Good morning, ladies and gentlemen. Welcome to our Full Year Results conference here in VIVE. This conference will be held in English, but you can also follow it in French or German using the headsets provided. Or if you're following watching the webcast, you can choose the right language by clicking on the respective link on the webcast page. Now let's start.
As usual, we will take this slide as read. Paul, you have the thought.
No. Thank you, Al. Thank you. Good morning, all. Welcome to our full year results conference.
And I must say thank you for your interest in our company, the people here in person, also the people listening in via the phone and also the webcast. So good morning to you all. I have here on the podium with me, Wandling Martello, our Chief Financial Officer, who shares this podium with me. I have also the whole executive board here in front in the first row. So and for the first time for the full year results conference, we have Stefan Katzikas, our new Chief Technology Officer and also Marco Setembri, Head of Nestle Waters, who took over in December of last year, Peter Voth also the first time for the full year results, Head of Human Resources and Marshall Roland, who is responsible Neste Professional.
They will join us for the question and answer. As you have seen and you have seen the results this morning and Wendling is going to give more details, but let me very fast give some comments on them. These are a good set of results. There are solid set of results, operational results for the year. We can talk about the macro environment that was soft, soft growth, actually below recent levels in emerging markets.
And I would say minimal or no growth at all in the developed markets. And our response to that has been to accelerate actually our innovation drive. I have been speaking about innovation every time I have been talking to you, but we have accelerated that. And in fact, 2013 has seen an incredible number of new products and the rollouts worldwide over. We have increased combined with that our brand support and that's very important.
And we have considerably increased our brand support because that's the link with consumers. And in difficult times, that's the right way to do it. And also, we have assured that our pricing was reflecting the consumer needs in this environment. So we had a substantial softer pricing. And that all gave us impetus.
And what you've seen is that our real internal growth has gotten more momentum. And that together combined with our structural and cost savings efficiencies has enabled us to, yes indeed, again, to deliver margin improvement and also very strong cash flow. So we also intensified our portfolio management. We have been talking about that in recent times and more specifically last time I was sitting in front of you. And we have done that by, yes indeed, putting the right resources and the people behind the right ideas, but also by defining and reinforcing our strategic direction.
That is all about nutritional health and wellness. And a few years ago, we have also started with Nestle Health Science where we spoke about extending the boundaries of nutrition. And a few days ago, we communicated to you, we have shared with you also the creation of Nestle Skin Health SR by bringing in the 50% stake of L'Oreal of Galderma into Nestle. And that's again a very important step in that definition of enhancing quality of life, which is all about nutrition, health and wellness. What we are doing there is for Nestle is extending the boundaries of health and wellness.
And we can talk about that later. It's a major, major platform of growth for the future. That is a few introductory remarks. And Marisa, Wendling, I hand over to you to comment on our results of last year.
Thank you, Paul. Happy Thursday to everybody here as well as those listening in. I am going to touch on those highlights Paul has just mentioned adding more detail. I will take you through our income statement, our cash flow and operational performance before handing it back. So on this slide, which is 2013 full year highlights, you will see that we have it was a challenging year around the world.
Our strong rig of 3.1% reflects our commitment to be competitive in an environment of generally soft commodity costs and also of subdued consumer sentiment. We have grown. And we have grown thanks to keeping in touch with our consumers, delivering products that are not only nutritious, great tasting, but also affordable. And we have done so by focusing on efficient operations and profitable growth, reflected in our increasing trading operating profit. This margin improvement was delivered while we sharpen our competitive edge by increasing our investment behind our brands.
You will see on the following slides how our continued investment in marketing paired with innovations and excellent execution in the market contributed to our 2013 performance. Our operating cash flow remained very strong at CHF 15,000,000,000. This was a great year with a further reduction in working capital, especially coming on top of the exceptional performance in 2012. Finally, our underlying earnings per share were up 11% in constant currencies. I will now take you through some of the key elements that help deliver this, but let's first take a look at the evolution of margin in more detail.
As I said at the half year, we have experienced a soft cost environment, generally in our raw materials. And we have been disciplined in delivering efficiencies from our operations. NCE, Nestle Continuous Excellence, once again delivered over CHF 1,500,000,000 in CHF and contributed to a 70 basis points decline in the cost of goods sold. Distribution costs fell by 10 basis points and admin costs also fell by 40 basis points, reflecting structural efficiencies including in our pension plans. We continue to invest substantially behind our brands, increasing the total marketing spend by 60 basis points with consumer facing spend up 16% in constant currencies.
Our digital spend was also up, up 40%. Our net other trading expenses increased by 40 basis points and this was mainly due to restructuring. Overall, we compensated for the many external events around the world that are expected to be part of doing businesses in about 190 countries. We increased our brand support and had a higher level of restructuring, while also increasing our margin. Our trading operating profit was CHF 14,000,000,000 and the margin was 15.2 percent, up 20 basis points reported and up 40 basis points in constant currency.
As a footnote, I know many of you still benchmark us on the old on the previous EBIT margin level. There is a better improvement at that level, 60 basis points before currency impact. So moving on to the next slide to complete the income statement. You can see here the net other operating expenses were up by 90 basis points. And this was due to what Paul mentioned our intensified portfolio management.
Taxes were in line with our guidance of 27% to 28 percent with the underlying tax rate at 27% and underlying earnings per share in constant currencies were up 11%. Looking at the group's operating cash flow, it remained very strong at CHF 15,000,000,000. As we commented in February of 2013, the remarkably strong performance we saw in 2012 was likely not to be repeated. However, the discipline across the organization in managing all aspects of working capital contributed to the positive trend as you can see on this chart. That completes my review of the group numbers.
Let me now move to the review of the businesses starting with our regional growth. First, let me highlight that we have again achieved growth in both our emerging and developed markets. The emerging markets had an organic growth of 9.3%, now representing 44% of the group's sales. The developed markets grew organically at 1%, but our rate was in fact higher at 1.9%, which I think is very, very impressive. Despite the differences in trading environments across the three regions, our markets have performed well and have delivered a positive and in many cases accelerating rig performance.
Moving on to the growth story in more detail, let's have a look at the zones and globally managed businesses. They all delivered positive organic growth as you can see here, with most also having a solid REIT performance. Looking more specifically at the Americas, the region finished the year broadly in line with how it started. A key part of this was the steadily improving rig momentum in the second half, especially in Latin America. The Zones growth was delivered in an environment that remained subdued in the North and in an environment that deteriorated in Latin America.
In North America, there was a continued decline in the frozen food category. Among our portfolio, lean cuisine suffered the most. Having said that, Stouffer's had a positive growth benefiting from our focus on improved ingredient quality. We dramatically reduced our SKUs in Hot Pockets, while driving the brand's growth and both DiGiorno and Jack's FIFTA brands were able to gain share in the declining category. We have worked hard to strengthen our whole portfolio through innovations such as DiGiorno Pizzeria, Butterfinger and Confectionery and salad additions for Lean Cuisine.
Equally, there have been innovations in the premium on the premium side. So creating moments of affordable luxury, Haagen D'Aosta ice cream for me and you, which I can personally vouch is super yummy as well as things like fancy feast for cats. You should try the gelato on our U. S. Fancy on our U.
S. Roadshow. The gelato ice cream, not the same forecast, not fancy beef. Pet Care North America came under pressure not only because of our wagon train withdrawal, which we talked about during the year, but also due to intensified competition in some dog segments. Even with those two headwinds, Pet Care delivered positive well balanced growth.
So now moving on to Latin America. Dairy had good momentum throughout the year. I've talked about Aptical, if some of you remember in our previous calls. It's a cholesterol reducing product in dairy and I'm happy to say it continues to do well. Chocolate, which is our 2nd biggest category in Latin America ended the year with double digit organic growth.
Nescafe Dolce Gusto was a particular highlight across the region. And in Mexico, we have adjusted our coffee portfolio to remain in touch with our consumers' needs with the rollout of 3 in-one and by ensuring affordable price points across the Nescafe range. Brazil continued to be a highlight for the region with good performances by adult in adult cereals and Nescao. Pet Care had double digit organic growth in Latin America, well balanced between pricing and rig. Dog Chow and Pro Plan were among the main highlights.
Moving on to Europe, trends there were unchanged, but we delivered positive rig. Our negative pricing reflected the deflationary environment seen across the region and our commitment to be price competitive for our consumers. Looking at the zone from East to West, the standout performer was Russia with double digit rate. This was driven by soluble confectionery, especially KitKat. And ice cream mainly due to PPP, which is our P level banana, Moben Pick and our premium cones.
The rest of Central and Eastern Europe faced difficult economic conditions, especially Ukraine and Poland. Western Europe saw standout performance from Britain, the Netherlands, Belgium and Austria. The continued investment behind innovations such as Nescafe Dolce Gusto, Nescwik Opti Start and in the Maggie range contributed to our growth. Germany did have a difficult year, especially in ambient culinary. France faced tough comparatives from last year and sluggish market conditions.
Southern Europe remained difficult as consumer confidence continued to be low. To finish Europe on a high note, Pet Care delivered strong growth across the zone driven by Felix, Pro Plan, 1 in Dorme. The highest growth rates were in Russia, in France as well as in Germany for pet hair. Next up is zone AOA. It ended the year stronger than the first half.
This was mainly due to the continued rollout of innovations together with brand support. Increased momentum in both rig and price contributed to organic growth of 5.6 percent. This performance is good, given the political and natural challenges the zone faced in 2013 on top of the economic slowdown across the emerging markets. It also reflects our ability to build competitiveness in a deflationary demonstrated by overall market share gains. Many emerging markets delivered double digit growth, most notably in Africa and Middle East.
China did slow down, but held or grew market share in most categories. Ambient dairy delivered excellent results including adult and senior nutrition in China. There were good performances from Nesbita, Yiyang and the Premium Yin Loo Congee and Indonesia with Bear brand. Returning to the zone, KitKat and Milo had double digit growth and Nescafe Dolce Gusto continued to be one of the biggest growth drivers in the zone. Saluable coffee saw intense competition throughout the year.
Our response has been to invest behind innovation and to continue our brand support and to make sure we win the sixty-forty taste preference. And in those developed markets, we saw trade pressure in Australia. Japan though continued to be the bright spot, where Kit Kat and our coffee systems are doing especially well. This was due to innovative market execution and the way they have embraced digital. Moving now to our globally managed businesses starting with Nestle Waters.
Nestle Waters delivered growth across the world despite pricing pressures in Europe and North America and a market slowdown in AOA. Our international sparkling brands including Perrier and San Pellegrino gained share. Nestle Pure Life, which is now the world's biggest water brand continued to grow well in the emerging markets. Nestle Nutrition. Nestle Nutrition grew at 8.2%.
The main driver being double digit growth in infant formula. The integration of White Nutrition has gone extremely smoothly and the business performed well. Our infant cereal business also had a good year, a highlight being Brazil with our Mucilane brand. Activities, Professional did have a challenging year and that's because of out of home environment in both Western Europe as well as Asia. Nespresso had another strong year of growth.
All its core European markets and the Americas contributed. Nestle Health Science had a great year, had a good growth. It also continued to build on its ambition to offer nutritional solutions that address disease and health conditions. And the acquisition of PAMLabs strengthened its capabilities in the areas of both brain and metabolic health. Let us now turn to trading operating profit.
The dose margins reflect an increased level of restructuring as well as a higher level of brand investment, partly compensated by NCE, which is Nestle Continuous Excellence. There was good margin improvement in our globally managed businesses. Nestle Waters improvement came mainly from efficiencies manufacturing and packaging. Nutrition on the other hand benefited from a mix effect of strong growth in the accretive infant formula, cereals among other categories. Now a very quick look at the product groups.
The profile of rig and pricing as you can see here is similar to that of our zones with the exception of prepared dishes and cooking aids where rig remained flat. Powdered and liquid delivered a rig in line with what we've seen earlier in the year. Here I'd like to take a moment and highlight the 75th anniversary of Neste Cafe, today present in over 180 markets. We are investing significantly in this celebration, including a new logo, new communication. Consumer focused innovation has always been central to Nescafe's success and we have a strong plan of rollout in 2014.
Following that commercial break, let's continue with our other categories. Dairy and ice cream saw improvements in both rate and pricing during the year, delivering its strongest rig performance since 2011. Prepared dishes continues to have its challenges and its rig remained flat. Ambient remains our strongest performer with frozen under pressure. Confectionery's rig was driven by Europe with particular highlights in Russia and the U.
K. And Latin America. And the rig for pet care accelerated with especially strong performance in Europe and Latin America. Looking now at the product group margins for 2013, Powdered and Liquid Beverages margins was up 70 basis points. The category benefited from a soft input cost environment as well as operational efficiencies.
It also increased its brand investment. This category has been called out by some of you for its low growth in 2013. This was partly because the category had no need to take any price. Here you see the other side, the flip side of that coin, a big increase in the margin. Milk products and ice cream had higher commodity costs in the second half and we continue to invest behind our brands.
Ice cream continued to improve its margin. Prepared dishes and Cooking Aids margin was down 90 basis points as we increased consumer facing marketing spend on a global basis and implemented restructuring in North America as well as in Europe. Confectionery's margin decline of 100 basis points was mainly due to increased marketing spend as we discussed in the first half. And finally Pet Care. The 60 basis points decline is entirely due to Wagon Train impact.
We also discussed this at the first half. The impact was somehow mitigated by a good operational performance. So to recap, despite the many headwinds we faced in 2013, we grew. We grew in all of our businesses and regions. We increased our brand support.
We intensified our portfolio and our cash management. We delivered an improvement in our trading operating profit margin. We improved working capital and delivered strong operational cash flow. We increased our underlying earnings per share in constant currencies. And finally, we are proposing a dividend increase to CHF2.15 a share, which is up CHF0.10.
With that, I would like to hand it back to Paul, who will give you the strategic context of our 2013 performance as well as talk about how we're shaping the company for the future.
Well, thank you, Wanling. And this promise, we're going to have a gelato next week when we're over there in the U. S. A. But I would say these are good results, solid results and they come on top of good results in the past.
And I want to walk you through what is actually driving, what has driven, is driving and will drive our performance over time and what did it also last year. And it is linked with, I would say, a very strong strategic direction that you see actually here in this chart. A strong strategic direction that is aligning all organization behind the right drivers and initiatives and that converges then into solid results over time. It creates value for our company. You see it first and I have shared this road map if you for several years and that's the strength of the road map.
We always challenge it to check it over time, but it is consistent over time. It is valid over time. And that is what strategic direction should be. We have also defined our priorities. And the priorities are guiding us basically to face the tough environment we have been living in for 5 years.
Each year with its own characteristics. Last year, it was seeing opportunities in the market in spite of being hided behind lots of challenges. It is linked with also and defining very clearly in commercial and marketing terms what the consumer values means also taking out what consumer doesn't value. It is linked with also engaging with society. The link with a company and society that we have structured in a way that is really meaningful and is captured by society in a meaningful way.
Hence, also the value that the society and the different stakeholders give to many, many initiatives, be it the cocoa plant, be it Nestle, creating shared value concepts, being how we link up with the local communities is increasingly important in a society that is asking from companies to link up with them in a constructive way. We have embraced digital. And what digital does in all aspects of our commercialization and also how we handle our relationship with consumers and then also having the best people. And I think that's taken for a given, it is not given. We drive our attracting, retaining, training, motivating our people and also aligning them by the right things.
And last the last year, we spoke about focus areas. Focus areas that we felt considering the intensity of the actual new reality that we have to focus on. And that is linked to strengthening our portfolio. And we have been talking and sharing with you this portfolio management, how we go about that. It's not only management, but also doing something with that.
And we have done quite a few of these things and also allocating resources and mastering complexity. And it is this combination, this consistency of roadmap, but this combination of priorities and focus areas and driving that through the organization with the same discipline that we have here in the Executive Board, but driving that through to all ranks of the organization, to all geographies is the strength of this company and is what is behind strong figures. So let me now share with you a few dimensions of it. That is actually in my eyes the most relevant drivers of success in the days of today. And the first one is, is a factor of the Nutrition Health and Wellness Agenda.
That is the core of our strategy. It is what we are all about as a company. It is one of the strongest value drivers as explained and expressed in profitable growth that is behind our success and our results. It is actually driving competitive advantage for our brands. And you see how we go about this nutritional fundamentals.
It goes through our food and beverage portfolio of products with specific aim at nutrition, Nestle Nutrition that is translating specific nutritional needs of people like infants, etcetera, into meaningful products. It is linked with our setting up of Nestle Health Science a few years ago, as I mentioned before. And now again, it is linked with setting up Nestle Skin Health through the taking of GOLDERMA. It is indeed the most strongest and most valuable value driver expressed in profitable growth and margin increases that we have, nutrition, health and wellness. And that is linked with also trends in society, the population growth, middle class building up in the emerging markets.
It is linked with aging population. It is linked with consumers that are more aware of the nutritional dimensions in their lives and what it means for their quality of life. And that linking up of all these dimensions is what nutritional advantage is all about. We are indeed about giving our consumers best tasting products with nutritional profiles in each of its categories. And that is driven through different dimensions.
It is driven through products and R and D. And I kind of stress the importance of our sixty-forty plus It is something we have been talking about for quite a while and sometimes we forget. But it's the most important tool and mindset that drives the nutritional health and wellness agenda in this company. It is bringing to what we are and the brands we have and the products we have everywhere in the world these arguments and these benefits. And it is something that touches quite a lot of our portfolio.
I have been saying that we want to churn our portfolio, each product, each brand everywhere, wherever in the world through that process of checking on taste and be preferred in taste and yet at the same time having arguments on nutritional and wellness. And that is a tremendous effort where quite a lot of our R and D is going out. It is this permanent momentum that gives the arguments to our product portfolio and our brands and that gives our competitive advantage. Last year, we have reformulated just like that to 8,000 products just last year. And if you add it all up, 1 third of our products is actually in that process.
We have spoken about micronutrient fortification, micronutrient fortification. This is going on continuously. Last year alone, we have delivered 170,000,000,000 servings of micro fortified products in the world again because we have all these products that are potential carriers of these micronutrients. It is a part an intrinsic part of our agenda and also creating shared value as being positive part of society where you have these deficiencies. And we can do it in a normal in a natural way.
We don't we can build it in a normal diets of the people wherever they are. We have also redefined our commitments to the levels of salt, sugar, trans fatty acids and also saturated fats, you find them on the website, they're very public. There is something that is committing us towards it is something that is committing us towards society, is committing our portfolios towards these targets and it is actually driving. And again, it is conditioning us. A commitment is to be fulfilled and that is driving also quite a lot of innovation, quite a lot of research and development to deliver these dimensions.
It is framing our portfolio quite drastically. What we have started also and very important for the future surely is studies, knowing what people eat and more specifically knowing what kids infant eat, because a healthy life starts with a healthy youth childhood. And we have done studies in the past. We're extending that now. We call it the FIT study, which is feeding infants and toddlers study that we did in the United States, which is going after what do kids from 0 to 4 eat really.
And we have extended now these studies who are standardized so that we really can use it and also share it with authorities. We have now rolled it out in Poland, Russia, the United Arab Emirates, China, Mexico and rolling it further out. So that's going to give us a mapping of knowledge that we're going to share. But it is also something that is going to learn how we can also gear our portfolio towards that part of such an important part of our society. We are auditioning and complementing now these FIT studies as we call them with the kids nutrition and health study that goes to children from 4 to 12 and rolling that out.
Last year was the 1st year where we rolled out in United States. We are in preparation now for Mexico, China and Australia and France and the Philippines. And there's a complementary study to the FIT study where we're going to know then from 0 to 12 what do kids eat, what is what are their behaviors, what is their diet. And it's different in each country and each region. So it is to be mapped worldwide, but it's going to give us a very broad view.
It's going to give us also a bridge of relationship with authorities who are caring for health in society. We then in our R and D system to really guide our innovation that is gearing products that are more specific to the specific nutritional needs of this part of the population. Another part of nutritional advantage is communication. And again, they're very simple straightforward things. We have been talking about nutrition our nutritional compass, which is pulling together different dimensions like the nutrition table, the ingredients list, etcetera, in a meaningful way so that our consumers can connect with us.
And that is almost in all our products now, they're rolled out worldwide. We combine that also with the guideline daily amounts of famous GDAs that we do have now in more than half of our products worldwide. GDAs are basically framed in certain areas or certain geographies or are regimented or we are rolling them out because we feel it's a meaningful way again of connecting with consumers and allowing them to have responsible meaningful choices for their diets. So that is now worldwide rolling out and we have the intention to roll it out to 100% of our products. We have websites.
We have intensified our call centers linked to digital too and social media apps are rolling out all this to connect with consumers, so that they can know what our products are, what they how they can fit them in their normal diets. So it is definitely the Nutrition of Emeritus, our strongest, strongest growth platform, profitable growth platform that we are embracing. Another growth platform that is combined in with this is premiumization. And premiumization is expressed in defining more nutritional benefits. It's defining in permissible taste.
It is linked with systems, it is linked with services. It is increased personalization. It is premiumization in different aspects that creates value also for our company. And it is clear that this pressure is our best example. It is used and abused and it's going well and we are pushing very hard to roll out worldwide of this fantastic concept that is that is indeed true success inviting quite a lot of other players and that is what is motivating to us.
We had exactly last year again a very good growth and we are all focusing and continuing doing that. Other examples though are Pet Care. Actually the whole Pet Care success that we have that we see now reflected also in Europe and Latin America and starting to gain momentum in Asia and Oceania and Africa too, there is innovation based on premiumization. It is really linking the proposition of Purina towards added value nutritional benefits. We have also Perrier, 150 years of Perrier was celebrated with bringing Andy Warhol back and having a limited edition of Pop Art bottles and cans.
That's a certain way of premiumization, un premiumization. Per Year is a premium brand. We have also other one Kit Kat Japan, for example, is a good story. Kit Kat Japan is well, Japan is a country where we are growing quite vigorously this year. It's not an environment where grow is natural and we are growing and at this time to seeing our business from different angles.
Kit Kat is not a Kit Kat and they have really premiumized this product very, very, very, very strongly in Japan And it is growing. It is part of the Japanese landscape. They opened a boutique where you have to queue for 3 blocks to get in. Just this intrigue of a brand and how you can make a brand that we all know for over 75 years, how you can really reenergize that through premiumization, but also normal auto products Nestle and Nesquik, Nestle Nesquik, which has been reformulated with less sugar and we've also the Opti Start, which is a new branded active benefit that is combining vitamins and minerals to give nutrition and nutrient support to kids has been re launched in Europe and has been growing very vigorously. It's part of the growth in Europe is ideas like that combined with others.
The nice thing about premiumization is this is not only for the big mega cities in the developed world. This is also working very, very well in the developing world. Remember, an emerging middle class is allowing premiumization in these areas of the world too. That's why we spoke about managing the extremes premiumization and also the emerging consumer. Well, with that, so we have this nutrition and fundamentals and our premiumization.
We combine that and it is the combination of things that helps us to have the dynamics in our results. It is the combination of nutrition and finance combined with premiumization, but rolling that out through the whole portfolio of Nestle. That combination, the whole portfolio of Nestle with which we can be part of previous life everywhere in the world, every moment of the day, every moment of his life. That is what drives translated locally. And the strength of that portfolio in these brands is translated locally.
And the strength of that portfolio in these brands is combined with the innovation innovative drive behind nutritional and vanilla and premiumization is what drives it. Innovation, I spoke about innovation. I'm going to not drag long on this. Our R and D setup that we have reinforced it last year. R and D is where we don't save money for saving money or cutting costs.
We have invested more. We have invested in our PTCs and research centers all over the world, stronger beat in Solon or here with our system technology center in Singapore and others. And as I mentioned before 2013 has been the year of record for innovation. And many of them have still to be rolled out much broader and getting more noise. But we have things like Maggi tendered Papyrus in Europe, one of these other elements why Europe is growing.
A new concept, a special cooking paper where you don't need to add fat and oil and to cook very, very tastefully. We have, for example, Nescafe Arabiana in Middle East, which is a typical Arabic coffee projection and instant coffee, how you combine localness again with global ideas. We have specialty that we start launching now also in Japan and I really see there are a lot of upside rolling out of good ideas. We have butterfinger caps that we launched in the of a few weeks and got quite a lot of noticeability. So 30% of our sales last year was actually linked to innovation and renovation in the last 2, 3 years.
So innovation and innovation is again very strongly behind that. And our portfolio has also managed through merger and acquisitions. And you saw Wyatt Nutrition that we bought a little bit over a year has been now embedded very, very well into the Nestle organization. It has delivered on its promise. We've it has delivered on its promise.
And you remember that we said also always acquisitions are linked with it has to make strategic sense. Definitely, it is complementary on platforms. It has delivered on business and it has actually outperformed our expectations there nicely and it has also delivered in being so compatible with our value cultures of this company. So very good experience there and really, really motivating. But we have others.
We had also PetFinder, the world's largest web site for pet adoption, which is showing again Purina of being not Purina is not about pet food, it is about pet care and how we again through added value services are creating premium on top of the normal offerings. PamLab is another acquisition that we did that gives us capabilities in the United States to connecting and through offerings of medical food with world that we are exploring in an intensified way. Sometimes you have to depart from certain brands, certain products and we have done that too. They when they don't really fit strategically or they don't give us a business enjoyment, we said we have several dimensions, but we have them to digest. And we have done that with Jenny Greg, which was a sizable one and also with PowerBar that was announced.
But that allows us then to put really the people and the resources behind the right things that are working for us. And that is what we did. And the fact to our SKU management is the same thing. They're getting rid of SKUs that don't work. And last year, again, we did a cleaning of more than 10% of our SKUs so that we can really get put the right resource behind the good SKUs and that work well for us and also the innovation.
And again, speak about the strong the strong portfolio that is driven by innovation, that is driven by putting resource behind the right things, that is driven by merchant acquisitions, has to be combined also again with our geographic footprint. A strong portfolio, a broad portfolio has to be combined with a strong geographical presence. We do have that portfolio not by adding parts worldwide. We do have a strong portfolio everywhere. And that is again a strength that we have, how we link up with our consumers everywhere.
And we have been there for many, many years. And linking up with consumers' brand links is emotional, how it works and accumulates over years, and we have been there for so many years. It allows us also to be so decentralized because we do have momentum. We do have minimal sizes in all the markets we're operating in. And you see that.
We are indeed an ant company. And it's the combination, as I said before, of added value through Nutrition and Humanities, driven by innovation and innovation, having a broad portfolio of brands and products, having the geographical presence that we have, That combination allows us to grow every year in the world. And you see it again, we have grown in the emerging markets with which is 44%, 45% of our total Nestle sales, has grown 9.3% last year and that has been we have de facto as a fast moving consumer goods, the biggest absolute presence in the market allows us to have organizations and operations that can be leveraged. We have indeed the biggest presence, I call it, Navy presence in the developing markets, which gives us also this important platform of growth together with the emerging and middle class. We have also grown in the developed markets.
Developed markets cannot be stressed enough how important that is to us. We always said, we're not going to hold back off on the emerging markets when we really got into trouble a few years ago. We embraced the opportunities. We looked for them. We pulled the resources.
We increased our brand support. And that has been showing up in 1% organic growth. The price was actually negative in the developed markets, in Europe specifically quite dramatically. We have grown 1% organically. We have actually grown 1.5% real internal growth, volume growth, gaining market shares.
Actually in Europe, it was close to 2% real internal growth that we had. So it cannot be stressed how actually proud, but also motivated we are by seeing growth in the way we don't have the growth tailwind. So and that is linked again with a lot of innovation and de facto the developed world is sometimes or in many instances the cradle of innovation. Many concepts that are born in these countries are then rolled out worldwide and we have quite a few examples of that. So look, it is again this and I come back to this chart.
The alignment that it gives, the pulling the resource behind the right things, the discipline over time that it gives cannot be stressed enough. It allows Nestle to be really uniquely positioned for profitable growth in the future, for creating value in the future. And we continue our Nutrition and Health and Humanities journey. That is what guides us. That is what really motivates us.
And we continue to building and constructing and positioning ourselves for future growth. And I have said before 3 years ago, we are all about nutrition at Hermannaz. We have our food and beverage category. That is what Food Good Food, Good Life stands for. A few years ago, we extended the boundaries of nutrition with the creation of Nestle Health Science that is backed with the Nestle Institute of Health Science.
What we have done and communicated to you this week with the creation of Nestle Skin Health is exactly the same direction. It is really and standing the boundaries of health and wellness and do that by bringing in Galderma and really going after specialized medical skin treatments and do that again on the same premises that Nestle has been driving growth in the past and the future and will do in the future. It is to be science driven, R and D driven, innovation that you can have really building in intrinsic differentiators into your portfolio, but that also creates value for consumers and by doing that also for society. We are all about enhancing the quality of life and that is what we are looking for. That is what that stands for.
That is what we are also constructing for the future. Definitely Nestle Skin Health is a very strong profitable growth platform for the future and we are happy that we're starting to expand in a meaningful area there too. Now all these dimensions are behind delivering results and the results are and to do that continuously. And the results have been there for so many years. And 2013 has just been one of these years that, in spite of all, has been an intrinsic building block again of what we call the Nestle model, which is, yes indeed, creating and delivering in a consistent way profitable growth and to do that with a good mind on resource efficiency.
And yes, we have a band of 5% to 6%, and that is what we delivered in the past. That is what we deliver and will deliver in the future. And last year was actually a very, very firm building block that allows us to do that over time. And I feel, dear, ladies and gentlemen, that we, for 2014, foresee a year that's going to have quite a lot of the same challenges. The developed world and the Europes of this world are not out of the woods yet, and they're going to have to work hard to bring national growth back.
But we are growing there. And also in spite of all, we're going to grow also in 2014. It's going to be in line with 2013. We see an acceleration of growth coming during the year, but we're going to again outperform the markets, it's going to be similar as 2013. We're going to do that with around 5% of organic growth and we have improvement of margins because also all the efforts that we have started to do so many years ago are continuously repeated each year and we're going to have an underlying earnings per share in constant currencies and also capital efficiency.
That's the model. That's what we delivered in the past. That's what we're going to deliver in the future and 2014 is the 1st year of the future. Thank you very much and we are open now for questions and answers. Thank you.
Thank you, Paul. For those of you on the call,
you.
But now let's take the first question from the room.
Yes, will you hold?
Mr. Buke. I like your word premiumization. Does that mean if you have for instance KitKat and you premiumize it, is it going to be the same price or is everything going to be a bit more expensive?
I wouldn't express it like expensive. What we do with premiumization is creating more value. And it can be more expensive if you see it like that. It's going to be still a good deal because you get more from it. So I mean but KitKat success in Japan has not been because of premiumization and pricing.
It has done by creative ideas of linking up KitKat, for example, with special moments of in the Japanese world, cool growing people. KitKat means actually good luck or something like that. So we have used that sound bite. That sounds like good luck. We have used that for students going and doing their exams.
Well, we created an emotional links. That's premiumization too. Premiumization is not only adding costs that are seeing different angles, adding more value for the consumer. If that is linked with more cost, well, we may reflect it in the price. But that's not what I mean by premiumization per se.
You see, a cup of Nespresso, people say, what else? Because there's a relationship of value that people they value what they get for and so on. And I must say that is the whole driver about if we build for example, if we build micronutrients, we add something. It doesn't per se cost something, but we add something. That is what I mean by premiumization.
And sometimes it is linked with, yes, indeed, higher price, but not always.
Yes, Uli, with that please.
Thank you. Holger Allisch from German Business Daily, Handelsbank. And two questions, if I may. First of all, about expanding the boundaries of health, expanding the boundaries of nutrition. With Galderma, some commenters say that this is really out of your core business because it's really more in the business of pharmaceutical companies.
So I would like to know what is for you something beneath that new boundary. So for example, Novartis, just as one example, is once you said perhaps this OTC business, is would that something be able to say, okay, this is really out of our boundaries? You could tell it's knowledge business. It's enhancing the health of people. So because it's quite, well, unprecise that Barnaway, I would just like to know for you where is the red line?
Where do you say that this is something we won't go in? First question. And second question concerning the portfolio. There's been lots of action in the last couple of weeks. Will that continue at that pace into 'fourteen?
And or are we yet to quite advance? So just a little bit on how far we are in that process. And just coming back to in that question on L'Oreal. Mr. Lemmat said L'Oreal, the participation is strategic but financial.
So does that mean now after this transaction, you won't sell any more stocks of L'Oreal in the next 12 months? Just to have a clear answer on that.
Well, first of all, the expanding the boundaries of we are about enhancing the quality of life. We have said we want to be the nutrition health and wellness company. And we have focused on our food and beverage business and we have brought in this whole nutrition environment as I mentioned through many areas, but sixty-forty plus abuse the mindset we have there. But that is what brings it to really drive nutritional arguments that bring health and wellness through food and beverages. That is what we are.
That is what we wear. That is what we're going to be also in the future and that is what we embrace. Now we have said also with new science, new technologies, new needs in society, you have to see the opportunity of these trends. And that's why we have built a few, 3 years ago Nestle Health Science. And why did we build it only 3 years ago and not 20, 100 years ago?
Because the conditions were not there. Society was not there. The health care system was not really starting some signs of fatigue in the sense of how do you finance it all? How do you is corrective therapeutic health? Is that the right equation for societies at large?
Or can we start embracing more inducive health, which is by lifestyles, by having more knowledge about healthy nutrition, by knowing also and using science to give and to make relationships that were not possible to make in the past because the science was not there. And that is why we have set up Nestle Health Science 2 years ago because we felt the conditions were there, the need of society, the awareness of inducive health and how it can help to be a much more efficient and cost efficient way of having healthy societies is not to get sick, is to keep people healthy. And that is what we have been looking into that. That is what we are building. And that is linked with science, a lot of science that do have certain elements of yes, maybe the health care sector because you're going about personalization, well, then you have to have diagnostics.
You have to have if you want to understand how nutrients interact with the human body, well then you have to have other platforms that we were not so close to, we're bringing them closer and it makes sense. And the same goes for the skin. It is the biggest organ of people and it is how you interact with society. It is how you feel quality of life and there are medical conditions on the skin that are having is indeed some therapeutical dimensions that need a lot of deep R and D because Galderma is a very R and D driven organization with a good part of their sales linked with R and D. It is clear that we as a company are increasingly through these dimensions, through deepening our R and D even in food and beverages, is a company that starts to be more and more R and D driven.
And I see an upside there in the sense of knowledge gives answers. Answers give solutions. Solutions are valuable profitable growth platforms. That is what we see in this whole extending the boundaries of health and wellness through Caldermattru Nestle Health skin health. So it is yes, indeed looking behind the corner and see value coming and in a society that is increasingly defining all the needs.
You see in the world the skin and skin health coming up very, very prominently as one of the biggest growth drivers in that area. We want to be part of that. It is playing with the same equations of R and D innovation, seeing a little bit further down the nose and seeing these platforms. There's a lot of compatibility, strategic compatibility there. Now on the portfolio restructuring, yes, we have intensified, I must say, yes, we have brought discipline with our portfolio tool, call it, this management tool framing.
We have created discipline behind it. And we have some more visible dimensions and expressions, and we have mentioned them, that they are creating to the outside world a much deeper intensity. And yes, we go quite intense behind it. We have done that, I would say, cleansing to a certain extent permanently. And I say SKU management per se is a very, very close action that is very close to portfolio management.
It is portfolio management. We have been doing that. 2014, we keep on going. We always said we're going to maintain. This is not a one shot tool that we utilize, use, see what comes out and then we park it.
It's going to be intrinsically built into our business planning locally and globally. And it's going to be something that we're going to use then permanently and it's going to have the same consequences. We are testing each product in a defined geography and we have defined 1800 product sales, we call it, which is a category in the market. We are testing them, 1800 of them. And that is something that drives our decision making, which is good category we invest or we fix it or we divest.
These are the 3 equations that came out and that's going to be a permanent thing. Now you speak specifically about L'Oreal. It has been said and you see the figures are out. I'm not going to get into the details of the specific deal, but we stay with 23.3 percent. And L'Oreal, there is sizable participation.
So and it has been said very clearly. We are 40 years plus linked with that company and that is a very interesting financial, but also strategic participation we have there. And we have been a very loyal and very constructive partner in this company and that is projected to continue like that. Yes,
Uli?
Hello? Good morning, everybody.
Could you just give us
a bit more color on how the political turmoil in some emerging market countries and turmoil in some emerging market currencies as well in the last weeks did or do affect your business?
First of all, when you have a devaluation and we consolidate in Swiss francs, we have less Swiss francs, but that's an impact that we have. And we see so much of the color coming back of periods, the famous periods in the 70s, 80s of certain continents like it was there Latin America inflation. You see some of that coming back to a certain extent and you saw it. And there's lots of volatility and nervousness on currencies with the Turkish and the Brazilian and the Indian rupee, etcetera. So you see that Tuznets coming back.
Again there our how we handle that is so much linked with again. We are decentralized. We have basically our factories in every country. Give and take, 90%, 95% of what we sell locally is normally a reality if you go local by local. When you look at the that's the reality if you go local by local.
When you add it all up, yes indeed, you consolidate less when you have some currency negative, again, in consolidation. And it has some shifts. It's negative gain in consolidation. And it has some shifts. It's an effect to us in margin sometimes.
It depends on the mix and where it happens. But last year, it was 20 basis points affecting our margin, if you would. That's why we have actually constant currency 40 basis points plus. But these are the impacts on consolidation on. What we have to see though is the volatility and also the turmoil as you mentioned it politically and how the drive of what we have been mentioning of the emerging markets are emerging, how that may soften that emerging and the middle class in many countries that are starting and that we have embraced the 1,000,000,000 emerging consumers that we have embraced, how fast that's going to continue, how solid that's going to be.
But again, and that's why I said also, that's our strength. We are present in all countries with operations, with local decision makers and that are aligned, but are adapting our offerings, are sensitive to what's happening in these countries, we can change and profile our portfolios and shift priorities. And that's how we react on these things. So I remember so well in Latin America, we had inflations. I lived in a country that had an inflation of 1,000 percent a a and we were linking up consumers and we were adapting.
And that's what I mean by our geographic footprint definitely is, I call it, a competitive advantage. We an adapted portfolio, not one product that is global that is not adapted to. We have an adapted portfolios and a combination of products. That's the strength we have. So but we it's tough sometimes.
I must say when our anchor factory in Syria last year, February was it, was blown apart and then and it's not operational. We had in that country, we were 600, 700 people. That was an anchor factory, means a factory that was also serving a region. And in one day, it falls apart. And we stayed until the factory was blown up, but we stayed.
Many would leave. We stayed because we are local. We had people who are staying and re adapting, taking living in a very, very healthy environment, but they stay. There's 600, 700 people, their livelihood depends on, but it was wrong. Well, these are setbacks that are very important.
But then again, that is rewiring, investing in compatible factories close by. That's how it is. I mean, but if you add it all up, we have a little bit of what I said, a national hedge of diversity in portfolio and therefore diversity in geographies combined with fantastic people in the front lines.
I think the other thing too that Paul touched on, I know it's top of mind for a lot of investors is you said that you've been in Latin America for so many years. We people forget, we are a company that's about to celebrate 150 years in a few years' time. So we've been in this in many of these markets many, many years. We celebrated 90 years in Brazil a couple of years ago. And so we've been there done that got the T shirt for it.
So yes, is it an issue? Of course. But is it something that our people have dealt with? Absolutely. So we're not it's not the sky is not falling, Rome is up.
It's not burning. So we're going to be okay.
It doesn't help, though.
But let's take one more question from the room, Tom, before we take a question from the call.
Thomas Muller from Bloomberg News. Regarding your forecast for organic growth, where do you see or what's going to improve in the second half compared to the first half? And my second question is, in terms of mergers and acquisitions, what areas would be the most interesting?
You're really curious there. Now on organic growth, we just see a certain comparative the competitive base, the dynamics of where we have programs, we have promotion, we have innovation, innovations, time lines. And when you add up, our projection internal projection for us is that we see it more geared towards. We have to deliver good growth in the first half too, but we see it with more momentum because of actions, because of competitors. And again, it is an accumulation of all these different geographies and initiatives that gives us that impression and we want to be aligned there.
That's why. Well, the pricing is very soft. We have said that. And that's why the 4.6% that we have last year is basically because there was no pricing need. And although if you see our raw material basket, it was still something that went up because we have dung coffee and all that, but we have milk that went up.
So and if you add a dollar, but much less down and in certain regions we had negative pricing, which was translating the needs of the consumer and the sensitivity to that and the dynamics of the markets like in Europe was negative. So it was low and we may see some momentum coming back there too. And that helps and we don't see it coming now. We see it coming in the latter part of the year. So it is a combination again of all that, but pricing is part of it, yes.
On M and A, look again, M and A is something that is part of our equation and tools that we have and dimension that we use to grow and to prepare or to invest in profitable growth platforms. And look, we have always said we have this dimension of bolt on that we're always going to be looking for. Again, we are present in the world and in the world we have many, many smaller and bigger opportunities and the small ones are as important as the big ones. So and more than that, I cannot say and I will not say. But this part of our growth, Dmitry, but I privilege definitely the internal growth of this company because we are present in all these categories.
We have all these initiatives going on. We have already expressed a new platform of growth that brings in a world leader already. So it is for us to grow these platforms internally, but with an eye for possibilities outside too.
Thanks, Paul. Now we will take a question from the conference call. We have Celine Panuti of JPMorgan. Please go ahead.
Yes. Good morning. Thank you. My first question, it's to rebound on the pricing commentary. One thing you said that talking about Asia, there was a deflationary environment.
Can we can you and it's going to be difficult to maybe on a global basis, but can we have a bit of a feel for what the pricing environment is and maybe to be can we differentiate between Europe, North America and certain part of and the other part of emerging market? And I would say also in the light of the raw material sorry, the FX deflation that you've seen sorry, the FX weaknesses that you have seen in these countries, how quickly you think you can absorb that? And my second question would be on so we can come back on the Galderma question, but 50% of what they do is a prescription drug. And does that mean that you are comfortable with acquiring this kind of businesses? Thank you so much.
Yes. Thank you, Celine. I let me in terms of pricing, we've always said this, right? It's pricing is something that's taken locally. We do not sit here and debate and sort of like dictate what pricing action need to be taken.
And depending on categories, depending on geographies, it very much vary. And you see the dichotomy especially at H1 last year where so we had pricing we were able to take pricing in Latin America because of the currency situation even though the underlying raw material cost went down. And so if you're specifically interested in pricing in Asia, I can ask Nandu to give you a better some
color. But not only just pricing in Asia, but overall, your ability for pricing in the current economic environment, and I would say many regions of the world where you operate are seeing lower currencies and whether you have the ability to perform higher prices.
Celine, let me take this question. I think OneLink's answer was pretty accurate. And indeed, the specifics of what you're referring to over the last 10 to 12 weeks, we have seen a lot of currency devaluations across Asian markets and Middle Eastern markets. We have seen also at the same time a lot of cost inflation specifically in milk solids. So both of these indeed put cost pressures.
The amount of the pressure is different market to market. And depending on the competitive situation, the decision on how to increase prices, how to manage price points, how to make sure that the consumer shock is minimized and we keep the underlying growth momentum is a case to case decision market by market. I can confirm that across many of our markets in Asia and the Middle East, we have indeed taken price increases where relevant and where required.
Right. And in digital market?
Develop markets, sorry. In developed?
In developed market, because I think there were some price cuts last year. So are we is that something that will remain for 2014?
Yes. I mean, if you look at developed market, you look at Europe, it's actually we see that it's a deflationary environment and there's not going to be you saw in 2013, it was negative pricing and we anticipate the same thing going into 2014. Now U. S. Might not be as severe as Europe, but its pricing is not going to be easy in a very in a deflationary environment.
And then on Galderma, the Nestle Skin Health is a platform or is a company that's going to provide a portfolio of science based innovative products that meet the full spectrum of people's skin health needs over the course of their lives. And if you define it like that and there indeed quite an important part of that business that is done by prescription, we don't have a strategy that says we want to stay out of prescription. Prescription is a platform, is a way of getting to serve some specific needs that need some professional assistance and that's what prescription is about. Well, actually, it is the best expression of some proprietary, more deeper science driven and science based innovation potential. So the same thing kind of is going to happen with Nestle Health Science where we're going to have a prescription dimension in our channel.
So that is again the best expression of we are an ant company. And it is yes, indeed, it brings complexity. Yet at the same time, I have the fortune not to have to handle it all myself. So we have specialists doing that and they know what they do and we embrace these channels and embrace these ways of connecting with consumers. Somebody who has to have a prescription treatment for his skin is a consumer and we want to be part of enhancing the quality of his life.
So I see that totally compatible with the science driven, R and D driven mindset of this company.
Thank you.
We have another question from the call. Alain Oberhuber, MainFirst. Please go ahead.
Good morning, everybody. I have two questions. The first question is about, again, the organic growth. Probably you could give us a little bit more why it is geared into the second half because given the base effect, is it because we currently see more competition? Or is it because your product generation will be geared more to the second half?
The second question is about Waters. Could you give us a little bit more information about local brands and the premium products? What was the development? And also if these products had margin improvement as well?
Can you speak about organic growth second half?
I mean, you're exactly right. A couple of things. There are a couple of dynamics going on beyond just if you look at the quarterly split, our expectation is there is some shift in terms of Easter in Q1. In terms of product launches, we are anticipating some product launches that will sort of like pick up pace in H2. But in terms of water, do you want, Marco?
I would say, Marco, you're going to take up there. But water, again, and I must North America specifically, there is indeed a price war going on and you can engage in price wars and sometimes you have to be price sensitive, but you don't jump in a price cliff. And so we didn't engage there and that has affected us. It kept our margins, I say. But Marco, yes, specifically on the specific local brands too.
Yes. You answered already the question. In reality, the second part of the question was about the premium brand, international brands. Peries and Peregrine are doing extremely well in the United States. So the development of these two brands in the United States has been extremely good, double digit growth.
So that's a very good element of the improvement that we have in North America.
In terms of regional brands,
it's exactly what Paul is commenting. So we look for profitable growth. So when there is a situation in which there is a real price war, we try to keep market share or to have a profitable growth in order not to lose market share, but we don't just seek growth for that. And then the situation of the market is also growing, but not growing at the level that was growing in the past.
We have a question via e mail from Wole Famu Rewa, CNBC Africa in Lagos. What is your growth target of your business in West Africa? And are you considering expanding your West Africa product portfolio to skin care?
Well, look, Fernando, you're quite requested today. But let me first say on this skin care and all, Caldera is presence in 70 countries and has 5,000 collaborators, employees all over the world. So they have already worldwide presence. Now I have to see how specific they are there. There must be if there is a market, they must be there.
But we have to see a little bit later on. But that's not the highest priority, I would say, now there. And are we growing? And West Africa is a fantastic good region. I don't know if you want to give some more color on it, but it is clear that West Africa, we have a very, very deep footprint there.
We have factories and we are in Ghana. We have actually our shared service center in Ghana, serving the whole region, actually extending the whole Africa over time. So we have very many, many, many years there. We have fantastic management team over there. I remember when Ivory Coast was in the trouble and all how we had the right people there in place to really rewire the whole business.
So I think we definitely are in there for growth together with the countries. Other question?
Excuse me, sorry, John. Yes.
John Reff from Wall Street Journal.
A couple of questions. I'd like a bit more sort of color on your portfolio review in terms of how far are you through it and how many more kind of divestments or sales do you expect? And then linked to that, what's the plan that you're going to do with the money from it? You got some money from the L'Oreal sale. And then also you said you're going to have a buyback.
So is the buyback going to be limited purely to the cash from the L'Oreal sale or more? And when would that be?
Do you want to take it? Yes. Hi, John. In terms of portfolio management, I want to first of all take a step back. It's not just about divestiture.
It's also about where to accelerate. It's important to be doing both. And so when people think about portfolio management, the first thing they always think about is, oh, you're going to sell more. But what we've done last year is not only walking away from businesses that we are no longer the best owner for it, but also to accelerate investment behind products or categories or geographies where we can win and we can really win do much better than others. So the other thing also when we look at portfolio management with the leadership in our strategic business unit, it's not just looking at businesses as a whole, but even within those that business.
And so it's looking at how can we resource allocation CapEx, it's R and D, it's people resources. So it's back to one of the six priorities that Paul had outlined last year or 2 years ago in making choices. So that's so it's a broader context and not just saying we're divesting. So that's so it's an ongoing thing and it's something that needs to be and has been embraced by our market, our people on the frontline, people who run a category in a certain market. So it's not us sitting here or the Executive Board dictating which where we need to sell and etcetera.
So in terms of cash, we had in our press release on the Galderma transaction indicated that it's our intent to with the cash proceeds from this transaction is our intent to launch a share buyback program. We have not obviously communicated the specifics in terms of how much and when. We'll wait to see when the transaction closes and we'll come out with an announcement then. Janit here from Swiss newspaper Blick, Sonntagsblick. I've got a question concerning the outcome of the Swiss vote on Sunday.
What consequences do you expect for Nestle?
Well, Nestle is a company that is worldwide present. And actually, we do under 2% of our activities in Switzerland. So we have here in this headquarter quite a lot of foreigners. And so but that's the vote of the people. We have to respect that.
So we're going to see and I'm confident that they're going to translate that in a workable framing, legal framing. We have to see, but it is indeed a dimension that creates for the time being uncertainty. And we are looking to the evolution of that very closely. But that's what I can say. We respect the vote, but it has created some uncertainty and I would invite to neutralize that uncertainty as soon as possible.
And I hope it's going to be wisely. Thanks, Paul.
We have another question from the call. John Cox of Kepler. Please go ahead.
Yeah. Good morning, guys. Congratulations on that cash flow statement. It looked very impressive. And just following up from John Revell's question.
You seem to have indicated you don't really want to go back to a AAA credit rating. And you've said and that seems to have indicated that you don't really need net debt to go below onetime EBITDA. Obviously, net debt now is below $15,000,000,000 EBITDA is around $18,000,000,000 on 2013. I think some people are probably scratching their heads wondering why you didn't announce some sort of buyback today, particularly after you've raised $3,000,000,000 from the L'Oreal disposal. I wonder if you could just give us some sort of clarity on that.
Is it because you want to go back to a AAA credit rating? Or is it because you want to keep hold of that cash because you see M and A? Or should we expect buybacks in the future as you've indicated? That is the first question. The second question, just on the organic sales growth.
And I understand what you're saying, but it seems that actually organic sales growth accelerated in Q4. The emerging market sales actually accelerated in Q4. I'm just still not sure why you think you'll be weighted towards H2 given the comparable base in emerging markets and your organic sales growth is actually going to be a bit tougher. And I'm just wondering why you've been somewhat subdued in your outlook saying it will be similar to 2013 given the fact you are seeing this acceleration in Q4?
The first question, you want the money now, you have to first have it. So we announced the deal. We don't have the money yet. So but maybe you can on the AAA
No, John. We are not going back to the AAA. We're very happy and very proud. We're the only one in our peer group company that's in the AA rating. And so that's something we're very proud of, but no intention of going back to the AAA.
And now we will be announcing something on the share buyback. We realize we're very proud of what the organization has been able to do in terms of the cash flow performance from 2013. So like Paul said, you want the people want the money now or just have to wait a little longer? But we'll announce it soon.
But that's also why we have announced it. We have expressed the intent to have a buyback later on. And that is just showing that we're sensitive to the asks of our investors. So I think we have always been very mindful and respectful to our shareholders and we maintain that the On the organic growth, as I said, yes indeed, we saw some acceleration coming at the end of the year. They're still in proportion.
It is volume driven, so it's good to feel that rig is having strength. But we do have plans. We do have innovations. We do have launches. We do have also competitive basis and see the dynamics of the different paces of the different geographies in the world.
We pull that together and that's how we call it dynamic forecast. And that gives us a more pronounced it's not dramatically, but a more pronounced growth dynamics in the latter part of the year. That's why. So we're speaking we don't speak from minus to plus, but we speak from softer to stronger. And it is linked to many dimensions that are linked with our operations and launches, etcetera.
We have another question from the room. This gentleman over here.
I'm Ishiguro from Yomiushinburn Japanese Newspaper. My question is was the same as it was relating to the last Sunday's vote on mass immigration. Then it is a follow-up So you talked about uncertainty created by this decision by this result. If this uncertainty continue without being solved, do you think that it is having an important impact on the decision of investment of NetSol here in Switzerland?
These are hypotheses again. You have to see how they're going to translate that vote into law and how that then may affect. It is clear that we are setting up a new factory of in Romain for Nespresso, we project 3 50 people. Well, okay, we are we going to find them? It's going to be we have people coming in here to help shape and to gain experience here permits, but these are already all speculates from my side.
So I respect the vote. It shows something underlying and worries of a society. You have to respect that. You have to actually read what does it mean this vote and how do you translate it. But that's the uncertainty we have.
Look, it's not the first time we live in uncertainty, but I would like to see that landed pretty fast. It's not only that. There's also what is Europe going to do. That's part of the uncertainty. And we have said more than half of the production of these all these factories of Nestle here in Switzerland, creating over all in all, over 10,000 11,000, 12,000 jobs, All half of that is exported.
And the biggest export market for quite a lot of these categories is Europe now. And Europe is linking free flow of people and goods that are like in the same line. So that's the uncertainty I speak about. But I as I said too, I'm confident we're going to be wise.
Thanks. We have another question from the call Dieter Bachmann of the Basel at Zeitoun. Dieter go ahead.
Good morning. I have a question concerning the change in the board. I mean you have stated that you remain committed to L'Oreal. Does this mean that you will continue the cross involvement by replacing Mr. Myers with somebody else from the L'Oreal or the Myers Bettencourt family?
Now what we have communicated is that Jean Pierre Meyers is leaving our Board. We didn't say more than that. So
Yes. That's why I'm asking whether there will be a replacement from somebody else coming from L'Oreal or the family.
Well, we said what we said because we didn't want to give an answer to your question. But it is what it is about you read. Jean Pierre Maers, who has been a very constructive Board member of Nestle, is leaving out many, many years the Board of Nestle.
Did you give a reason for that?
Well, there's actually many reasons. First of all, he has been over many years and governance is dictating also limits of age, of number of years, etcetera. And so it's also a decision he has to take.
Okay. Good. Thank you.
We have another question by e mail from again from Lagos asking about the prospects for the region in 2014 in the context of consumers buying power, which is expected to drop.
Okay. Africa, you're really Lucas, it's nice to see so many questions from Africa. I say hello to Africa.
Thank you, Paul. Look, in 2013, as Wanling mentioned earlier, Africa had excellent double digit growth, so also the Middle East. So we see in the foreseeable future Africa continuing to grow and continuing to be an important growth engine for us. We continue to invest. What you say about purchasing power and inflation is very true, but this is not new.
These are conditions we have faced before. We have overcome these conditions and we hope to do so again as we go forward. And we do not make specific forecasts by region, as you know. The only forecasts we make are corporate, which were made by our CEO already.
Thank you, Anandu. Thank you.
We have another question from the call, Irene Hu from Morgan Stanley. Irene, go ahead.
Hi, good morning, Paul and Wang Ling. A couple of questions for me. The first one is on Nutrition. Impressive acceleration in the Q4, almost 13%. How much of this was driven by Jenny Craig no longer being a drag as well as your performance in China?
Can you just update us on trends in China specifically? I understand you've introduced new SKUs at higher price points. And can you also tell us what YY's organic growth was in the quarter? And then secondly, in terms of the U. S.
Business, I mean, clearly, the whole packaged food space has been under pressure for some time and there appears to be no improvement despite macro indicators getting slightly better and you're seeing this particularly in frozen business. Could you give us your view on what you think is driving the sweeteners? Is it the economy or is it a somewhat structural shift towards healthignatural fruits? And if so, do you think you have the right portfolio in the U. S.
To address this shift? And what are your plans to improve category growth? Thanks.
Irene, I tried to formulate the question because we didn't have a good hearing here of your question. But the first question was nutrition has shown an acceleration of organic growth in the latter part of the year in the last months. Is that also because Jenny Graves went out? Or and was it also because White came in? And what is the organic growth of White?
First of all, we don't give all the details on organic growth of individual parts of it, but it is clear that Jenny Greg not being in the competitive base is helping there. But it is specifically the strong growth of our infant nutrition business worldwide and in specific areas even more that is coming more true because they didn't have this dimension that was dragging them a little bit down. So the figures are really coming out that are comparative to some competitors. And I don't give we don't normally give the figures specifically on each of the underlying parts of the business. I think we can go to the USA.
USA frozen food is like not getting colors back in the category of frozen food in general. What are we doing? There are different trends, but maybe you, Chris, can
Well, if we speak of the U. S. Overall and Wanling talked about it earlier and Irene also you mentioned, I mean the overall environment there is challenging. Demand is subdued. And if we look at our portfolio in the U.
S, we were fortunate last year as well as this year to grow both real internal growth and organic growth because of the breadth of the portfolio we have. Wendling first mentioned about pet care which is the largest single category that we have there again through good innovation in a number of areas gaining good share in cat food and litter as well. The 2nd biggest area in the U. S. Is the one you alluded to which is frozen food.
And there we participate in 4 segments. And each of those segments have different dynamics. We can say overall that frozen food is subdued as a category. But starting with the biggest one that we participate in which was in frozen pizza which we as you know acquired from Kraft in 20 10 saw this year actually an improvement. Category last year had declined or 2 years ago had declined I think around 4%.
This last year was fairly stable. We were able to actually grow share as we mentioned earlier in DiGiorno's and Jack's. If you look at the 2nd biggest area is Stouffer's the frozen prepared meals there we grew share. We grew both in volume and value. And there we did it through good value good products in this particular segment.
Hot Pockets was mentioned earlier. Snacks as a category is growing. We also grew in that category. And there we did it actually by rationalizing SKUs. I think we cut out around 50% of the SKUs in that category and still grew.
The challenge is the 4th one and that is in Lean Cuisine where both that segment and our participation in that segment our share and our volume actually declined. And there we're taking a number of actions to deal with that. One is and we started last year making sure we have the price value relationship correct in this segment. We're also addressing this segment through a lot of innovation. Innovation for example last year we had kicked off with the salad additions which is value added components to salad.
This year we're complementing that with wrap additions. Also getting into the breakfast category another segment that Lean Cuisine has not participated in and a segment in frozen that is growing. And last year also we participated and started to participate in this more natural segment with Honestly Good which we're continuing now to roll out. It's still early days but this is a way that we're also looking at that particular growth area in frozen. So again just to follow-up then on the U.
S. If you looked at Wichita Water we had growth in water, we had growth in nutrition if you factor out Jenny Craig. Good growth in coffee, Coffee Mate, Nesquik and confectionery as we mentioned earlier also showed some good promise. So overall to summarize difficult environment the U. S.
We don't see this necessarily changing as we move ahead. But our opportunity to grow even in these difficult environments I think we have the opportunity to do.
Thank you, Chris. You want to say, Lalit? I'll go
back Irene. Your question about you're trying to get some more color in terms of nutrition growth. Paul is exactly right. We do not provide the breakdowns, but I just want to share with you that the Jenny Craig, the sub period where by the time we sold Jenny Craig, the impact is not material on Nutrition's performance. And equally for YITH Nutrition, remember we only started to consolidate the organic to have an impact on organic growth starting only in December.
Thanks. We have another question from the call. Warren Ackerman of Societe Generale. Warren, please go ahead.
Good morning, Wang Ling. Good morning, Paul. It's Warren Ackerman here at SocGen. I've also got two questions. The first one is for Paul.
And it's just going back to the Nestle model. I mean, obviously, the Nestle model is 5% to 6% organic growth, but you've guided to around 5% for the last 2 years. So I'm just kind of wondering whether 5% is a new Nestle model. I'm looking at my own model of Nestle and I can't remember 2 consecutive years even going back more than a decade where growth could be lower than the Netflate model? That's the first question.
And then secondly, could you talk about the competitive environment in coffee, specifically pricing where we've been seeing a decelerating trend? What are you seeing in single serve coffee following the Mondelez launch in Europe? And what was the Nespresso growth in 2013? And did you add the CHF 500,000,000 to the revenue base that you usually target? Thank you.
Well, 1st of all, the Nestle model. And you didn't find 2 years in a row in the last 10 years, we didn't ever have a situation and an environment like this in the last 10, 20 years either. So you have to we can all dream. You have to be realistic. And there is no pricing need.
We're not going to price for getting to levels off. The model is something over time. I have said that over and over again. It is a band that we want to walk in over time. In the last 10 years, we did 6.1% and nobody came and say, oh, you didn't do it right, you had no over the 6%.
So and it was an average of 6.1%. So and that's the model. It is to go and aim and gear the organization, go for the growth platforms, invest in where you have to, to allow to have the 5% to 6% happen over time with acute sense of reality. And that's the Nestle model. And to do that holistically, the end company, that is top line and margin improvement.
And that combination is a strength. And to do that efficiently in resources, resource efficiency. Actually, this is what the company should do over time. It is to go for profitable growth and do that resource efficiently. And that's the 5% to 6% because we felt that worldwide perspective of time, over time, the world is going to grow 3%, 4%.
We want to have accretive value on that normal growth because we are a worldwide company. So you're flourishing and going with an environment, but we want to outperform that environment, and that's how we get to 5% to 6%. That's the model over time. And I feel 20 13 was exactly that. Considering the environment, considering the soft pricing needs and intensity, that is what comes out.
That is what allows us to construct the Nestle model over time. That is what we did. That's why I feel last year was exactly a good year in line with the Nestle model over time. And this year gives scores of the same. We're going to do whatever it takes.
And that's why we say we're going to go around 5%. It will not be realistic to push an organization like this, I would say, unhelpingly to just be in a range when the pricing or whatever is not there. So that's the help that's I feel also the guiding health of the national model. It guides you and then you have expectations, but it guides also an organization to reality. It's a challenging reality that we want to create for ourselves over time.
It is a challenge. It is a target. It is something we work for. It is guiding. And it is something that we do with a huge sense of reality and also relative to the market, outperforming.
So and without jeopardizing the near future, you can always force the near future. We do maintain long term perspective on things. We are investing heavily pushing something back on our margins. We are investing heavily for things we're going to enjoy in 5, 10, 20 years' time like people did before us and that we are having now that enables us to do that. That's inevitable.
There is a band there is a focus on a possibility of 5% to 6% growth with a permanent margin increase. Now why permanent margin increase? Because we are getting more and more added value, more research based, more argument based in a more volatile environment needs more return. That's also a logical thing. So I'm EEs, we are very intense, but I'm very honestly relaxed into the nervousness of getting to 5 or 5.5 average.
Actually, we have done 6.1 over the last 10 years. And then the coffee environment, the Mondelez and espresso portion coffee, it's a fantastic one. I may give that to Patrice Buller who has a global view on these things. It's a fantastic, fantastic dynamic market, I must say. So Patrice?
I think you have said it. Coffee is probably the one of the category where we operate in and in the food industry that has been the more dynamic, creative, innovating and premiumizing over the last 10 years. And of course, we are very, very proud to be in the forefront of this through Nespresso, which is now 25 years old, but also Nescafe do Dolce Gusto, but also in soluble coffee. So to paint the picture, coffee is a buoyant, growing and premiumizing category in all dimension of the depth of these categories. To start with soluble coffee, we have seen and we have had, we have talked about success of Japan, but also in some European market.
In a difficult environment where we have had price pressure on coffee, we have been able also to premiumize with new technology, a product called AZERA in the U. K. And Kumibai san in Japan and getting growth through better cup of coffee and bringing people there. We have also developed specialties product, cappuccino and so. And you will see in 2014 even more innovation to continue to drive this very, very dynamic category.
Capsule Coffee is, of course, where it's been the more visible part of this premiumization of Coffee. You competitor. But just to give you an idea, today, we have more than 130 system competing in Capsule Coffee, of which 90 do claim to be compatible with Nespresso. So I would just say Mondelez is one of it. And while this is a reality, it's a reality that has stimulated Nespresso.
We have grown strongly last year. We have grown in proportion in Swiss franc at the same level as before. We have opened new markets. We have opened 48 new boutiques. We have opened new distribution channel.
So we continue to compete on our unique business model of unique blends, unique distribution channels, unique machines and outstanding services. So some of these 90 companies and brands will fight on the shelf for supermarket. We are in direct relationship with our consumer, and I have to say that all of them seem to be extremely satisfied with us. So look out for more growth. This is a category, and the capsule coffee will continue to grow.
I will say also that if you have seen results of some important brand launching also system in the U. S, so you will see that it's not so easy to succeed. It's not easy to succeed. You can have a brand, but you need also the technology and the system. We are leading in there.
We have an extraordinary program in R and D to continue to deliver better products, system and services to clients.
Thank you, Patricia.
The other thing that Warren asked, Warren credit to you for not asking the growth rate of Nespresso because you know very well 2 years ago we stopped doing that. But to your question about did we did Nespresso deliver against our commitment a few years ago for growing the business at $500,000,000 a year. We are very much on track.
Okay. We have another question from the call, Robert Balschmidt of Merrill Lynch. Robert, you go ahead please.
Yes. Thank you very much. Excuse me. Two questions. 1, you mentioned pension efficiencies as a source of gain this year.
If we look to the footnotes in the annual report there, it looks like the service costs have gone down. And in particular, I'm just wondering if you could give some more clarity about that boost to your earnings this year. And then secondly, when we think about the growth, I mean, in terms of second half weighted, you've clearly given some reasons on that. If we just take the first half versus the second half, I mean, clearly with lower comparators in the first half and then normalizing out Easter, it would still seem to imply that you're expecting some further slowdown in markets. And I'm wondering if you could call out which markets in particular you might be expecting to slow down given it sounds like you're expecting similar growth trends in the U.
S. And Europe. Thank you. Pension?
Yes, you can answer the pension.
Hi, Robert. On and you can actually see on the financial statements that we released today this morning, you will see in terms of pension, there are actually 2 components. There is the Swiss in the Swiss pension plan where we switch it from defined benefit to defined contribution. We also had a one time benefit in terms of the U. S.
Medical plan. So that's what's driving it. And you'll see you can catch all the details in our financial statements that were released this morning.
So it's definitely a change from one plant to another that has reduced liabilities. That's right. On the growth, you referred to the fact, Robert, that I have explained already why and all that. Do we see further slowdown? I mean, I see more stabilizing on growth.
Europe is not getting better, doesn't get cars back very faster, starts to smell like deflationary. You have to see what's happening there. I hope it doesn't go in that spiral. North America, as we always said, is rebounding faster back doesn't do that this time. It It is way too structural, way too profound a problem to have a very fast turnaround there.
The emerging market is growing slower. I think they go to a pace that is possible to maintain. I speak in general, country by country can be different. We see some headwinds in certain countries of Latin America, but also in Asia. You saw the projections again of China, 7% plus is there we're going to see, but we don't see Africa slowing down, but it's going to be different in different areas.
So I don't see our comment coming from a feeling that the world is going to slow down in the second half of the year. No, definitely not. It is more the combination of pricing needs and inflation in certain countries that are going to go for pricing needs in the latter part of the year and some and a combination of launches and marketing plans that are going to get on stream in the latter part. So basically, that's a combination of factors that induces us to say more gear to the latter part of 2014. Thanks, Paul.
We have one last caller, Patrick Schleniman of Zurcher Kantonalbank. Patrick, please go ahead.
Good morning, Paul. Good morning, Van Linge. What's your best guess expectation for input costs for 2014? That's my first question. And secondly, regarding the Confectionery margin was down 100 basis points last year.
You were mentioning increased marketing investments. What should we expect here for the future for the contractionary margin, some margin improvements from this lower level? Thank you.
On raw materials, you want to add?
Yes. Hi, Patrick. It's on raw material, our guidance is low single digit, so for 2014.
On compared to your your question just to make sure that I have the right question, you said that the margin went down?
100 basis points last year in 2013. And you were mentioning increased marketing investments. So what are we expect here for the future? Any more pressure coming from marketing investments? Or shall we expect some margin improvements from this lower level now?
Yes. We should be I mean in 2013 a big part of it was in Brazil where we were investing World Cup. And so that should obviously not be repeated in 2014. We had prepaid spend it that's obviously for this year.
But again, Derek, it's a combination of things. First of all, this was indeed a heavy marketing spend, specifically Brazil, but also cocoa prices went up. So and there again, the dynamics of pricing, costing, efforts and marketing plans. Fact is, the compression in the last year has been driving up its margin dramatically in the last years. And this is not a setback.
That is an expression of investment, which is a reflection of
trust in the category. Okay. Thanks, Paul. We have time for last sorry. Patrick?
Okay. We have a last time for last question from the room. Nathalie, over there please. Thanks.
Hi. Nathalie Olaforce from the AFP. Two questions. I want to come back on the immigration vote. I think you've got over 90 nationalities represented here in Switzerland.
Could you let us know how the immigration for the quarters are going to affect your recruitment policy? And second question, in emerging markets, some of your competitors have mentioned a rebound during the Q4. Could you give us an indication of how emerging markets have performed with Nestle and whether the competitive environment is getting tougher in these regions?
On the rebound of the emerging markets, I must say first, what you saw was quite and we were very early on to see that. You may remember in 2012, in the 9 month result, we really felt the emerging markets slowed down a little bit. It looks like we are a very good barometer before others were talking about that. We really felt that. And what you saw with them is like a pandemic over and it comes back, but it's not vigorous growth coming back to the we get used to positive things so easily.
There are high, high, high growth rates. I was the first to say too that a country that is growing 15% year after year, there's always the engine overheats. And why? Because, first of all, it's growth on growth and but also social structures, the mindset, the fabric of the country doesn't cannot fall 15%. So it is there's in many markets going back to normal, what I say, sustainable growth levels.
And we see that political, social, political in certain areas that affect again, it's a basket of things. What you saw though is an overreaction of slowing and there's some confidence coming back in certain emerging markets. So that could give some, I would say, better figures coming in, not on the same level as it was, but better than we would expect. Your second question was immigration again. I mean, it looks to be it was last Sunday, that's why we're asking.
But we are indeed 19 nationalities. And but we don't from here going to the countries and taking people in. It's people working in operation in Nestle somewhere who come here, who had their experience and who then go back to the market. And so we have a flux of people. Just like me, I'm an immigrant.
So ask all the questions, maybe next year I'm not here. But you understand. So and that's why I said, considering that dynamics we have, hundreds of people Peter, how many per year? It must be 100 and 100 of people coming in and going back into the markets. And we have factories with quite a lot of people who are coming in from over the border to work in our factories too, I must say.
So we're going to see how that starts out. But I'm look, if I trust in the wisdom and the wisdom of the Swiss people to see through the short term and see what is at stake here. Also in the votes, what they whatever they're going to do in the future, the votes that they see what is at stake, that they see the underlying interrelationships of things, also and the recommendation that they're going to have now to set up on this that they see and to do that wisely so that we don't actually break something that has gone so well for this country. But I'm really confident that's going to be the case. So it's actually a good note to say I'm confident on many things.
And I think with that, we basically Derry, I want to thank you all for 1st of all, for your presence, also for listening in and seeing in for your questions. And yes, indeed, 2013 was not an easy one, but the bigger the challenge, the greater the glory. But 2014 is not going to be easy either. But again, I feel we have invested in the right things. We have focused on the right things.
We have defined the right things and we have understood the challenges ahead, and I think we're going to answer them. So once again, thank you very much. And well, all of you have a good year. Thank you very much.
Thank you, Paul. As usual, we're happy to take any follow-up questions via e mail or Twitter. I'm sure you know the addresses. Thank you very much.