Good morning, everyone, welcome to the Nestlé full year results conference call. As usual, we will start with the presentation, then we'll take your questions. I would like to remind you that this call is being recorded. Before handing over to Wan Ling, I'd like to update you on our plans for the coming weeks. Immediately after this call, at 10:00 A.M., Swiss time, Paul Bulcke will host our press conference. Our next presentation will be by Chris Johnson, Head of Zone Americas, at CAGNY next week. Paul Bulcke will present at CAGE in March. We are not doing our usual roadshow presentation in London next week, as we feel that the other presentations during the course of February and March render it unnecessary. I'm excited to announce that we will launch a new IR section of the Nestlé website one week today.
I think you will find that we have made it a more useful tool for you. As ever, I'd welcome any feedback. Back to today, we are not going to run through each of the zones in Globally Managed Businesses, which are covered in the press release, but will instead cover the key financials, then do a broader look at our performance in 2012 and the drivers for 2013. I will now take the safe harbor slide as read and pass the call to Wan Ling.
Thank you, Roddy. Great to have you back in top form. Good morning, everyone. We are live via webcast from our home office in Vevey. I never imagined I would spend Valentine's Day with a few hundred investors and analysts. Hopefully, these results will make your hearts beat faster. I don't need to tell you that 2012 was another tough year to be operating a global business. Let's just remind ourselves of what we set out to accomplish in 2012. In terms of financial performance, the commitment was to deliver the Nestlé model. We have done so. Our key priority, and one which I told you I would be very focused on during my first year, was to improve our working capital performance. This we did with a resulting big improvement also in our cash flow performance.
The credit goes to all our people who have done a fantastic job. In terms of efficiencies, our target was to deliver at least CHF 1.5 billion. We did so. In terms of complexity, the priority was to reduce our SKU count meaningfully, we reduced our SKUs by almost 14%. We've also increased the dividend to CHF 2.05 per share. Some good achievements from a financial perspective in 2012, of course, this only raises the bar for us for 2013. On the strategic front, the priority was to integrate the two Chinese partnerships. The integration has gone well, the partnerships are very much on track. We also closed the Wyeth acquisition. This was, of course, great news as we expected it to close in 2013.
We have transitioned the business, started the integration, cleaned up inventory with our distributors, and we expect to meet our pre-acquisition estimates for 2013. I would describe 2012 as a good year for Nestlé, especially because of the way in which we have delivered our results. It is some years back when our CEO, Paul Bulcke, first described Nestlé as the AND company, A-N-D, emphasizing our ambition to make the right choices without compromise, to deliver top line and bottom line, to focus on winning in both emerging and developed markets. In essence, to deliver today and to invest for tomorrow. As I go through the details of our performance, I hope you will agree that these are broad-based results, aligned with our strategic roadmap and achieved while continuing to do the right things for the longer term. They've confirmed that we are indeed the AND company.
We have lifted our performance in 2012 while laying the foundations to win in 2013 and beyond, to deliver the profitable growth year after year that is so ingrained in the Nestlé DNA. Now let's take a look at the highlights. Sales increased by CHF 8.6 billion in 2012. Organic growth was 5.9% and RIG 3.1%. To deliver this growth, we had to overcome tough 2011 comparables of 7.5% organic growth and 3.9% RIG. I have to say, for someone like me, new to Nestlé, near 6% growth on top of 7.5% is just really awesome. The trading operating profit was up CHF 1.5 billion to CHF 14 billion. The margin was up 20 basis points to 15.2%. The operating cash flow was up CHF 5.5 billion to CHF 15.8 billion.
The free cash flow was up from CHF 4.8 billion in 2011 to CHF 9.9 billion in 2012. Let's now take a look at the profit performance. NCE, also known as Nestlé Continuous Excellence, once again contributed over CHF 1.5 billion of savings. That's CHF 1.5 billion. These savings are most evident in the reductions in the cost of goods sold, 30 basis points, and in distribution costs, 20 basis points. The marketing and admin costs were up 50 basis points. The increase in marketing costs, 30 basis points, reflects our commitment to supporting our brands and sales activities. In constant currencies, consumer-facing marketing spend was up nearly 8%. The 20 basis points increase in admin costs in 2012 should be seen in the context of the 80 basis points decline in 2011, due to the restructuring of pension plans that year.
R&D spend was up CHF 100 million, but unchanged as a percentage of sales at 1.7%. As I go through the business review in a few minutes, you will see a lot of innovations both for 2012 and 2013. Our pipeline is strong, whether for premium and systems, for PPP, or for nutrition, health, and wellness. The net other trading expenses were down 20 basis points below the average of recent years. The inclusion of this line in the Nestlé model adds a degree of volatility, as you know. The important thing for us is that our people running the business, who are responsible for delivering the Nestlé model, are held accountable also for these line items. On this next slide, the rest of the income statement, no major changes here year on year. Net profit was up 11.8% to CHF 10.6 billion.
Earnings per shares were up 12.2% to CHF 3.33 per share, and the underlying earnings per share in constant currency were up 7.5%. On this next slide is our cash flow and working capital. You might recall we shared our enhanced cash flow reporting with you at the half year point. It is now fully in place. As you can see, we have significantly increased our cash flow generation, up around 50% to CHF 15.8 billion at the operating level. The key driver is our improved working capital performance. Obviously, part of the 2012 improvement is just a reflection of the easy comparable from 2011, as I said at the half year presentation. For the year as a whole, we saw a significant step up in our performance in all dimensions of working capital. I should add an obvious note of caution.
Such a large improvement in cash flow due to working capital, like we achieved in 2012, cannot be repeated in 2013. You should not extrapolate the 2012 performance for 2013. That said, we will continue to drive working capital efficiency. On this next slide, you can see the net debt bridge. The second half was impacted by the Wyeth closing. The year-end position is helped by a good contribution from cash flow. On the next slide, to help you with your 2013 forecast, is an update on the restatements resulting from changes in accounting standards. We told you about IAS 19, which is pension, at the half year. The other change is the deconsolidation of joint ventures, IFRS 11. We will publish the full restated 2012 in good time before the first quarter sales call.
Just to wrap up on the financials, we have delivered a good broad-based set of numbers, once again demonstrating our ability to grow the business profitability today while investing for the future. We achieved the Nestlé model. We up our brand support, we improved our cash flow, and we delivered double-digit growth in our earnings per share. Now let's review the business performance. First, the billionaire brands as usual. They have outperformed the group with 7% organic growth. Highlights this year include KitKat, Nescafé, Nespresso, Nestlé Pure Life, Milo, the infant nutrition and milk brands, as well as Purina ONE and Dog Chow. I will touch on many of these as well as other brands in my business review. Next, the geographic perspective, including all our businesses, both regionally and Globally Managed. This is the most complete comparison I can give you with our peers.
Our growth is truly broad based. It is achieved on the back of growth in previous years. This is key. A global company can truly claim to be winning only if it is growing everywhere, both in developed markets and in emerging, year after year. A couple of quick comments. In the Americas, you might remember that I told you on the first half call that the U.S. had improved its rate in each quarter. This trend continued in the fourth quarter. Both the U.S. and Latin America grew during the year. The U.S. had challenges in some categories in 2012. I think the new product launches, the communications plan, and the new leadership are all reasons to be more positive about the prospects for 2013 and beyond. In Europe, we continue to grow in the West, even despite the macro issues in the region.
I have to say, Team Europe, under the leadership of Laurent Freixe, has delivered in the face of shrinking local economies. I mean, just a fantastic job. Russia has maintained its improved momentum seen earlier in the year to end with high single-digit growth. In Zone AOA, I am happy to report that the zone's rate was significantly higher in the final months of the year than in the previous period. This delivers on Roddy's forecast on the nine-month call that the region would have a stronger end to the year. We ended with double-digit growth in many of the emerging markets, and Japan had a better year than it has had for quite some time.
I am now going to go through the business in detail, but rather than show the reporting units, which are in the appendix, so not to worry, I am going to divide my presentation between developed and emerging markets. I have to say, I was surprised to hear at our investor seminar in Shanghai last September, that some of you were surprised by just how big we are in emerging markets, which, of course, go beyond Asia and Africa, with our large businesses in Latin America as well as Central and Eastern Europe. Let me now start with the developed markets. Developed markets are 57% of our sales and grew by 2.5% in 2012. I do not need to tell you that the trading environment in these markets has remained tough around the world, and consumer confidence remains very low.
You can see this with private label in Europe, the growth of dollar stores in the U.S. as examples. In that context, we achieved share gains in Western Europe, building on those achieved in 2011, and we grew the business. While in the U.S., our market shares have, for the most part, been improving during 2012. What have been the key drivers of our performance? Our product segmentation has been critical. Whether supplying moments of indulgence and pleasure with premium, addressing cash-strapped consumers with PPPs, or delivering on our nutrition, health, and wellness promise. Let me give you some examples. I would like to highlight coffee. The systems Nespresso, Nescafé Dolce Gusto, Nescafé Milano, and Viaggi are all performing extremely well at the premium end. This slide shows the new San Francisco Nespresso boutique, just opened on Grant Street on Union Square, near Saks Fifth Avenue and Neiman Marcus.
Roddy has been there and tells me in his usual quintessential Roddy way that it is fab. The success of the Nestlé Professional Beverage Systems is one reason for that division's continued ability to grow around the world, despite an extremely tough environment for the out-of-home industry. Coffee is more than just systems. See in this picture, the lower price refill packs in the U.K., the value offerings in Southern Europe, particularly in Greece, the Hispanic range in the U.S., and Nestlé Professional's value system, Nescafé Alegria, which is now in over 60 markets, are all performing well. Nescafé was key to our successful year in Japan, where the Nescafé Barista machine has sold one million units since launch in 2010. 2013 is Nescafé's 75th anniversary.
The Nescafé story is one of nonstop innovation, which has seen it go from a tin of soluble in 1938 to the world's number 1 hot beverage brand, present in 180 countries. It's amazing for me to see an 80-year-old brand with sales of over CHF 10 billion deliver 8% organic growth in 2012. Our nutrition, health, and wellness focus was also key in 2012. Let me give you four examples. The first, new lower sugar recipes driving growth for Nesquik. The second is the performance of the new NaturNes baby foods in France. The third is Gerber Organic in the U.S. Fourth, last but not least, the market share gain for the relaunched BOOST, which is part of the Nestlé Health Science portfolio. Our water business both demonstrates the benefit of segmentation and validates our focus on nutrition, health, and wellness.
After all, what can be better for you than drinking water? The business has seen good growth at the premium end with S.Pellegrino across developed markets and in regional waters such as Poland Spring in the U.S., Buxton in the U.K., and at the value end with Nestlé Pure Life, also in the U.S. and U.K. Talking about water, I'm going to take a water break. Vittel, our very own brand. Roddy, you want to say something while I'm taking a break?
Cheers.
Quality H2O. Okay. Initiatives in other categories. That was not rehearsed, by the way. Initiatives in other categories, for instance, letting consumers choose flavors for KitKat, such as the green tea one here on the screen, which, oh, by the way, happens to be my all-time favorite. I was visiting with an investor in South Korea, and she told me that every time she goes to Tokyo, she stuffs her suitcases with the green tea KitKat. I don't blame her. It's really fantastic. Another one on the screen is a multi-pack of mini Buitoni pizzas and peelable ice cream have all played their part. KitKat became the number 1 chocolate brand in Japan in 2012, which is so exciting. A fantastic achievement for a brand that was launched in 1935 in the U.K. and is delivering near double-digit growth globally nearly 80 years later.
There is, of course, PetCare, which has continued to be a strong contributor. They have delivered compelling innovations addressing different segments and channels. For example, they've launched a super premium offer in the U.S., while at the same time, by contrast, making good inroads into the dollar store channel. In Europe, PetCare has also taken share in key markets. I mentioned dollar stores. Channel development is also important in Europe, whether it is hard discounters still growing fast or the pound stores in the U.K. There are the online retailers, another relatively new channel for food, as well as our own online activities. Key too has been our ability to find opportunities to grow in Southern Europe, as demonstrated by the performance of our coffee business in Greece. Greece, a country where unemployment has tripled since 2008 to 25%.
Overall, we were able to keep growth near flat in Portugal, Spain, Italy, and Greece, where the economies have shrunk. The categories that have helped, apart from coffee, include ice cream and chocolate. Our performance in these markets demonstrate that for Nestlé, for us, all markets have opportunities for growth, no matter how weak their economies. Sticking with developed markets, I'd like to look briefly now at what we've been doing in 2012 to ensure continued growth in 2013 and beyond, including investing in R&D, in innovation, and consumer communication. This commitment to investment is one of the key takeaways of my presentation. I've already told you that we increased our media spend and that our total marketing spend was up 30 basis points.
One of the things that I believe sets Nestlé apart is our commitment, regardless of shorter term challenges, never ever to sacrifice future development just to meet shorter term targets. Let's have a look at what we've done in 2012. We have announced two new R&D centers in developed markets. The first was the Nestlé Institute of Health Sciences. Working closely with Nestlé Health Science, it will focus on personalized science-based nutritional solutions to help prevent or manage chronic diseases. The second was a global center for our clinical trials attached to our R&D center here in Switzerland. This is the first time we've centralized our clinical development work. Clinical trials are recognized by food authorities as a robust way of assessing the effect of nutrients or foods on consumers. Because of that, we welcome the increased rigor that exists around claims.
Which means that the ability to make claims is more important today than ever. This new center will be at the heart of our efforts to drive competitive advantage through our claims. We also enlarged our global chocolate product technology center in England. This will work on our innovative ideas around manufacturing, raw material processing, product reformulation, and packaging. Innovations are the cornerstone of our ability to develop growth and to remain differentiated from our competition, whether it's private or branded. In the U.S., there is also a stream of innovation coming through in our frozen business. This includes DiGiorno Pizzeria!, to which I give my personal seal of approval, and DiGiorno Italian Style Favorites, and Lean Cuisine Salad Additions. In ice cream, you can see in the picture Häagen-Dazs Gelato, Outshine Fruit Bars, and SkinnyCow candy bars.
There will also be new capsule options and machines coming for Nescafé Dolce Gusto and Nespresso. Some innovations in Nescafé, new flavors in KitKat, range extensions in pet care, innovations in Maggi. A very full pipeline. With a lot of innovation to come, it is natural that we will be continuing to provide an appropriate level of communication and brand support. We will also continue to exploit opportunities in digital media. Turning to investment, we announced a new factory for Nescafé Dolce Gusto in Germany, for Nespresso in Switzerland, and for Nestlé Health Science and Pet Care in Australia. We have extended lines in a range of factories across Europe and the U.S. Important to note, therefore, that we continue to see many opportunities for growth in the developed markets, even despite the challenges. Finally, on developed markets, a few words on creating shared value.
I think many people associate our social activities more with emerging markets, working with farmers and the like, but we also are very active in the developed markets. Let me give you some examples. In the U.S., we're partnering with the American Academy of Pediatrics as a founding sponsor of a new organization called the Institute for Healthy Childhood Weight. This is dedicated to the prevention and treatment of childhood obesity. We are also working with the International Association of Athletics Federations to encourage school kids to get into sports and to educate them about the benefits of exercise. At the other end of the age spectrum, we are working with the International Osteoporosis Foundation to help make people more aware of what can be done to prevent this disease. In Carbon Disclosure Project, Nestlé topped the list of companies disclosing and cutting their carbon emissions.
Now let's look at emerging markets. Our sales in emerging markets are now over CHF 39 billion. This makes us the biggest player in our industry in the emerging markets, a fact which is sometimes overlooked. Not really sure why. This represents 43% of our sales and is accretive to the Nestlé model. The emerging markets had organic growth of 11% in 2012. The BRIC markets and our PPPs, which are sold mainly in emerging markets, both also grew by about 11%. A number of markets, including Greater China, Africa, and the Middle East, achieved double-digit growth. We had high single-digit growth in Russia, Brazil, South Asia, and others. This is a good performance in a trading environment that, while okay, definitely very positive, slowed a bit in the final months of 2012. Let's have a look at some of the catalysts for our 2012 performance.
We have maintained a good level of innovation. Examples in AOA are Maggi Magic Meals in the Philippines and Malaysia, Nestlé Omega Plus to reduce cholesterol, Milo with added fiber, a new ready-to-eat version of Golden Morn cereal in Africa, and a further rollout of the peelable ice cream across the zone. In Latin America, apart from the famous peelable ice cream launched in a number of markets, there have been regional launches and rollouts of the Maggi Juicy range, of Nescafé with microgrounds, and of Greek yogurt. We also launched two firsts in Mexico, the first shelf-stable yogurt and the first drinking yogurt that helps reduce cholesterol. A big success was the launch of KitKat in Brazil. We also had a success there in the out-of-home channel with two nutrition, health, and wellness chocolate offerings, a diet white chocolate bar and a no lactose, no sugar bar.
We also launched a range of Nestlé Fitness snack bars. Nutrition, health, and wellness is arguably even more important in emerging markets than developed. This is especially true for our emerging consumers, who spend a high proportion of their incomes on food and who do not have the protection of insurance and cannot afford the luxury of being ill. Nestlé Pure Life grew rapidly. Emerging markets now represent about 20% of our water business. The dairy business saw good growth on the back of its strong nutrition credentials and communication. The infant formula and infant cereal businesses both grew double digits, with innovations being rolled out across their markets. One aspect that people perhaps overlook in emerging markets is out-of-home consumption. Nestlé Professional saw double-digit growth.
It serves the extremes, from supplying food ingredients for traditional on-street vendors to providing coffee systems to the Western QSR chains that are springing up everywhere and want a high-quality, easy-to-operate coffee solution. China is today Nestlé Professional's third-biggest market and will likely be the number 2 in 2013. Pet care in emerging markets grew about 20%, including in Latin America, where sales are now around CHF 1 billion. It enjoyed 40% growth in Russia. I would conclude on 2012 by saying we had a good year in emerging markets. There was strong growth, a good contribution to the group's margin improvement, and an improved working capital performance. We weren't simply focused on delivering 2012. Just like in the developed markets, it's the same in the emerging. Much of our energy was spent on securing a successful future.
We are in the fast-moving consumer goods, one thing is for sure, they move even faster in emerging markets. You cannot wait for opportunities to come to you, and you cannot wait to invest. If we want to continue to win in the future, we need to be positioned to lead today. We announced our open factories in Malaysia, the Philippines, the Congo, Angola, South Africa, Chile, and Sri Lanka. We have extended lines in many factories, including in Russia, China, and India. We also opened three R&D centers in emerging markets, two in China, in Xiamen and Dongguan, and one in India. Our two Chinese partnerships, Yinlu and Hsu Fu Chi, I'm happy to report, are meeting our expectations. We are equally excited by what we can learn from them, which is very important. These transactions have significantly increased our scale in AOA.
Our sales there in 2012 were up by a quarter. We've also begun the integration of Wyeth. This is a great fit with our existing business, both in terms of geography, also brand positioning, as well as know-how. We have also continued to expand our distribution. For example, reaching an additional 1 million points of sale. That's 1 million points of sale in 2012 in AOA. This extends our sales footprint for 2013. As an example, you have already heard about the boat we use on the Amazon to reach consumers. We now have one in Bangladesh. You can see it in the picture, where about 80% of the population lives in rural areas. Another likely positive for 2013 is Russia. We are seeing improving trends there, helped by now having local manufacturing in coffee and increased capacity in pet care. We also have improved chocolate portfolio.
We've also seen an extremely strong take-up for Nescafé Dolce Gusto, the best-selling system there in their first full year on the market. It was just incredible. First full year in the market, Nescafé Dolce Gusto becoming the best-selling system. It's unbelievable. I will finish my global tour with a few words about our creating shared value activities in emerging markets. I've mentioned coffee quite often today, I will start there. We have many programs with coffee farmers. In 2012, we extended our commitment with Colombian farmers for a further five years. We launched a program to help farmers in Haiti, we're now working with 20,000 farmers in Vietnam. We also opened our first coffee demonstration farm in India. All these initiatives have a shared objective. It's to ensure a high-quality crop for us and to improve the standards of living for the farmers.
Nespresso, meanwhile, sources 100% of its coffee direct from farmers. Do you know that only about 1% of the world's coffee beans are good enough quality for Nespresso? Only about 1%. No wonder people love the Nespresso coffee. Turning to chocolate, we scaled up the Nestlé Cocoa Plan, increasing the amount we source directly from farmers, aiming to reach 15% of our total supply this year. We trained 21,000 farmers in 2012. We distributed 1 million high-yielding, disease-resistant plantlets. We also continued to work with the Fair Labor Association to try to eradicate child labor from cocoa farming. Our biggest interaction with farmers is in dairy. Among other initiatives, we have opened a training farm in China. We're working with the authorities in Morocco to improve dairy farming practices. Finally, one initiative that crosses all crops.
Since 2001, we have reduced our own greenhouse gas emissions per ton of product by 50%. We are now working with our farmers to help them also reduce their emissions. This concludes my presentation. To recap, as I said at the half year, this year was not a walk in the park. Even so, we delivered a good broad-based set of results, delivering on top line once again, on the margin, on the earnings, and on the cash flow. We delivered in emerging markets and in developed world. We have brought dynamism to our categories. We brought exciting, far-reaching, consumer-driven innovations to our products and brands. Our innovations go beyond products. We're bringing new services to our consumers, and we're finding new ways to engage with them. We have grown the portfolio across all segments in premium systems, and products, and in PPPs.
We know there's no room for complacency, which is why we have continued to invest for the future, to invest in our people and brands, to invest in R&D, and to invest in our capacities and our capabilities. We have done so while respecting our commitment to create value both for our shareholders and for those societies in which we operate. This sets us up well to win in our markets around the world, not just in 2013, but also beyond. To deliver the Nestlé model and to continue to drive the consistent growth, the performance improvement, and the brand investment that is Nestlé's DNA. Thank you very much for listening. I'd now like to open for discussion for Q&A. I will now pass the call back to the operator.
Thank you. Ladies and gentlemen, your question and answer session will now begin. If you wish to ask a question, please key star 1 on your tone dial phone. If you change your mind and decide to withdraw your question, simply key star 2. All questions will be answered in the order received. You will be advised when to ask your question. All other lines will remain on listen only. Please restrict yourselves to two questions per person. Thank you. Your first question is from Eileen Khoo of Morgan Stanley. Please ask your question.
My two questions are, the first one is on Zone AOA. If I look at the growth in the fourth quarter, it was about 5.9%. That's still substantially below the usual double-digit run rate. Would it be right to assume then that the run of issues that you raised in the third quarter were still impacting growth to an extent, maybe in October or November last year, and therefore, your underlying growth might actually have been higher excluding that? The second question is on the balance sheet. Your net debt is now back at CHF 18 billion, which I think was your original target before you made the Pfizer acquisition. Can you share with us how you're thinking about capital allocation and possibly a return of your share buyback program at some point? Thanks.
Hi, Eileen. How are you? It's two questions. Let me address the question on AOA. First of all, the markets where we had highlighted in Q3 and in the nine-month call that Roddy had highlighted, they've all come back. They've all reversed the trend. Really happy to see the performance, the reversal of the trend in AOA markets towards the end of the year. I want to highlight that H1 performance in terms of growth for AOA was unusually high. If you look back in recent years, AOA's growth has averaged in the high single digit. We do not expect any different for 2013 and going forward. In terms of net debt, you are completely right. It was a few years back, if I recall, that we had guided net debt to be in the CHF 15 billion-CHF 18 billion range by 2013, excluding acquisition.
You're completely right. Despite Pfizer's acquisition, we're now at CHF 18 billion, the close of last year. We're very happy about that. What we usually say on share buyback, whereas the dividend policy is one of a sustainable dividend policy, for share buyback, it's more opportunistic. To the extent that we have excess cash, we will always consider a share buyback program.
I think also on AOA, Eileen, I think you need to strip out the impact of the pricing, because pricing has obviously trended down in each quarter during the year. That has a negative impact on the trend in the fourth quarter, if you like. The trend in RIG is absolutely clear. If you look at the RIG in AOA for the final quarter compared to the previous quarter, there's a very significant improvement.
Okay. Thank you very much.
Next question, please.
Thank you for your question. Your next question is from Patrick Trueman from CKV.
Good morning. Good morning, Wan Ling. Good morning, Roddy. I have a question regarding input costs. What are your best guess estimates for 2013? My second question is regarding the powered and the liquid beverages. The margin was down 20 basis points for the full year, but was down 60 basis points in H1, clear improvement in H2. What should we expect here for the future in terms of mixes? You're investing a lot in Dolce Gusto, for example, in new boutiques. What is your best guess for the future in terms of margin development? Thank you.
Thank you, Patrick, for the question. In terms of input cost, what we had guided for last year for 2012 was exactly spot on. For 2013, we are not giving any guidance because we only give guidance if we anticipate high input cost volatility, which we do not anticipate for 2013. In terms of powder and liquid beverages category, it was down for three main reasons. Input cost was up. The second thing is our continuing investment in Nescafé Dolce Gusto. The third one being we were lapping in some markets with pension cost benefit in 2011 that was not repeated in 2012.
The second half trend that you referred to, I haven't actually looked at those second half numbers, but clearly the input cost pressure that Wan Ling referred to was greater in the first half than the second half.
Looking into the future?
Well, as we do with the other categories, we would want powdered liquid to contribute to the Nestlé model. I think one has to remember that Dolce Gusto now is a materially sized business. It is a fast-growing business. Because it's still in sort of launch phase in a number of markets, it's still dilutive to the powdered beverage margin. That's clearly a drag that is there, and it's there on purpose because clearly over time it will become a margin accretive business for that division.
All right.
That also goes back to the point of the presentation, which is that we deliver on short term, but also have the courage to continue to invest in the future. Nescafé Dolce Gusto clearly is a great example of that.
Okay. Thanks a lot.
Thank you, Patrick.
Thanks, Patrick.
Thank you for your question. Your next question is from Mr. Jon Cox of Kepler Cheuvreux.
Good morning, guys. I have a couple of questions for you. Actually, it's good to see that AOA appears to improve in Q4, but just looking at the Americas and emerging markets overall, it appears there was a deterioration in Q4, and I'm just wondering, was that something specific potentially to Brazil? I know it's a very big market for you, and is it more of a macro issue there, or am I being wrong with my assumptions? That is a Latin America slowdown we saw towards the tail end of the year, which knocked emerging market growth overall versus the nine-month figure you gave. That's the first question. Just on the second question, congratulations on the cash flow statement. It's obviously very positive. Just wondering what you think you can do in the future in terms of working capital, trade working capital as proportion of sales.
Do you have any sort of target in terms of percentage of sales? I know you've always said you can't compare us to someone like a Danone or a Unilever. We're not going to go negative. Clearly you could probably do a little bit better in terms of trade working capital proportion of sales. I'm just wondering, should we be expecting 50 basis points improvement per year? Is that the sort of average you're looking for? What is your thinking there? I'm just going to slip in very quickly. The dividend for 205 wasn't really very generous given the fact that the cash flow statement was so good. I'm just wondering what your thoughts were on that dividend payout. Thank you.
Let me go back to one of three questions. On the working capital, you are exactly right. We are not going to repeat because in 2011, working capital increased by two, in 2012 it went down by two. You are not going to see the kind of delta improvement in 2013. That said, we will continue to focus driving working capital efficiency, both in terms of absolute as well as a % of sales. Now, we do not guide and we do not share externally, but we do have internal targets. The management's focus on working capital, which was great in 2012, will continue in 2013 and beyond. On your first question in terms of emerging markets, pricing for AOA did slow down towards the second half of last year. Back to dividend.
Yeah. Jon, on the dividend, I think you need to put it in the context of the ratio. We were quite clear during the course of last year in saying that our focus was on the absolute amount of CHF, that we were paying rather than increasing the ratio because where we already are in the ratio, and I think we have been consistent with that. Just coming back to the emerging markets, I think the issue is the pricing, because it is clear that the RIG has continued to improve in the emerging markets in the fourth quarter. Actually, even if you ignore AOA, it has improved in the other emerging markets. We told you this at the nine months if you remember, we did a resetting of the pricing for coffee in Russia, a very big change to the Gold Blend pricing.
That has a significant impact on emerging markets. In Latin America, as was the case earlier in the year, the pricing has come off a bit. The underlying growth, the RIG, has continued to improve in the fourth quarter.
Okay, because if you look at emerging markets overall, it appears there was another deceleration, probably below 9% in Q4 on the organic. When I do my backing out on the Americas of the RIG, it looks like RIG was actually a little bit weaker in Q4. Maybe I am doing my sums wrong.
The key driver is the pricing.
Yeah.
Okay. Thank you.
Thanks, Jon.
Thank you for your question. Your next question is from Mr. Alain Oberhuber from MainFirst.
Good morning, Wan Ling. Good morning, Roddy. Just two questions. The first is about Japan. Could you elaborate a little bit more which categories grew faster? How was the development of the categories excluding coffee and confectionery? The second question is about CapEx pattern when we compare it to sales. Will it be similar in 2013 as we saw in 2012?
Yes. On the two questions, in terms of CapEx, our guidance will be about the same level as in 2012. In terms of Japan, KitKat, like I said, did really well. Confectionery did really well. Coffee also did very well. The barista machine had an outstanding performance.
Yeah. Alain, those two categories are about 80% of our Japanese business. The smaller categories, they performed fine, but frankly, if we didn't get those two right, we won't get Japan right.
Yeah.
They're both doing very well.
It's really good to see Japan come back, and not only in terms of growth, in terms of profitability, but their market share is also up, which is really good to see.
In coffee, it's not just the Barista. Barista is obviously a great success, but also Dolce Gusto is doing well, and so is the traditional soluble business. It's doing well across the board.
Pricing and volume. Was both up or was pricing flat and only volume up?
We had a bit of both.
Yeah.
Bit of both. Yeah.
Thank you.
Thank you for your question. Your next question is from Mr. Warren Ackerman of Societe Generale.
Good morning, Roddy. Good morning, Wan Ling. It's Warren Ackerman here at Soc Gen. I have a couple of questions. Wan Ling, can I get some of your thoughts on some of the other moving parts for 2013? Obviously, there's lots of moving parts. I'm thinking about any kind of color on gross margins, your marketing spend. Should we expect similar run rate in cost saves? Is there anything you would like to say on the first half, second half phasing on organic growth and margin? That's the first question. Then secondly, you said at the Q3 stage that you were looking for a strong performance in Q4 in the U.S., obviously your biggest market. I think at the Q3 stage you said that the macroeconomic situation in the U.S. was improving, also your market share trends were picking up as well.
I was just wondering whether you're able to tell us what the Q4 organic growth was versus Q3 in the U.S. I know you don't like to split it out, but it's obviously hard to see the U.S. in isolation when it's lumped in with Latin America. Back at the Q3 stage, you even sounded a bit more confident on categories like frozen food, which has been struggling for some time. The question is, could you kind of maybe just walk through some of your U.S. categories, what's happening to market shares, and has there been an overall pickup in the weighted category growth in foods in the U.S.? Thank you.
Thank you, Warren. In terms of guidance for next year, obviously, we always stick to the Nestlé model. Also continuing our commitment in terms of NCE of CHF 1.5 billion in savings. That's our guidance. In North America, it's really good to see as we close the year that RIG continues to be up. Market share also continues to be up. In terms of the frozen aisle categories, we actually saw good momentum closing the year. Quite happy with the way we ended the year and coming into 2013.
I think, as you've pointed out yourself, Warren, we don't give the Q4 numbers.
Sure.
Broadly speaking, the U.S. performance was in line with the developed market performance in the fourth quarter.
Yes.
As you know, that was quite positive. It was a good performance.
Sure, on the various categories. I think in Q3 stage 1 category you said that wasn't up was water, I think because there were some issues with private label. Is there any kind of big variances in market share in some of your bigger categories in the U.S.? I'm thinking kind of pet care, confectionery. Are they all generally moving in the right direction?
Yeah. Warren, if you think about the businesses that started the year really well, your pet care, your coffee, your Coffee-mate, confectionery, they're still doing very well. In terms of the ones that didn't start out well, which is basically the frozen aisle, it's improved during the course of the year, both in terms of RIG and market shares.
Right.
Also, Warren, and my comment was talking about Nestlé USA in the zone.
If you were to broaden that to Nestlé in the U.S., then my comment would have been an understatement of how well it performed, because Nestlé Waters had a very strong fourth quarter in terms of sales, partly because of Hurricane Sandy.
Sandy.
The other Globally Managed Businesses contributed as well. That and nutrition. Nutrition improved as well, Nespresso also had a good quarter.
Sure.
So the US is looking-
Okay, thanks guys. Cheers.
Thanks.
Next question, please.
Thank you for your question. Your next question is from Celine Pannuti of JPMorgan.
Yes, good morning. My first question is on coming back on Zone AOA. I understand your guidance like that we may come back to rather high single digit like for like versus double digit. Equally, Q4 was not what I would call high single digits. Can you try to give us a bit more color, maybe by big countries, on why was the number at around 5.8%? Am I right in understanding that December was much better and towards the high single digit? Is that what you are trying to say for 2013? Secondly, on your guidance on delivering the Nestlé model and your commitment to continue to improve trading margin. If I'm correct, the acquisition of Wyeth should have a positive margin impact, both in terms of the higher mix of the margin and as well the potential savings.
Do we look at this on top of the underlying business model of Nestlé in terms of margin expansion? Thank you.
Yeah. In terms of AOA, there was a 250 basis points improvement going in terms of RIG in Q4. It's now back to the long-term average in Zone AOA. That's for the food and beverage. At the NIM level, it was even stronger. In terms of Wyeth Nutrition, our guidance, you're correct. It's accretive, and that we do not foresee any change in 2013. That's a deviation from our earlier guidance when we announced the signing of the deal early, well, that was almost a year ago in April. Our guidance continues to be the Nestlé model for 2013, and that's all in, including the Wyeth Nutrition.
I think it's also a question of relative scale, Celine, in that it's a good margin business, but it's CHF 2 billion of sales as against CHF 90 billion of sales. The incremental margin impact on the group as a whole is not enormous. I think on AOA, it's always difficult to compare a quarter to a year or a quarter to a trend. If you think about 2012 as a whole, the big markets, China, Africa, Middle East, are double digit. South Asia is high single digit. These businesses are performing, and the emerging markets as a whole in AOA were double digit. These markets are performing broadly where you'd expect them to perform. We've turned Japan around after many years of struggling in a difficult economy.
I don't see why our expectation of returning to an average level of growth in AOA for the year is unreasonable. We effectively did the average in 2012 despite one weak quarter.
I understand it seems like an historical average. Pricing has decelerated to 1%. What is the outlook therefore for local inflation and local pricing in AOA next year or in 2013? Sorry.
I'm sorry, I didn't hear the first thing.
We didn't hear the first half of your question.
Sorry, the question was, the RIG has come back to around mid-single digit. Pricing, as you rightly say, has been weakening.
Nevertheless, 1% pricing, given the local inflation in those markets seems light. I was wondering whether we should see a rebound in pricing in 2013 in AOA.
Well, we're not going to give you a forecast on the pricing of AOA. Clearly, you have to also factor in not just raw material cost inflation, but wage inflation and other issues as well. The markets will take the price they need to take. That is all factored into our expectation of AOA performing well.
Thank you.
Okay. Next question, please.
Thank you for your question. Your next question is from David Hayes of Nomura.
Morning, all. Just two from me. I think you mentioned earlier about SKU rationalization and part of that being the working capital management. I just wonder whether that was any kind of influence on the RIG performance in the second half of the year, and whether you can try and quantify if there was any impact. Second is following up on some of that discussion around emerging markets, just looking at China specifically. Can you confirm that the RIG in China in the first half and the second half was the same kind of level? Thanks very much.
No, I can confirm that in terms of the SKU rationalization, there's no material impact vis-a-vis RIG. That did not happen. In terms of China RIG first half and second half, it's a bit lower, but nothing material. It's a bit lower due to tough comparison if you go against 2011.
By the way, it's double digit in both-
Yeah
halves and for the year. Okay. Next question, please.
Thank you for your question. Your next question is from Jeremy Fialko of Redburn.
Jeremy? Can I get the next question, please, operator? Operator, can we have the next question?
The next question is from Mr. Alan Erskine.
Okay, good morning, guys. Can you hear me?
Yes, Alan.
Okay. Yeah, just a couple of quick questions. One is on restructuring. I seem to recall a year ago, Jim indicated that you thought restructuring costs might go up a little bit this year, sorry, in 2012, and they actually seem to have gone down a tad. I just wondered if you could give us some color on that, and I guess also any guidance you can as to what that line item might do in 2013. My second question is on pricing again. If I've done my math right, I think pricing in Q4 was about 1.6%. Clearly, you do have some inputs coming down, which may need to be reflected in lower selling prices.
Can you give us any guidance at all as to what pricing might do at the group level in 2013, if even just to say that it could be a bit above or below the normal trend? Thanks a lot.
Hi, Alan. In terms of restructuring, as you know, the items in that category tends to be volatile, and it's strictly triggered by business decisions. We do not forecast or give particular guidance in terms of those line items. In terms of pricing, we had the benefit of pricing going from 2011 to 2012, and clearly, we saw a deceleration in pricing for the balance of 2012. Having said that, we also did take new pricing actions. Going into 2013, we guide on OG. On organic growth, we don't break it out by RIG or pricing.
Can I just follow up and ask, you mentioned you'd taken new pricing in 2012. Could you give us any idea what the level of sequential pricing was in the second half of last year? Just to get a handle on what would be the pricing simply due to carryover from increases that you took during 2012.
We don't try and work it out. It's a hugely complicated thing to do, it doesn't really bring us, the center, much benefit. The important thing for us is that the people in the different markets are taking the pricing that they need to take. I can tell you that PetCare has taken pricing, and clearly, you're aware of the grain costs in the U.S. They've taken pricing, I think, globally. Culinary has taken a bit of pricing. Milk's taken pricing in Latin America. Milk beverages have taken pricing. There's been pricing in a number of categories in the final months of the year that obviously will play through into 2013. We can't give you a number on what that impact is.
Thanks a lot.
All right. Thanks so much, Alan.
Thank you.
Next question, please.
Thank you for your question. Our next question comes from Jeremy Fialko of Redburn. Your line is open.
Hi. Can you hear me now?
Yes. Hi, Jeremy.
Yes, Jeremy.
Hi there. Yeah, just a couple of questions from me. First of all, on Nespresso, can you talk about how that finished the year and what your expectations for that are in 2013? The second question is on the tax rate. That looks like it was a little bit lower than we had thought in 2012, and what the expectation for your 2013 tax rate is. Thanks.
Jeremy, in terms of Nespresso, we are very happy to say that it met expectations in terms of growth rate profitability in 2012. We continue to have high expectations from our Nespresso business going into 2013. As you know, at the half year call, I had said that we were not going to give a lot more details in terms of our Nespresso business, given the competitive environment that we're in. Just know that Nespresso met expectations, and we continue to have high expectations of that business. The tax rate is actually similar to last year, and we do not give guidance on underlying tax rate going into 2013. We don't anticipate anything significantly different.
From the 2012 rate?
Yes.
We don't give guidance on the reported. The underlying is around 27.
Yeah.
Yeah.
It'll be about the same.
Next question, please. Operator, any more questions?
Okay. Our next question comes from Robert Dickinson of Citi.
Oh, good morning. I've just a quick question on margins within the zones. I see that you've continued to improve margin in Zone Europe despite over 200 basis points improvement in 2011. In Zone AOA, there's just 10 basis points of improvement in 2012. Is this what we should expect going forward in terms of continuous improvement in Zone Europe, was the margin improvement in Zone AOA a bit below your expectations?
No. Our expectation is that margins should continue to improve for all businesses, for all zones. What had happened in AOA, if you recall in the half year point, we did say that there was a slight dilution from our two Chinese partnerships, Yinlu and Hsu Fu Chi, that caused AOA to come down a bit. Going forward, we don't give guidance for zones and GMBs. Our internal expectation is that all businesses should improve year-on-year.
Thanks.
Next question, please.
Thank you for your question. Our next question comes from James Targett of Berenberg Bank.
Good morning. Thank you for taking my question. Just a couple from me. Firstly, could you give some color on the RIG developments in Southern Europe, in Q4 versus the nine-month period? Secondly, you mentioned the strength of the positive development in the discount channels and online channels in developed markets. I wonder if you could give some color on the growth here and the size of the business that it accounts for now. Thank you.
Let me take the online markets. The online e-commerce is going to continue to grow. Obviously, from an industry perspective, we've seen the migration of categories like electronics, apparel, and consumables have tended to be slower in terms of migration. Having said that will happen. What we've done is in different markets in the U.K., in Switzerland, we've started to work with either the pure play online players and also been experimenting on our own in this space. That's the answer to the online market. In terms of the Southern European markets, Greece did really well thanks to coffee and ice cream. There's really no big change between how we ended the year versus the nine-month sales results that you shared a few months ago.
Basically, it was in line with the nine months.
What's exciting about that is despite the economies, the challenges, the macroeconomic challenges, it's really innovation that's driving that. You see the Nescafé Dolce Gusto, the different products in our PPP lineup continues to help us win in very tough markets like Greece, Spain, Italy.
Great. Thanks. Can I just quickly follow up on the first question, just in terms of the discount channels in Europe. Was there a significant difference in growth in these channels than for the region as a whole?
The discount channels have been growing faster than the traditional retail channels. As we succeed in those channels in Europe, there can be an impact on pricing. I would just remind you of what we talked about a few years ago now, when we first started talking about hard discounters and discount channel, which is that the cost to serve these channels is often a lot lower than the cost to serve other channels. Even if the pricing appears to be suffering as a result, in fact, it's not impacting the overall profitability of the business. We're very excited about the opportunity in those channels.
This is clearly a phenomenon not just in Europe, but also in the U.S. Next question please.
Okay. That's great. Thanks very much.
Thank you.
Thank you for your question. Our next question comes from Jeff Stent of Exane.
Good morning. A quick question on margins. I know you sort of focused on the newly defined margin, is this still a will within the business to actually achieve underlying margin improvement each year, i.e., excluding trading items? Or is that no longer percolating through the business? Thanks.
Thank you, Jeff. First of all, our Nestlé model on trading operating profit, I'm very proud of what the team has accomplished in 2012, delivering 20 basis points above 2011. This is done despite the fact that we have increased our spending in marketing. Despite the fact that we were lapping against some one-time benefit in 2011, like the pension restructuring benefit. This despite the fact that I mentioned in the presentation what a great news that we closed on the Wyeth Nutrition business early, much earlier we had anticipated. I think we guided last year that was going to happen sometime in Q1 of 2013. It happened in end of November. When we took over the business in December of last year, we had some transition costs. We took the business over, and we had a lot of inventory at the distributor level.
We did the right thing, which is clean out the inventory in December. We had transition costs as well as early integration costs that were not anticipated. Very proud of the team that they were able to do the Nestlé model at 20 basis points despite this headwind.
I think also, Jeff, it's a very good question. The other way to think about it is that because of the low level of what you're calling non-underlying costs, the bar is tougher for 2013, and we need to deliver the Nestlé model in 2013 as well. Arguably, that makes what you're calling the underlying margin improvement all the more important. We are absolutely focused on delivering the Nestlé model and delivering it in the way that we always have, which is whilst continuing to invest in the brand. If that means delivering your underlying margin, then that's what we have to do, and that's what the markets are focused on.
Thank you very much.
Thank you.
Any more questions, please?
Thank you. Our last question comes from Andreas von Arx of Helvea.
Yes, good morning. Two questions. The first one will be if you could give any details on Dolce Gusto, either a sales number or growth rate. The second question, if you could give an update on these remaining countries of Pfizer acquisition in Latin America or let's say, a number and percentage of sales of businesses that you would have to dispose. Thank you.
Yeah. In terms of Pfizer, we had said earlier, I think, in one of our calls, maybe yours, Roddy, we had said that it's about 15% of the business will be divested. We're clearly at this point working with the local regulatory agencies and in terms of divesting the business. Nothing significant, 15%. In terms of Dolce Gusto, Roddy, I don't think we disclose the growth for Nescafé Dolce Gusto.
I think we risk getting into another Nespresso situation.
But-
No, it's very high, hundreds of millions of sales, and it's growing well into double digit.
I can probably say this, that Nescafé Dolce Gusto, sooner than later, will become part of our Billionaire Brand.
Yeah, absolutely.
That would give you a good sense of the size of the business growing very fast.
Okay, then.
Thank you. Any more questions? Is that the last one?
At this time, there are no more questions. I will hand the call back to Wan Ling Martello.
Okay, great. Thank you. Well, thank you everyone for your questions. As I said, 2012 was a good year for Nestlé, and one which leaves us fit to win again in 2013. Don't forget, if you're interested, our press conference will be webcast at about 10:00 Swiss time. Thank you again, goodbye, and have a great year.
Drink better, live better.