Good morning, and welcome to the Nestle Half Year Results Presentation for 2012. As usual, we will go through a few slides before opening it up for Q and A. We'll take the Safe Harbor statement as read. And without further delay, it's my pleasure to hand over to our Chief Financial Officer, Wanling Martella.
Thank you, Ian. Good morning. We are doing this webcast live from the Swiss Stock Exchange in Zurich. A very warm welcome to those of you who are joining us here in person. And before I get started, a special good morning to Roddie, who you all know is our Head of IR.
Roddie is recovering and will be back in tough form sooner than later. I know, Radey, you are watching. And if I'm not mistaken, this is the first call you're missing in 12 years. So Radey, this one's for you. We have an hour and a half together this morning.
I will take you through the highlights of our first half, followed by a more detailed at the performance for the year so far. I will then spend some time talking about the key elements of our cash flow performance as well as some important changes we've made in the spirit of building on our transparency in this area. With that, let us go to our group highlights. During the first half of twenty twelve, we saw continuing macro trends with regards to consumer sentiments in both the developed and emerging markets. North America remains challenging, as you all know, while the European trading environment has deteriorated, no surprise, especially in the southern countries.
In contrast, the emerging markets have continued to show robust levels of growth, and this is the environment we are operating in. But what is more important though is how we have anticipated, how we have responded to that environment, driving performance that is aligned with our strategic priorities. Roadmap, which I gather you all have seen many times. I believe that the numbers we are going to discuss today demonstrate that we have indeed delivered once again, remaining true to our culture of combining shorter term action with longer term thinking. We have been fast moving and flexible, achieving strong performances relative to our markets in both emerging and developed countries.
We've done this by embracing opportunities, making right choices, tough choices even to deliver sustainable profitable growth. We have continued to invest behind our innovations and our brands. We've been deepening and widening our distribution, and we've been focused on flawless execution. And we have benefited from having a well established global multi tier strategy from value to premium, capturing growth across all consumer segments. And above all, we have benefited from having over 300,000 people aligned behind the Nestle roadmap, driving take a look at our highlights of our performance.
The group maintained the growth momentum with an organic growth of 6 0.6% in the first half of twenty twelve. This reflects a very good balance between real internal growth of 2.9 percent and pricing of 3.7 percent. The group's trading operating profit was CHF 6.6 billion, up from CHF6.2 billion in the first half of twenty eleven. The resulting margin of 15% is in line with our Q1 conference call comment that our 2012 trading operating margin improvement will be weighted towards the second half. You also see here the group's operating cash flow of CHF5.1 billion, that's up from CHF2.1 billion in 20 11.
Now why is that? This is mainly due to improvements in operations as well as working capital that I will come back to later on in my presentation. Other elements of this chart, as you can see, I'd like to highlight our net profit, which was up 8.9% at CHF 5,100,000,000 and the underlying EPS that rose CHF 12.4 to grow in all three regions. Our European performance reflects some tough comparison for the globally managed businesses, but the zone continues to perform at the same level as Q1. Americas has maintained a momentum, which with increases in both rig and organic growth in North America in Q2, we actually saw increases in both rig and organic growth from Q1 to Q2.
This despite the low consumer confidence there. Asia, Oceania and Africa continue to deliver double digit growth. Overall, as you can see on this slide, the emerging markets continue to do very well and grew by almost 13%. The developed markets posted 2.6% organic growth, a good performance in view of the environment in Europe. Portugal, Italy, Greece and Spain had a slightly negative organic growth overall.
And last but not least, our billionaire brands grew over 8%, which is above the group average. Here you can see the overview of our zones and globally managed businesses. I'd like now to take you through the highlights of each of these individually. Starting with Zone Americas, Zone AMS, where we had 5.7 percent organic growth and a rig that is flattish at around negative 0.1%. While the North American trading environment remains challenging, like I said before, we actually saw a slight improvement in growth over the Q1.
The frozen aisle is continuing the trend we have seen. We recognize that as the market leader in this category, we are at the forefront of returning value to the category, be it through new product offerings or the approach we take in communicating to consumers. This is relevant whether we're talking about technologies like flash freezing that preserve the freshness behind our frozen brands or successful new range extensions such as those launched by Lean Cuisine and DiGiorno. The frozen pizza category unfortunately remains soft overall, but our strong brands are enabling us to hold market share despite the significant pricing we have taken. Talking about pricing, we have also taken significant pricing action in ice cream.
The category has also seen increased pressure from private label as well as the regional players in premium take home. An important step change in premium for us is the relaunch of slow churn, dryer's brand's slow churn, bringing all the taste, but with half the fat and a third less calories. For those of you in the U. S, if you have not tried our slow churn, I urge you to run to the store. Don't walk to the store, run.
After listening to this webcast, I promise you, I love ice cream, you can tell. It's fantastic. It tastes great. It tastes even better than full fat. Okay.
So we have also seen growth in ice cream snacks and the super premium. Confectionery has accelerated year to date with innovations such as Skinny Cow still growing very well. Nescafe showed good organic growth, thanks to Nescafe Classico and innovations like Nescafe Memento that targets younger coffee consumers. Coffee Made launched new varieties of natural bliss, enabling our consumers to individualize their coffee moment. That achieved high single growth high single digit growth, I should say.
Last but not least, for North America, pet care category is growing, and we have actually increased our share. Our innovations delivered high single digit growth with examples like Beneffoul Baked Delights and Friskies Plus. We have also entered the ultra premium segment through specialty channel with Canyon Creek Ranch, which is a whole natural food for adult dogs with added vitamins and minerals. Our Latin America story is very positive with double digit organic growth. The key drivers by category are confectionery, coffee and pet care, where Dog Chow and Pro Plan stood out.
And by geography, Brazil, Mexico, Andean and zone's trading operating margin increased 10 basis points. Moving on to zone Europe. The growth is in line with our Q1 performance. So again, it's important to highlight that we did not see a deceleration, which is great. This is by the tough comparison to 20 11.
Although the trading environment has deteriorated during the year, as you all know, as I mentioned earlier, particularly in the South, we continue to see growth both with PPPs, our popularly positioned products and with premium products with PPP growing at over twice the zone average. In the West, we achieved mid single digit growth in the K, driven by coffee and culinary and in France with most categories contributing. In addition, the zone's organic growth in Iberia, Italy and Greece actually remained positive. In the East, Russia improved in the 2nd quarter with strong contributions from coffee and chocolate, while the Ukraine, Romania and Adriatic were the geographic highlights. By category, chilled culinary, Nescafe and frozen pizza were all strong.
Kit Kat accelerated in the 2nd quarter. Now ice cream unfortunately had a weak half due to poor weather and Purina continued to accelerate with strong performances in Russia and many Western European countries. Innovations, including the continued rollout of Nescafe Dolce Gusto, Nescafe Crema Sansioni are doing well as if reflects the 2011 impact of restructuring and retirement plan changes. Next is zone AOA. The zone delivered good growth.
This performance was driven by emerging markets, most notably Greater China, India, Africa, the Middle East and a number of Southeast Asian markets. Japan also showed solid growth. China and India continued to perform well and are in line with our expectations. Happy to report there are 2 partnerships in China, which is Yinlu and Shufuji are very much on track. New commercial structures and distribution models are having a positive impact, particularly in Africa, where our continued focus on route to market has helped the good performances across all categories.
In the Middle East, dairy, coffee and chocolate were the highlights. And as mentioned at Q1, the trading environment in Oceania remains tough. Japan, however, strong showed strong growth, driven by innovations such as the Nescafe Barista and Nescafe Dolce Gusto systems and a strong performance once again from Kit Kat. I love Kit Kat too aside from ice cream. Although the zone, we have done well throughout the zone, we've done very well across all price points, PPPs in chocolate with Shark in China and Munch in India, ambient culinary with Maggie and mainstream products, particularly in dairy and coffee have had double digit growth.
And in premium, the rollout of Nescafe Dolce Gusto in Zone AOA continues to be a success. The Zone's like for like trading operating margin actually improved in the first half of the year. We discussed this at the full year results presentation. The reported figure of 18.9% reflects the dilution that we had expected from the partnerships in China. I will, however, mention that Okay.
Okay. Now we're moving on to our globally managed businesses. Here we have Nestle Nutrition with organic growth of 5.7% and a 2% real internal growth. Let's start with infant nutrition. Double digit growth across the emerging markets more than offset the slower performance in the developed markets.
The key growth drivers were South Asia, Brazil, China and the Middle East. Infant formula delivered double digit growth, mainly driven by an acceleration of growth in the emerging markets. The U. S. Sales have been under pressure as a result of general category softness, and this is largely due to no surprise declining birth rates and really tough comparables from 2011, where we benefited from a competitor's product recall.
Baby food improved its organic growth performance. Cereals, especially in India and Pakistan, are the highlights. Jenny Craig unfortunately continues to be under pressure in the U. S. We continue to take corrective actions and it's taking longer time for us to see some results to materialize.
In terms of performance nutrition, our strategy of going back to basics is showing improved results. We're happy with how things are going for our performance nutrition category. Trading operating profit for Nestle Nutrition is down 50 basis points, and this is due to the impact of weight management. Next, we have Nestle Waters. We delivered mid single digit growth driven by North America and the emerging markets, which again reported double digit growth.
There was a slow start to the peak season in Europe in comparison to the same period of 2011. If we talk brands, highlights include Netflix Pure Life, the International Sparkling Water, San Pellegrino and Perrier. I was told this morning that we could not find any Perrier in the neighborhood. And local spring waters such as Poland Spring, the U. S, Almanhaw in Saudi Arabia, Minaret in Thailand and Baraka in Egypt.
Overall market shares have improved, especially in North America. Trading operating profit increased by 140 basis points, thanks to sustained growth, a positive price impact and significant cost reductions in our water the first half of twenty twelve, both in beverages and food, and this is driven mainly by strong pricing actions. Emerging markets, which represent around a third of Nestle Professionals sales delivered double digit Prometheus and Vida Flow, our recent most recent acquisitions in Nestle Health Sciences are both having also double digit growth. Cereal Partners Worldwide, CPW, achieved strong growth in emerging markets. This is partially offset by softness in developed markets.
The realignment of BPW, which is beverage partners worldwide, is on track. Pharmaceutical joint ventures, Galderma and INNEO, also reported positive growth. Now let's move on to product segments. As you can see here, all categories grew about 6%, with the exception of prepared dishes, which was impacted by frozen food in North America. Let me now go through each of these product segments in more detail.
First one up is powdered and liquid beverages. This product segment achieved 10.8 All product segments, all markets contributed positively with premium, out of home and PPP offerings delivering outstanding growth. That's all product segments in all markets, which is very, very exciting. Soluble coffees had a strong performance and held market shares despite price increases. There was double digit growth from Nescafe Dolce Gusto, Nescafe 3 in 1 and ready to drink.
By geography, growth was double digit in the emerging markets. In Latin America, our regional brand, Nescafe Dolca performed strongly with a good contribution from Mexico and Argentina. Western Europe grew high single digit with the U. K, Spain and France among the highlights. There was also improved growth in Russia.
The powdered beverage business achieved high single digit organic growth that's weighted to price and was double digit in AOA. Ready to drink also delivered high single digit organic growth, driven more by RIG with a strong performance in AOA in particular. The trading operating margin reflected the input cost pressures for this product segment. Moving on to milk products and ice cream. This product segment posted 6.7% organic growth with 0.8% RIG.
This builds on the double digit growth achieved in the same period last year. Our milk business enjoyed strong growth driven by Africa, Middle East, China and Pakistan. The continued success of this category is closely linked to our focus not just on innovation, but also On this chart, you will see the picture of a product called Nestle Acucol, which was launched in Chile and Mexico across various formats from liquid to shelf stable. This is an example of our many value added initiatives in this product category. Our ice cream business had positive organic growth with a strong contribution from emerging markets.
In North America, pricing impacted real internal growth. In Northern Europe, this business, much like our water business, suffered from a weaker start to the season compared with 2011. This segment did benefit from the very successful international launch of peelable ice cream. It's called This product group's trading profit margin increased mainly due to ice cream. Moving on to prepared dishes and cooking aids.
This product segment was characterized by strong growth in ambient in in the U. S. In contrast, a very positive highlight is our frozen pizza across Europe. Ambient was driven by double digit growth in emerging markets, especially in Africa, China and India. As an example, we fortified our MAGI cubes in Central West Africa with Arin.
This helps address one of the region's most widespread micronutrient deficiencies. Okay. Now I have a question for this group here. I know Ian talked about Q and A. The way I do Q and A is I do the Q and you guys do the A.
How many the question is, how many cubes do we sell in Central West Africa every day? I'll give you a clue. It's in 1,000,000. Yes, sir.
No clue. No clue. It looks
like $7,000,000 $7,000,000 Okay. Signor, welcome. I'm sorry? $50,000,000 $50,000,000 $75,000,000 $75,000,000 The number is going up, John. 75.
75. Going, going, gone. We sell more than 1 100,000,000 cubes every day across the region. So next time we see each other and I ask you the same question, I'd be deeply disappointed if somebody gives me the wrong number. But so Ava is just amazing, more than 100,000,000 cubes every day.
This is not every year. So I was supposed to take a water break. When I was asking you guys a question, I got too excited. In Europe, continuing on this product segment category, we have innovations building on the juicy roasting concept that really expand the boundaries of modern cooking. Globally, chilled culinary is stable with some bright spots such as Herta delivering strong growth in France, where we have also built on our nutrition, health and wellness promise through sodium reduction and improved consumer communications.
The 10 basis points decline in trading operating profit margin was mainly due to the frozen category. Next, we have Confectionery. Organic growth 6.4% and a rate of 4%. We have been able to deliver growth on growth also in this category. The emerging markets delivered double digit growth with brand highlights being KitKat, Shark and Munch.
We have seen an improved performance in Russia with good Easter results and revised portfolio, including the newly launched Rosia Tablets. This, together with our new commercial structures there, gives us confidence about the outlook for that market. In the U. S, Skinny Cow continues to do well and our market shares remain stable. The strength of the Nestle portfolio in Confectionery lies in 2 things.
First, our strong presence with local brands and the geographic balance across the portfolio being the second point. In fact, over 50% of our confectionery sales are now generated in emerging markets. This means we still have a lot of runway ahead of us. We continue to drive our business for the long term. So while we are investing behind the growth in our emerging market businesses, we are also protecting the fundamentals and investing behind established brands like KitKat.
With the very successful launch of KitKat in Brazil and the continued strong performance in countries such as Middle East, Japan and Iberia, this 75 year old brand continues to go from strength to strength. The confectionery trading operating profit margin was impacted by combined effect of input costs, mix and last year's credit on restructuring and pension costs. Last but not least, our pet care business. The pet care business delivered organic growth of 8.2%, driven by strong growth in emerging and developed markets. The performance in emerging markets was due to double digit growth in Latin America and Central and Eastern Europe, specifically Mexico, Russia, Brazil and Argentina.
Nestle grew market share in all regions and across all major pet food segments, thanks to strong brands, innovative and expansion in new channels. The trading operating profit margin rose by 70 basis points versus last year and this is because of improved mix, pricing and lower fixed costs, partially offset by higher commodity commodity margin bridge depicting the evolution of the trading operating profit margin, which is 15% for the half year. Let me pause here and stress the 15% is the reported result. The input cost pressure during the first half of this year led to a cost of goods increase. This was however mitigated by timely pricing and savings from NCE.
You all have heard Nestle Continuous Excellence, which we continue to roll out across the organization. The impact after the savings was 50 basis points. And for the full year, we very much lowtomidsingledigit percentage increase. So no change to that. Looking at distribution costs, we were able to improve by 30 basis points and this is due to the cumulative effects of mix and efficiencies.
Efficiencies. For example, in our water business, we've been able to save get some savings out of doing some work on network optimization. Our reported marketing costs were down 40 basis points and I will come back to this on the following slide. Admin costs were up 20 basis points due to the comparison with last year. The first half of twenty eleven saw a decrease of 150 basis points as we benefited from restructuring of post retirement plans.
Finally, we continue to invest in R and D, driving our innovation, and this remains unchanged at 1.6% of sales. Like I said, earlier, I was going to come back to marketing. Here we are. Our consumer facing marketing spend was again up in constant currency for the half. We have continued to drive better returns from our marketing communication investment, improving our return on our brand building efforts, more bang for the buck, so to speak.
Specific global and regional initiatives have given us very positive results on cost, consistency and quality in media buying and planning. In addition, our consumer facing communication continues to improve. Our creative content has been recognized with Nestle now ranked 2nd based on the recent 2012 FE Awards. The FE Awards were founded in 1968 by the American Marketing Association as a means to recognize the most effective advertising efforts each year. And as you can see on this slide, on this chart, in the first half of this year, our top quartile TV ad performance improved by 12 percentage points over 20 11, continuing the very positive trend.
We've also continued to enhance our investment in digital communications, including strategic partnerships, particularly in the digital space. 2 examples from the many are KitKat and Perrier. KitKat in the U. K. Encouraged 600,000 consumers to choose the next chunky variety through various media channels.
Importantly, we were able to accurately measure the positive impact of the campaign on the KitKat brand sales. Perrier's Le Drop generated more than 3,000,000 online views in less than a month. This is one example of how we are creating significant earned media success for our brands. Let me now share one of this with you. Was one of the highlights for water in the first half, building on its double digit growth in the first half of last year.
So very impressive. Moving back now to our income statement. You can see here that there are no major changes year on year with the exception of the net financing line. The low interest rate environment over the first half of 2012, coupled with our attention to cash management, has delivered the results you see here. Now staying with the theme of cash management, I will spend the next few slides talking about the key elements of our cash flow area.
Cash flow and our efficiency in managing cash well remains a key priority. And by the way, this happens to be something I strongly believe in. As I said to many of you when we met at the beginning of the year, cash is king. We will continue to focus on our operating margin and working capital management, along with other critical elements that contribute to the cash flow, such as treasury and tax. At the same time, we want to build on our objective of being the industry reference for financial performance through increased transparency, highlighting the fundamentals of our cash flow evolution and at the same time delivering a more comparable disclosure.
Before I go into the details of our new cash flow presentation, let's take a look at where we stood at half year. As you can see here, the group's operating cash flow was CHF5.1 billion, up from the CHF2.1 billion in 2011. The chart shows that all the key elements contributed to the improvement. In particular, we had a higher operating profit of CHF 0.5 billion. We've made a real improvement in working capital, but we also had an easier comparison to the same period last year.
Less in working capital that you see here. Less in working capital that you see here. Given this easier comp, I would not expect the same level being maintained for the full year. And of course, it sets us up for a tough comparison next year. Having said that, looking at the longer term picture on working capital, I'd like to bring back this chart that you've seen before.
Working capital remains an area of focus. I'd like to give you a few concrete examples of how we look at this internally. It goes without saying that our structures, our policies, our principles have a direct bearing on working capital philosophy. Across Nestle, the concept of efficient working capital management is driven from the top down. We have well established cross functional ownership structures with clear improvement across several dimensions.
At the same time, we will not compromise on quality of service. Our customer service levels are class. My message to you is that we will continue to drive performance going forward. Although there may be a certain degree volatility, the long term trend that we have seen here is set to continue. I'd like now to return to my point on transparency.
Building on the level of detail that we've previously in your book or if you download from our on our website. It's in the appendix with some illustrative examples based on full year figures. In essence, we have broken out the cash flow before changes in assets and liabilities, added a line on the evolution in working capital, separated the disclosure of taxes and treasury activities. The objective behind all of these changes is to also like to draw your attention to some of the slides we have included in the appendix. In the spirit of being proactive, we have outlined for you the changes in pension accounting under IAS 19 and how it will impact our P and L from 2013 onwards.
In the interest of time, I won't go into the details here. I will just emphasize that this is only an accounting change. It will have a 20 to 30 basis points impact on our margin, but needless to say, it has no bearing on our underlying performance or our cash generation capacity. We will, of course, restate 2012 when we report 2013. This brings me to my concluding remarks.
As I said in my opening power of alignment behind the Nestle roadmap. The power of alignment behind the Nestle roadmap. It's been said that great global consumers very well. They leverage globally and they transfer knowledge very effectively. Nestle, as you all know, is a very decentralized consumer needs.
We know how to partner with our local trade. We are part of the fabric of the local community. The competitive advantage that NetPlay has that is not obvious to outsiders is our ability to align 330 1,000 people across 150 countries. For me, coming from the outside, this absolutely blows me away. There is also no doubt that the road map is as relevant today to drive performance as it ever was.
We have delivered what we needed, top and bottom line in the first half to confirm our guidance of achieving investments that will enhance our future performance, that balance of short and long term focus that I mentioned earlier. Nestle has delivered in the first half, will deliver for the full year and continues to enhance our longer term capabilities to win in our markets globally. This concludes my presentation. Let's now open it up for discussion.
Thank you, An Lin. We will now start with questions from the audience here in the Zurich Stock Exchange Do we have any questions here? Yes, please.
Good morning. It's Alex Molloy from Credit Suisse. Two questions, if I may. Firstly, on cash flow. Clearly, in 2011, was an area of considerable investor focus and generally not particularly favorable.
With the better cash flow performance in H1, can you say to what extent was that due to increased focus on management's part and a determination to improve the cash flow performance? That's my first question. My second question is margins in Europe were down 100 basis points. As you said, pensions and restructuring played a role in that. Could you say whether underlying margins excluding this were up or down?
Thanks.
Do I just have to press anything, push?
Just talk.
Oh, I guess I guess, just talk. Hi, Alex. How are you? First of all, before I tell before I should have talked the new rules of engagement. We expect questions to be multiple parts.
If not, we do not answer those questions. So you actually without me telling you the new rules of engagement, you had a 2 part question. In terms of cash flow, definitely, categorically, there is increased management focus. And so if you look at where we're going to end the year, it will not be like I said earlier, do not extrapolate sort of like the improvement in working capital. We will improve visavis the position last year, but don't do an extrapolation.
But all the elements, whether it's cash flow. In terms of our Zone Europe's trading operating margin, you're right, excluding that, we actually improve.
Yes, please.
Jon Cox with Kepler. Sorry, Wendling, am I allowed to ask multiple questions? Or do I have to ask them one at a time? I misunderstood what you were saying there.
Oh, you can ask a question, but it has to have multiple parts.
Multiple parts.
Yes. Otherwise, we just ignore it.
Okay. All right. Just back onto that cash flow trade net working capital. Do you have any sort of goal in your mind where you think you can get to as a proportion of sales?
We obviously, like I said before, do have internal goals. And we actually, group. Obviously, it's a target that I'm not going to share with you all, but we have specific targets by business that will roll up to group. Obviously, it's a target that I'm not going to share with you all, but we do have goals internally.
Just on the U. S. Issue. You say that basically organic growth accelerated in Q2.
That's correct.
Can you give us an indication of what the acceleration was? Because if you look at the Americas, it seems if you strip out Q1, Q2 organic seemed to slow down somewhat overall for the Americas. And I'm just trying to work out, well, if the U. S. Actually went up, what was maybe deteriorating?
No. In the U. S. For the U. S.
Market, we actually saw an acceleration from Q1 to Q2. I'm not going to specifically say which category, which product. But overall, our U. S. Market did go up, both in terms of rig and organic growth.
And then just on your commodities guidance remains sort of unchanged. If anything, if you look at some of those soft commodities, they actually seem to be coming down even quicker than potentially expected. Is it now you're seeing the grain complex and saying that this will offset the soft commodities? Is that
Yes, exactly. Because we look at it sort like our guidance is a basket of input costs. And so you see it's a mix in the U. S. Given the drought in the Midwest.
We're going to see increase in those commodities coming from the corn, soybean, but on the other ones, they're going down. So in overall as a mix, our guidance is not changing, which is still lowtomidsingledigit.
And then just the last one on sort of coffee generally. But in espresso, you're talking about the growth remains strong, but you're starting to mention the word is getting competitive out there. Can you just give us an idea of where you were in terms of the Nespresso growth? Is it still running at 20% -plus? Or has it dropped into the mid teen level?
And then just on Dolce Gusto, maybe just give an idea of the dynamics there because that No. You should be focusing on both Nespresso and Dolce Gusto. Nespresso?
No. You should be focusing on both Nespresso and Dolce Gusto. Nespresso, like I said, the growth is very much in line with our expectation. Competitive standpoint, I served as well. So I will say that we're very happy with the growth in espresso.
It's very much in line with our expectation. And I think it was a few I can't remember which conference call where we said our expectation is to grow the Nespresso business by $500,000,000 that was
2010, that's the investor seminar.
Gosh, it's like a walking encyclopedia of when we said what. But so that's the answer to Nespresso, very happy with how it's doing. So finally, hey, let's it's very competitive. It has been. In terms of Dolce Gusto, very, very strong performance.
It's again, we're not giving specific. It's obviously double digit,
Just on espresso, it's important to add that we are gaining market share as well.
No, that's true. That's a good point.
Thanks and congrats on the results.
Thank you, John. On behalf of the 330,000 people, thank you.
Okay. So if we have any more questions from the room?
Yes. Jean Philippe is not going to go without questions I know.
Jean Philippe Berchie, Francois. You were like mentioning China as well several times. You had 2 acquisitions last year, Sufuchi and Yinlu. I guess you will give some additional Yes. Are those 2 questions?
1 2 parts of 1
Yes. Are those 2 questions? One 2 parts of one question? Okay. You qualify then.
I we do not give specific growth numbers for Shufuji and Yindlu, but I will tell you that we are very happy with how it's going. It's very much in line with expectations. And in terms of synergies, it's more the acquisition when we talk about acquisition, it's interesting. It's not sometimes necessarily on just cost synergies. If you think about the Shupuji acquisition, overnight, it gave us access to thousands of sales force that now penetrates into the 3rd, 4th tier cities in China.
In in And so but we're just really happy. It's very much on track. And so those 2 partnerships are going really well.
And maybe the second one on nutrition. I think infant formula was growing double digits globally.
Yes.
And then the rest was negative as well globally. Yes. Infant formula is growing
fact formula, it's growing double digit in emerging markets. That's more than offset the ones in developed markets. And I talked about how the recent thing is declining birth rates. And also, we're comping against last year in U. S, where there was a product recall by one competitor.
Good morning. Patrick Frey, Cryov Bank EHAWK. What is the percentage of sales in the emerging markets? And what was the growth there?
We have we showed the growth percentage in terms of total globally emerging.
Do you have that number?
It's just over 40%.
Over 40%. Over 40%. Yes.
Yes. And the growth there is 12.9%.
Over 13%.
Daniel Grunheisen, Von Topol. I would have a question on the Western world or the developed world. I think it's beautiful to see in Nestle what is going on here that emerging market is growing very robust, but we have some weakness in the Western part or in the developed world. What can be a strategy for Nestle to kind of counter fight what goes on? Is it PPP that you try and launch more aggressively or put more aggressively focus on?
Or is it pricing? That's what you do, I think, be it in the pizza business to try and offset maybe a soft market. Could you elaborate a bit on that?
Yes. First of all, thank you. Thank you for your question. It's interesting when you're when you see results like the ones that we just released and we just announced, by no means this is no walk in the park. I mean, this is not these are hard fought numbers in the developed markets, even in emerging markets, thanks to a very strong team at Nestle.
In Europe, it's both PPP and premium that's doing well. And so to be able to get the kind of numbers in developed markets where it's very challenged from a macro ice cream or it's Nescafe Dolce Gusto, those will continue to serve Nestle well. We don't people always ask what do we see in terms of the balance of the year for U. S, for Europe, it's hard I mean, it's hard to tell, but what's very comforting for us is the fact that we do not see a deceleration going from Q1 to Q2. And we are cautiously optimistic given our product categories and what we've seen in the first half that we will hence our confidence of reconfirming that we will once again deliver the Nestle model in here.
Michael, Suterbank, Belvieu. One question regarding the Americas again, maybe on Q2. You've said U. S. Is growing in rig and organic growth.
So is the conclusion right that you have seen quite some slowdown in Latin America? And maybe you can point out in which countries and maybe also how you see the remainder of the year? And my second question, maybe an update on Pfizer and Nutrition business. What we should expect there, when to close and consolidation? Thank you.
Let me start with the Pfizer Nutrition. We will when we announced the transaction back in, gosh, that was April, I think that was week 2 for me on the job. It's we had said that we anticipate closing probably beginning of next year or at the earliest end of this year. We are going through, obviously, process of working with Pfizer in terms of how we transition services, but more importantly, we are working with the regulatory authorities in every jurisdiction to get approval. And I'm happy to report that so far we have already seen a handful or more than a handful of countries approving, giving us okay.
But that's going to again, no change in time line. It would be Michael, it's going be beginning of next year likely. So no change. In terms of Americans, like I said earlier, we saw actually a from both from a rig and LG perspective, acceleration for the U. S.
Or North America in general and for the U. S. Specifically. And so that was again very, very, very nice to see. So we are again cautiously optimistic.
Some people have highlighted Brazil slowing down or Russia, some people have highlighted Brazil slowing down or Russia. We're not seeing that. Brazil is keeping for us anyway. We are maintaining our momentum in Brazil. Russia actually is recovering very nicely for So that's it's good to see that.
So no slowdown.
If I may just add, the only thing that you might see down there is the Easter effect, especially in confection in Brazil, which of course is one of our biggest categories there.
Or might it be possible to give us the Letum growth or give us an indication if the Letum growth is higher or lower than the Bricks
growth? Nice try, Michael. Okay.
All right. Thanks.
Maintaining its momentum.
But we also always give credit for who try. The reason why this table has it's not open is because Ian has warned me on things that I'm not supposed to share. So he kicks me under the table not to give the details that we haven't given before.
You also want to bear in mind, I mean, we don't manage the business by quartertoquarterbasis. So over the long term, I think there's a much more a broader perspective if you look at the full year comparisons. Any more questions from the room?
Yes, there are 2 more.
Patrick Harzenberger from Sarazin. Do you expect a further improvement of operating profit margin for Nestle Waters business in the short and mid term?
We've been very pleased with our Nestle Water business. And as you can as you know, the water business, it's in terms of margin, it can be a little volatile. It's if you talk about the 2 businesses that well, first, it's a commodity cost and then there's from depending on what competition does. But needless to say, we're really pleased with how it's doing this year. And obviously, our expectation is that we hope that it will continue.
My kudos to the Nestle Waters team.
Next question?
That's an interesting question too because sometimes we get questions about do you expect the all categories to sort of like deliver on the Nestle model. We always say that
Joy, Benenida, PIKTEC. Can you give us a little bit more color on your PPP growth breakdown between the emerging markets and the developed markets and the targets that you have for this PTT product in the future?
We do not give targets in terms of the PPP products. But what's really interesting, I know when I first joined Nestle and I heard about PPP, I always the first thing that you go to is PPP is for emerging market. Well, that's I was wrong. It's actually actually for the emerging consumer. And so whether the consumer is in the emerging market or in the developed market, it resonates resonates to that consumer who wants to buy our PPP products.
In terms of percentage of it's overall about 12% today, and it's very accretive in terms of growth and profit. And clearly, as I said in my presentation earlier that it has helped both the emerging markets as well as the developed markets. So it's really fascinating to see that how well PPP is also doing in the developed countries. Good morning. Good morning.
Good morning. It's Sandra Bostrom from UBS. Forward? And earlier, you guided for net debt of about €15,000,000,000 to €18,000,000,000 by end financial year 'twelve, 'twenty 13. Are you still sticking to that guidance?
Thank you. I'm sorry, it's just the second part was the net debt and what was the first part? M and A. Oh, M and A, yes. We have been very public post the announcement of Pfizer Nutrition that we will not be doing any significant deals.
And if anything, we'll probably do not probably, we will look at sort of like bolt on acquisitions here and there, but no significant transactions post Pfizer Nutrition acquisition. So that should the other thing in terms of net debt, we do not obviously, our net debt position based because of Pfizer Nutrition, it will be it will go up. But we do not we're not giving any specific at this juncture.
Okay. If we have any more questions in the room?
John.
And John is going to have like 5 parts.
Just on the what you said about net debt. And I know you sort of moved to a bigger payout ratio and away from doing buybacks. Is that still the way you feel now you've been in the job for 6 months or so? Is that the way you would continue? Or do you see in the future potentially move back to do some buybacks?
Or would you rather continue to increase the payout ratio, which is very good already? But is that how you would prefer to return cash to shareholders if you have sufficient?
Yes. Thank you, John. We do not see the 2 being mutually exclusive. We have always said that we strive for a sustainable dividend policy. And if you go back, how long have we started tracking dividend, but it's been over 50 years.
And if you look back in the last 50, I think, 56 years, we have never decreased our dividend in absolute terms. So I would argue that that's pretty sustainable. And so we're not walking away from a sustainable dividend policy. We have said since the end of last year that we will not there is no new buyback program. And that is more opportunistic.
To the extent that we have excess cash, absolutely, we'll look at that. So I don't look at those as mutually exclusive dividend policy where it's going to be sustainable and that doesn't change. And no new buyback now, but we're open to that when the circumstances are
pension changes. I must admit, I was quite surprised to see that what the impact will be for you guys next year. Of course, it is just an accounting change. But you mentioned that your finance costs will go up by €250,000,000 I guess that is will a cash outflow because you say there's going to be no cash impacts, but that net finance cost of €250,000,000 would that
Yes. No cash outflow.
No cash flow. No.
No, absolutely no cash outflow. It's purely an accounting change. And like I said earlier, it's we will restate 2012 when we go into 2013. We just wanted to be proactive this early on to give you all some sense of what this accounting change is going to how it's going to impact our P and L. So but no, absolutely no cash flow, no cash outflow, simply an accounting change.
And I'm reminded my husband always reminds me that the road to hell is paved with good intentions. So as we're preparing, being more proactive and being more transparent on the cash flow, the back of my mind, I thought, is this going come back
to haunt us?
Just a follow-up on the sort of PPP. You mentioned, I think, it's about 12% of group sales, did you say?
12%.
And then just in terms of the premium part of your portfolio, what would you say the share is of that roughly?
Roughly ish.
That's actually a difficult one to measure.
Yes. Because you can yes, because when you add yes, that's difficult. So we don't have an exact figure. No, we don't. But that's an interesting we should take that question back, Ian, and
I mean, you should take into account Nespresso, Nescafe, Dolce Gusto, the rates of growth that they've got. But then you've also got other categories where the classification of premium is blurred at best, especially if you're looking at ice cream and other areas. So it would be a difficult one to give an exact percentage of.
Yes. I mean, you could think that Nespresso, Nescafe Dolce Gusto, NAN, our sparkling water, San Pellegrino, Perrier, you can tell Haagen Dazs, ice cream. So yes.
It's interesting what you say about the dichotomy between in Europe where you've got the low end doing very well and you've got the high end doing well. And then obviously, we will think, well, how big is the middle part? And what's happening with the middle part? Is that the part of the portfolio that's under some pressure in
the No. But if you see our coffee, our I talked about our powdered beverage business. It's all markets, all product segments contributed, and that's very much our mainstream line, right? And that's it's yes, the dichotomy. One of the great strengths, one of the capabilities of an organization like Nestle is ability to operate on sort of like both ends of the spectrum, to be able to be successful in PPP and to be successful in sort of like the high end with Nespresso and other product categories, that speaks to capabilities.
What you all see are in black and white, the other thing that's asset test of somebody good or a collection of people if they're good is the ability to manage something new without having to master it first. You look at we as a manufacturer are able to go into Nespresso and 50% of our sales is now through e com. And a significant chunk of our sales is also over 2 70 boutiques on a global basis. Having come from retail background, it's not easy to have a retail footprint that is meaningful to be able to provide great customer experience when you walk into our boutiques. Those are capabilities that even though Nestle was never a retailer, was never involved in e com, to now be able to do that speaks to a great strength of Nestle.
It's the ability to manage something new without having to master it first. So I'm as a new person, I'm just really, really impressed. You're welcome.
Okay. So with that, we will now go over to questions from the phone. Please don't forget to introduce yourselves before asking your question. Could I have the first question, please?
Remember, it has to be multiple part.
Our first question comes from Amy Hu. Ma'am, your line is now open. You may begin.
Good morning, Wendy and Ian. This is Eileen Huja from from me. The first one is on Russia. It looks like you've actually had an inflection point in performance there. Is that because of the macro environment or is that because of the internal restructuring that you've been doing?
For example, I think it's quite interesting that in fact you did well compared to some cautious comments for one of your competitors there? And then the second question is on pet care. I noticed that your growth has been steadily improving and accelerated to close to 9% in the Q2. You mentioned expansion in new channels and positive mix. Could you give us a bit more color on the business mainly in the U.
S. Market? Thanks.
Thank you for the question. On Russia, I will give credit to the Russia team as well as our Zone Europe management. We had I think we had talked about Russia being the market was a bit of a challenge for us in the past. And so internally, they've been doing some restructuring. They've been bringing some innovation to the market.
And so the recovery really is thanks to the management team's focus on quality and really, really nice to see the turnaround in that market. So kudos to that team. Pet Care Growth, actually in Russia, as long as I continue the team on Russia. Pet care also strong growth in Russia along with Nescafe Dolce Gusto. In terms of pet care, the growth is also helped by the fact that we're going into specialty channel and so in the U.
S. So really great to see that we're increasing share as well as the category is growing. But the thing that's really interesting also for pet care is we're doing well in emerging markets in Latin America AOA, which again is what makes it in both Latin America and AOA, which again is what makes it so exciting for us, a very strong category like pet care for us to be under indexed in those 2 regions or 2 zones. It's very exciting for us to be able and we're seeing traction that used to be when for the pet cat category, if the U. S.
Is not doing well. So the whole product segment for us kind of goes with how the U. S. Goes, so it goes for the category. But now with us doing well, seeing traction in emerging markets in Latin America and in Eastern Europe, they're now becoming a meaningful share of our pet hair product segment.
Great. Thank you. Thank you.
Great. Thank you.
Thank you.
And our next question Alain, who may interest. I have two questions. The first is about the cash flow net working capital. Would you elaborate a little bit more about the development of net working capital? What were the main drivers that increased slower in order to get more insight on that?
The second question is coming back to North America again. Could you let us know where you gained market share, in which categories and in which categories you lost market share in U. S?
Thank you for the question. I'll take the second part first, North America, specifically in the U. S. We don't obviously give market share by product category, geography. I will say that it's mixed, and I've, I think, mentioned a few categories early on in my presentation.
I will say this, however, that when you all look at market share from Nielsen, for instance, and we do we tend to look at it on a more granular, which is more comparable. I'll give you example, for instance, water. We don't compare, for instance, our water to sugar beverages in the U. S, which if you don't dive deeper and get the right level of granularity, it could be very, very misleading. So needless to say, for U.
S, it's a mixed bag, and we do track it, obviously, on a monthly basis. And anyway, in terms of working capital, it's a combined effect of both efficiency as well as our increased focus on driving down how much we tie up in terms of working capital to support the kind of growth that we see. But also, like I said earlier, it's an easier comp for us versus last year. And but one thing that you all should take away from this meeting, this session is that there is increased focus on cash and working capital in general by all of us at Nestle. And it's something that Poboke has it's a top down driven by all the way from the top from Paul.
So If I can just add, I don't want to contradict the it's always the exception that proves the rule. As Wanling mentioned in her presentation, we have seen some gains in market share in different categories, I mean, pet care for 1. And then we've also seen them across our pizza range and lean cuisine due to the innovations that we've there and amongst others, including confectionery. So I think you can say that it's a mixed picture, But overall, we're holding our category growth in various key areas.
Thank you. Just a follow-up question about the program, the excellence program. In the past, you gave cost savings of 1 500,000,000. Do you still give this guidance for 2012?
Yes. We that's you're referring to Nestle Continuous Excellence, our program. And that's going in line with expectation, and we are staying with the RMB 1,500,000,000 guidance that we have given you at the beginning of the year. It's really interesting if you think about Nestle Continuous Excellence. It's not people again, as a new person, when I first came in, I thought, well, it's some kind of a productivity program that's kind of like one time shot, right?
It's you do it for a year, you do it for 2 years, you do it for 3 years and it's kind of like all over. But it's not it's really a change in mindset. And so it's pushing the ownership to the person responsible, the ownership to the person responsible for doing the specific task, for doing the specific process. And so the way to look at it is we value whatever we do, we value what we do only if it brings value to the consumer. So it's a continuous process, it's at all levels.
And in fact, NCE has not been rolled out entire and it's to the whole organization. So it's still very much in the process of rolling out. And it's at all levels. It's not just at the COGS line, it's the cost of goods line. You'll see it in admin, you'll see it in distribution.
And so it's across the whole enterprise affecting all the lines on your P and L. So again, Nestle Continuous Excellence is great. It's a mindset change. And it's really it's again, another very phenomenal thing that's going on at Nestle.
Thank you very much, Fang.
Thank you.
And our next question comes from Mr. Warren Ackerman. Sir, your line is now open. You may start.
Hi, Wang Ling. It's Warren Ackerman here at SocGen. Hope you can hear me. I've got 2 questions and one clarification. 6 months into the job, just be interested to hear where you think the biggest margin upside is in the Nestle Group either by category or by geography?
And then secondly, Wanling, would you better touch on Japan? Obviously, it's an important market for Nestle, very attractive margin structure. Just interested in what the growth was, what's driving that, is it sustainable? And then on the clarification, What marketing are you doing that is not consumer facing? Thank you.
What marketing are you doing that is not consumer facing? Thank you.
Warren, it's nice to hear from you. Why are you not here in person? I'm disappointed. But Warren has 4 parts to his question, even though he's not here in person, and we'll attempt to answer that. Okay.
Let's start with marketing, 40 basis points down. When we talk about marketing expenses, Warren, it's not just consumer facing portion of it. It includes, obviously, what I call infrastructure, such as sales and marketing people, the folks who work with our who do a lot of work on digital. So it's the SG and A or it's the what I call the infrastructure part of marketing. So yes, it's when we talk about marketing, it's not just the consumer facing.
The 40 basis points down, 1st of all, were in constant currency, were up, like I said, 1.3%. And that is on top of last year that increased about 6%. But more importantly, when we talk about marketing, you have to put it in context, okay? First half of last year, for instance, in Nespresso, we saw the first ever global launch of pixie machine, which was highly successful. And so we had a lot of marketing spend behind that launch.
And obviously, this first half, we will not we did not have a new machine like Pixy. So marketing spend in that for that specific for Nespresso is down compared to last year. But having said that, we're excited. We have 2 new machines coming out for or has come out actually for Nespresso that will be introduced to consumers second half. The other thing too is if you look at first half of last year, Warren, we had big events.
You talk about Brazil had celebrated its 90th anniversary in Brazil, a lot of marketing spend behind that event. The Philippines, another key market for us, had spent also celebrated 100 year it's double it's double digit, pick a number, whatever number you want to pick, 20, whatever, 30, that's not the number, by the way. But you would not expect the same level of 40 basis points decrease year on year. So that's part
Very quickly, just so if you were to hit that whole marketing bucket, I mean, would you be able to give us a rough idea of how much is kind of consumer facing and how much is kind of this other kind of infrastructure? Just to try and get a feel for whether you think this marketing as a percentage of sales being down. Is that kind of going to be a long term secular trend?
No, we do not break out correct me if I'm wrong, Ian, we do not break that out for in terms of details, right?
No, we don't break that out.
Yes, we don't break that out.
But And Warren knows that.
And Warren knows that, but Warren is just trying. Nice try. Okay. Let me can I move on to your 3 other parts? Good.
Thank you. In terms of confectionery, down in terms of trading operating profit margin, that's because of we it's because of in Europe, where we had the credit last year from pension restructuring as well as a decrease in restructuring costs. So it actually underlying confectionery margin actually improve if you were to strip that away. So that's obviously, that's confectionery in Europe because those 2 are related. Japanese team.
We are seeing strong growth. And it's a combination of the introduction of innovations like Dolce Gusto, coffee and also KitKat doing well. So very happy to see that. And your last question, which is wanting me to opine on margin upside for the group by category, I will share this with you. When I first came in to the organization meeting, whether it's CFOs from our key market, I also had the good fortune in the 1st month April, we had the Key Market Conference as well as the Market Manager Conference.
So I had a good fortune of meeting a lot of people, also had a good fortune of talking about kind of like my perspective as a new person coming in. And I shared an outside in perspective. I said Nestle, from a top line perspective, if you were to look at the last 10 years compared to our peer group companies, competitors, we're best in class. That's just the last 10 years. If you look at margin, we have been able to improve margin in the last 10 years, meaningful increase in margin.
But we're not we're in line with peers. And so very much to the point that if you look at margin upside, there's still a lot of headroom, there's still a lot of opportunity to improve. And the key thing also, when I was talking to our folks about that, the interesting thing about those 2, as you look the last 10 years again, it's a competitive set. We were probably one of 2 companies that were able to deliver both top line and margin improvement. You see some companies who are able to do drive top line performance, but not so much in margin or the other way around, margin improvement, but not top line growth.
And so kudos to the team to be able to do both. But having said that, our margin is very much in line with peers. So a lot of upside because we strive to be, again, the financial reference for the industry. So a lot of we would continue to drive margin improvement. Warren, I think I answered your 4 parts to your question.
In the interest of time, could we just take one more question from the phones, please?
And our next question comes from Ms. Barbara Ambers, Emmanuel Weisel.
Yes, hello. Thank you. This is Barbara Ambers of LBBW. I have a question actually a question of a clarification for North America. Would you please maybe tell us if rig and organic growth you said they improved versus Q1 and Q2.
Would you tell us if they were positive please? And a similar question on organic growth and rig in Zone Europe in the first quarter. Europe and it sounds as if it was vice versa in the second quarter. Could you maybe elaborate a bit on that? And I have a question on Nutrition.
The weight management business has been under pressure for years now because of weak economy. I understand that. And you said you were going to take measures. What are those? I mean scaling down the business or enhancing investment?
Maybe you can elaborate a bit. Thank you.
Thank you, Barbara, for questions. Let me add there are 3 parts of that. Let me take Nutrition. Yes, we recognize we're not happy with the way the business has performed in the last year and obviously going to this year. It's interesting.
And we're from a the industry in general is not doing well. But having said that, we're not going to hide behind that. There are things that we can be doing and that the team continues to try different things. It's interesting. Paul, in one of our roadshow, Paul Boulky had said, if you think about mother, the woman in the household, it's sort of like in terms of in the order of priority, it takes care of the baby first, then takes care of the pet, then takes care of the other children.
It's the husband, if the husband is lucky. And then finally, herself, woman in the household, who is really our target audience, the mother, the woman in the household, who is really our target audience, tends to not take care she's not the priority. So but having said that, like I said, we are not going to hide behind the fact that the consumers are challenged and that the industry as a whole is difficult. We are the team is looking at different difficult. We are the team is looking at different dimensions, everything from celebrities to online marketing to focusing on healthy lifestyle, both at work, collaborating with the American Heart Association.
So they're trying different things. And I will say it's not for lack of trying. It's just unfortunate that we're not seeing the kinds of improvements that we like to see. So hopefully, the next time we get together, we will be able to tell you that there's some light at the end of the tunnel. So that's a question on weight management.
In terms of North America, in the U. S. U. S. So that's the U.
S. And in terms of Zone Europe, I think your question was Western Europe versus Eastern.
Western versus Eastern.
Yes. We're seeing good growth in both Yes.
So across the group, we've seen good growth across all businesses in all categories. But you're right in that there are some key drivers, east to west. And of course, some positive turnarounds as we've seen some better growth in Russia, which is also encouraging. And that's had an influence of the
East to West divide as well. So I think that was our last
question, Ian? That was the last question. I'm sorry. I have to drag rattling away to some
1 on ones
now. Yes. Thank you for the questions, and thank you for those of you who made the effort to come here in person, I would just like to close today by repeating that Nestle has delivered a performance in the first half of 2012 that both is aligned with our strategic priorities and really sets us up for further performance improvement in the future. And on a personal note, I am very excited to be part of that future, and I look forward to sharing it with you in the years ahead. Thank you again.