained our market share in 57% of our geographies and categories. It is 49% maintained and 8% 49% increase and 8% maintained.
This is the outcome of our investments and commitments made across our portfolio behind innovation, marketing, premiumization and e commerce. E commerce now reaches 4.7 percent of our sales. As anticipated, pricing the pricing environment remains challenging. We had deflation in developed markets and low commodity pricing overall. We expect stronger pricing in H2 though.
We started to take selective price increases in some categories and geographies. By the way, all data of the quarterly data over the last 10 quarters are available in the appendix of this presentation. Let's now move to the sales growth by zone. These slides include our globally managed businesses as well. We had a good real internal growth across geographies.
Actually the 3 zones are at the same level, 2.8% or 2.9%. And we had healthy organic growth as well in all three zones, 4.7% in AMS, 2.5% in EMEA and 2.3% in AOE. As you can see pricing was negative in both EMEA and AOA. In EMEA we were facing deflation in Western Europe while in AOA, we had low pricing in dairy based categories. We had positive pricing in both Latin America and Eastern Europe.
Let's now move to the breakdown of our growth between Developed and Emerging Markets. Developed Markets contributed to 58% of our sales and 42% in emerging market. The contribution of developed market has increased. It used to be 56% 18 months ago. This is largely the result of depreciation of some emerging market currencies.
In developed markets, we grew by 1.9% in organic growth, which we consider as solid. This is the outcome of our strategy of innovation, premiumization, active portfolio management and mix. We had real internal growth in developed markets at 2.6%, which is good. This is actually the highest in many years. We are facing in developed markets deflationary pressure across many markets with negative pricing and we do not expect any improvement in that area.
In emerging markets, we had organic growth at 5.4%. This is lower than what we had in the past. In spite of the fact that our rig at 3.1 accelerated, it is actually 2 times higher than what we had last year with which we consider as a good result in light of difficult political and economic environment. In emerging market, we had limited pricing mainly as we felt the pressure of commodity pricing remaining low especially dairy, but we started to take selective price increases towards the end of H1 to offset both currency depreciation and inflation. Now I would like to walk you through some examples of our innovation given that innovation is instrumental to support our growth.
These are some examples of innovation that are addressing new consumer needs in terms of naturality, organic, higher protein, gluten free. I will start with some innovation that are in the natural and organic space, starting with COFINET Natural Bliss. This is a star performer in the for the Coffee Met line. It contributes actually to half of the increase of the Coffee Mate line overall, this Natural Bliss, which is a 100% natural coffee creamer. And this the Coffee Mate Natural Bliss is having an organic growth of above 50%.
Link cuisine as you know we've renovated our entire frozen food franchise in the U. S. And the marketplace line which is really addressing the need for organic, higher protein, lower salt, lower sugar and gluten free is growing very fast, 19% of organic growth in the 1st part of the year. If we move into the pet care space with Purina Beyond, which is addressing the need for natural pet food as well, this beyond Purina beyond has increased by 42% in terms of organic growth in the 1st 6 months of the year. Some innovation is also science based with nutritional benefits to improve health and Boost Simply Complete is a good example of it.
We launched it in the U. S. We launched it as well in other geographies Korea and we experienced an organic growth of 17% for that product. We talked in the past about YOS, we upgraded in Illumina. We upgraded Illuma, which is marketed in China and we had very, very strong growth over the last 4 years and it continues.
We had an organic growth above 30% in the 1st 6 months of the year. In Nestle Skin Health, we have a consumer range, which is growing north of which is growing double digit north of 10%. And we brought in the market some breakthrough innovation with Solentra, which is a new topical treatment for Rosacea, which grew by 36%. So all of these examples show you what we can deliver in terms of innovation and contribute to growth. Let's now move to the details of our 1st semester zones and we'll start with zone AMS with sales of CHF 12,100,000,000, RIG of CHF 2.5 and OG of 5.1.
RIG and pricing contributed equally to the organic growth, but we had different dynamics between the key markets. I'll start with North America where we had a very encouraging rig, actually the highest in many years, which has been supported largely by innovation. I talked a few minutes ago about U. S. Frozen food continues to deliver attractive results.
Coffee Mate as well. Coffee Mate I talked about natural bliss, but we could have talked of flavor extensions as well, which are contributed to the development of the product. Pet Care, we mentioned we had solid results as well in ice cream. Confectionery on the other hand is more challenging with no category growth overall in the U. S.
Pricing in the U. S. Was in the 1st 6 months very limited. Moving to Latin America, we had positive rig and pricing. As I mentioned before, we started to pass on some selective price increases to compensate for both devaluation and of currencies and inflation and more specifically in Brazil.
Brazil accelerated in spite of a tough macroeconomic environment and we gained market share during the period. Mexico was our strongest performer in Latin America with broad based growth across all categories. Product wise in Latin America, we were very satisfied with the development of Nescafe Dolce Gusto and Pet Food we talked about it in our Capital Market Day both Nescafe Dolce Gusto and Pet Food were significant growth drivers. Margin wise, our trading operating profit in AMS declined by 20 basis points to 17.8 percent as we had not passed in H1 yet to consumer the full impact of commodity pricing linked essentially to currency depreciation and somewhat inflation, but we have started to do it at the end of H1. Let's now move to EMEA with sales of EUR 8,100,000,000, RIG at 3% and organic growth at 2.6%, all 3 sub regions contributed to growth.
We had a good rig momentum and we gained market share across the zone. We experienced as well negative pricing overall with minus 0.4%. So it was clearly deflation in the West and we had a little bit of pricing in countries like Russia, Turkey or Ukraine. We are pleased with our results in Western Europe where we had soft pricing in a deflationary environment. Country wise, we were satisfied with our performance in France, in Spain, Portugal, in the Nordics.
All of these countries delivered solid rig. The situation was a little bit more challenging in countries like the UK or Switzerland. We got some good traction from once again Nescafe Dolce Gusteau, Pet Care and Pizza as well. In Central and Eastern Europe, we delivered single digit rig and double digit OG. Countries like Russia sustained good growth and with a healthy balance between volume and pricing.
Category wise in Central and Eastern Europe, the key contributors were confectionery, coffee and pet care. The Middle East and North Africa, we are more challenging in what we can qualify as an unstable environment. In spite of that, we managed to deliver both positive growth in terms of both volume and pricing. The key highlights in terms of categories were soluble coffee and culinary, while dairy remained challenging. Countries like Turkey achieved double digit growth both in RIG and OG.
North Africa achieved solid growth, but the situation was much tougher in the Middle East and more specifically in countries like Saudi Arabia, Yemen, Iraq as well as Israel. Margin wise, we increased our margin by 70 basis points to 16.9%. We increased our marketing spend during the period, but we managed to increase our margin due to our active portfolio management, better mix, decrease of input cost. Just as a reminder, we expect to close our transaction in ice cream, for Neri, with R and R at the end of the summer. Let's move now to Zone AOA.
Sales reached EUR 7,100,000,000 and RIG at 2.4% and organic growth at 2.3%. We had soft pricing in the zone, especially with coffee and dairy where we experienced low commodity pricing. The Yinlu performance in AOA clearly impacted negatively the overall result of the zone and mask actually very good results elsewhere. We gained market share in AOA outside of Yilu and India. In China, the food and beverage market overall saw its growth decelerating to basically 0 growth.
In that context, we had a solid performance for products like Nescafe soluble coffee, chocolate with good product renovation and good retail execution. A good example of it is the attractive performance that we had with Shark Wafer. Tsofuchi has been soft in the period, but we expect an improvement in the later part of the year. And Nilu is clearly under pressure. We addressed the issue during our Capital Market Day.
We are currently executing a plan in order to address the entire needs of the mix. It will take some time to stabilize though. India was positive as Maggi Noodles regain momentum. We have a market share of the noodle market in India, which is now close to 60%. We had 80% before the withdrawal of our product.
So to regain 60% of market share in a matter of months is a good performance, especially so that our distribution reach is only up to 2,300,000 stores, again 3,900,000 stores before the crisis. Our BrandTrust, which was at 98% for Maggie Nudon's pre crisis fell down to 8% at the peak of the crisis and we regained a very good brand trust to 85%. Moving to ASEAN, all five markets accelerated and we had positive sign with our new Nescafe mixes blend and brew and we are happy to report as well that the Philippines is back to high single digit growth. Sub Saharan Africa did good results and especially in Central West Africa. Japan, as you know, is a fantastic story for Nestle and we are very happy with the result there.
Margin wise, we increased our margin by 140 basis points to 19.6% in spite of a material step up in marketing spend with new launches. We managed to achieve it through strict cost discipline to drive efficiency, lower input costs, more specifically in dairy. And don't forget as well that last year we booked the new door withdrawal cost at the end of the first period. Let's now move to our GMBs and we will start with Nestle Waters. The consumer demand shift towards healthier beverages and safe drinking water is clearly contributing to a strong category momentum.
We reached an interesting milestone during the period with CHF 16,500,000,000 lit the 1st 6 months of the year. Our sales reached CHF 3,900,000,000, RIG of 4.7 percent and organic growth of 4.2%. These results show a slight deceleration of our growth in developed markets, which is a consequence of negative pricing, poor weather conditions in Europe. And as you I think we mentioned that last time we had tornado that damaged one of our factory in Texas and we had to stop production there. In emerging markets, we continue delivering double digit growth and we were especially happy with the results in Thailand, Vietnam and Egypt and Latin America Latin American countries are all were delivering good results.
We continue enjoying a strong performance with our our premium brands Perrier and San Pellegrino. Waters increased its margin by 90 basis points to 12.4%. There again, we increased our consumer spend, but it has been compensated by a positive mix, by premiumization, rigorous cost management and we benefited from lower PET cost. And we also experienced some leverage positive leverage from volume increases. Let's now move to Nestle Nutrition.
Sales of CHF 5,200,000,000, RIG of 1.1 percent and organic growth of CHF 1.3 percent. This is a softer level than what we had in the past, which is largely the consequence of limited pricing. We see distinct dynamics between geographies with the U. S. And China somewhat under pressure and the rest of the country doing well.
I'll start with the U. S. Where we continue to be affected by the certain number of factors. One of them is the fact that we decided voluntarily to exit some regional weak contracts, which are delivering low or no profitability. We had a little bit of difficulties in the transition to new packaging glass to plastic and we had some temporary supply constraints to produce pouches, which have now been sorted out.
So we are more optimistic from the later part of the year. In China, the demand is clearly slowing. The market itself in China used to enjoy a double digit growth and is now into low single digits. In our premium and mainstream ranges where we have NAN and S26 Gold, we clearly see a softer demand with much more price competition. And the situation is certainly a little bit more complicated there.
While on the other hand in the super premium segment where we are present with Illumina, we are growing north of 30%. Overall in China for Nutrition, we are slightly gaining market share. In all other markets outside of the U. S. And China, we grew by 3.5% and we have a good performance especially in emerging markets and more specifically in Latin America and Southeast Asia.
For Nestle Nutrition, we increased our margin by 20 basis points to 23.2% with thanks to a positive mix, Illumina certainly contributing to it as well as low input costs mainly on the dairy side. Let's now cover our other businesses, which as you know include Nestle Professional, Nespresso, Nestle Health Science and Nestle Skin Health. Sales for these four businesses reached CHF 6,800,000,000 with RIG and organic growth at the same level at 4.2%. I'll start with Nestle Professional where we had resilient and solid growth across all our food and beverages platform. With Nespresso, overall the portion coffee market continues to grow and Nespresso within that category is performing well.
The virtual line drove positive results in North America and we are continuing to expand on a geographic basis with the opening of 16 new boutiques in the first half of the year. Moving now to Nestle Health Science, our Consumer Care franchise is delivering double digit growth supported by products like Boost and Carnation Breakfast Essential. This is mainly in the U. S. Medical Nutrition had a good performance as a combination of attractive performance for the allergy line as well as continued geographic expansion.
Nestle Skin Health's growth came from a combination of real internal growth as well as geographic expansion. We had some recent launches such as Solentra for ROSA SAAR in MENA or Epidio Forte for acne in the U. S. I could mention as well our consumer franchise and self medication, which enjoyed good growth with products like Cetaphil cleanser or Belong sun protection. Margins for the other businesses increased by 60 basis points to 16.4%.
There we increased our marketing spend as well benefited from lower input costs, but our portfolio management and cost discipline helped to finance it and increase our margin. Let's now move to our growth by product groups. I will cover only the product group that I have not covered before and I will start with meal products and ice cream. We have a slow low level of growth there, which because this is where we book Yilu and I talked about the challenges that we are facing there. We had as well poor weather in Europe for ice cream and obviously the low milk pricing is putting some pressure on this category.
Prefab dishes and cooking head, you can see that we have a significant increase in margin, which is largely linked to the one off the fact that we booked last year the one off cost of the withdrawal of Nudon's in India. Confectionery, we are experiencing tough trading condition both in the U. S. And in some emerging markets. Brazil is one of them.
Pet Care continues to deliver accretive growth, a little bit of negative drivers on the margin because we did not we had not passed on the impact of input cost in some countries mainly in Latin America during the first half, but we will address that in the second part of the year. Let's cover now our trading operating profit, which increased by 30 basis points in the 1st 6 months, both on a reported and constant currency basis to achieve 15.3%. Our cost of goods has increased by 130 basis points as a consequence of efficiency gains with NCE. NCE during the period not everything goes to the cost of goods, but NCE delivered CHF 660,000,000 of hard saving during the period. In the cost of goods, we benefited as well from some favorable tailwind from commodity pricing as well as our portfolio management and premiumization contributed to it.
We reinvested part of this positive development in the cost of goods in marketing and administration cost for 90 basis points. Our marketing spend increased by 8% in constant currency during the 1st 6 months of the year versus the same period of last year. We invested more as well in R and D. This is an investment in innovation for the long term as you know in order to support our nutritional health and wellness strategy. We talked during our Capital Market Day of our structural selling initiatives.
We have now identified 8 key initiatives to reduce our structural cost. We have already started to implement 4 out of the 8 initiatives and the other ones are going to follow soon. Let's move now to our gross margin. It is interesting to see that we improved our gross margin from 47% in 2012 to 50.8% in the first half of twenty sixteen. So it's a gain of 3.8 points in 4.5 years including another increase again in 2016.
Several factors are explaining that. The significant increase in gross margin, pricing, cost efficiencies, input cost, mix portfolio, but we are satisfied to see that because it shows the strength of our portfolio. As you know, we have an active view, a dynamic view of our portfolio. It also illustrates well our pricing power including in a deflationary environment and our clear cost control focus. Let's now move to EPS and to our income statement from operating profit to net profit and I will walk you through the main items.
Starting with other operating expenses, we had a tailwind of 50 basis points there because last year we booked a one off adjustment for hyperinflation in Latin America. Our taxes, we booked a one off non cash adjustments in Q2, which is linked to deferred taxes, liabilities following a change of tax laws in the in Switzerland as part of the tax Swiss tax reforms. This change is a one off, once again a non cash item, which does not impact our underlying effective tax rates. The decline of income from associates and joint venture is coming from lower reported earning level from L'Oreal and the non controlling interest has been impacted by the fact that we increased our stake in our Israeli affiliates. Our underlying EPS has increased by 5.7% in constant currency.
Let's move now to our free cash flow generation, which is one of the highlights of H1. We increased our free cash flow by 41% to CHF 3,300,000,000 As you know, the majority of our cash flow used to be generated in the 2nd part of the year, but we managed to generate an attractive amount in the 1st period of the year. This is driven by a combination of factors from top line growth to margin improvement, which we covered both of them before, tight control on CapEx, which is at the same level as last year and another good performance in working capital. You have another illustration of our continued focus on working capital. On this slide, we gained another 100 and 50 basis points in the 1st part of 2016.
These are June data as this is the average of the last five quarters. The values are actually slightly different from the year end values, but what matters is a trend, which is very positive again. We are confident that we can achieve further gains. I would like now to conclude with a summary. We achieved an organic growth at the upper end of the food and beverage industry and this is what we achieved is in line with our expectations.
Our strong internal growth has been driven by innovation. There again we are in the top quartile of the food and beverage industry as far as volume and mix is concerned. Our pricing on the other hand is at historical low, but we expected it to improve. We believe that we have hit the bottom in Q2. We managed to gain further market share with 57% of our categories and markets increasing or stabilizing market share.
We had another strong gross margin improvement, which of 130 basis points partly reinvested in marketing for 60 basis points. Our operating profit improvement has been up to 30 basis points and reflect our focus on cost. And we delivered a strong free cash flow this quarter increasing 41% driven by further working capital improvement. As a consequence, we confirm our outlook for the year. We expect some improvements of our business in the 2nd part of the year versus the first one, which is linked to innovation that we have already put on the market, which is linked to portfolio management.
We expect, for example, to deconsolidate our ice cream business after we close the Fornery transaction at the end of the summer. We expect as well to get better pricing in H2 starting with Brazil, but it goes beyond Brazil. And we have as well some favorable comps from last year because we had no Nudon sales in India last year and we had the one off adjustment for skin health in Q3 last year. That concludes my presentation. We are now moving to Q and A.
I'll pass on the mic back
to you, Stefan. Yes. Thank you, Francois. So for those of you on the call, if you want to ask a question, please press star 1 on your keypad. If you want to remove the question, please press star 2.
With that, we take the first question, which today is going to be Warren Ackerman from Societe Generale. Good morning, Warren.
Good morning, Stefan. Good morning, Francois. It's Warren here at SocGen. Two questions, please. The first one is, can you talk about the cost savings and the margins?
I mean, I think you mentioned 8 key initiatives. You've implemented 4 and others to follow. Can you provide maybe just a bit more color on the detail around that and the related costs? And do you expect margins to accelerate in H2 due to those one off dropping out and the JV in ice cream? And then secondly, in terms of the categories, it seemed to me the two areas of relative weakness were nutrition and other food and bev.
I was just wondering whether in nutrition you can actually tell us a bit more exactly what's going on in China. How deep is the price competition in the mainstream sector? And what's your outlook on the second half? And same thing on other food and beverage, it seemed to me that everything was quite good, but the organic growth was only 4%. So was Nespresso slower in the quarter?
Thanks.
Thank you, Warren. As far as the cost saving is concerned, so as I mentioned, we have identified 8 key initiatives, 4 of them have already started. I mentioned during our Capital Market Day some of these initiatives, the largest one are obviously the asset intensity increase on the manufacturing side where we are reviewing our footprint. We expect significant savings as well to come from consolidation of procurement activities above market. We are increasing our shared services.
We are working in terms of work place solution, real estate optimization, delayering and there are some country specific projects. So we are really entering into the execution phase now. As you know, these projects are have a horizon of 3 years because some of them will take some time to crystallize, but we have already started. So don't expect to get a significant impact of this project in H2 and even next year's impact will be relatively limited, but it will scale up as we move over time. We are not providing any guidance as far as margin is gross margin is concerned for H2.
That being said, you have seen the trend that we have experienced. So we continue focusing on portfolio management, premiumization, cost discipline and so forth. But obviously our margin is influenced by other factors that we do not necessarily fully control such as pricing, inflation deflation as well as commodity pricing. You talked about you a question about nutrition in China. As I mentioned, the market used to grow double digit a few years back and it lasted for some time now.
The market nutrition infant nutrition market in China is was experiencing a growth of low single digit essentially because of pricing. And our strategy to focus on super premium with Illumina is paying off because we are gaining market share. Obviously, we are feeling the pressure from a pricing point of view on the mainstream and premium segment where we have NAN and S26 gold. That being said, we are not going to go into a price war. So it's very clear there.
Once again, overall, we are gaining marginally market share in China. So we are positive on China infant nutrition even if the situation is not in the market is not as attractive as it was before, but we remain positive. One other information which is important, we continue to grow as well in volume in H1, which is good news, but pricing is obviously putting some pressure. Pricing is also not only linked to competitive forces, it is linked as well to low commodity pricing and mainly milk. You want to add something, Stefan?
There was
another question on other category.
On other categories, what was the question?
You asked on the slowdown of the other category, Warren. Look, this is basically we had good growth, but some deceleration versus Q1, and this is also mainly due to pricing. If I had to pinpoint in other category, the one that slowed down here probably was skin health, whereas all the others still did well, okay? Right. Let's take the next one.
That is Jean Philippe Bertschy from Vontobel. Good morning, Jean Philippe.
Good morning, Stephane and good morning, Francois. The first one would be indeed on Nestle Skin Health and Nestle Health Science. It looks like you had a sequential growth slowdown, as you said, probably due to pricing. And the margin is as well under pressure. It was already low in H1 last year.
So now we're like reaching the 7% level. So if you can lead us through this Nutrition Health Science NSE Health Science and NSE Skin Health sorry. And the second one would be on the contractionary. It looks very weak with negative rig in the Q2 and the pricing remains still high. The margin is under pressure.
So if you can lead us as well, I guess, North America is the problem child here, if you want to continue to invest in this market or if you want to let it go? Thanks.
Okay. Good morning, Jean Philippe. As far as Nestle Skin Health and Nestle Health Science is concerned, these two businesses are clearly accretive in terms of sales growth and we see an attractive potential further over time. And we are they are slightly dilutive on the bottom line because we are in an investment position. So we are investing in R and D, we are investing in innovation, we are investing in terms of geographic expansion as well.
I mentioned for example we entered Korea with some products, we entered Europe as well for example the success we have with products like Boost in the U. S, we have it's so successful. I mean, we grew by 15% in the first half of the year. So why don't we do the same in Europe, which is actually what we are doing as well. So obviously this has a cost, but the flip side of it is the fact that we are strongly accretive in terms of sales growth.
So it has been the case for some time and it was again the case in the 1st part of the year. The dilution is not that bad though and we need to put things in perspective as well. Confectionery, it's a difficult category. Our organic growth is indeed below what where we were last year. We had positive pricing, which is driven essentially by Latin America and Eastern Europe.
Rig was slightly negative impacted by the U. S. Where our business has been challenged by a category slowdown with intense competition in the mainstream segment. Brazil as well is because we have a strong franchise there in confectionery has been impacted by the contraction of the market for Eastern, which is usually a strong driver of growth during the year in the context of difficult political and economic crisis. Outside of the Americas, we did well.
We have done well in Russia and ASEAN. Western Europe was positive. We did well in Germany, Iberia, Italy. The UK is a little bit more complicated. KitKat, you know that this is the main product that we have which is global, continue to enjoy mid single digit growth driven by AOA and AMS.
Remind you that this is the 2nd largest confectionery brand in the world. So that's so we remain positive on the category while our margin suffered due to our challenge U. S. Position and economic crisis in LatAm.
All right. Thanks a lot. The next one in the line would be Eileen Ku from Morgan Stanley. Good morning, Eileen.
Good morning, Stefan. Good morning, Francois. Two questions from me. The first one is really to follow-up on Nutrition for China and Food Formula. We're seeing a spike up in milk powder prices.
Do you expect this to continue? And do you think that puts more pressure on your margin going forward? Or could we see more pricing coming back to that market? And then given your strategy of premiumization in China, so for example, the recent Illumina and S26 upgrades you talked about, how confident are you that the new regulations coming in will allow you to continue introducing more SKUs at higher price points? So that's the first question.
And then the second one is just on market share really. You gave helpful information on market share momentum in overall Nestle Group. Can you just talk a bit more about AOA in terms of categories, geographies? And within AOA for Yinlu as well, what sort of decline are we talking about here in 2Q? Thanks very much.
All right. I'm going to take the question on the milk prices. So the whole milk powder and skim milk powder prices have been trending up a very little bit from a very low level, to do with a bit of reduced production. And in Latin America also weather conditions impacted. But it's definitely too early to make larger assumptions here on the future of the dairy prices.
The regulation in China, look, we always said we welcome regulation. We our business is compliant. We have been careful to engage only where we have business in regulated channels. And the government has taken concrete action to regulate with taxation, with formula registration. And overall, we welcome that because it is in line with our business practices today.
Just on the second question, the market share in EWAY, I don't have the data for EWAY, but I can tell you in China, we gained market share in 60% of our categories in China. So it's we consider that it is relatively good. Don't forget that the market in China is slowing down and the market F and B market is now down to 0 growth. If you look at the Nielsen data, which is obviously a concern. But in that context, we are gaining market share in 60% of our categories.
Outside of China, in Southeast Asia, we did actually very well in all countries. I mentioned the Philippines where we are back to double digit growth, which is good. But I could have mentioned other markets where we are doing well overall in Southeast Asia. And in India, we are back, so it's which is pleasing.
Okay. Thank you very much. Next one is Celine Pennuti from JPMorgan. Good morning, Celine.
Yes. Good morning, gentlemen. Right. My first question is on your outlook for pricing. Can you be a bit more specific on where did you take price action?
You mentioned Brazil. But as well on given that you are mentioning deflation in many parts of the world, How confident you are on the step up in pricing for the second half of the year? I'm also putting that in the context of your guidance, which imply a step up in organic growth in the second half of at least 1%. So if you could comment on that given that as well Rick can't find that easy. So overall pricing and outlook, how you balance that for the second half of the year?
My second question will be a bit of the same on margin. It seems to me that you had mentioned that the full year will be H2 weighted and I took that was as well a margin comment. I think last year you had a hit on margin. You had mentioned a specific issue that hit margin last year. Is that a correct assumption to believe that H2 margin will accelerate?
Okay. Regarding pricing good morning, Salim. Regarding pricing, yes, I am confident on the fact that we have hit the bottom in Q2 and that this is going to increase because we have put through price increase in some markets. I mentioned Brazil because we have discussed Brazil over the last couple of quarters, but it goes beyond Brazil. I mean we have done it in other markets like Russia.
There will be some pricing coming in, in other markets like even if you take the UK because with the devaluation of 15% of the currency, we have 2 main lines in the UK, which is confectionery and coffee and we import raw materials. So with the 15% devaluation over time, we need to pass on some of the price increase raw input cost increase that we have linked to currency depreciation back to consumers, okay. The timing of it needs to be reviewed. We have also started to see overall some increase of commodity pricing. So overall it depends from one category to the other.
So is it going to last or not? There is always a time delay between what happens in the commodity market and what is passed on to consumers. But yes, we are confident on the fact that pricing is going to improve to what extent and how long is it going to last. Okay, we'll see. I'm more concerned I would say on the impact that pricing may have on real internal growth possibly because there is always some elasticity which over time tends to ease off.
But in the short term, when you increase prices, obviously, consumers have a tendency to go down in terms of category. That being said, we can't address it because for example consumers who are in the mainstream category they may after price increases move into affordability or what we call PPP. So they can downgrade their purchasing a little bit. So we should be able to recover most of it. But let's see how it goes because elasticity is always in tune.
Regarding margin in H2, once again, I don't want to provide any guidance. You saw what has happened. We improved our margin regularly over the last four and a half years. I'm not saying that it's going to happen in H2. You mentioned a certain number of factors that have happened last year that move in that direction.
But I mean margin is a consequence of many factors starting from pricing, going to raw material, input cost, inflation, deflation, mix and so forth on premiumization. But you can see through what we do that improving our gross margin is certainly something we are working actively upon in all dimension, the one that I mentioned from pricing to cost and premiumization, portfolio management and so forth.
Okay. Next one is Martin Deboo from Jefferies. Good morning, Martin.
Yes, good morning, everyone. I've actually got a question that relates to Celine's on H2 pricing. I'd really like to push you a bit harder on this, if I may. If we just look at the shape of H2, simple arithmetic tells you you've got to do close to 5% organic growth in H2. You get on the volume rig side, you get the benefit of lapping Maggie.
But on the other hand, you're up against a tougher comp. And as Francois Xavier just said, there could be some negative elasticity from pricing. So it would seem to me that you're going to have to do a lot better on pricing in H2. And the two things that you're calling out are, 1, the reversal of the skin health provision, which you sort of get for free, so to speak. And I'd be grateful if you'd remind us what the impact of that is on H2.
But it would seem to me that pricing in Brazil has to be a very big component of the H2 price move. And to come back to the debate we had at Q1, you were arguing at Q1 that you were late to put pricing through in Brazil because of the different dynamics of dairy and also the effects of hedging. But you're in a position in Brazil where you're coming late to the pricing party at
a point when the real is
starting to appreciate again and a just what's the risk that you can execute your pricing strategy in Brazil in H2 because it seems to me to be key to the whole thing? That's the question.
Martin, thank you for your question. The pricing execution, it's already in the market because we did it in May June. So it's already there. So we need to see what the impact is and especially on rig, but we have already put it through. We can always revert it, but there is no intention to do that.
So we are sticking to it. You are talking of H2, indeed, we need to achieve our guidance, which we reiterated, we need to be around 5 percent of OG in the 2nd part of the year. This is not only linked to pricing. You mentioned some of the items such as the comps, Nestle Skin Health, the adjustment that we did in Q3 last year as well as Noodles. This contributes to about 50 basis points of improvement in the 2nd part of the year between these two components.
You have pricing, which is taking some share of it. Innovation is another component and portfolio management because we launched a lot of new products. And portfolio management as well, Fronery for example, we expect to close at the end of the summer. So this will slightly contribute to it as well. So it's a combination of factors.
We have clearly identified the building blocks for the acceleration of our sales with always some risk. One of them, as I mentioned, is the elasticity that is coming from some pricing. We talked of Brazil, but it's not only Brazil. And we put through price increases in countries like Mexico and other Latin American countries. And I even mentioned 1 European countries when it will come over time.
Okay.
Thanks a lot. Next one is John Cox from Kepler Cheuvreux. Good morning, John.
Yes. Good morning, guys. Thanks for taking the question and congrats on that cash Looked very impressive given the environment. But looking at the volume growth in Q2, it seemed to be a clear deceleration and that appears to be focused on the Americas. Do you think that was just really maybe the volume growth in Q1 was pulled forward by some countries expecting prices to increase, I.
E, Brazil. Because if you look at the Americas region, volume growth seemed to be around 2% after being 3.5% in the Q1. That's a pretty sharp slowdown. And in Europe as well, we've got a 40 basis point slowdown in volume growth Q2 versus Q1. So a volume question for you, what was behind that deceleration we saw in the quarter?
And then the second question just on NCE, did you actually say the savings in gross margin that was about 60 basis points? Thanks very much.
All right. Thank you, John. Just I don't see really a deceleration of our real internal growth in Q2. Don't forget that Q1 we benefited as all our competitors from the fact that 2016 is a leap year, so which obviously there was one more day of consumption, so everybody benefited from it. But I don't see a clear deceleration.
We provided some quarterly data on Page 3. If you look at the graph, you don't see it's a marginal deceleration, but there is not much to see. There is a little bit of an increase in Q1 because of the leap year. So I don't I'm not reading it as any with any concern. NCE, what I mentioned is the figure of CHF 660,000,000 of saving and hard savings in H1.
Not everything flows into the cost of goods though, because MCE is not only about manufacturing efficiency, it's about efficiency overall. So some of it goes to G and A and to it can even impact marketing spend, for example. So this relates to the figure that we gave at our Capital Market Day where we had saved about €1,500,000,000 a year per annum over the last couple of years. So the momentum continues and so we are satisfied with what we achieved again in H1.
Good. So we carry on with Adam Spielman from Citi. Good morning, Adam.
Good morning. So I have two questions. The first one is on China. You said that food and beverage have got to 0 growth if you measure this Nielsen. I'm interested though that if you include e commerce, what you think the growth rate is in China in 2Q or first half?
And whether you also think this is a permanent move down? I guess this is sort of the question is also relating to the outlook for China Food and Beverage, including Internet sales. That's one question. The second question is similar, but talking about developed markets, you talked about very high good rig in developed markets in H1. And particularly, you said that innovation is driving better rig.
And I was just wondering if you could sort of isolate that. And also, the question relates to the future. Is your what is this a one off boost to innovation? Or are we seeing a permanently better innovation pipeline, which should lead to, I guess, permanent improvement in rig from that element in developed markets? Thank you.
Thank you, Adam. I'll take the second question and let Stephane answer to the first one on China. On the second question, innovation. Well, innovation is some of many different initiatives on project and product. But just to give you some hints, because we track innovation very closely.
You remember that we have about a third of our products which did not exist and we are not on the share 3 years ago. And we measure innovation on a permanent basis and innovation is not marginal innovation just changing the label on the bottle or whatever. It is reformulation. It is really bringing new real product in the market. And we see that out of our growth on because we track it on a monthly basis, we have about 2 third of our growth, which is coming from the base business, which is growing by itself and about a good third, which is coming from innovation.
And there innovation, I'm even taking what we launched this year and what we launched last year or so over the last 24 months. So we have a real momentum there, which is largely the result of first of all our strategy. We have a strategy which is driven by permanent innovation and renovation and we have as well a strategy where we invest heavily in R and D. We invest heavily as well in marketing spend. Some of this innovation can take different shapes and form.
As I mentioned in the slide that I put and that I added because I wanted to give you further highlights on and further color on what we can do in terms of innovation. And Stefan, I'll let you answer the
question on China. Yes. The question on China market share, really it's difficult to say if e commerce is included here. What we see is that from Nielsen data on MAT in 2016, the market has come down from previously about 3% to now really 0. The part is in, but we're not confident it's all in.
A part is in, but we're not confident it's all in. So back to your question, including e commerce, the market might still be slightly up. Growth by category is driven by coffee and shark wafers. But as we said before, Yinlu is soft. And as Francois also explained before, returning the negative trend of some prior years.
What is also interesting to mention for China is that our market share is improving in more than 50% of our sales, exactly in 56% of our sales. We're improving market share in China, which I think is an interesting data point. With that,
I would I would just add that in China, our e commerce is increasing very fast as well. So we are very present there. So it was increasing by more than 80%, eight-zero, in the first half of twenty 16 versus the same period of last year. So we are growing very fast. We are really investing a lot of resources.
We did you heard about it some specific promotion for example with Alibaba in the context of our 150th anniversary. So it's a very strong momentum as well. That being said, the traditional market, which represent the very vast majority of the market, which is covered by Nielsen, is actually showing no growth in the market.
Okay. With that, we move on to Patrick Schrendeman from Zurich Cantonalbank. Good morning, Patrick. Good morning, Stefan. Good morning, Francois.
What tax rate do you expect for the full year and in the midterm? That's my first question. And second question, why was the nutrition margin not better despite significantly lower dairy prices? What do you expect here for the future in terms of margins for nutrition? Thank you.
Thank you for your question, Patrick. On Nutrition, the margin improved, which is good. Obviously, we benefited from low commodity pricing, but on the other hand, we had the pressure from pricing on the mainstream and premium in China, so which is the reason why the net impact is positive. But let's say, it could have been better obviously if we had not to adjust somewhat pricing down as well for the mainstream and premium lines. Our tax rate, we don't provide any guidance on tax rate.
The only thing I can mention is the our tax rate has been underlying effective tax rate has been around 27% over the last couple of years. The adjustment that we took in Q2 is a one off adjustment, which is linked to a change of tax laws in Switzerland, which does not impact our underlying ETR. Thank you. That
brings us to the next caller Alain Oberhuber from MainFirst. Good morning, Alain.
Good morning, Steph. Good morning, Francois. From my side, also regarding China question, you mentioned that Sufuchi had some problems in Q1 and that should improve in the second half. Could you elaborate a little bit on that? And the other question is regarding Yanglu.
Are we still expecting an improvement only by 2017? And then the second question is regarding the ice cream deconsolidation. What could we expect of deconsolidation on the margin? How much will that contribute for the second half? And on an annual basis, how much could be the positive impact from the deconsolidation of your
All right. Good morning. Alonso, Fuchi, it's not that they did poorly in H1, but it's a business which is fairly seasonal, which is very linked to festive seasons and so forth. And we know that because of that, we will be in a better position in H2 because some of these festive seasons are moving a little bit during the year as well. So it's more, I would say, technical issue in terms of calendar.
Yinlu, as I said, it will take some time. YINLOO is in negative territories and we are not satisfied with it. This is a strong asset. We have clearly a very good distribution platform in the beverage space nationwide in China, which is something that is not common. We have a good innovation pipeline.
We have a good track record as well of new products. So Shaki Symonds are ready to drink coffee that we launched recently shows very encouraging results. And we are well positioned as well because we have a significant presence in a growing segment, which is a plant protein beverages. So I think that the company has a certain number of assets. We need to fix the number of issues.
We are also in categories which are not that attractive anymore. One of them is congee and we are heavily dependent on 1 subcategory of plant protein, which is more specifically peanut. So we need to improve in terms of execution capabilities. So we have already started to address clearly most of these issues through innovation. We brought in some people from outside as well to help us on the execution capability.
So we are actively working on the YiLoo turnaround, which will take some time. Will we see some result in 2017? Yes, probably in the latter part of 2017, but it's going to take a little bit of time. As Crane deconsolidation, it will have some impact. We should deconsolidate at the end of the summer.
So it will have some impact in Q4 more specifically. So the impact in 2016 will be limited and there will be some impact as well for 3 quarters next year. But we don't provide any quantification of the an evaluation of this impact. But this is part of what we record on a normal basis as part of portfolio management. We had the same for example this year with the deconsolidation of Davigel that took place in France last year.
So this is part of what we do regularly.
Okay. Next caller is James Edward Jones from RBC. Good morning, James.
Yes. Good morning, Stefan. Good morning, Francois. Two quick ones, if I may. First of all, you called out the increase in R and D.
It was only up, I think, about 10 basis points from what I can see. Given the intended changes in the portfolio, is that going to increase materially going forward? And secondly, have you got anything to say on promotional efficiency? I mean, it's obviously been something that's been talked about a bit over the last year or 2. And I wonder if that could partly be a factor behind the relatively subdued sales growth but big increase in gross margin.
Okay. I'll take the first question on R and D. It's increased indeed we increased by 10 basis points. We expect to continue investing significantly in R and D. We do spend more than our competitors.
We spent about CHF 1,700,000,000 a year, so which is significant. Material increase in the future, I would not say material. We are targeting efficiency there as well. I'll let Stephane answer the question on efficiency of our promotional spending. Efficiency matters as well in R and D.
And R and D can take different shapes and form as well. We live in a world where part of the R and D is coming from a collaborative way of working. So we need to partner a lot with other companies. A lot of innovation is also coming from small companies, which we address through participation and cooperation with VC partners and so forth. So it takes different shapes and forms, does not necessarily mean that everything we do goes through the P and L.
Some of them could be equity investments as well as we have always done and we have had we have been the first ones I think to invest heavily in external innovation as well. Heavily in external innovation as well. Yes. For
promotional efficiency, James, this is something Nestle has been doing since I can remember actually also in the operational business. There are several things you can do. There's the classic marketing mix modeling, where you see uplift of your trade or marketing spend and you can pinpoint it very closely. It's part of our operational processes. And in specific cases, we also go on a project basis like in the United States.
We've had a very broad study that was called strategic pricing where we used statistic correlation models as part of our relaunch of the frozen portfolio, especially in pizza. So there are several tools. And yes, we're aware and we use them all, but we feel we've done it always and it's part of the DNA. So this is not necessarily changing. All right.
That gets us to the last analyst and then we have 2 more journalists in the queue. So first, Jeremy Fialco from Redburn.
Hi, good morning. It's Jeremy Fialco, Redburn here. I guess following up on James' question, more of a question on the marketing and
last
few years, yet your rig has been, I'd say, relatively stable, admitted in a slightly slower market. So the question is also how satisfied are you with the efficiency of your marketing spend? And then what initiatives have you got ongoing to improve the efficiency of the marketing spend? Is that one of the 8 areas that you referred to earlier on in the presentation? Thanks.
Okay. Thank you, Jeremy. Indeed, our marketing spend has been increasing significantly. If I just take the last two figures, last year we increased our marketing spend by 12% on a constant currency basis. This first half we did it with 8% additional increase.
I would say this is what drives the fact that we are delivering a strong rig, which is at the very top end of the industry. And so we are translating that into market share gains as well. Efficiency is on the top of what we aim at doing. This is not something new. This is not part of the 8 areas because this is something that we have been addressing always over time, which it has a lot to do as well with higher investment that we do in digital marketing and we try to cap now a little bit more what we do in the core marketing spend.
It's not that it is not efficient, but people continue to watch TV and read magazines and look at billboard in the street, but it is true as well that the efficiency is quite strong on the digital space. So this is not part of the 8 area, but this is a clear area of focus. That's it is.
All right.
Then the next question is Ralph Atkins from the Financial Times. Good morning, Ralph.
Hi, good morning. Two questions. Firstly, back to the deflationary pressures, which have obviously had quite an impact on the organic growth rate. You mentioned your confidence about pushing through some price increases in the second half, but you mentioned Brazil and Russia. It seems the problem seems to be focused largely on Continental Europe.
What do you expect by way of price developments in Continental Europe? And how will that impact on your growth projections? I mentioned Continental Europe, obviously, excluding the UK, but the second question is, what impact do you expect the Brexit vote to have on UK in terms of UK sales, but also on your future investments in the UK? Thank you.
Okay. Deflation in good morning, Raf. Deflation in Continental Europe, we are in negative territory there. So our pricing is negative, reflecting global deflationary environment. And I mentioned earlier that we don't expect any improvement there.
So it's not improving. The deflation is probably even accelerated a little bit further as far as the food and beverage industry is concerned because there has been some consolidation in terms of retail in some markets, France is one of them for example. So it doesn't help. So we and we don't see any improvement. The UK I covered earlier.
The Brexit for the UK, we don't see any direct impact in the short term apart from the fact that obviously the translation of our UK business into our group accounts has reduced a little bit because the currency has devalued by close to 15% again the Swiss francs. So we see the contribution of our UK business, which is sizable, will be lower in the total group. In terms of transaction, we were hedged in terms of imports and exports for certain period of time. So we don't expect any significant impact on our business in the very short term. As I said earlier, obviously given that we import a lot because our 2 main categories are made products which are imported, cocoa and coffee.
We will have to reflect that in pricing going forward. We don't have a negative view of the UK. We have actually invested in the UK because we have built one of the few lines of Nescafe Dolce Gusteau, it was before the Brexit, but in the UK. So we continue to be committed to the UK as a market in terms of consumption and as a place to it has some room to play even within Europe in our industrial setting, for example.
Okay. Final question is from Silke Kultrowitz from Reuters. Good morning, Silke.
Yes. Hello. Good morning. So I have two small questions on details like your organic growth in the Q2 was the weakest since when? Can you tell us that?
Because you've given 3 years back, but I think it must have been longer ago than last. Is this the weakest ever even? And then on China, again on China, how bad was how was the Chinese performance of Nestle? You talked about the market in general saying it was flat. Was Nestle sales in China flat in the first half?
Or was it like still slightly up? And then maybe just on your dividend policy, can you tell us if you're still like committed to raising the dividend each year every year? Thank you very much.
Okay. Good morning, Silke. Organic growth in Q2, I don't know the story because I joined the company only a few quarters ago. So but again, we could have a look. But anyway, we don't manage really the business on a quarterly basis.
A given quarter in itself doesn't mean too much. You take several quarters, it shows a a the historical perspective over 10 quarter. We see some slowdown, which is not linked to volume and mix, which is much more linked to pricing, which is once again the consequence of the deflationary environment as well as low commodity pricing. But don't look at 1 quarter in an isolated way, rather look at the time perspective. In China, we were negative in Q2.
That being said, we gained market share. It might be a little bit counterintuitive because if I say the market is flat, but the market is flat with Nielsen data. So was always a little bit of a time lag between our sales, which are down to distributors and market share recorded, which are consumer market share. So we were negative in Q2. Our dividend policy, we have increased our dividend over the last 30 years and we value shareholder return and shareholder remuneration.
The dividend is a significant part of our cash flow. It was close to 2 third of our cash flow generation last year. We have had I would not say general dividend policy, but we have maintained the dividend in Swiss francs, which was, I would say, relatively a bold move over the last 2 years, especially when the Swiss franc revalued last year. But we are committed once again to maintain good level of shareholder remuneration.
We We have not reduced the dividend in the last 70 years, so that noblesse oblige. That brings us to the end of the call. Thank you very much for your attention today, and we talk to you again on the event of our 9 month earnings results. Thank you very much. Bye bye.