Good morning, ladies and gentlemen, and welcome to the Nestlé 2012 First Quarter Sales Conference Call hosted by Roddy Child-Villiers, Head of Investor Relations. As usual, there will be first a presentation, and then we will open the call for a question and answer session. My name's Miley, and I'll be your coordinator for this morning. Throughout the conference, you will remain on listen only. If you need assistance at any time during the call, then please key star zero on a phone dial telephone, and a coordinator will be pleased to assist you. I would like to advise all parties that this call is being recorded and webcast. Now, I'd like to hand the call over to Mr. Child-Villiers. You may now begin.
Thank you, Miley. Good morning, and welcome to our First Quarter Sales Conference Call. As usual, I'll take the safe harbor statement as read and go straight to the key numbers. Sales were up 5.6% to CHF 21.4 billion. Organic growth was 7.2%. The major contributor, as you would expect following the 2011 evolution, was pricing at 4.4%. Real internal growth, or RIG, was solid at 2.8%, coming on top of a very strong 4.9% in the first quarter of 2011. We had a positive evolution from acquisitions of 3% net of divestitures, this being mainly the two partnerships finalized at the end of last year in China, Yinlu and Hsu Fu Chi. Foreign exchange, on the other hand, continued to be a drag at 4.6%. A couple of points to make on guidance: we are still seeing an impact in our business from the 2011 raw material cost pressures.
I know that a number of you are assuming an immediate cost benefit, but there is always a time lag of several months, even if we don't have any hedging, before the spot price is reflected in our business. Any benefit from raw materials will be felt more in the second half. We still expect low to mid-single-digit input cost inflation for the year as a whole. Looking forward to the end of the year, we are confirming our guidance of delivering the Nestlé model of 5 - 6% organic growth, as well as an improvement in the year-end trading operating profit margin and underlying earnings per share in constant currencies. Nestlé has again grown in all three regions. The Americas grew 6.8%, Europe 3.4%, and Asia, Oceania, and Africa by 12.2%. The emerging markets grew by 13%, and the developed markets by 3%.
Those numbers are for all our businesses, including the zones and the globally managed ones such as Nutrition, Water, Professional, and Nespresso. As such, this is a real like-for-like for you to benchmark with our peers. Let's now look at the performance of the individual businesses. Zone Americas achieved 6.2% organic growth, but - 0.4% RIG. Pricing was strong in both North America, where it has impacted RIG, and in Latin America, where RIG has proved more resilient. Let's start with North America. Food category volumes in North America are generally down. As people are not literally eating less, this seems to reflect cash-constrained households being more careful in terms of spend, but also being more careful to ensure that less food goes unnecessarily to waste. The frozen category remains in decline in the first quarter. Entrées are down mid-single digit, single serve a little less, and handheld up slightly.
Our performance broadly reflects these market trends. The pizza segment is also down. The restaurant carryout delivery segment is running very high levels of price promotions and media spend. This is impacting the frozen pizza market. Our innovations, particularly Pizza Plus and Italian Favorites, have led to share gains, though our growth is down. Ice cream was flat in terms of organic growth, as high levels of pricing by the industry, particularly in the premium segment, balanced out weaker volume. In super premium, Häagen-Dazs is performing well, whilst in the snacks business, I'd highlight Fruit Bars, Drumsticks, and the Häagen-Dazs bars. The chocolate business gained share. The Skinny Cow launch into chocolate is going well, actually running at double our expectations since launch and with good levels of repeat purchase.
For Coffee Mate, our new Natural Bliss range is building good momentum a year on from its launch and is driving growth in liquid coffee enhancers. Nescafé also had a strong start to the year with double-digit growth and share gains. The pet care business is performing well, continuing its improving momentum seen during 2011 and gaining shares in its segments. In Latin America, we have seen strong starts from both Mexico and Brazil, as well as a number of the other regions. Almost all categories achieved positive RIG, even though meaningful pricing was taken in a number of categories, including powdered beverages, soluble coffee, ice cream, and chocolate. Next is Zone Europe. The zone achieved 0.2% RIG and 2.3% organic growth. This is the same level of organic growth as in the first quarter of 2011, though it is more weighted to price in 2012.
In Western Europe, where the economic environment is poor and the consumer sentiment is weak, we have continued to see growth in most markets. Germany's first quarter was flat, impacted by some now resolved retailer negotiations, but elsewhere we have continued to see positive momentum in the business, building on the growth in the first quarter of 2012. Amongst categories, I'd highlight pet care, soluble coffee, culinary chilled, and frozen pizza. Eastern Europe is a mixed picture with generally good performances in the region, but no growth in Russia. The Russian business is certainly impacted by the economic environment there, but we have also been realigning our distribution. This should hopefully enable a better performance going forward. Zone Asia, Oceania, and Africa achieved organic growth of 11.4% with RIG of 7.2%.
The emerging markets continued to deliver double-digit growth, among them Greater China, Africa, the Middle East, and the South Asia region, which includes India. In each case, this is double-digit growth on top of double-digit growth in the first quarter of 2011, so we have strong momentum in the zone's emerging markets generally. This performance is reflected in a number of the categories, including ambient culinary, ambient milk, chocolate, powdered beverages, and ready-to-drink beverages. Japan and Oceania had a slow start to the year, partly due to the strong comparators in the first quarter of 2011 and partly due to the economic environment in those markets. Next is Nestlé Nutrition. It achieved 5.8% organic growth and 2% RIG. The biggest division, Infant Nutrition, had a good start to the year with above mid-single-digit growth on top of double-digit growth in the first quarter of 2011.
Many of the emerging markets in AOA and Latin America were double-digit, including the Middle East, South Asia, Africa, Mexico, and Brazil, with good performances from both the formula and infant cereals divisions. The developed markets were more subdued, as one would expect, with low but positive birth rates in some countries and declining birth rates in others. These markets were, however, positive contributors to the division's growth. Innovation is playing a role here, with, for example, our successful launch of baby food pouches in the U.S. being the fastest-selling SKU in that space, and graduates organics also doing well in the U.S. Rate management continues to be impacted in the U.S. by aggressive competition, as well as constrained consumer spending. We clearly still have work to do here to change the dynamics. More positively, the European launches are making steady progress.
In performance nutrition, our initiatives in 2011 to refocus the business back onto its core athletic client base, core products, and communication themes, assuring good early returns with an improved performance in North America. The smaller international business continues to perform well. Next is Nestlé Waters. The division reported organic growth of 8% and RIG of 5%. The North American market has continued to evolve positively in 2012 after its growth in 2011. We have seen good performances across the business from Nestlé Pure Life, from the regional waters, and from the international brands. Our home and office business also continued the positive growth trend seen in 2011. Europe is also seeing growth. We had a strong performance in France with share gains. We also gained share in Italy and had double-digit growth in the UK due to Buxton and Nestlé Pure Life, and in Germany with Vittel performing well.
The emerging markets also achieved double-digit growth. In Asia, I'd highlight Vietnam, the Middle East, Turkey, and Egypt, and in Latin America, Mexico and Argentina. Nestlé Pure Life, a big brand in the emerging markets, as well as in North America, grew double-digit globally. I will now wrap up the segment reporting with our final category, Other. Nestlé Professional continues to deliver positive growth around mid-single digit globally, fueled by double-digit growth in emerging markets. The beverage division focused on premium and super premium systems and services is building good momentum. As examples, a key account in North America is taking several thousand Nescafé Milano machines. Viaggi, our super premium system, is now in four European markets, whilst at the other end of the spectrum, Nescafé Alegria, our more mass-market machine, has now been launched in 60 markets. The standard pure, soluble, and dairy businesses are also performing well.
The food business also saw good growth, again double-digit in emerging markets. The culinary flavor solutions approach, products such as bouillons, sauces, seasonings, soups, desserts, is resonating well with customers. Nespresso continued to perform at a similar level to that in 2011. Boutique openings continue, and club numbers continue to grow. Nestlé Health Sciences has started its second year well, particularly in Asia and the Americas. Last year's acquisitions are performing to plan. Beverage Partners Worldwide is starting the process of realigning its markets. Many of its Latin American businesses are now being integrated into the zone, with the AOA ones following later in the year. Cereal Partners Worldwide saw strong growth in emerging markets, but this was somewhat mitigated by the weaker consumer sentiment in the developed world. Overall, though, the business achieved positive growth. On the next slide is the overview of our product category performance.
I have touched on most of this already in my zone comments, so it will be brief. We can always come back for more detail in the Q&A. All product groups were positive from an organic growth perspective, and only the one didn't deliver positive RIG. Again, this underlines that we are performing well in terms of growth on a broad basis. Powdered and liquid beverages have had a good start to the year in view of its near double-digit RIG in the first quarter of 2011. As you will remember, this was driven by a number of factors, including imminent pricing in soluble coffee. The different product group constituents have all contributed well in the first quarter of 2012. Nescafé Dolce Gusto and Nespresso continue to be key growth drivers. Miele has also had a strong start with double-digit growth.
Milk Products and Ice Cream is showing 8.5% organic growth with 7.2% pricing. The pricing is in both dairy and the ice cream business, and has impacted real internal growth, particularly in ice cream. The dairy business, which is predominantly an emerging market business, is performing well in AOA, where I would highlight China, Pakistan, and the Middle East, and in Latin America, including in Brazil and Mexico. Ice cream has started the year well in Europe, though it is the off-season. In North America, the business is flat overall. Prepared dishes and cooking aids is a mixed picture. I have already discussed the frozen business. The ambient business, mainly Maggi, is performing well globally. It continues to be one of the key emerging market growth drivers. Hertha, mainly in France, also deserves a mention as it continued to achieve mid-single-digit growth in the chilled category.
Confectionery achieved 7.1% organic growth. There is some benefit from Easter falling earlier than in 2011, so the first half number will be a better guide than Q1 to the underlying growth performance. Double-digit growth in confectionery in zone AOA, where Easter isn't a material factor, demonstrates that the business is continuing to perform well, with highlights including China and the Middle East. The business also grew double-digit in Latin America. Pet care delivered organic growth of 7.7%, driven by good growth in both developed and emerging markets. Nestlé grew market share in all its regions and across all major pet food segments. In addition, growth in emerging markets continued to be strong, driven by double-digit growth in Latin America and Central and Eastern Europe.
In the U.S., the pet food category appears to have stabilized from the early 2011 negative trend, with indications of some early recovery in pet population trends. We continue to grow share, driven by good performance in cat food, dog food, and new product launches, including Beneful Baked Delights, a new line of dog treats, and an expanded premium line for Wet Cat. In Europe, continued momentum on Felix, Purina ONE, and Purina Pro Plan contributed to the Q1 2012 growth. In addition, Felix Cat Snacks was rolled out in Germany, France, Holland, Belgium, and Spain. We also continued to grow market share in Central and Eastern Europe. A final slide then, just to summarize. The year has started well from a growth perspective. The first quarter is a bit impacted by the Easter timing.
As ever, therefore, the first half numbers will be a better read-through to our underlying sales performance than the first quarter. The business environment is tough in developed markets, with consumer confidence under pressure and, if anything, lower than in 2011. We will be investing in our brands and innovation, and we'll be focused on realizing the growth opportunities that we know exist in developed markets. On the other hand, the emerging markets continue to be dynamic, and we are very focused on driving distribution in those markets to increase our exposure from PPP to premium. Our 2012 outlook is unchanged. Delivery of the Nestlé model for the full year, as I have already said. That concludes my presentation. Let's now go to the Q&A.
Ladies and gentlemen, your question and answer session will now begin. If you wish to ask a question, please key star one on your tone dial phone. If you change your mind and decide to withdraw your request, simply key star two. All questions will be answered in the order received, and you will be advised when to ask your question. All other lines will remain on listen only. I would like to remind you to restrict yourself to two questions per person. Thank you. Our first question is from Warren Ackerman of Société Générale. Your line is now open. You may now ask your question.
Morning, Roddy. It's Warren here at Société Générale. A couple of questions. The first one is, I appreciate it's not easy, but I was just wondering whether you're able to give us a feel of the group impact on organic growth of the leap year, and also the early Easter, which you touched on in your confectionery commentary. I was wondering whether you can kind of aggregate both of those impacts up at the group level. That would be really useful. The second one is, the M&A line was higher than consensus, quite a lot higher than consensus, mainly due to Yinlu and Hsu Fu Chi. Just wondering how big Proforma will kind of be after those acquisitions. It looks like it's going to be maybe a doubling of your Chinese business. Are you able to talk about how those acquisitions will impact your capabilities generally in China? Thank you.
Thanks, Warren. Good morning.
Morning.
Yeah, on the Q1 impact, I think, as you say, it's a quite difficult question. I think we need to start with 2011. Of course, back in 2011, we had the Arab Spring, we had the tsunami in Japan, we had some customers buying in ahead of price increases. On the other hand, we didn't have an Easter. There were a whole number of things that went on in Q1 last year that are quite different from Q1 this year. This year, as you say, we had the leap year. We did have the Easter. We didn't have customers buying in ahead of price increases, but we did have some disruption with customers in Europe around price negotiations. There's a whole bunch of moving pieces in both quarters. We haven't attempted to try to sort of aggregate out what that would mean in terms of basis points.
I mean, clearly, you can do the leap year amount yourself, and it's about 1% statistically. There's a bunch of other stuff in there as well. I'm not sure it's hugely meaningful to do it. We haven't done it. On the M&A side, I guess the reason that the M&A number has come out higher than consensus is because the Chinese businesses, perhaps the Chinese businesses, the partnerships that we signed at the end of last year, are probably growing faster than people imagined. Remember that there is no RIG or organic growth in those acquisitions. It's all included in the acquisition number. In terms of the impact of those businesses on China, it's very early days. Clearly, the SBU heads have been out there. They've met the businesses. They've talked about what we can bring in terms of marketing expertise.
Equally, they're keen to learn from the Chinese businesses about their capabilities. You asked about capabilities. We're very excited, in particular, about Hsu Fu Chi's distribution capabilities into retail. Also, Yinlu's aseptic packaging capabilities, which are as good as anything we've seen anywhere in the world. They're certainly bringing a lot to us in terms of capabilities. That's one of the reasons that they're so attractive, apart from, obviously, the categories that they're in. The other thing that we're excited about is that it takes us into local Chinese diets rather than just a more European-focused business. I'm a bit reluctant to give a sort of pro forma Chinese number for the current year, but it's clearly going to be somewhere around 4% - 5% of sales.
The Chinese business is quite material, which actually reminds me that when it comes to the 2013 Q1, you're not only going to have the Easter and the leap year impact, you're also going to have the Chinese New Year impact because Chinese New Year is the peak season for Hsu Fu Chi. The Q1 in 2013 and thereafter is going to be a pretty poor guide, I think, to the underlying trends in the business.
Roddy, just in terms of a point of clarification, you said something at the beginning of your speech about the raw material issues being a bit of a lag. I was just wondering whether there was a bit of a message in there that margin delivery will therefore be maybe a bit more H2 weighted compared to H1.
Roddy, there's always a message. There's always a message.
Yes, noted.
That's a good read-through. Yeah.
Okay, thank you.
Thanks very much, Warren.
Thank you. Our next question comes from Jon Cox of Kepler. Your line is now open.
Yeah, good morning, Roddy. Good set of figures there, probably much better than everybody expected. Just to come back to this Easter issue, it looks like you're a bit reluctant to talk about an overall impact. Just wondering on confectionery specifically, do you think maybe it added maybe a point to organic growth and as a result, maybe a point less organic growth in confectionery in Q2? That's the first question. A second question, just on the sort of coffee generally and the system business. This is obviously tremendously important for you in terms of Nespresso and the Dolce Gusto. I wonder if you could actually just mention something about Dolce Gusto and how the trends are there.
Also, wondering if you've seen anything that worries you from a competition perspective, given the fact that there seems to be a lot of competitors getting into it and trying to obviously grab some of that fast-growing market. Is there anything that gives you cause for concern, or are you pretty relaxed for the time being? Thank you.
Thanks, Jon. Yeah, I mean, you're probably broadly right on your Easter assumption. There are a lot of moving parts, even in confectionery. On the coffee business, we've continued to see a very good development of both the Nescafé Dolce Gusto and the Nespresso retail systems, and as I said, also within Nestlé Professional with their systems. That broad business segment continues to be a key growth driver. You talk about new entrants into the market. I think at this stage, the new entrants are still actually talking about it rather than doing it. It's clearly something that's coming. No, we're not relaxed. We're never relaxed. We are very focused on ensuring that we are doing all the right things to continue to drive the business forward as successfully as we have been doing so far. We're certainly not relaxed. There's not much more to say about it.
Nescafé Dolce Gusto continues to build on its presence. It's now in nearly 60 markets. The organic growth is lower than it was last year, but it's coming off a much bigger base, so that's hardly surprising. It's still the fastest-growing big brand that we have, I guess, by a fair way. As I said earlier on, Nespresso is also performing very well.
Great. Thank you.
Okay, Jon. Thanks.
Thank you. Next question comes from David Hayes of Nomura. Your line is now open.
Morning, Roddy. Hi.
Morning.
Just two areas, please. First one on pricing levels. I just wonder whether there was any category where you notably took up pricing sequentially from the fourth to the first quarter. Then just looking forward, looking at kind of the way you talk about the outlook, it feels like you're saying that the pricing is taken and that will obviously sort of reside through the rest of the year rather than pricing to go up substantially or at all through the year. I just wonder whether that is kind of the interpretation that we should have. The second question is just in terms of, again, sequential trends. You obviously talked about the U.S. being a little bit lackluster. Also, other companies, and I think you guys have also said, obviously, emerging markets may be a little bit slower as well.
I just wonder whether you have seen a slowdown between the fourth and the first quarter in either the U.S. or any key emerging markets, or whether that's just a commentary which is a continuation of what you were already saying at the end of last year. Thanks.
Thanks, David. Good question. Starting with the second question, we don't tend to look at the Q1 off the Q4 base because the Q1 is also very much driven by the comps from the prior year Q1. We're not seeing, if we were to do it, I don't think we would see dramatic changes in pattern of growth between Q4 and Q1. Looking at the U.S. in particular, yes, clearly, consumer sentiment is lackluster. Clearly, it's impacting our categories and our business. I think what we will see in the U.S., though, is the pricing effects from last year will obviously come off later in this year. With luck and innovation, it should be somewhat replaced by increasing RIG. The emerging markets, I don't think we're seeing a dramatic slowdown. We were 13% this year.
I think from memory, we were about 13% in the fourth quarter, and I think we were 12% in Q1 last year. I think the emerging markets are performing at a similar level to where they were last year. Now, one can have a debate about the macro environment in emerging markets and is there a slowdown or not. We are far more focused on what we are doing to drive our growth in those markets. We're not seeking to be a market growth business in the emerging markets. That's why we're investing heavily in increasing our distribution of our products in Africa and Asia and other such regions. On pricing, we have taken pricing. I think dairy would be an example. Soluble coffee would be an example. Water would be an example. Pet care would be an example.
In the U.S., in frozen, we've taken pricing in the sense of a change in promotional behavior. We're no longer doing five for $10. We're doing four for $10, which is a quite significant pricing change, which has not necessarily been followed by all of our competitors, which goes some way towards explaining our market share performance in the Stouffer's business.
Okay. For the rest of the year, I mean, I guess you might just take pricing in some categories if you don't know necessarily, but you're not trying to then say that that's it for pricing. That's not kind of the message that we should take.
Well, no.
I mean, we take care of the price outlets, supposedly.
Yeah. As you know, David, the pricing decisions are made locally around the world by the guys running the categories and the markets, and they will do what they need to do. The way that the raw material picture is looking, it doesn't look like we're going to be taking the level of pricing we were taking last year. As I said in the previous question Q&A, the impact is more H1 than H2. I think that's actually also reflected in the consensus.
Okay. That's great. Thank you very much, Roddy.
Thanks, David.
Thank you. Another question from Alain Oberhuber of MainFirst. Your line is now open.
Good morning.
Morning, Alain .
Alain Oberhuber from MainFirst. Just two questions. First is about the currencies. If we assume, because the number was much weaker than the market was expecting, it's just about the proportions. If we assume that all the currencies remain constant, when do you expect a positive impact of currencies in your results? Secondly, if we look at the growth rate in Latin America, I assume that in particular Mexico and Brazil was at least as good as emerging market growth, i.e., 13%. Is that a fair assumption? If not, was it a positive momentum in these two markets versus Q4?
Thanks, Alain. I think your first question on currency is rather difficult to answer because we don't tend to assume that nothing's going to change in terms of currencies. It's clear that if things stay as they are, the negative currency impact will reduce over the course of the year. We haven't done a model that says, what will it be at the end of the year based on today's rates? In Latin America, no, you would be aggressive if you were assuming that Brazil and Mexico were growing at 13%. They are growing very well, but they're not growing at that level.
There is positive momentum versus Q4 in both markets.
They are both performing well. Brazil is certainly above where it was in Q4. Mexico had a very strong year last year and continues to be very strong.
Okay, thank you.
Thanks, Alain. Next question, please.
Yes, sir. Our next question comes from Mr. Pablo Zuanic of Liberum Capital. Your line is now open.
Hi, Pablo.
Good morning, Roddy.
Good morning.
Two questions, one more macro and one specific. Are there in your portfolio any categories that we should think of as pass-through categories? You know, we're seeing rust and ground, margarine, yogurt, fluid milk. Prices go up and down with underlying commodity. Are there product lines in Nestlé at all where we should think about that, like for example, in powdered milk? That's one question. The second one, obviously, is more around the single-serve coffee platform. Can you just, I have two very brief questions there. I'm hearing that the Nescafé Dolce Gusto type of coffee in North America, because it's more milky and foamy, doesn't really go with the type of brewed black coffee that the market looks for, for example, Green Mountain Coffee Roaster sales. That's why NDG is not growing so well in North America.
I understand that can be irrelevant given that 85% of the business is still in Europe and it's growing at 60% this year. If you can comment on that. The second question, in the case of single-serve coffee in Europe, is the category growing much? I'm talking about the non-Espresso category, if I can differentiate it that way, meaning the category where Senseo, Tassimo, and Nescafé Dolce Gusto compete. It seems to me, from the data I'm looking at, that the category may be flattish or at best growing single digits. If you can comment on that, please. Thanks.
Thanks, Pablo. Good question. Yeah, I mean, the way you describe Dolce Gusto in the U.S. as not being the classic American black coffee is accurate. We can say the same for Nespresso, of course. It hasn't stopped Nespresso building a successful business in the U.S. I don't think the issue for Dolce Gusto is that it's offering the wrong product. To support that, we know that where we have been successful in selling Dolce Gusto machines, the use per machine is very high. It's above our average use per machine. The people who are buying the machines are enjoying the product. I think where we're successful in converting the traditional American coffee consumption moment, we're enjoying success. That, as I say, also applies to Nespresso.
On the European market, I don't have a number for the European market ex-Nespresso, but the European market is still growing very nicely, and we are still growing our share. You were at a cage when Fiona Kendrick presented, and we showed you a share chart. I think that the trends on that share chart remain accurate today as they were then. On the pass-through categories, clearly, our strategy is all about added value. The more you add value, the less you have pass-through, I suppose. You cited dairy.
The reason that our dairy business has been so successful over the last 10 years and more is because we've moved that business from an effectively plain powdered milk business into a business that is segmented by consumer benefit, whether it's for children between one and three, three and six, or above eight, or indeed now into adult milks and milks with other specific nutritional benefits. The whole secret of our success in milk has been to create value from what would otherwise be a commodity pass-through category. I could take you through other examples. You mentioned roast and ground. Roast and ground is clearly a pass-through category, which is why we don't, as a rule, play there, albeit we have one or two small businesses. Of course, obviously, the systems business Nespresso, that's quite different.
I guess the pass-through category that we do have would be water, where clearly the water pricing is very driven by raw material costs, particularly by PET and oil. Does that answer the question, Pablo?
Yes, that's very helpful. Thank you.
Thanks. Thanks, Pablo. Next question, please.
Thank you. Another question comes from Patrick Schwendimann of Züercher Kantonalbank. Your line is now open.
Patrick Schwendimann, Züercher Kantonalbank. Good morning, Roddy. Firstly, regarding your input costs, you were mentioning for the full year a low single-digit increase. What should we assume for the H1, H2 pattern? Should we assume a high single-digit increase in H1 and a decrease in H2? That's my first question. Secondly, regarding your performance in North America, could you give us the organic number for North America for Q1? Also, your best guess estimate for the full year. You were already mentioning that probably the RIG should be better later in the year, maybe pricing less. At the end of the day, what would you expect from the organic growth? Thank you.
Thanks, Patrick. Good morning. On the raw material, no, I'm not going to, no, guidance for the full year is low to mid-single digit. I'm not going to give you guidance for the half year. What we said is that it's first half weighted. Therefore, if it's low to mid for the full year, it's going to be higher for the first half. I'm not going to give you a number. We also don't disclose the North American organic growth, but it was positive and made up of negative RIG, positive pricing to give positive organic growth overall.
To have a flavor for the full year, should we expect any improvement here overall in organic growth in North America?
We'll wait and see. I'm not going to give forecasts on organic growth for all the zones or even all the regions. We'll wait and see. Okay?
Okay. Thanks, Roddy.
Thanks, Patrick. Next question, please.
Another question from Mr. Jeremy Fialko of Redburn. Your line is now open.
Morning, Jeremy Fialko, Redburn here. Just a question on Russia for you, Roddy. Can you talk in a bit more detail about what the distribution changes that you've made are? Is this a kind of a one-quarter impact that you've got from implementing the changes, or is it going to be something that's going to act as a drag for most of the year within Russia? When do you hope to see some sort of an improvement? Thank you.
Morning, Jeremy. Thanks very much. Yeah, Russia, as I think you're aware, has been a bit of a challenge for us for a couple of years now, particularly in the zone businesses. It's been rather better for us in the last couple of years in infant nutrition. Also, the pet care business is doing very well. What we've been doing in Russia, we have just recently opened a major new Nescafé plant, which is obviously bringing us in line with some of our competition who already had local manufacturing there, whereas we didn't. That's important in view of import duties. In terms of distribution, it's simply just realigning our distribution to make it more effective. I'm not going to go into the nitty-gritty aspects because it's a little bit competitive. Is it a one-quarter hit? No, it's not a one-quarter hit. We're not expecting a sudden recovery in Q2.
I think, frankly, the issues in Russia are deeper than that. I mean, for a start, the economy isn't the best. Hopefully, what we're doing with our distribution will give added momentum to the business and will contribute to an improving performance over the course of the year, not necessarily in Q2.
Okay, thanks.
Okay. Yeah, thanks, Jeremy. Next question, please.
Thank you, sir. Another question from Ms. Jane Gelfand of Barclays. Your line is now open.
Morning, Jane.
Hi, Roddy. Good morning. Good morning. A quick question on how you see competitive dynamics perhaps developing into the back half. A couple of sort of innovation or ingredients partners have talked about seeing a greater pipeline of new products slated to come up and online in the back half, particularly in North America. I guess I'm wondering what you're expecting from kind of a promotional versus fruit marketing standpoint in the back half, especially as commodities decline. A couple of years ago, we saw sort of similar trends to start the year, meaning RIG definitely impacted by price mix, not just for Nestlé, but for the industry as a whole. In the back half, we went into sort of a downward spiral from a promotional perspective.
I'm just wondering whether you expect the industry to be more rational in the back half this year, maybe backed up by true innovation, or you know we have to kind of hold our breath and potentially brace ourselves for less rational dynamics. Thank you.
Thanks, Jane. It's a good question. I think that's all about North America. That's how I'll answer it. First of all, I don't think that we would suggest that the competitive dynamics have not been rational. I think our competition do stuff because they believe it's rational to do it. Certainly, we do stuff because we believe it's rational to do it. I think that the competitive environment is rational. Now, in terms of coming innovation, I'm not obviously aware of what the competition is up to and how that might change the competitive dynamic. We have some interesting stuff coming through in a number of categories. Some of it is already out there. I mentioned pet care. I mentioned some of the stuff we've done in pizza as well. Also, in Coffee Mate with our natural bliss. We've got a lot of stuff out there that's already happening.
Skinny Cow I mentioned. There's also stuff coming through, which I haven't talked about and which I'm not going to talk about until it's happened. I'm hopeful that there is some innovation that will bring some dynamism to the market for us, at least in the second half of the year. In terms of the mix between pricing and promotion and marketing and so on, I cited the one example in frozen of going from five for $10 to four for $10. It's up to the individual guys running the individual businesses in the States how they want to play that. We're not going to micromanage that from here. Clearly, if there is an easing in raw material pressure, that provides an opportunity for them to look at how they're going to market.
Roddy, thanks so much. If I could just follow up quickly about Nespresso patents. Yesterday, during the AGM, there were some comments about the patents being upheld. I'm just wondering whether that was a change relative to what you've said previously, whether that allows you to pursue any other legal avenues from a sort of an injunction standpoint, or whether it's kind of more of the same and you have to continue to fight the individual legal battle.
Yeah, Jane, there is a press release that went out yesterday just confirming that we had won a ruling in the European Court. It doesn't, I mean, it's not a, I mean, that's what it was. It was a press release in the European Court. Effectively, what it means is that we won that ruling and that puts us in a good position as we now pursue our court cases in the individual European markets. I think what we have always said, and perhaps this will resonate more on the back of a victory than when we're in the middle of a court case, what we have always said is that Nespresso is going to win in the market because it's got a better product, better customer service, better design because of the whole secretive Nespresso system, not because of what happens in courts.
Perhaps that message will now resonate more strongly on the back of a victory rather than when we're fighting a court case. I think the change, if there is a change, is that it's a net benefit. It's a net positive for us as we go into these local court cases.
Understood. Thank you so much.
Okay. Thanks, Jane. Next question, please.
Yes, sir. Our next question comes from Mr. Xavier Croquez from Cheuvreux. Your line is now open.
Hi, Xavier.
Good morning, Roddy. Good morning, everyone. Two small questions. The first one is, I was a bit surprised by the level of pricing in your milk and ice cream category. I knew you could see that coming into the quarter because there was a build-up from last year. With the type of raw material price evolution, and I take your point on the lead time, I was still quite surprised on how strong the pricing has been. Is there anything else than raw mats behind this pricing? Is the ice cream business pushing pricing up, or is there a mix effect? What is behind this very important pricing factor in that category overall? The second question is a smaller question. If by any chance you could give us the RIG numbers in emerging markets and developed markets, it would be helpful. Thank you.
Thanks, Xavier. I think there are two fundamental things answering your first question on milk and ice cream. One, there's cost pressure, so we take in price. Second, in the U.S., the premium ice cream segment, which in Europe would be the mass ice cream segment, has always been sold very heavily on promotion. We have changed our strategy into our promotional strategy to make it less promotion-led. That has had a positive impact on pricing, which is quite dramatic. I think you'll see that's true across the industry.
Okay. Sorry, to get a timing sense of this, is this what is behind the numbers since mid-2011, or is this something relatively new?
No, it's more this year than last year. Last year's pricing would have reflected fundamentally the raw material cost pressure. This year's pricing reflects the carry-through of last year's pricing on the raw materials and what we're doing on ice cream. I don't think we normally give you the RIG numbers on emerging and developed markets, but the emerging market RIG was between 5% and 10%, and the developed RIG was also positive.
You didn't give it, but it was a suggestion. Thanks.
No, it's always good to try. Thanks, Xavier.
Thank you.
Next question, please.
Thank you. Our next question comes from Mr. Robert Dickinson of Citigroup.
Good morning, Roddy.
Hi, Robert. Morning.
Good morning. Could you give an indication of the performance of the business in some of the tougher European markets, such as Spain and Italy, and whether that had any impact on Zone Europe's RIG? I know last year you highlighted that some of those tougher markets had been performing pretty resiliently. Any help there would be great.
Thanks. Sure, Robert. Portugal, Spain, Italy, Greece, combination continued to deliver positive organic growth for us, not at quite the levels it was last year, but still positive. We're still eking out growth even in those tough markets. I think it's fair to say that the environment there is tougher than it was last year. Italy, actually, we're doing pretty well. I think we talked last year about how we made some changes there. The business is performing well. Market shares are good.
Market shares are good fundamentally broadly across the whole of Western Europe. I think we're still outperforming our peers. I think we're still doing pretty well. There are issues. For example, the quite significant increase in VAT in Portugal, as an example, is a bit of a challenge. If you take, as an example, you take Nescafé Dolce Gusto, the impact of the VAT increase is to push the price of a box of Dolce Gusto capsules over EUR 5, which is quite a challenging price point. There are issues that are in those markets, which we need to manage. Overall, we're still eking out some growth. I think that's a pretty good effort by our people.
Thanks very much, Roddy.
Thanks, Robert. Next question, please.
Thank you. Our next question comes from Mr. Pierre Tegner of Natixis. Your line is now open.
Hi. Good morning, Roddy. Good morning, everyone. I would like to come back to David's question on pricing. Due to the stick and chill price increase we can see, specifically on AOA and on emerging markets between Q4 and Q1, do you consider that you are quite happy with the level of price you have at the end of Q1, or are we to expect further small price increases during the next quarters? The last question is, my feeling is that you have a big focus of price increases, specifically in the emerging markets. In sequential terms, we have much more lower price increases between Q4 and Q1 on the water, nutrition, and Europe. Is it the effect of the challenging trading environment, or is it much more a Nestlé policy to preserve your competitivity in this market? Thank you.
Thanks, Pierre. If I understand your question, it's about the trend in pricing Q4 versus Q1 in AOA and generally. First of all, you know the pricing in any given quarter reflects the pricing taken in the prior year. It's clear that there was pricing in Q4, raw labor pricing in Q4 that is no longer there in Q1 because the year has passed. The Q1 number does not include raw labor pricing that was in Q4. Equally, there would have been pricing taken in Q4, and there's pricing taken in Q1. You can't just do a Q4-Q1 price comparison and say, "Good heavens, the pricing's come down dramatically. Nestlé must have reduced their prices." It's just the result of raw labor pricing in Q4 not rolling over into Q1.
Yeah. On these points, can we expect further pricing actions in sequential terms in Q2 versus Q1 and in Q3 versus Q2 in the course of the year?
As I said earlier on, the pricing decisions are taken in the markets locally by the category heads. It's clear that where we have cost pressure in those markets, they'll be taking pricing. We have taken pricing already in Q1 in some categories and some markets. As and when the market, the category heads feel they need to take pricing, they will do so. I would be astonished if there was no more pricing in 2012, particularly in emerging markets. I'm sure there'll be more pricing, yes.
Okay.
All right?
Okay.
Okay, thanks, Pierre. Next question, please.
Thank you. Another question from Mr. Jon Cox of Kepler.
Hi, Jon.
Thanks for letting me take a second question, Roddy.
Very cheeky of you.
Yes, as always. Just looking at the sort of net trading income line for this year, looking at consensus around CHF 700 million, I seem to remember your guidance was restructuring and legal and all of this stuff that comes in that line is actually going to be closer to half a point of revenues for the year. Is that still the case? I'm just trying to work out why, on consensus at least, you have a sort of there's a CHF 716 million figure there in that line, which leads me into the second point. I know your guidance now is for the trading operating profit margin to come up, and I can see that's plus 20 basis points on consensus.
On your old operating profit, would you think you'd actually get a margin increase there at all, or would you say no, given the fact that you're guiding for maybe only half a point of in that net trade income line, actually, that margin is likely to be flat, if not somewhat lower?
Good question, Jon. Even cheekier, I think, to come around a second time and ask that question. I mean, there's no reason why our guidance on the net non-trading and all that should have changed from the full year to the first quarter. You can assume that the guidance we gave at the first quarter is still good guidance. In response to the requests from the market, we have changed our reporting, gone to net net sales, tried to bring ourselves in line with our peers, tried to make comparisons with our peers easier.
In line with that, we've now changed how we guide. You're now asking me to guide on a number that we don't even report. I'm not going to do that. Our guidance is based off constant currency improvement and trading operating profit margin and underlying earnings per share. I'm not going to give you guidance on the old EBIT.
Okay. Are you pretty comfortable with that plus 20 basis points at trading operating profit?
A big one.
Consensus at the moment. Are you comfortable with the trading operating profit consensus plus 20 basis points?
The consensus is what it is. As you know, we don't endorse it. It's what it is. I think that what the consensus is telling us is that we're going to have a tougher first half than second half, but we're going to deliver on the Nestlé model. We've said we're going to deliver on the Nestlé model. At least directionally, we and the consensus are in the right place.
Okay, because the tone of the call overall has been maybe it's only on the margin, watch out H1, don't get too carried away. I guess you're not trying to push consensus down at all.
John, the consensus will do what it will do. I think all we're doing is we're saying the consumer environment in Western Europe is tough. This is no surprise. We all know that. It's perhaps a bit tougher than it was last year. Emerging markets remain dynamic. Again, I think we know that. We're very focused on being better than market in terms of our great performance in emerging markets. The raw material environment remains, I think, perhaps a little bit tougher than some of you guys are writing about because we still have cost pressure in the market. As we say, it's more H1 rated than H2 rated. The consensus is already saying that. I think that we and the consensus are broadly aligned. I'm not going to get into basis point discussions on consensus.
Yeah. Okay, Roddy. Thanks very much.
All right. Thanks, Jon. Any more questions?
Yes, sir. We do have another question coming from Mr. Pedro Gil of Santander. Your line is now open.
Hi, Pedro.
Hi. Good morning. I have a question on your nutrition business. Could you give us some color on the rate of organic growth that you are seeing in infant nutrition in your emerging markets as compared to your developed markets?
Sure. The infant nutrition business is growing double digit in emerging markets and is growing low single digit in developed.
Okay, thank you.
All right. Thanks very much. Next question, please.
Once again, if you would like to ask a question, please key star one on your tone dial phone. If you change your mind and decide to withdraw your question, simply key star two.
Okay, if there are no more questions.
Okay, sir. There are no more questions in the queue. I will hand the call back to you, Mr. Child-Villiers.
Thanks very much. I'm told that we apparently had some technical problems earlier on in the call, for which I apologize. If you missed anything, there's always the replay, which hopefully will work. Thank you very much for listening. As I say, we reconfirmed our commitment to deliver the Nestlé model for the full year, 2012. Thank you for your interest in Nestlé. Thank you for your questions and for your time. Goodbye.