Good morning, ladies and gentlemen. Welcome to our full year results conference here in Vevey. This conference will be held in English, but you can also follow it in French or German using the headsets provided. If you're watching the webcast, you can choose the right language by clicking on the respective link on the webcast page. I take the safe harbor statement as read. Let's start. Paul, you have the floor.
Good morning, everybody, welcome to our 2014 full results conference. I, first of all, want to thank you for your interest. I want to also say hello to the people who are following us. We have Wan Ling Martello, our CFO. In the room, we have also in the first row, my colleagues of the executive board, Greg Behar, who is leading and heading Nestlé Health Science, and Humberto Antunes, who is heading Nestlé Skin Health. They're here in the room, also available for any questions that you may have at the end of our speeches. You saw we have published our results for 2014 a few minutes ago. I would say they are solid. They are solid in the sense that, first of all, they are delivering on top and bottom line.
Secondly, also, they have been built upon delivering over the years, also over the last years. They have also delivered in a soft trading environment. There is enough talk about that in the press. Also, very importantly, they have outperformed the market. I would say they show something that I'm going to come later on, which is some intrinsic, I would say, differentiating strengths of our company. The first thing I want to say there is the commitment of our people everywhere in the world. Our people, how they are committed, aligned behind our strategy is an intrinsic, very strong element of our continuous success, I would say. Also our global footprint. We are truly a global company that has integrated activities in every part of the world, and that is definitely a strength.
Also our portfolio and our brands and the complementarity of the different categories we're working in is also very important. What is driving this portfolio is our R&D and our innovation drive. These are four elements that I would say are at the base of the success of last years and the years before and will be also at the base for the future. I'm going to go a little bit more in detail. You saw the figures. I want to ask now Wan Ling to walk us a little bit more through the details of what's behind these figures. Wan Ling, please, the floor is yours.
Thank you, Paul. Good morning and good afternoon. I would like to first start by wishing all my Chinese friends and colleagues a very happy Chinese New Year. It is today. Not to worry, I'm not doing this session in Chinese.
You've seen I put my red tie.
I know. He did something for me today. Just today. Looking back at 2014, it was indeed not an easy year. I have to say that I am proud of the group's results. Let us start by taking a look at our highlights slide. We had sales totaling over CHF 91 billion. Our 2014 organic growth is made up of 2.3% RIG and 2.2% pricing. This is good performance and represents two things. First, our ability to sustain growth, like Paul said, year after year in very difficult markets. We focus on the value of our brands, driving innovation, premiumization, and engaging effectively with our consumers. Second, the group's ability to offset areas of weaker performance, areas that we're keenly aware of and are in the process of addressing, something I will cover more in our Zone review.
In addition, this growth has been delivered while improving our trading operating profit up 30 basis points in constant currency. Our operating cash flow of CHF 14.7 billion has to be viewed with the comments I made in 2013 as well as in 2014. We have had two years of remarkably strong performance. 2014 was again a good year. Finally, our underlying profits, our underlying earnings per share were up 4.4% in constant currencies. With that in mind, I would like to now turn to the details behind our performance. Starting with our regional growth. Our regional organic growth, that is our Zone and globally managed businesses together, was 5.4% in Americas, 1.9% in Europe, and 5.7% in Asia, Oceania, and Africa. Real internal growth was 2.3% in Americas, 2.4% in Europe, and also 2.4% in AOA.
This performance is representative of a whole host of factors affecting our markets around the world, whether it's the deflation affecting pricing in Europe, a moderate improvement in North America, a more subdued Latin America, or the slowdown we've seen in the Middle East and China affecting AOA in the latter half of the year. Looking at our global presence from the developed and emerging market perspective, emerging markets delivered 8.9% organic growth, sales totaling CHF 40.2 billion, which is about 44% of our group. This solid 8.9% growth is slightly below where we were last year. It reflects the challenges we face in some key emerging markets. Developed markets delivered 1.1% organic growth, sustaining a performance that quite frankly is very good. Let's now turn to our performance from a zone perspective.
Beginning with Zone Europe, with sales of CHF 15.2 billion, OG of 1.5% with 2.2% RIG. I know we've said this before, but the strength of the zone comes from innovations and premium products we have brought to the market. This is clearly reflected in market share improvements. I don't need to tell you that the trading environment in Europe remains quite intense, with deflationary pressures making it very difficult for pricing and consumer confidence continuing to be fragile. Having said that, both Western and Eastern Europe continued to grow. Pet care, Nescafé Dolce Gusto, and frozen pizza had good performances across the zone. In the West, France, Austria, and the Netherlands had good growth, all three markets benefiting from Nescafé Dolce Gusto. In France, Herta and chilled culinary and our frozen pizza business and Fraîch'Up and Buitoni Fiesta varieties both had a good year.
We also had a successful launch of Les Recettes de l'Atelier chocolate. I was afraid I might mispronounce this, so show and tell here. Very good product, very good chocolate. That's doing really well, especially in a challenging confectionery category. It's also worth calling out that Spain and Portugal, we saw some recovery. Coffee, particularly Nescafé Dolce Gusto led the growth, no surprise, with frozen pizza and snack noodles and ambient culinary doing well too. The Great Britain region, Germany, Italy, and Greece remain challenging markets for us. In Central and Eastern Europe, the growth was driven by Russia, although we did see a slight slowdown towards the end of the year. The largest categories, coffee, confectionery, and ambient culinary, all had very good performances. Nescafé Gold, KitKat, and the launch of Maggi Papyrus cooking papers being stand out performers.
Ukraine also delivered good growth despite the challenges that the market is facing, driven by confectionery, especially KitKat. Overall, across the zone, pet care remains the strongest growth driver. As a category, it is one of the best examples where differentiated, value-added, premium products can sustain growth in tough market conditions. Some of the strongest performances come from brands like Felix, Purina ONE, Gourmet, and our snacks range. The zone also continued to invest in the future. A few examples include expansion of our Nescafé Dolce Gusto factory in Tutbury, U.K., a capsule factory in Germany, and a pet care factory in Poland. The zone's trading operating profit margin was 15.3%, up 30 basis points. This reflected the zone's ongoing efficiencies and a general reduction in structural costs. Looking now at Zone Americas, the zone achieved 5% organic growth with 1.1% RIG.
Starting with some of the macroenvironment dynamics for the Zone, it is fair to say that the various indicators do show an improvement in consumer sentiment in North America towards the end of 2014. In addition, the lower oil prices may help the consumers. We will have to see how this plays out in 2015, and how any improvements actually translates into the F&B sector. In comparison, Latin America's economic environment continues to slow down. Looking at our performance in North America, our growth was slow. We had relatively good performances in pet care, coffee creamers, and super premium ice cream. This growth was offset by the continuing contraction of the frozen category and further declines in premium ice cream. I do realize that we've been speaking about the issues in the U.S. frozen food category for some time.
For those of you who have seen what we presented at our investor seminar in Boston just a few months ago, what we discussed there remains relevant. Building on that, I'd like to share with you some more specificity of the plans we discussed in Boston, particularly for Lean Cuisine. We are systematically changing all the elements. We are improving the segmentation of the ranges with new consumption occasions like snacking. We're making the portfolio more relevant in reflecting the needs and wants of our consumers, so more natural, organic, gluten-free, more protein. We're fully embracing digital across all of our communications. More importantly, the changes we've been working on for several months will make our nutrition, health, and wellness promise, NHW, consumer relevant, producing as fresh and natural as is possible and keeping the recipes as simple as possible.
Of course, this relaunch comes with investment, both in our operations and particularly in consumer marketing spending. Let me be clear, there's a lot of work to be done here. Our expectations are that we should see some recovery over the course of 2015. In frozen pizza, the category dynamics in addition to our pricing led to disappointing slowdown. This was despite the innovations we brought to the market. Our California Pizza Kitchen brand did relatively well, particularly with crispy thin crust. Looking at ice cream's performance, the premium segment remained under pressure. I can tell you, though, that the super premium segment did well with Häagen-Dazs Gelato. Our snacks business that includes Drumstick and Outshine bars recovered nicely also. In confectionery, the growth had a slow start due to the tough comparisons and general trading conditions.
The ongoing successful rollout of Butterfinger Peanut Butter Cups continued to be one of the key drivers of growth. Coffee-mate maintained its growth momentum, helped largely by seasonal flavor innovation. Natural Bliss, our all-natural dairy-based creamer, had another good year and remains a platform for future growth. We also had a successful launch of Coffee-mate 2Go, concentrated creamer in handy pocket-sized bottles. Innovation also ensured the pet care business in North America to continue to grow well. Dog Chow, Pro Plan, and lightweight cat litter were some of the highlights. The brand Beyond had an important launch in the fast-growing natural segment. Moving on to Latin America, there was good organic growth helped by pricing that's reflective of inflationary pressure. Consumer sentiment varied across the region, yet most markets did well. All of Nestlé Brasil's categories grew.
Double-digit growth in coffee, largely thanks to Nescafé Dolce Gusto, Ninho and Growing Up milks, Kit Kat and confectionery, Nesfit and biscuits, and NESCAU and cocoa and malt beverages also made very strong contributions to the market's performance. In Mexico, the changes in fiscal legislation did affect consumer sentiment. NIDO, Nescafé 3 in 1 mixes, Nescafé Dolce Gusto, and Carnation were some of the biggest growth drivers. Across the Latin America region, pet care delivered a broad-based growth. It is now a meaningful size business for us in the region. Dog Chow, Pro Plan, were again the main drivers of growth. We also had a successful launch of our Revena natural dog food in the specialist channel in Brazil. In terms of trading operating profit, despite higher input costs, the zone's margin improved by 60 basis points to 18.8%.
This improvement was thanks to many factors: lower restructuring costs, the non-recurrence of the Waggin' Train withdrawal in 2013, if you recall, and ongoing operational and structural efficiency gains and pricing. Altogether, this offset input cost increases. Moving to zone Asia, Oceania, and Africa. At the 9 months, we talked about a slowdown in AOA compared to half year structural costs. Lower input costs were partly offset by higher distribution costs. Moving on to Nestlé Nutrition, with a 7.7% organic growth and a 3.6% RIG. A strong result given the tough comparisons in 2013. From a geographic perspective, there was double-digit growth in AOA, despite disruptions in many markets due to political unrest. Latin America also had a good year with many markets contributing to a solid growth rate. North America and Europe were more challenging, resulting in relatively flat growth.
Infant formula continued to be the key driver with double-digit growth. We continue to invest behind our brands. Our super premium line, illuma, and the premium products NAN and S-26 were again the highlights. Many markets delivered very strong growth, including China, the Middle East, Indonesia, and the South Asia region. Happy to report that Wyeth Nutrition had another good year. In baby food, infant cereal saw a steady recovery in the U.S., with strong contributions also coming from Brazil, Central West Africa, and Pakistan. The organic fruit puree pouches for infants combining good nutrition and convenience were a highlight for meals and drinks in the U.S. Despite pressures coming from higher input costs, trading 80 basis points to 20.8%. This was driven by a combination of active portfolio management, a solid performance in Wyeth Nutrition, and efficiencies across the value chain.
Moving on to other businesses, we achieved 7.1% organic growth and a 5.6% RIG. Nestlé Professional had relatively good growth, especially when you consider the very challenging out-of-home environments in both Western Europe and North America that together represent over half of our business. Not surprisingly then, the growth was driven by the emerging markets with China, Philippines, the Indochina region, the Middle East, and Russia. The beverage solutions continued to perform well, and this was helped by the rollout of new technologies behind our Nescafé Alegria and Nescafé Milano machines. Dessert solutions also had a good growth. Moving on to Nespresso. Nespresso grew in all regions. Our ongoing focus on quality and the many investments we made and continue to make in products, machines, and services delivered strong results.
As I reported at our last call, the successful launch of the VertuoLine system in North America is creating a new premium coffee segment, and we're very happy with the progress so far. Nestlé Health Science growth was primarily driven by strong performances in Europe. We continue to drive new innovations across the portfolio. For example, new products in our Vitaflo business in the U.K., a new Boost bottle in Canada, and the Meritene range in Europe. Last but not least, Nestlé Skin Health had double-digit growth with strong performances in all businesses and geographies, particularly in the Americas and in Asia. The trading operating profit margin of other businesses increased by 140 basis points to 19.1%. The drivers of this were good performances across all other businesses and an exceptional contribution from Nestlé Skin Health.
I have to say that it is a business whose profitability is traditionally weighted towards the second half. I've talked a lot about our product categories as I've gone through the zones, but this slide does serve to highlight where we have challenges and successes from a category perspective. Powdered and liquid beverages had good growth driven by both coffee and cocoa and malt beverages. Highlights being Nescafé Dolce Gusto, Premium Soluble Coffee, Milo, and NESCAU. Both coffee, cocoa, and malt beverages contributed to the trading operating profit improvement of 40 basis points. Waters we've covered as a GMB. The milk products and ice cream results reflects the challenges we've had in peanut milk in China, and relatively flat growth in ice cream. The 90 basis points improvement in trading operating profit margin was driven by lower structural costs and pricing more than offsetting increased input costs.
The performance of nutrition and health sciences clearly demonstrates the growth pillars we have here. All elements contributed to the 210 basis points increase in trading operating profit margin, coupled with exceptional contribution from Nestlé Skin Health. Prepared dishes and cooking aids performance is no surprise, affected by the challenges we're having in frozen, despite a strong ambient culinary performance driven by emerging markets. The profit improvement here is mainly thanks to cost savings from all areas of the product group, and strong growth in ambient. Confectionery is a similar story to the first half. As you can see, the growth is driven by pricing in response to inflation. A growth highlight remains KitKat in emerging markets. Some larger markets, particularly developed markets, have seen intense competition.
The 210 basis points decline in profitability is driven by much higher input costs and difficulty to take pricing in developed markets. We continue to see good growth in pet care in both emerging and developed markets. The profit improvement is mainly due to the non-recurrence of the Waggin' Train withdrawal in 2013. That, ladies and gentlemen, covers our business review. Let's now take a closer look at our income statement. The trading operating profit margin was 15.3%, up 10 basis points as reported, and up 30 basis points in constant currencies. As you can see, a driver of this improvement was the cost of goods sold. They decreased by 30 basis points, a reflection of the ongoing benefits from product mix, our efficiencies and pricing actions, that more than offset increases in input costs.
Distribution costs for the group as a whole remained relatively unchanged for 2014, although we did see some variability in the different parts of the world, as I mentioned in my previous comments. For marketing and administration, the 2013 structural efficiency gains, including in our pension plans, gave us some tough comparisons, but we made good progress in reducing our overheads. We also continued to drive greater efficiencies in our marketing while reinvesting behind our brands. Our consumer-facing media spend was up 5.8% in constant currencies. Digital continues to be a core part of our marketing strategy and now represents roughly 20% of our media spend. It has become a major influencer in the way we engage with consumers. Our R&D investment increased by 20 basis points. Some of this is related to the inclusion of Nestlé Skin Health.
The strong Swiss franc had an impact, as about half of our R&D costs are in Switzerland. Net other trading items were broadly in line with 2013. Next up is the income statement from trading operating profit to net profit. As I've said, the group trading operating profit margin increased to 15.3% reported, but up 30 basis points in constant currencies. Net income and expenses includes an impairment of goodwill of CHF 1.8 billion. Now, this mainly relates to the direct store delivery system as a cash-generating unit for both frozen pizza and ice cream in the U.S. As I explained in my Zone Americas review, we have seen continuous declines in these categories. This has meant that the cash flow projections needed to cover the asset base, as required under IFRS impairment tests, could not be sustained. Therefore, we had to take a goodwill impairment for DSD.
Net financial income and expenses were comparable to last year. Reported taxes have been affected by one-off items. Underlying tax rate is broadly in line with last year. Income from associates and JVs has changed following the L'Oréal-Galderma transaction. Net profit increased 490 basis points due to the revaluation of the 50% of Galderma and the proceeds of the partial disposal of our L'Oréal stake. As a consequence, reported EPS were CHF 4.54, up 44.6%. Here it is important to bear in mind that we have a drag on the net operating expenses, mainly due to monetary corrections driven by hyperinflationary accounting. In turn, this impacts net profit, which when coupled with currencies, has affected our reported EPS. Our underlying EPS, as reported, decreased by 1.7% to CHF 3.44. This is on the base of a strong 2013 comparison. In constant currencies, underlying EPS increased 4.4%.
The group's free cash flow remained strong at CHF 14.1 billion. While this figure includes the proceeds from the partial disposal of our L'Oréal stake, it is also a reflection of our ongoing focus on capital discipline, including all elements of working capital, CapEx, and a continuous focus on efficiencies and profitable growth. Working capital remains an area of focus. While we have not seen the same results as last year's strong performance, our efforts have delivered another year of improvements. I'm sharing this slide with you. As you can see here, the way we track our working capital internally. Working on a quarterly average gives a much more accurate picture than simply a snapshot at year-end. Another important aspect of the free cash flow is our CapEx, where we have stayed the course.
If you recall, Paul said back in 2013 that we would reduce our CapEx as a percentage of sales. I'm happy to report that with the help of our portfolio tool, not only have we delivered what you see in this chart, but we've also driven a more discerning allocation of our resources, driving value for the group. The next slide. The group's net debt fell from CHF 14.7 billion to CHF 12.3 billion, reflecting our strong free cash flow during the year at CHF 14.1 billion. More than offsetting the payment of the dividend of CHF 6.9 billion and the initial phase of the current share buyback program. The strong Swiss franc has again had an important impact on our financial KPIs. In fact, the cumulative impact of currencies has amounted to around 40% of sales since 2008.
Please bear in mind that the Swiss National Bank announcement we saw in January has created further uncertainty to face in 2015. Importantly, even in these volatile times, we remain committed to a sustainable Swiss franc dividend. As you can see on the next slide, this chart starts in the 1980s, but in fact, since 1959, we have never decreased our dividend in absolute Swiss franc. For 2014, we have again proposed an increase in absolute dividend. The proposed dividend is CHF 2.20 per share. To wrap up my part of the call, like I said at the beginning of this presentation, 2014 was indeed a challenging year, and I have to say, I am very proud of the group's results. We have delivered both on the top and bottom line. Our growth was broad-based in emerging and developed markets.
There were ongoing improvements in operational and capital efficiencies. Our portfolio has continued for tomorrow. With that, we expect 2015 to be similar to 2014, and we aim to achieve organic growth of around 5% with improvements in margins, underlying EPS in constant currencies and capital efficiency.
Well, thank you, Wan Ling. You really gave us the whole story. Let me, in the next charts, to share with you a few thoughts, highlight a few things that actually explain how we want to drive the delivering of results. Easy environment, soft trading conditions, you name it. Volatility, instability in many areas, and always say we have selective memory because there's never an easy year. What's happening today may induce people or companies to really go and shorten their perspective and time and start to focus and conditioning, actually, all what they do towards delivering today. While we do and focus on delivering today, but never we would do that with losing out of sight our strategic direction, the long-term perspective of this company.
I want to walk you through a few things that I already mentioned to you that is actually linked with certain strengths, competitive advantages, we can call it, but intrinsic strengths that are so characteristic for what I see in Nestlé. The quality of our performance, the quality, not only the figures, but the quality of our performance has dimensions and time. While we stay in the course of our strategic direction, that, in a few words, is this whole agenda about nutrition, health and wellness, and all the growth potential, all the added value that comes out of it. We are continuing to take the decisions, I would say, of the decision and the strategic considerations that will build this company also for the future.
You see here, we are definitely combining always the short term with long term, and that has promises, but that has obligations. We can do that because of what you see here. It is because of our intrinsic strengths, and I'm going to walk you very rapidly through them. It is also to be aware of certain challenges that we have today. Be aware of them, acknowledge them, and do something about them, and build again solutions for these. Then also to do and to invest today, because also before us, people have invested for us, so we can do and continue doing that for the future. The first thing is our intrinsic strength, and I must say there, I have mentioned them before. Our intrinsic strengths, that give us that resilience, that consistency over time.
These are definitely what I see strengths and competitive advantages of our company. You have the first thing is our people. I've mentioned it before, and every time I travel and every time I go wherever in the world, it is that strength that radiates and that motivates. It is not only the strong commitment to an alignment behind what we have been sharing with you in many occasions of a roadmap that actually says what we want to be today and in the future as a company. How we want to go about that, where we are going to look for growth? How are we going to organize ourselves efficiently and effectively? That alignment behind us, that talking the same language is one thing.
The capabilities and professionalism that we have, the fact that people that are knowing so well the realities of all parts of the world, and in a very volatile world, definitely an advantage. How we can rewire our organization operations everywhere, its people. It's the attitude too, the values they live and the way they go about their business. Actually reflecting so much what we say Nestlé is all about. It is about creating shared value. That's a strength. That's a strength that is even more relevant in turbulent times. The other one, it is foresight. Actually, I've mentioned before, foresight and courage. That translates into having today, the results of investments made before. Nestlé is going to have 150 years of existence next year. 150 years.
Actually, it started 150 years ago with one of these products that we're still selling today, Cerelac. It has been a story of every time repeating, reinventing, inventing new dimensions for the future, that's the strength that we are building upon now, that it is our obligation also to do it for the future and the next generations. That is why we are extending the boundaries of nutritional wellness. That is why we are investing in countries and taking it for the long term. That is where our strong portfolio comes out. That's where our global footprint comes out, that is what we do further. How we are organized. This combination of how you combine local with global. We are privileging, as an operational structure, decentralization.
Having the operational decision making as close as possible where the action, where the consumer is, where the reality is. At the same time, not losing out on global inspiration, we call it, on global ideas, rolling it out, having a common agenda, alignment behind the same song sheet, the road map, and translate that in actions and in results in every market. These are three intrinsic strengths that I want to highlight here that we have to build. It's not for free. You have to build it permanently, it's something that we have to leverage too. That is at the base of our consistency today and in the future. We have challenges, and we do have very strong challenges. Wan Ling has walked you through quite a few of them already. It's first of all, acknowledge them. Accept them as a challenge.
We have not done everything right. We have failed in connecting with new realities, and we have to see them as opportunities by correcting them and bringing the right actions and strategies in place. The first one is something that is not so much of our making. It is the Swiss franc, Wan Ling walked you through that. It is something that came to life all of a sudden a few weeks ago when the Swiss National Bank decided to unlock or unpin the CHF from the EUR, actually is something we have lived with for so many years already. You mentioned 40% in the last five, six years. Even if you take further back into the past, it's even more.
We have lived with a strong CHF, it has impact, although Nestlé has a natural hedge, we call it, because we do almost all of our production and sales in the regions where we operate. We have that natural hedge between revenues and costs. We do actually less than 2% of our turnover in Switzerland. We have also our debt and financing that is basically 85% in USD and EUR, because again, there we have that done where we have our operations. It has an impact. You cannot just pencil that away. We do export out of Switzerland. We have 10 factories here, two-thirds of what we produce in these factories are exported. Nespresso is a very good example of that. It impacts the added value that is generated in CHF differently. We have structural costs. We have our headquarter here in Switzerland.
We have R&D and give and take almost over 50%, two-thirds of our R&D is based here in Switzerland, so paid in Swiss francs. We have translational risk through the consolidation, and we always mention that. That's why we say constant currency, because over the last years it has had, although limited, but still has an impact. That calls for action, and we have to take that action further. Not something new, but we have to continue revisiting and rewiring supply chain logistics, renegotiate contracts with suppliers that do have import elements in their operations. We have to have transparency in our supply chains and go after these dimensions. That is what we have done. We have a call for intensity there to go faster. We have to for productivity gains.
The factories we have, actually we're going to inaugurate in a few months time a new factory for Nespresso here in Switzerland. They were all calculated around productivity. Now we have an additional challenge and look for productivity gains in these. That is possible. That is something, a strength of Switzerland where you are able to do that, and that is the base of our optimism to be able to do that in the future too. We have structural costs, something that is not linked with the Swiss franc, something we're going after permanently, be it here or in the world, and the actual recent strength of the Swiss franc is just inducing us to do it even faster. That's the Swiss franc.
We have other challenges, we have gone through this already, and one thing I've given you already, many points that highlights our plans we have in place. China. China is definitely the land of opportunity, and we have invested in China, but China has seen some changes. First of all, slowing of growth Still growth though, but slowing of growth with all what comes with it. It is our two biggest market now, second biggest market. What happens in China is very close to our heart, and we are really involved there to see how we can swing growth back into high gear. You have to say, Nestlé in China has grown last year. If you say Nestlé in China. What comes out of the Zone AOA is specific a part of the range, but in total, we have grown in China.
It is a mixed bag when you see these figures. There is good performance. We have mentioned it. We have good growth in ambient culinary, almost double-digit growth. Ice cream, double-digit growth. RTD coffee, the new way of drinking coffee in China. KitKat, as a brand, double-digit growth, and that's a brand that we have been building upon for a long time. Dolce Gusto, just starting and really up for a very good start. Infant nutrition, very strong performance last year. Nestlé Professional, that was a little bit suffering before last year, is back on a very good growth path. We do have many underperformers, and the underperformers are definitely below expectations. We have all the chocolates, coffee, as a category, I say. Yinlu, the whole brand, and all the products linked with that brand, Hsu Fu Chi.
What we have seen slowing environment, what we have seen is two fundamental things, and you see them here. A fast moving and fast changing consumer landscape and a fast changing trade landscape. We lost touch. We have identified that now for quite a while. We work on plans to reconnect. You see, in China, the consumer, never in the world, at least from what I have seen, has the consumer so fast fundamentally changed as in China. His expectations, his awareness of health, his digital drive that really jumps many changes. The fact of clear label, the awareness of so many dimensions there. How he combines traditional and really gives value to that, and yet at the same time lives with a combination of modern, new. How he works with, embraces the local brands, and yet also combines that with the international brands.
The fact that e-commerce is offering new platforms, new products, new categories, and can wrongfoot the traditional dimensions of our portfolio. That is what has impacted us. We didn't recognize that at time, and we have to reconnect there. That touches the whole marketing mix, and we have done that. That is now in the process of being rolled out. It's going to be taking momentum over the months to come, and specifically as from the second part of this year. Nescafé, back to 60/40% preference in all products we have. Yinlu, nutritional arguments and clean labels, and having more protein arguments. Hsu Fu Chi, how we combine that tradition and the traditional design of the brand, and yet give it a modern flavor without touching the fundamental traditional dimension of the brand.
How we go for digital and increase our PFME, our product fixed marketing expenses, our support behind the brands through digital. China, de facto, is in the Nestlé world, the most advanced already in digital, and yet it is having so many opportunities. Another part is the trade. A fast moving trade landscape. The word that is used is destocking. What happens is if you have a trade that is multilayer, multi different layers of distributors selling to distributors. Then you have another dimension of tier 1, tier 2, tier 3 cities. When you have a slowing down, you have still a push model, well then you have a disbalance. That's the balance we have to strike again between pull and push and going for the new trade channels too, as e-commerce. That is linked with restructuring and realigning also your grocery sales organization.
It is to organize around the e-commerce and combine that with digital and social media. It is linked with product differentiation and have for each channel the adapted products. It is embracing out of home and Nestlé Professional more deeply, and that is what we are doing. That has to give back this wind in the sails of good growth in China, something, a country we are believing in, a country we have invested in, and a country where we're going to see growth coming back shortly. Another challenge, I think Wan Ling walked you through quite a lot of details already there in U.S. frozen food. It is a category and a business for us that is challenged, and it is a fantastic category. It is a fantastic category because first of all, it is part of the North American landscape.
It has huge penetrations, Nestlé and our brands too. It is a very sizable business, CHF 23 billion business, it is projected to be growing for the next years to come, 2%-3%. The category has decreased over the last years 2%-3% every year. Why? Because the consumer has changed also the expectations that was not given through that category. Expectations, again, very many points in common. Fresh. How fresh is perceived, and how frozen is not perceived fresh, although it has all the intrinsic freshness in there, and we have to get that across. Less processed, natural, gluten free, the high protein drive that we see. Also the way people want to eat and not going from the three classical meals, but having more healthy snacking throughout the day.
These are new trends that a category, because of its success, was locked into not delivering or not understanding or not making these links, and we have to connect that category again and our brands with it. We have spoken in the Boston investor seminar about that, and you referred to that. It is linked with touching the whole portfolio mix, it is a fundamental work to be done, something we started already a year and a half, two years ago. It is linked with the quality and the freshness of the products, the ingredients we put in there. It is also going for the intrinsic quality of the category, and that's why we have this campaign, Freshly Made, Simply Frozen. It is to also go digital to get the right messages across. It is to support our brands much more.
The category was a little bit starved of brand support. You may remember we spoke about the fact that this category was driven into being on deal, there all efforts were just pricing. People don't buy prices, they buy value, and we have to get that back in there, and that is what is being done. It is also repositioning Lean. We are seeing that the whole Lean market, not only in frozen, in general is challenged. People don't want to go only for diet, they want to go for healthy lifestyles, and that's where Lean Cuisine has to move into and is moving into. It is also capabilities, and we are integrating also in Solon, a product technology center to really go about these new dimensions and to bring that as added value into that category. You see there's quite a lot of initiatives happening.
It is happening as we speak, rolling out. It started last year. These are fundamental changes that need some time to roll in, to hit, and to connect with consumers. The trade has a very high acceptance of all the plans we have. That is boding well for the acceptance also of consumers. We see that accelerating throughout the year as from the second quarter of this year in a much more meaningful part. These are just to show we have other challenges. We have things that's going well and others. These are the major ones that you have also identified. I just wanted to share with you that we accept them as a challenge. We acknowledge that, we are working on that, and we have plans that are being rolled out as we speak.
The last point I want to touch is how we position ourselves for the future. I have mentioned that Nestlé is a company that, yes, we do have short-term intensity. We are there to drive results today. We are living day and day and delivering that behind a common platform and a common strategy. Yet at the same time, we are investing. Part of the P&L is going for investments that we are going to enjoy later on. We can do that because this company has been driving this rolling building platform dimension, and we can do that because they did it for us in the past, building strong arguments, building strong portfolios and brands. Well, for us to do that also. That's why we are building on our nutritional health and wellness strategy in a very meaningful way.
The best example of that is our expansion of the boundaries. We are building through our food and beverage, which is the foundation of this company, our nutritional health and wellness agenda. That is where the biggest part of our R&D goes to. Yet at the same time, that is what is delivering the results today. At the same time, we have to build and make complementary growth platforms that have a lot of promise. Hence there, our new Nestlé Health Science that we started in 2011, that we started to build. Also last year by bringing Galderma in, the establishment of Nestlé Skin Health. These businesses are small and yet sizable. They do already over $4 billion, and that's just a start. They have and entail promise of profitable growth for the future. Nestlé Health Science, three, four years work on that.
We have selected or identified the selection of opportunities, growth opportunities that will differentiate and where we invest in science. I am not going to walk you through the details. We are going to have opportunities later on for that anyhow. We have shared and structured also that company behind these 3, I would say, businesses. Consumer care, specifically more intensively organized around healthy aging and all what comes with that and all the brands that already play there. Medical nutrition, a very scientifically driven dimension for specific inborn error metabolism, you read it there, pediatric care, also metabolism, metabolic care, and so on. We have this novel therapeutic nutrition that really looks for development of transformational nutritional therapies.
This is really building the future, that's where also we have taken stakes in Seres Health, for example, that really goes about exploring how nutrition can be linked with the microbiome and giving there also good answers in. We have engaged in venture funds to keep our ear close to the ground because there is so much happening in that field that entails so much promise. Same with Nestlé Skin Health. We brought it in last year through Galderma, an existing business. We have a very strong setup. We have leadership in the specific areas that they are playing in. You see there also we have defined the business and structured the business also behind 3 businesses. You see them, prescription, that is basically healthcare professionals handling our leading brands like Epiduo or Oracea. Self-medication, over-the-counter, Daylong, Cetaphil.
Very strong brands that we have there that are increasingly also fueled by more deeper science and our research and development than aesthetic and corrective. Well, these are definitely building blocks for the future. We're going to talk over time how we evolve there, they really entail an amazing promise of profitable growth. Another thing, that's my last one I want to share with you, is that a few months ago, here in the fall, I was sharing with you the establishing of Nestlé Business Excellence. To give that really the right level, under the leadership of Chris Johnson on executive board level. It is by bringing together Nestlé Continuous Excellence, Globe, and Nestlé Business Services. Each of them were initiatives that do have and have had a major impact in our organization.
Globe dates back from 2000, where we really went for harmonizing the business processes, standardizing data management, and also systems and technologies. In 2008, we had Nestlé Business Services. We have now in 5 markets, 5 business services. We have 1 central one here. There are services in our markets, yet there is huge opportunity there to go deeper. Nestlé Business Excellence, this whole mindset change of looking into each person, the 340,000 people of Nestlé, this whole drive and awareness of doing things more efficiently. Many projects that are converging to our savings that we have been communicating every year. We are a fundamentally decentralized company, I've mentioned that. The local global dimension. I'm a true believer of that part of our DNA. Yet at the same time, we have a size. We have a size that we have to translate into scale and into competitive advantage.
If we do and see, just as an example, the benchmark. We benchmark how deeply we are scaling up certain services, be it finance and control services, or be it HR service or procurement. There is upside, that is what this whole thing is all about. To really see how can we leverage our scale, our size into scale, competitive advantage, and unlock resources so we can invest for the future. That is going to translate or it's going to be done on 3 basic principles. It is all about simplifying, it is all about standardizing where we can, and it is all about sharing and leveling it up where we can. That is going to give us then these highly efficient support structures, and it's going to go deep. This is going to touch the whole dimension of our company, every part of our company.
We're all involved there, it's going to be a fantastic story because it's going to give us the speed and quality of execution in everything we do, with the only purpose to have the resources to invest for our future. To have the resource to invest behind our brands. I think that is what gives to Nestlé, what I would say with some pride, definitely these characteristics. Nestlé to be resilient, good times, bad time, resilient, strength into strength, be innovative, be groundbreaking, have this vision on and anticipate future dimensions, and build for them. Also this consistency. A quality I feel in our operations is dependable. You can count on the people, you can count on the company consistency.
Well, with that, I think I come to the end of my little part where I really wanted to stress a few intrinsic dimensions that are sometimes not mentioned with the right attention. I have said that one of our strengths is our people, and I want to, through this again, say how important I feel people are. They are, at the end, bringing all these results, and I want to thank them for that. With that, thank you very much for your attention. We are open now for questions and answers.
Thanks, Paul. For those of you on the call, if you want to ask a question, please press star 1 on your phones to join the queue. If you want to withdraw your question, please press star 2. Please limit yourself to 2 questions. Let's now take the first question from the call. The first question is from James Targett at Berenberg. Please go ahead.
Good morning, everyone. 2 questions from me. Firstly, just on the U.S. I wonder if you could give me a price and color on the magnitude of improvement that you saw in the second half or the 4th quarter. You have clearly communicated the need for repositioning of some of your brands to make them relevant. How satisfied are you with the portfolio you have in the U.S., particularly in frozen? They've been under review now for a few years. Is there still some prunings to come or bolt-ons? Secondly, just in terms of China, again, you flagged the need to reposition some of the Zone categories in China. That still needs to be done. Is the de-stocking element that's impacted the performance in 2014 broadly over now? Do you expect that to be a drag again in 2015? Thank you.
Well, on frozen, I think we have been quite explicit there. This is something that we're not rolling out now only. We are touching each. You saw we have 4 categories there where we have the leading brands, and we have been working on them now for quite a while. There is an acceleration of launches because when you start reformulating brands, repositioning, not fully, but repositioning, redesigning brands, also revisiting your communication, these are fundamental shifts. It's clear that we're not going to have them all at the same time. We have been doing already certain things in handheld and in pizzas quite a lot. We do see for Lean Cuisine and Stouffer's, the relaunches being done as we speak, with connection with the trade, some to come on in the second part. That is going to have to get traction.
That is going to have to get traction over the months to come. It is clear that momentum is going to be built up over the months, I would say second quarters and then further on. If you compare versus the years before, we had decreases. We definitely speak about vigorous growth again. It's good timing because North America per se, is again, consumer confidence is taking some additional colors and there is openness for it. I'm really optimistic to see good results coming off of all the efforts we're going to do. It is clear we have to have the trade first with the new offerings and before we really start to support these new ideas and new brands, and that's going to be also a little bit later on.
It is something that is going to take momentum, definitely. Now, in China, the destocking. It is clear, destocking, I spoke about the change in consumer. At the end of the day, that is what drives then sales. Yet at the same time, you have these buffers. There was definitely a system in China where through the, and I mentioned it, through the different layers and different dimensional cities, the first, second, third, and you had quite a lot of stock in the trade. You get a softer growth environment, a softer pull of takeoff, and you don't identify that as a company or as an industry. Actually, the whole mindset was push because it was growing, and there was nothing too much. All of a sudden, there's definitely accounting. All of a sudden, you slow down, and it pushes back upstream.
That is what we have been doing now for quite a while because you don't do it abruptly. There's still some remnants to be done, we have definitely now embraced also again, this whole pull model where you go really for the consumer, but then with the right offerings, and hence the whole reformulation of the marketing mix. These are not done overnight, that's again, coincidence maybe in the timing, but that's again, something that has to gain momentum. Also, the launches are coming in, are being rolled out. Again, not all at the same time. They're going to have a phasing because there is also efforts and people involved there. Our sales forces have to be linked to that. I definitely believe there's a good-- I saw that. We're going to go there in a few weeks' time again to see it in situ.
I see good things happening, there is very good arguments. Linking again our brands with the consumer. That is what matters, that is well done. That doesn't have the same, I would say, impact in time as, for example, destocking. We got the bat all at once. We're going to have the good rolling out and gaining momentum over the next months.
Thanks, Paul. The next question from the call, Jon Cox, Kepler. Jon, you have the floor.
Yeah, the call. A couple of questions for you. Paul, you seem to be talking quite a lot about the sort of the cost base in Switzerland. Obviously, in 2014, we saw a 30 basis point impact on the margin from that sort of slightly overexposed Swiss cost base. Given the fact the currencies at the moment seem to be pointing to a -6%, similar to what you had in 2014, would you anticipate another 30 basis point impact as a result of what's happening with the currencies? Are some of these measures you're talking about, you would think that maybe there'll be a reduction in that impact? That's the first question. A second question, maybe for both of you, and your thoughts on dividend and buyback. Again, you've increased your dividend, which obviously is good news in this environment.
You have the buyback going. What should we expect going forward? You seem to have maybe moved the mix back to buyback plus dividend from, say, dividend from the previous CFOs. I'm just wondering what you think of that. I just want a quick sneaky number three question, if I can, just to come back to that China situation and the destocking. Am I right in understanding that it's because a lot of the products now are moving to e-commerce, and you haven't actually been there, so exposed, and that is the issue for you in China, at least partly? Thank you.
Well, on the cost base, and I may give some of the answers to you online, but on the cost base in Swiss francs, I have to remind you, for example, a few years ago, we had a Forex impact of almost 12%, I think it was, over the year versus our basket of monies there. That was an impact of 30 basis points. I don't see, and I'm not going to express because that would be very anticipative. The Swiss franc is going to have that impact. That's why we're going to work on that, to see how can we soften the impact of the Swiss franc revaluation. We have all year to do that. It's something that is not new. As I mentioned, we have been going after that now for many years.
We just feel there is a little bit of an acceleration or visibility from all sides. That's going to be done. Actually, I've done it over time. It is productivity gains, basically, and there are still upsides, and that's what we're going to work on. At the end of the day, also NBE is part of that solution too, in the sense of how can we really have support functions being better and more efficiently given. On the dividend and the buyback, maybe when you look at the , I think in dividend policy, you have shown quite a nice history, and we want to have some traditional qualities too. For you, maybe China, before you answer then the dividend on China, the destocking, I would not say it is e-commerce taking over. There is traditional trade, people go to stores, et cetera.
There is e-commerce, I feel while in China, it is reconnecting with consumers in general. We still have very good growth and very strong brands there going well in many areas. Some have weakened. They're still connected with consumers. We just have to add that additional new expectation on the consumer and build that in our brand architecture. E-commerce has gained a lot of traction. It's true. E-commerce has different portfolios that are offered that may out-foot the traditional dimensions of the consumer product landscape. That's where we want to reconnect. These are adjustments, some deeper than others, adjustments that we are making. We are engaged definitely in e-commerce as a trade channel in China.
What I do see, and I have mentioned that before, I think e-commerce, in all its expression and forms, is going to be actually, I think, proportionally more important in developing and younger markets where you don't have such a strong retail base yet. A little bit like the cell phone, how these markets or these countries are jumping stages, that's why we are engaged in digital, be it social media, because they're intimately linked to each other and e-commerce. That is also part of the answer we give in China, building these capabilities in an accelerated way and engaging with the big e-commerce players proactively and in certain dimension partnerships. On dividend and buyback, maybe if you're willing.
Hi, Jon. On dividend, we've repeatedly said that it's going to be a sustainable dividend policy. For 50 years, we've never reduced it in absolute terms. That has not changed and will not change. In terms of share buyback, you've seen on our cash flow statement, we've done CHF 1.5 billion of the CHF 8 billion program that we announced last year. To date, we've done CHF 2.5 billion, that is a program that we intend to complete by the end of 2015. That should answer your questions on both.
Thanks. The next question from the call is from Alan Erskine of UBS. Alan? Alan Erskine? We don't seem to be able to get that call. Shannon, can we have a question from the room? John?
Hi. John Revill, The Wall Street Journal. Couple of points. In your guidance, Mr. Bulcke, you say you're guiding for around 5% organic growth for next year. Does that mean you're preparing the way to go lower than your 5%-6% next year as well, after two years of missing it? The second point is, you describe these results as solid, but they are actually your weakest growth in five years. Is this solid compared to your peers, or how would you describe that? Just a final cheeky one as well. Just can you give us a bit more color about China in terms of the destocking? Is it basically you had the wrong products before and you've replaced them now, or just give a bit more color on what's happened in China. Thank you.
Thank you, John. You're always so nice to me.
Sorry.
In fact, we can talk later still. This around 5% is actually the best expression of a sense of reality, and answers your second question too. You said that with weakest growth and et cetera. You look at the world, and you see what the growth environment is of the world. We're part of that. What we did though is, again, building growth on growth, and do that also by outperforming the market and combining top line and bottom line at the same time. That is what I call consistency. I think that's what I meant with solid. I didn't say they are excellent, they are good. I said solid. That I think is what it is. I didn't fail the Nestlé model per se. I explained that here quite explicitly last time.
The Nestlé model is something we're aiming at for the medium term, that is built upon, sometimes we go over it, we don't excuse ourselves for that. Sometimes we're under it, you see it over a medium term, it is right there, 5%-6%. Why? That's what we feel we are working for, we are conditioning the company for, that is what the environment over time should allow us to be doing. We are aiming again at 5% because that's how we are. Sometimes I say to myself we are arrogant because that is what we are aiming for. We have all reasons. We're not asking a low weight on our shoulders. We are struggling to strengthen our shoulders and say we're going to do whatever it takes to get to 5%. That's our aim.
That is what helped us, for example, last year to over-perform because we aim to 5%. Around 5% is a term that I feel is appropriate for what we feel is in there for this year.
China, just give a bit more color on the China situation.
The destocking.
The destocking.
I do believe, when I said in China, there is always this dimension of destocking. I don't feel that is right to explain. That's actually an effect. That's a result of something, softer environment, softer this, models of push, balancing push-pull. I feel it is much more important to understand, I feel as a company, are we still connected? We are. We are very hard on ourselves because we go what doesn't work, what works, let it go on. Certain dimensions, certain brands, and certain parts of our brands, Yinlu connects with the Chinese consumers millions of times a day. Yet, there is a movement, a shift, and that shift we should translate into that brand to be able to connect with that shift too. That's what we're talking about. Destocking is what you see. That's the effect. That's what hurts on the figures.
There's underlying something more important that we are working for. We do one, but basically what matters is the other one. I feel that has a softer impact. Once you reconnect, you reposition, you reformulate, takes time. All these things, they have a longer timeline to really impact, and let's wait for that now.
You had the wrong products in some places, so now you're replacing them.
Sorry?
You had the wrong products in some places.
No.
Now you're replacing them.
Again, you have this tradition, for example, Hsu Fu Chi is a brand that is so much tradition, so much linked with the landscape of the Chinese consumer. We're not going to throw that away. That has value. Yet, at the same time, we have to build behind this brand that also without disturbing the tradition, the new dimensions, the new expectations. It's not wrong or right, it is evolving. That is what we're doing. We're not throwing things out and restarting. There's no rebooting of certain brands in China. There's this evolution of connecting in different dimensions. Brands do have different faces to the consumer. We add them so that they respond to the new expectations.
Okay, let's take that next question from the call from Alan Erskine of UBS. Alan, please go ahead.
Good morning. Can you hear me? Hello?
Hello, yes.
Yes. Do you hear us?
Yes, I can. Perfect.
All right.
Okay. Just two questions from me. Technical questions, really. Firstly, Wan Ling, you mentioned that the margin performance of the other division was helped by the fact that Galderma is seasonally weighted to the second half. My question is: can you give us an indication, if Galderma had been there for the whole year, what the difference would've been to the margin? My second question was with regard to the performance of nutrition in the fourth quarter. If I've got my numbers right, it was a very strong performance on lapping, a very strong performance in Q4 of 2013. I wonder, could you just give us some color as to what were the main features for nutrition in the fourth quarter? Thank you.
Well, on the margin, I think you can answer, but you did it already because you said the business of Nestlé Skin Health, Galderma, is weighted to the second part of the year. As we had it only in the second part, we have an advantage there that's going to be softened if you would have taken it the full year, and that's what we're going to have this year. Basically, I feel this is the answer. I would like to go in more details there. Then on nutrition fourth quarter, maybe you, Heiko, on nutrition, you can give us some light of why is nutrition going well and specifically in the fourth quarter. You want to say something first?
I just want to add, too. Hi, Alan. On the Galderma impact, it's obviously not something that we publish because it's part of our other businesses. If you look at our annual report, you can very easily calculate the impact. It's there.
Alan, it looks like.
It's there. We don't publish it.
You have it, but we don't give it. Okay, Heiko, now just to highlight a little bit what is Because nutrition has gone well for us, and infant nutrition in certain areas, in certain geographies, really well for us, and we saw some acceleration. Why is that?
Yeah. If you look at the performance of nutrition-
Is the mic on?
Yeah.
Yeah. That's on. If you look at the performance of Nestlé Nutrition in the fourth quarter, it's I would say more continuation of also the quarters before. It didn't particularly grow more in the fourth quarter than in the previous quarter, but it's true that last year in quarter four, we had a very high comp to compare with. I would say similar to what Wan Ling and Paul were highlighting is that very strong performances in Asia across the board. Yes, in China, but also in the rest of Asia, particularly on our formula and our gum businesses. I would say on e-commerce is an area which there were some questions about. We have certainly also accelerated our performance there.
That's maybe something that throughout the year, we're seeing quarter by quarter an acceleration of our business there.
Thank you.
The next question from the call is from Alexia Howard of Jefferies. Alex, go ahead.
Good morning, everybody. It's Alexia Howard from Jefferies here. Can I just confirm how you've treated the organic growth of Galderma and other acquired skincare, skin health assets this year? Have you included these within the group organic growth number or within the M&A number? If you have included it within the organic, could I ask how many basis points contribution it's made to the group number? On a separate tack, could you give a little more on how the VertuoLine launch in the U.S. has progressed? You say you're pleased with it, but perhaps you could flesh out what's been achieved to date with the launch and if it has driven a materially higher rate of growth in Nespresso in North America.
Maybe if you go, although we have given already on Galderma some answer on that, on the VertuoLine, I must say it is really going well. Nespresso Classical is going well. It gets quite good traction. The acceptance of VertuoLine is going very well. What is very important to us is the usage of it. There's a high throughput on the people who bought that new machine. It is really giving very good marks on acceptance of the product. That is very important again. It is something that starts in the biggest coffee market, it has a lot of promise. We're very happy with how the VertuoLine, together with the Nespresso brand in general, is going in the U.S., I would leave it there.
Yeah.
On Galderma-
On Galderma, in terms of organic growth, yes. The organic growth for Galderma for the six months in the second half, when after we bought, we finished the transaction, it's included in our OG. That is included, and the impact is about 10 to 20 basis points.
The next question from the call is from Gerry Gallagher of Deutsche Bank. Gerry, go ahead.
Good morning, everybody. Thanks for the question. Want to come back on the guidance, if I may. I couldn't help but notice the inclusion of the words, "We aim to achieve organic growth of around 5%," I think those two or three words, "be able to achieve" are new. I appreciate, Paul, that you've made the comment in the past that excuse to miss numbers, and that's why you've stuck to the five, around five. Firstly, is this a way of giving yourself additional room around the 5%? Secondly, aligned to that, can you give us a sense of the impact of pricing in terms of the contribution to organic growth? Thank you.
To read around 5%, there's quite a few words to get it appropriate. I mean, seem to relax an organization like Nestlé and say, "Let's adjust a little bit our targets now, let's go for three to 5% span," you can actually choose then. I think it's maybe arrogant. They should maybe not be so arrogant. What it does, though, it aligns an organization like Nestlé. Actually, the around 5% is only for me, because everybody has another figure, that is linked with the potential of the reality, the potential of the business he's responsible for. I think that's actually the way we work. The internal targets, to a certain extent, is what we pronounce to the outside world.
We don't play around with, we go for this, but we hope we can. The other question, I must always answer that later on.
Okay, the next question from the call is from Warren Ackerman of Société Générale. Warren, please go ahead.
Good morning, Paul. Good morning, Wan Ling, Stefan. It's Warren Ackerman here at Société Générale. I hope you can hear me. It's not been a great line. The first question from me is around confectionery margins down 210 basis points in the year. Some of your peers have pointed out that Nestlé has taken no pricing in chocolate in Europe in 2014. I'm just a bit surprised by this, despite your comment about the difficulty to pass that on given the intense retail backdrop. I mean, you've clearly been hit by much higher cocoa costs, as we can see the operating margin in confectionery. Is your pos-
Paul, if you could tell us what's your raw material cost expectation for 2015, whether that effectively is driving the pricing lower. My second question, well, I will come back to FX. Could you-
Can't hear you very well. Celine, could you repeat the second part of your question? We couldn't hear it.
Yeah. My first question was about weakening pricing as well as the raw material outlook for 2015.
Yeah.
My second question.
Okay. Yes, second question.
Yes, was on FX. At current rate, what should we expect in terms of impact on top line? Am I right from what you said on the first question that the impact on margin would be less than 30 basis points?
FX, yeah. Well, I think.
Yeah. Hi, Celine, it's Wan Ling here. First of all, you know we do not guide pricing. Pricing is something that we do locally, we don't do it on a group level. Having said that, our expectation is no different going into 2015, which is emerging markets. In hyperinflationary countries, we should be able to take pricing. Developed markets, Western Europe, North America. North America, we might be able to do something in Q4. We were able to take some pricing in terms of frozen, actually. Western Europe, more of the same. The dynamics going into 2015 will be more or less the same as 2014. In terms of input costs, our guidance is the same as 2014, in the low single digit for input costs.
In terms of FX, again, same thing, we don't guide in terms of FX impact on our results. One thing to bear in mind, there's the translation and there's the transaction. From a transaction standpoint, Paul talked about it in his presentation, almost between 80%-90%, there's not a mismatch between sales and cost because we produce where we sell. 2% of our sales is basically in Switzerland. From a translation standpoint, yes, but we don't guide on that. From a transaction standpoint, there's not a significant mismatch because like I said, between 80%-90%, there's natural hedge.
The next question is from the room over here, please.
Bernd Biehl, Lebensmittel Zeitung. Hello, Mr. Bulcke. You talked about business excellence and an impact of 10 or 20 basis points. We are talking about efficient consumer response and value chain management for 20 years now. Don't you have higher impact in your company with all these efforts you drive internally, or do you give it away to your customers, to your retailers, or to your end consumers?
Giving away is a bad term, because it sounds like for free. First of all, in BE, we bring together already initiatives and dimensions of our company that are already there. That is what has helped us also to really drive our performance over all these years. We speak about growth with an enabler. We're speaking about our Nestlé Business Excellence, Nestlé Continuous Excellence efforts that really driving a lean thinking through the whole organization. It is always many things coming together that allows you to deliver. The results are part of what we deliver. Other part is we have increased our R&D over the last years. We have increased also our, as we call it, PFME, our support behind our brands. We have, every year, more added value products that we have to communicate deeper for. We're building the platforms for the future.
That takes resources like the Nestlé Institute of Health Sciences, that is supporting Nestlé Health Science as a business, and that has a lot of promise. These are upfront investments. What we do with whatever comes out in more efficiencies and more effectiveness is to really use that as a fuel for growth. That's how actually we are calling Nestlé Business Excellence, by bringing these three dimensions together. By going deeper into the organization, there's going to be resources. We do it for that. Resources to fuel growth. Part of that goes to the bottom line. Part goes there to customers. Yes, indeed, to keep on being competitive in our relationships with them versus the others. It's a matter of resources. We tell them where we have upsides, and I think we have still upsides there.
I don't think I spoke about 10 basis points. The 10 basis points or increasing margin, we say, is a target that we. Again, that is something we set ourselves for. That is, if we go as a company and leverage our scale better, if we do Nestlé Continuous Excellence well, if we are smart and driving added value to our products, that should have an effect on margin. That's why we say we go for margin. What we get in additional resources, much of that goes behind supporting our future.
Do we have another question from the room? Yes, Harrison? Well, okay.
Hello. Thank you very much. I just have two questions. Two local questions, I'm Valérie Beugnet from Le Temps in Geneva. My first question is, you will propose Patrick Aebischer to be elected at the next annual general meeting. I would like to know if you could just comment on what you think he can bring to Nestlé. My second question, sorry. You said the productivity in Switzerland must be raised because of the Swiss franc on your 10 factories. I wanted to know how very concretely do you think you can raise the productivity, and if it will have an impact on your employees here in Switzerland. Thank you very much.
Well, I think if you see the track record of Patrick Aebischer, can he bring something to Nestlé? If you then see Nestlé being increasingly on a drive, if you see what we want to stand for, it is to drive enhanced quality of life of people through nutritional wellness based upon increasingly science-based innovation. He is somebody who has a passion for exactly that, and how nutrition is part of a healthy lifestyle, and science, et cetera. I think it's a very strong addition to a board of a company that has the same agenda. I see that as very positive. Now on productivity in Switzerland, what we said is, that doesn't mean taking people out. These kind of factories are growing, and we have to be effective in competing, even with the Swiss franc, of having these factories having more production.
We are going to absorb that with the same people, definitely. We have a natural outflow of people. Should we replace them? I don't know. We're going to have to see. Definitely, there we are in direct discussion with our employees to see how can we be more productive. The easy part, what I see a little bit of too easy for us would be we take 10% people out. That's not the answer. We have invested. I have mentioned our people here before. They are driving results of this company. There are productivity gains to be made together, and that's what we're going to do. We start to have saying also, should we increase our salaries? I don't think so.
If you see that Nestlé alone has reduced price on 600 products, while inflation in Switzerland should, at least if there is one effect that we would expect of having the strength of the Swiss Franc coming in, is that quite a few products should go down in price because there's still quite a lot of imports here. We have to see that all together, and that is what we will do.
The next question from the room, Hara San?
Hello, Katsuhiko Hara from Nikkei. I have two questions. The first one is about the Swiss Franc. In the actions that you will take to encounter the situation, you did not mention moving the production or the R&D or the headquarters out of Switzerland. Maybe you feel that is too extreme, or given the situation with the immigration as well. My second question is about Japan. Since you're doing so well with the innovations, do you have anything in mind that you want to take out to the world and expand?
Let me first answer on Japan. Japan is a good story, that's in spite of all, you see there's an environment that wouldn't use or help you to have all the arguments to say, "Well, I'm not growing because look at," then there you go. Do we have vigorous growth in Japan? Why is that? Because of creativity, very innovative ways of going about the business, bringing new elements in. Actually, we have been speaking about Pepper, which is small computer. These are, well, not only those, it really makes an impact, these are all ideas that came out of a market that are, I do believe, are totally useful for many other markets. It's an attitude.
It is not accepting a no as an answer, finding new ways, digital, going deep in there, new systems, adding value to the base products we have, and build value around that for the consumer. Actually, I think we're going to have one of these Pepper here when you go out a little bit later, or two, so you can really shake hands with them. It's very cute. You see, it's again, quite a few things that fall together. There's one common denominator on that thing, is it's entrepreneurship. Going after this, so much value to be created, even in countries that don't have that natural, I would say, pull effect of growth. That's induced growth, definitely. You see KitKat again, last year, very good growth. KitKat, that was already a sizable brand in Japan. Well, it is growing like it just started.
Nescafé, very strong growth there, too. On your second question of moving, these are the questions that you get then, is Nestlé going to move? Well, we are a Swiss company. We have our headquarters here. We have R&D, if R&D grows, then you have tendency of growing. We have factories. We're going to inaugurate in Romont, in a specific factory. It's clear there's a decision taken to a few years ago. Would we take the same decision? I don't know. We have to see. It is clear that decisions are made, take into account many dimensions. There are so many good dimensions here in Switzerland. You have just to see, would that be the same equation today? It is not only the strength of the Swiss franc, it's part of, I would say it's the minimum part.
It's more that framing condition of Switzerland that I feel with immigration, with et cetera, with that I think Switzerland has to think about that. I'm saying we're going to translate or bring or export parts of our activity to the outside world. I'm not saying that. What I'm saying is, if we would have to expand something here, well, I would think twice. That's another way of seeing it. I think we, and we are part of Switzerland, we in Switzerland have to think about that.
We have a next question over email from Johannes Ritter of the Frankfurter Allgemeine Zeitung. Two questions. If Ferrero was for sale, would you be interested? The second one is, why did the operating profit as a percentage of sales fall in 2014?
You answer this. The first one, I'm sorry. I'm not going to answer that. Actually, this family is in a special moment, and I respect that, I'm not going to have comment on that. On this, did operating profit as a percentage of sales fall in 2014?
Yeah.
There's a reverse.
Yeah. Trade operating profit was up both on a reported and constant currency basis.
It didn't fall. It end up.
It was up in constant currency by 30 basis points, so.
We have time for one last question from the room. Perhaps, well, two. Let's Ueli and then Natalie here.
Ueli Ruch, AWP. Two questions from my side. First, on acquisition. Is acquisitions actually becoming more of an issue if the Swiss franc should stay on this higher level we've seen in the last weeks? Secondly, on financing, we've seen negative rates on some of your bonds in the last couple of weeks. Does this have any impact on your financing policy? Thanks.
You can answer that.
This is clearly a very interesting time that we're in, as a company, Nestlé, we're obviously going to leverage whatever favorable condition that's out there. That we will continue. In terms of M&A, we don't guide in terms of specific transactions. Clearly, we as a company, our first focus is on growth and investing for our future. To the extent that there are interesting acquisition possibilities out there, we're always looking at them. We don't guide in terms of specific names.
No. Also the Swiss franc. The Swiss franc is stronger. If you buy something in another country, the natural hedge plays again. I don't think this is an impact. That's not part of our consideration per se to do acquisitions.
Okay. Perhaps the last question to Natalie.
Hi, Natalie Lacroix from the AFP. I'd just like to come back on the pruning of your portfolio. Back in 2013, you said you were starting a major review of the underperforming brand. Could you let us know where you stand now in the process? Shall we expect some form of acceleration on this? My second question would be around artificial flavoring. Two days ago, you announced that in the U.S. you would remove artificial flavoring from confectionery. Could you let us know if you intend to extend that to Europe or to other categories, and what that says about consumer trends? Thank you.
On portfolio management pruning. Portfolio management is not only about pruning. Portfolio management, pruning is part of it, but portfolio management is to have insight and to make that shared with people who decide on what we expect from our sales, as we call categories or products or brands and markets, what we expect from them. By defining that very explicitly and build that into your whole planning process, you create an awareness that each sale has to earn its place. When it does, then we invest even more. It is also a tool that is not only pruning, it is also to decide where we allocate our resources because we have higher possibility of winning. It is driving better profitability and growth, but has prospect of having our agenda and lead that category, et cetera.
SKU management is one of them where we really prune, because there we take out what is really more ballast than enjoyment. What's important is we say we're going to accelerate portfolio management. We had portfolio management, what we did is actually make that awareness much more visible and explicit in the decision criteria, and also make that decision criteria much more felt through the whole organization. That is now built into the strategic planning process in a very fundamental way. Artificial flavoring is something we have been working on for quite a while. This is not because it knows it. What we did in the U.S., we said at the end of the year it's over. That's a little bit linked with the commitments that we have publicized on many other areas.
You may remember in our annual report, we said, look, instead of having these internal objectives and all, in all transparency, why are we not putting them outside and share them and say, that's what we're going to do. That's what we're aiming for. That's what we will do. We report, and you're going to see now in the annual report of this year again, we report on last year and how we're doing. Commit for the next years to come on many of these issues, too. One of the biggest chunks of this commitment is what we want to be as a company, Nutrition, Health and Wellness. Well, artificial flavors, we've consumed that, although fully safe and all, but that's the sensibility that consumer has. We answer to that.
We have done that already in all products that go specifically to kids, like Smarties and all that. They don't have that for many years already, while we commit to the outside world to do it in the whole range of chocolates and confectionery in the U.S. That's a move that is in Europe, too. We do something in the U.S., the Europeans, we don't care because the insights, the way to do it, all that we apply it then worldwide over.
That was the last question. Perhaps your concluding words?
Well, my concluding words is, I just want to stress that results are coming because of certain qualities that you have to build. It's not for free. This combination of building, and yet at the same time delivering, strike that balance is what I see as one of my personal objectives, to keep that balance going. To invest, yet at the same time to deliver. We aim around, et cetera. That is what guides 340,000 people. That's what we all together want to deliver. We're going to work for that, and we're going to do that, again, in this consistency, I would say, and balance that Nestlé has been characterized for. We will keep that. A lot of energy going into that, too.
With that, I want to thank you all for having shared this time with us and show interest in our company and see you then in next occasion. Thank you very much.
Thank you, Paul. As usual, we're happy to take any follow-up questions via email or Twitter. I'm sure you know the addresses. Thank you very much.