Nestlé S.A. Management Discusses H1 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: Nestle S.A. (NSRGY)

Nestlé S.A. (OTCPK:NSRGY) H1 2013 Earnings Call August 8, 2013 2:30 AM ET

Executives

Roddy Child-Villiers - Head of Investor Relations

Wan Ling Martello - Chief Financial Officer, Executive Vice President and Member of Executive Board

Analysts

Warren Ackerman - Societe Generale Cross Asset Research

Celine A.H. Pannuti - JP Morgan Chase & Co, Research Division

Alain-Sebastian Oberhuber - MainFirst Bank AG, Research Division

Jon Cox - Kepler Cheuvreux, Research Division

David Hayes - Nomura Securities Co. Ltd., Research Division

Eileen Khoo - Morgan Stanley, Research Division

Chow Yik Cheung - Value Partners Limited

Jeremy Fialko - Redburn Partners LLP, Research Division

Patrik Schwendimann - Zurcher Kantonalbank AG, Research Division

Alex Molloy - Crédit Suisse AG, Research Division

Thomas Adrian Russo - Gardner Russo & Gardner

Robert Waldschmidt - BofA Merrill Lynch, Research Division

Roddy Child-Villiers

I'm Roddy Child-Villiers. Welcome to our First Half Results Conference Call, and thank you for tuning in. I am here with Wan Ling Martello, the Nestlé CFO. As usual, we will start with the presentation and then open up for discussion.

As we always have financial journalists and the wire services listening to our results calls, we have also opened the discussion up to them, should they wish to join in. If you are listening online rather than by phone, the number for joining the conversation is on the invitation.

As always, this call is being recorded.

I would like just to remind you that we are reporting off the base of the restated 2012 numbers following the various accounting changes this year, including employee benefits and joint ventures that can no longer be proportionately consolidated.

I'll take the Safe Harbor slide as read and will hand the call over to Wan Ling.

Wan Ling Martello

Thank you, Roddy. Good morning, and good afternoon, everyone. We have about 0.5 (sic) [1.5] hours together, so let me spend 20 to 25 minutes to update you on how things are going so far this year and leave enough time for questions and discussions.

Let me start with some key takeaways. I'm happy to say that these are quality numbers, well balanced for growth, margin improvement, reinvestment in growth and cash flow performance. The group's rate accelerated during the first half, the group's margin was up 20 basis points and marketing investment was up 60 basis points. The cash flow performance was strong and working capital remains on a good trend. Of course, we also have challenges, and I will highlight those in my presentation. So let me give you a little more detail.

The good news at a group level was acceleration in RIG from Q1. Yes, pricing was low, but we should expect that in a generally deflationary environment. The input cost situation may have reduced our pricing, but it has benefited our trading operating profit margin. The margin was up 20 basis points even after reinvesting 60 basis points in marketing spend. And earnings per share were up both in reported as well as in constant currencies. So it is clear that we have succeeded in delivering quality, profitable growth in the first half of 2013. Our cash flow was also strong, driven by our improved operating performance despite the tough comparable.

Now turning to some summary comments on our business performance.

Our continued growth in developed markets is clearly noteworthy. Emerging markets grew over 8%. We're double digit in Latin America and Russia; over 7% for AOA as a whole, though double digit in many markets there; and single digit in the rest of Eastern and Central Europe.

Looking forward to the rest of the year, we expect continued good momentum in RIG to enable us to end the year with organic growth of around 5%, together with an improvement in our trading operating profit margin and underlying earnings per share in constant currencies, as well, of course, as an improvement in capital efficiency.

So now let's get a look into the half year numbers and look at the zones and globally managed businesses. Let's do first, growth. You can see on this slide they all delivered positive RIG and organic growth. The majority accelerated the RIG during the half, nutrition did not, and RIG for the Americas was flat. Also, their pricing reduced, so a pretty consistent picture.

Now margins. Europe was slightly down. I think this was a reasonable performance in view of the tough competitive environment, the challenges around product recalls and label scares in Q1 and the fact that marketing spend increased in the period. Americas was up, a good performance. Again, marketing investment was up. There has been good work done here in terms of structural costs and streamlining of operations. Also, the zone had to overcome continued inflation in Latin America, reflected in the relatively high pricing for the zone.

Moving now to Asia, Oceania and Africa. AOA delivered 20 basis points margin improvement. The zone has been the brunt of external criticism recently, focused mainly on its top line performance. I would like to give the zone credit for delivering margin improvement in a period characterized by slowing economic growth and the destruction of a major refill factory. It also had an extremely strong working capital performance.

Nestlé Nutrition saw margins fall 60 basis points. This is, in part, explained by the expected Wyeth dilution. The other impact was Weight Management, which has continued to contract. We're restructuring the Jenny Craig centers and taking other steps to address the situation. The core Infant Nutrition business is performing well.

Nestlé Waters. Nestlé Waters held its margins flat, bearing in mind that H1 2012 has the leverage from strong volume growth and H1 2013 did not. So this was a good achievement enabled by their focus on cost management, as well as a mix benefit in terms of both brand growth and geographic growth.

There was also a good improvement in our other activities, which of course includes Nestlé Professional, Nespresso and Nestlé Health Sciences. I will now move to the product groups. And again, I will start with growth.

The story is similar here, with pricing reduced everywhere but a mixed picture on RIG. There was a good improvement in RIG of powdered and liquid, driven in part by Nespresso's acceleration to double-digit growth for the first half, in line with Roddy's promise at our last sales call. The powdered and ready-to-drink segments also accelerated. Dairy and ice cream both improved their RIG during the half, and both were positive.

RIG in prepared foods remained slightly negative. Ambient accelerated slightly, but there wasn't much change in the other segments. RIG in confectionery's first 2 quarters is always impacted by the timing of both Easter and Chinese New Year, so after a strong Q1, it normalized during the second quarter. RIG for PetCare continued with its good momentum, this, remember, despite the Waggin' Train recall in the U.S.

Next up is a project group -- our product groups' margins.

Powdered and liquid was up 100 basis points. Our coffee activities and malt beverages both improved. Dairy and ice cream was also up, ice cream being the main contributor. Margins for Prepared Dishes and Cooking Aids was up, frozen being the main driver. In case of frozen food and ice cream, the margin improvement was driven mainly by structural cost savings in the U.S.

Confectionery's margins were down. There were a number of drivers here, first the highly competitive environment in the sector, generally speaking. Also, we had a very significant increase in marketing spend in Latin America relating to the Confederations Cup as well as the upcoming World Cup. PetCare's margin was down, although I have to note the underlying operational performance of PetCare was very strong. But the improvement in margin was canceled out by the costs of the Waggin' Train recall. You can see this in our financial statements, which are published online today.

Now I would like to pause here for a moment and come back to the group's overall pricing. Clearly, as we beat consensus with our RIG performance, we did not on organic growth. Pricing was the biggest disconnect versus your expectations. My view on the change between Q1 and H1 pricing we have reported is that it reflects more the current inherent volatility in our marketplace than it does a trend for the rest of 2013.

As you can see in these last few slides, we have very varied levels of pricing, whether by geography or category. So you see, ranging from strongly positive in the Americas to sort of like negative in Europe, from flat in Powdered & Liquid Beverages to strongly positive in PetCare. So you would ask, so what's -- "Wan Ling, what is happening?" Weaker currencies in Latin America are driving inflation there. So even in categories such as chocolate, where the U.S. dollar cocoa price has fallen, we have responded with pricing. On the other hand, in coffee, for example, where the commodity is sharply down over the last 12 months, our lower pricing reflects this in key markets such as the U.K. and Russia. Or think about milk: We're seeing high raw material prices. And again, our pricing reflects this in our dairy and nutrition businesses.

As you know, we don't make pricing decisions here in Switzerland. Those decisions are made locally by our people in the markets in view of their local cost pressures and competitive environments. And those pricing decisions are made to drive profitable growth businesses. Their objective is, therefore, not to take price for the sake of taking price. Their objective is to ensure that they are at the appropriate price points. The fact that we have delivered an operating performance that includes both increased marketing spend and an improvement in our margin demonstrates that our people around the world have got their pricing right, enabling us to drive RIG as well as margin.

As an example of this, look at powder and liquid. They may be at the low end in terms of pricing, but it is at the top end in terms of margin improvement. Doing the right thing for consumers and, therefore, doing the right thing for our business. And this is nothing new here. You go back over the last 10 years, before we changed our revenue reporting to net-net sales, you will see that pricing dip below 2% on several occasions. We have always been and will always be responsive to changing local conditions, focused, above all, on delivering profitable growth. And that, for me, is the key point, not whether we hit a price target for the group but whether or not we are delivering profitable growth. And in the first half of 2013, we have certainly done that while continuing to invest for the future, with a big step-up in marketing spend.

Moving to the next slide, regional growth. Let me dig down deeper into our performance, and I'm going to do this on a regional basis for total food and beverage, as many of the trends and challenges are common across the different divisions. So on this slide, by way of introduction, is a geographic split of the growth of all of our businesses, including the globally managed ones.

The Americas finished the half basically unchanged from Q1 for organic growth. North America was slightly weaker due to reduced pricing. Latin America, on the other hand, saw good RIG momentum, with pricing remaining firm. Europe ended the half slightly weaker than Q1 for organic growth, as Eastern and Central Europe experienced lower RIG and price. A number of the regions in Central and Eastern Europe are struggling from a macro perspective. In Russia where we have taken a number of initiatives over the last couple of years both structurally and tactically in the marketplace to improve on our competitive position, RIG was double digit. Western Europe accelerated slightly due to increased RIG.

AOA ended the half basically unchanged from Q1 for organic growth. The increased RIG was almost matched by the reduced level of pricing. So the trend, as you can see here, is the same in all our 3 regions, RIG acceleration. There was no material change in the organic growth of the developed or emerging markets. And the trend was the same, more RIG in both, less price.

Those were some introductory remarks. Let's now have a look at each region in detail and share with you all where we are doing well and where we also have challenges. So let us start with the Americas.

In North America, ice cream is a challenge in segments that lack differentiation such as premium, though we are gaining share. When there is differentiation such as super premium, growth is definitely more dynamic. Häagen-Dazs, for example, is up near double digit.

PetCare is a mixed picture. A key strategic question for us in PetCare is the growth of the specialist retail and natural segments where we are clearly underrepresented. We're, of course, looking at various approaches to address this, but it will take some time. And I could equally describe this as an opportunity, much like it's a challenge for us. In more immediate challenge in sub -- in some segments in dog, where we have lost share recently after consistently gaining share over the last few years, we are fighting back and, the latest trends suggest, successfully. On the other hand, we are doing extremely well in our cat, treats and litter segment. And to put the challenges in context, the business continues to perform well from a top line perspective.

The frozen entrée and pizza categories continue to struggle for growth. The competing restaurants are pushing hard on the "fresh, not frozen" theme. We are responding to this with our own messaging under the theme, Balance Your Plate. In pizza, home delivery continues to compete on a very promotional basis.

In this subdued environment, Stouffer's is actually having a good year and DiGiorno has taken share, and both are RIG positive. The bigger challenge in frozen is in the nutritional segment, which continues to contract. This is impacting our Weight Management business, Jenny Craig. And as I've said earlier, we are making significant changes there. Lean Cuisine is also being impacted. We have launched some new lines, but these are not changing the overall dynamics in the sector.

Moving on to the waters -- to waters. Waters environment is tough, with private label players pricing aggressively. We have taken a more profit-focused approach, which has of course impacted our market share. More positive on water, though, is the continued growth in the market and in our business. The premium brands San Pellegrino and Perrier are performing well.

Infant Nutrition is performing extremely well in North America, both in formula and in meals and drinks. Innovation is clearly playing a part in both areas. And market share performance in formula is good. Also going well are chocolate, coffee, Coffee-Mate.

Finally, on North America, you might recall that we put new management into Nestlé U.S.A. less than a year ago. Early signs are encouraging. Shorter-term market share trends are positive. There was positive RIG for the half. The margin performance was good. And they are tackling structural costs and business complexity. There's obviously still room for improvement, but so far, so good.

Now a few words now on Latin America. The key challenge in the region is the macroeconomic situation, including the weakening in some currencies, but this is something that we are used to. This is something that we are able to manage.

Input costs are another challenge, as those weaker currencies mean that the fall in the dollar price of raw materials is not reflected in local currencies. In that environment, we have delivered double-digit growth, with a good contribution from RIG.

Among categories, there are no major challenges. Doing especially well are PetCare, Powdered & Liquid Beverages, culinary and biscuits, Infant Nutrition, waters and professional, all growing double digit.

Let's now move to Europe. The challenge here should be no surprise. It is a macro environment and everything that springs from it, whether it's the recession in Southern Europe, the slowdowns in parts of Eastern and Central Europe, austerity programs, increased taxes, falling consumer spend, increased competition, I could go on and on, but you get the idea. Given all of that, the fact that we're growing our RIG suggests that there must be a few things that are going well. For example, the zone's customer service levels are high, innovation continues to flow and existing launches have the ranges expanded or extended into new markets. With a lot of activities, it is not surprising that the zone's marketing spend was up.

Of course, not everything in Europe is going well. No surprise. So let's have a look at the challenges. Southern Europe is extremely tough, now this cannot be new news. We talked about challenges in Q1, such as labeling issues in the industry. We're also seeing signs of improvement, and -- we are seeing signs of improvement in the affected categories. Ice cream also had a slow half.

Water is having a challenging year after the strong growth in 2012. The competitive environment has intensified. It's the same story as in North America, with increased promotional activity. Our best performers are the more differentiated waters. Nestlé Professional has had a weak start. Clearly, there is a link to the macro environment here, though I will have to say that beverage solutions continue to perform well.

I touched in my opening comments on what is going well, and here is a little bit more detail. The zone's growth drivers such as premiumization, value-focused offers and Nutrition, Health and Wellness have strong traction. PetCare, PetCare was again a key growth driver for the region. Coffee activities, consisting of Nescafé, Nescafé Dolce Gusto and Nespresso, continue to be growth enhancing. Key markets perform well, particularly in the U.K., in Germany and in Russia. Infant Nutrition has good RIG in the region, with positive growth in both France and Germany.

Next up is Asia, Oceania and Africa. The environment in AOA continues to be relatively buoyant even though there has been a slowdown during the last 18 months. We're also seeing the effects of government responses, such as the austerity programs in China. And the zone continues to be impacted by civil unrest and natural disasters.

Let's have a look at some of our challenges. The loss of a Syrian factory in Q1 has had an impact even if we were able to restore supply by the end of June, albeit at lower margins. We are in the process of establishing a new facility in Dubai that should replace the Syrian factory on a permanent basis, hopefully next year. Our coffee activities are a bit of a mixed picture. Some of our PPPs are fighting tough competitive battles in countries such as the Philippines, but we're doing well in premium and in systems both in the developed and emerging markets in AOA, as well as in ready-to-drink.

Nestlé Professional is having a tough start to the year also in the region. Its biggest market in AOA is in China. It also has been impacted by the austerity program, as well as a slowdown at a major customer. Elsewhere in the region, the business is going well.

Looking at the more positive aspects now in AOA. Powdered beverages, especially Milo, is performing extremely well. And in dairy, Bear Brand is outstanding. CWAR, which is Central and West Africa Region, picked a pace, doubling its Q1 organic growth in Q2, as we said it would be on the Q1 call. China continued to grow double digit but has slowed a bit after the New Year benefit to Q1. Having said that, we in China grew faster than the market.

Indonesia, Malaysia and Singapore are performing extremely well. Category highlights included Milo, our coffee activities, dairy and chocolate. The South Asia region, which includes India, picked up pace as ambient culinary continued to perform well and key enhancers accelerated sharply. The developed markets in AOA are also delivering positively, driven by our coffee activities, chocolate and Milo.

The Nestlé Infant Nutrition business grew extremely strongly not just in China but across Asia and Africa. Formula and cereals are both performing well. Wyeth Nutrition, as you all know, is not included in our organic growth, but I'm very happy to report it is meeting our expectations. Finally, Waters in AOA performed well in the first half.

Let's now move to the group numbers and start with our trading operating profit performance.

Here you can see our usual margin bridge. The headline story is the 20 basis points improvement in margins to 15.1%. Let me give you a little more color: We have taken advantage of an improved cost environment driven by raw materials but further enhanced by our efficiencies. We have overcome unexpected costs around the world, such as the recalls in both Europe and the U.S., and the factory that was mentioned earlier destroyed in Zone AOA. We have increased our marketing spend by 60, 60 basis points, and our consumer-facing spend is up 15%, again that's 15%, in constant currencies. And we have added that 20 basis points to our margin.

In summary, our H1 margin performance reflects 3 things. First, we have benefited from a low -- lower input cost environment. Second, we have the ability to invest dynamically in marketing. Third, our efficiency programs over the years means that we convert more sales into profit. And also, for those of you who continue to benchmark us against our old EBIT, there is also a bigger margin improvement at that level. This speaks to a high-quality first half.

I would like to take the opportunity to say a few words on the trading operating profit margin for the full year. I am aware that, in February, we guided to a second half weighting of margin improvement, which could lead some of you to think that we will further improve from our first half performance. A few words of caution: First, our operating performance in the first half was already good, so it would be difficult, it would be hard, to materially be better in the second half. Second, the first half was more benign in terms of raw material pressures and comparables than the second will be. Third, I've talked about being more active in how we manage our portfolio. It's difficult to forecast specific timings, but it is clear that a more active approach brings with it likely increases in other income and other expenses.

That all said, our commitment remains an improvement in the margin in constant currencies.

Here's the rest of the income statement. Our financial expenses increased in line with our higher net debt but fell as a percentage, no surprise, due to our growth and the lower interest rate environment. Taxes were also higher, but we are not changing our full year guidance of an underlying tax rate of around 27% to 28%. Earnings per share, up 3.4% reported and 7.2% underlying in constant currencies, that's 7.2% underlying in constant currencies.

Next up, cash flow and working capital. Our cash flow is strong. We had an extremely tough comparison due to 2012 cash flow performance, you should know that, but we remain at a similar level in 2013. This was driven by a good operating performance and improved cash conversion, with the major offset being a significant increase in taxes paid due to timing differences.

On working capital, our cash conversion cycle improved by 6 days, and total working capital has decreased in absolute value versus June of 2012 even though we have increased our sales and we have acquired Wyeth. A very positive trend.

So let me now wrap things up. It has certainly been an eventful first half. I think we have been successful in navigating through the various challenges that we have faced, as well as continuing to drive successfully where we are winning. We wanted to be transparent in highlighting to you what's going well and where we clearly have work to do.

I would like to end by underscoring 3 key points. First, from the group perspective, the quality of our numbers: well balanced with RIG acceleration; margin increase, together with the marketing investment going up; and good cash flow performance and positive trend in working capital.

Second, from an operating perspective, the results are also broad based, the Americas progressing on both top and bottom line; Europe, despite the macroeconomic condition, continuing to grow and to invest for growth; Zone AOA improving margin despite cost pressures and driving RIG. Nutrition, very strong emerging market and U.S. performance. Waters, positive growth in a difficult season. And last but not least, Nespresso, double digit in H1.

And third, for the rest of the year, our good RIG momentum will enable us to deliver organic growth of around 5%, together with an improved margin in underlying earnings per share in constant currencies as well as improved capital efficiency.

With that, let's now open up the discussion. So I'll turn it over to you, the operator.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Warren Ackerman from Société Générale.

Warren Ackerman - Societe Generale Cross Asset Research

Wan Ling, Roddy, I've got a couple of questions. The first one -- I hope you can hear me, it's not been a great line, to be honest. Looking at your full year guidance now of around 5%, I mean, it has nudged down slightly from the low end of the 5% to 6%. You did 4.1% in H1, so you kind of need to do around 6% in the second half. I mean, that looks, on the surface, to be quite a stretch. I'm just wondering, what are your assumptions for the second half for some of the key elements or pricing and Zone AOA growth and any other moving parts that you want to call out at this stage for the second half in terms of organic growth to get you to around 5%? That's the first question. And then the second question is just around -- you made an interesting comment around North America and the new management team. You talked about taking out structural costs, some business complexity. I think that was the term that you used, Wan Ling. Can you maybe give us a bit more color as to what that means? And is this just an issue in North America, or are you looking at structural costs and business complexity in the other zones given the current environment that you face?

Wan Ling Martello

Thank you, Warren. Let me answer your first question about the outlook. You are correct, we are guiding around 5%. And you are also correct, Warren, this is a stretch. Will we -- it's interesting, I'm fairly new to the organization. And you -- I mean, like you did, you can do the math. And some of my colleagues are optimistic that we can make that number, but it is not going to be easy. And I completely agree with you, it's going to be a stretch. In terms of North America's complexity and structural costs, they're looking at everything from infrastructure costs to how they go to market. And yes, this is something that Paul Greenwood in the U.S. is doing, but it's something that we will be looking at on a broader basis, so not just in the U.S. but also in other regions.

Roddy Child-Villiers

I think what...

Warren Ackerman - Societe Generale Cross Asset Research

Wan Ling, can I just maybe just push you a little bit on the second half? I mean, obviously, Zone AOA has been in the spotlight for the last few quarters. And you did see a slight acceleration in Q2, I guess, in line with your thinking, but given the easier comps in the second half of the year, are you still confident that Zone AOA can achieve sort of high-single-digit growth in the second half of the year to leave you in a better place for the full year? Or have things changed in the quarter so that you are perhaps, on the margin, less confident on that uplift in the second half in the Zone AOA?

Wan Ling Martello

So Warren, you are exactly right. There are easier comps in AOA as we go into the second half. But there are other things, like we've talked about issues that were in Q1 that we're obviously recovering from, much like the factory that was destroyed in Middle East. And so we are -- we'll see. Pricing obviously is take -- its local decisions, so a lot depends on input costs as well as competition. So we do not, as you know, guide on pricing. And so it's lots of moving parts.

Roddy Child-Villiers

Yes. I think, also, I'll just pick up on Wan Ling's comments on the -- in her presentation about the volatility in the pricing and the change between Q1 and H1, not being so much a pointing to a trend through the year but more just volatility within quarters. And as Wan Ling says, there are other issues in different business -- different regions of the world that also provide perhaps more momentum in the second half than the first half. And clearly, one of those is the situation in Europe with the bounce back from the labeling-related recalls. Also of course, we've had a pickup in the season for ice cream and water, so there are some other more positive drivers which support our confidence in terms of the RIG momentum in H2.

Wan Ling Martello

Yes. But I will -- Warren, I will go back and underscore what you said. It is, in fact, a stretch. But it's the organization's intention to get there, but it is a stretch.

Operator

Our next question is from Ms. Celine Pannuti of JPMorgan.

Celine A.H. Pannuti - JP Morgan Chase & Co, Research Division

Again, just to understand what you said in your guide on pricing, with my first question, I would like to -- if you could give a bit more commentary around what you said in the presentation that you think that Q2 pricing will not recur in the rest of the year. Can you explain a bit what you mean there? Has there been any specific promo activity in Q2 that will not recur? And are you as well expecting some local pricing in emerging market to pick up to recover FX volatility in emerging market? And then my second question is around margin. There, I understand that you were saying that it was more going to be H2 weighted, and now you're saying it's maybe more balanced. Is that the way we should look at it? And could you as well explain why Wyeth is dilutive to your margin in the first half?

Wan Ling Martello

Yes. Thank you, Celine. For -- in terms of margin, I was -- in my presentation, I had indicated you've heard us talk about more focus in terms of portfolio management, and so there will be -- we are -- timing, it's difficult to predict, but we are actively looking at our portfolio and what we need to do, so there will be restructuring. Whatever it is, I -- we can't really say what it's going to be, but there will be some volatility in terms of other expenses and income. And so the H2 -- we said H2 weighted in Q1, but that will not -- that -- we did not anticipate raw material costs to be as good as in the first half, so that's not going to be repeated. That, on top of activities that we're doing relating to portfolio management, is what's guiding us to tell you that H1 improvement in margin is likely not going to be repeated in H2, so -- for the full year. In terms of pricing, do you want to take pricing?

Roddy Child-Villiers

Yes. Just also on the margin, on the Wyeth question you asked. Wyeth is accretive to the group. It is not accretive to Nestlé Nutrition. That was the point we made. Which actually, the point we made at the time of the acquisition as well, so there's no change in message there. On the pricing, all that we're saying is if you just do it a straight-line trend from Q1 to H2, you'd end up with probably no pricing at all in Q3. That's not the case. This is more about volatility in the trend. That's what we're saying. Also, the pricing started to decrease already in H2 last year, so there's also a comp benefit, in a sense, to the pricing.

Wan Ling Martello

I want to come back to Wyeth, though. If you go back to our presentation when we announced the Wyeth Nutrition acquisition, you will recall that the Wyeth margin was accretive to the group but not accretive to the Nestlé Nutrition margin, that's why.

Celine A.H. Pannuti - JP Morgan Chase & Co, Research Division

All right. And on pricing: So pricing turning quite negative in Europe in the second quarter, is that something we should continue to expect?

Wan Ling Martello

The what, [indiscernible]?

Roddy Child-Villiers

The -- yes, I mean, the pricing in Europe was driven fundamentally by coffee. And you might remember that even last year, we talked about this, and we'd made a major reduction in the coffee price Russia. That was second half last year, and that's an example of one of the pricing actions that we did last year that will not be in the comp for H2 of this year. But coffee is the key driver of the -- well, coffee is the key driver of the weaker pricing in Europe, but it is also fair to say that most of the categories in Europe have got less pricing than they had earlier in the year.

Celine A.H. Pannuti - JP Morgan Chase & Co, Research Division

And can you give a bit which categories on -- are less pricing? Because this pricing on coffee, as you said, was already in the second half of last year. And here, we really see a worsening of the pricing in Europe.

Roddy Child-Villiers

Well, as I just said, the pricing is weaker, to a certain extent, across basically all the categories in Europe.

Wan Ling Martello

Yes.

Celine A.H. Pannuti - JP Morgan Chase & Co, Research Division

So all -- across all of them. Okay.

Operator

Our next question is from Silke Koltrowitz from Reuters.

Silke Koltrowitz

Actually, some of my questions have already been answered, but I wanted to ask specifically about pricing in China, if you could give us a bit more guidance for how that developed in the first half and what you're expecting there in the second half. And also, can you give us in that [ph] price outlook on the input costs you are expecting in the second half? What will the impact be in H2?

Roddy Child-Villiers

Yes. The -- our pricing in China has been pretty minimal. Our growth in China is really driven very predominantly by real internal growth, not by pricing. And in terms of the input cost, the input cost picture, generally, our guidance remains what it was at the start of the year, which is that we expect to see low-single-digit cost pressure.

Wan Ling Martello

Yes. The second half input cost in that situation should have less tailwind than the first half, so...

Operator

Our next question is from Alain Oberhuber from MainFirst.

Alain-Sebastian Oberhuber - MainFirst Bank AG, Research Division

Wan Ling and Roddy, I have 3 question, more on the regional side. First is, could you tell us if the -- what happened in Mexico? You mentioned that there is lower growth than before. Was it in the past? Because we had almost similar growth in Mexico than in Brazil. Maybe you can elaborate a little bit on Mexico. Secondly, what are the current trends in France? Have you seen an acceleration in volume in France as well? And then, specifically in which category, the same is true for Germany? And the last question is about Lean Cuisine. We see now for, I think, the third quarter already, that's a pretty difficult category. Could we see a bottoming-out of that category probably in the next 1 to 2 quarters? Or what is your knowledge about that category?

Wan Ling Martello

To the question in terms of Mexico. Mexico was impacted by coffee. Our dairy business in Mexico continues to do really well, less pricing. And so that's sort of the situation in Mexico. In terms of Lean Cuisine, the whole category has continued to contract. And we -- being a category leader, we have to -- we're obviously affected by that. And we also have the responsibility and the obligation to try to get that reinvigorated. We have launched 2 products, 2 new products, Honestly Good as well as Salad Addition. And I said earlier in my presentation that it's not -- so far, it's not changing the dynamics in the category. So our team in the U.S. continues to explore different things. I do know, I was visiting with Paul Greenwood in the U.S. a few months ago, there are indeed a lot of new products in the pipeline, and so hopefully, that would make a difference sooner than later. And what was the other?

Roddy Child-Villiers

And on France, the -- you may remember that we had a fantastic year in France last year. So we're clearly, challenged by the comps. The business started the year quite weakly in Q1, and it has picked up a little bit since. And of course, part of that pickup relates to, again, the horse meat-related recalls. But we are seeing a slight pickup in France in Q2, so hopefully, that momentum will continue into the second half.

Operator

Our next question is from Jon Cox from Kepler.

Jon Cox - Kepler Cheuvreux, Research Division

I wonder if I can just come back on this whole commodities issue in terms of the impact in H1. And then you seem to be saying you're going to start picking up headwinds in H2. In just sort of the way you normally hedge, exclude coffee for the moment, but typically, you hedge, say, 6 to 12 months forward. I'm just wondering, you're saying it seems to be, coffee in H1 was the main driver of that gross margin gain. But so what is unwinding in H2? Why would there be more headwinds in H2 than there were in H1? That's the first question. And then just in terms of the overall environment with regards to the -- to come back a little to this pricing question. You seem to say there's also different factors going to happen with pricing. Should we just expect a continuation of this sort of 1-point pricing seen in Q2 that would really just go through the rest of the year or -- that seems to be what you're saying or are you saying it could actually start to go up again as we go through the year?

Wan Ling Martello

Yes. Thank you, Jon. On your first question in terms of COGS, well, first of all, we do not share with you like what our hedging policies -- policy is. But across commodities, we can hedge anywhere from weeks to months, and so that varies depending on what commodities. And obviously, we work with our procurement folks who are really good, so I can't tell you exactly what categories hedged how long. In terms of the tailwind that we picked up in H1, clearly, it's not just input cost being favorable. There's obviously pricing impact, there's volume leverage. There is also efficiencies that we have done in terms of conversions. So the favorability you're seeing in H1 is not purely just input cost. So it's a whole host of things that's coming together. And when we go into H2, first of all, we are -- it's already improved. And in H2, we're comping against a much tough -- a much lower level in H1. So it's -- issue is all -- it's a tougher comp is what I should say. In terms of pricing, you know we do not guide RIG or pricing RIG guide on an OG, from an OG perspective, Jon, you should know that. And we have said in the presentation we expect pricing to be volatile again because of a whole host of reasons, depending on market, depending on input costs, depending on competitive landscape that we'll see. But our overall guidance for the year is around 5% for organic growth.

Roddy Child-Villiers

Yes, and I think that the big -- the key message on commodities is that the commodities began to fall already in H2 last year. That, therefore, provides a tougher H2 for this year than an H1. That's the key message.

Operator

Our next question is from Morgan La Pierre [ph] from Bloomberg.

Unknown Attendee

I have 2 questions. The first, which currencies have impacted your sales in the first half of the year? And how will foreign exchange rates impact your sales in the second half of the year?

Roddy Child-Villiers

Well, I mean, the biggest moves in currencies have been in Latin America, particularly, obviously, Brazil.

Wan Ling Martello

And Venezuela.

Roddy Child-Villiers

Venezuela, they're the biggest ones. How we'll be impacted in H2 clearly depends upon how the currencies evolve. I think the important thing is, from a group perspective, we did not have any impact on earnings, either GOP margin or earnings per share, from currencies. But we always, every year, we have an impact on the top line.

Wan Ling Martello

Yes. Last year, we ended with a positive impact, so we don't guide on what we expect for the full year this year. Did I answer your question, Morgan?

Unknown Attendee

I see in the release that actually sales has been impacted in the order of 0.9%. I just wanted to know if -- what your -- if you expect this to remain the case in second quarter -- in the second half of the year?

Wan Ling Martello

Yes, Morgan, we -- that -- you are exactly correct, that was 0.9%. We do not guide for the balance of the year, but you can -- we don't forecast how currencies are going to move. I mean, clearly, Swiss franc is getting a bit stronger, but we'll see. A lot can happen between now and December 31.

Roddy Child-Villiers

We could easily give you a number of today's spot rates but it won't be the right number by the year-end. So...

Wan Ling Martello

We're not going to do that.

Roddy Child-Villiers

It's not really very helpful.

Unknown Attendee

Okay. But compared with earlier periods, how was that, the performance?

Wan Ling Martello

Compared to what?

Roddy Child-Villiers

Well, I mean -- last -- I mean, it's incredibly volatile. Last year, we had a positive contribution from currencies. This year, we're having a slightly negative contribution from currencies. But it's simply -- I mean, we are present, fundamentally, in every country in the world. We're always going to have these currency swings because we report in Swiss francs. It's not something that we try to hedge or manage. We run the business locally in local currencies and then we just convert into Swiss francs, then we report.

Wan Ling Martello

Yes.

Roddy Child-Villiers

And that's as simple as it is really for us.

Wan Ling Martello

Yes. I mean, having said that, you saw the trend in the second half of last year started to be more favorable. And so as we go into the second half of this year, it's going to be a tougher comp, if you're just looking just at FX.

Roddy Child-Villiers

Yes.

Operator

Our next question is from David Hayes from Nomura.

David Hayes - Nomura Securities Co. Ltd., Research Division

Two for me. Just on the Zone AOA, you talked at the first quarter about too much stock in the shipment. I just wonder whether you've seen that now normalize and at what point during the second quarter you saw shipment patterns return to normalized levels. And then secondly, just on beverages, the margin, obviously very strong, up 100 basis points. You talked about coffee prices actually coming off. Is there a risk that pricing-wise in coffee, you're still a bit high, and that margin, effectively, is slightly overearning and that you expect prices in coffee to come in the second half, and therefore, the margin there to come in as well?

Wan Ling Martello

Yes. In terms of -- David, in terms of destocking, it varies by market and category. So in markets like Philippines, Thailand, we are seeing a recovery and doing better. In terms of coffee pricing, it's -- again, it's going to vary by market.

Roddy Child-Villiers

Really, we've been extremely aggressive on pricing so I think there will be -- it will be -- I'll be extremely surprised if we are -- however you just phrased it, over -- over -- whatever the phrase was used, extracting too much profit. We've been extremely aggressive on pricing. And we are managing locally our price points extremely carefully, and you see that in the volume growth as well.

Wan Ling Martello

Yes. I would say that, David, we have done a fair bit of adjustments in terms of coffee prices. So that would -- I would characterize it that way.

David Hayes - Nomura Securities Co. Ltd., Research Division

To just go back to the first question. So there's still a reasonable amount of shipment disconnect then that may wash out more significantly in the second half? I'm just trying to understand where the underlying -- the consumer take is a bit better effectively, and whether that, effectively, disappears as the disconnect in the second half?

Wan Ling Martello

No. We are, David, again, in that -- in terms of destocking, we have improved significantly. So we're not anticipating any meaningful impact going into H2.

David Hayes - Nomura Securities Co. Ltd., Research Division

Okay. Can I just be cheeky and ask 1 other question. Sorry, I know it's meant to be 2 but just the third one, last one, for me. Just on the working capital, obviously, CHF 1.9 billion outflow, first half, but seasonally, we see that outflow and then a catch up. You talked about structurally effectively better working capital. Would you say that you'd expect more than a catch up in the second half, that working capital would be a net inflow, or at least flat? Or do you see that as a big dynamic in the second half to catch up to the CHF 1.9 billion?

Wan Ling Martello

No, it would still be an outflow because we're growing, and so I don't anticipate that, no. To answer your question, it'd still be an outflow.

Operator

Our next question is from Eileen Khoo of Morgan Stanley.

Eileen Khoo - Morgan Stanley, Research Division

Just a couple of questions from me. The first one is on cash and returns. Could you update us on the internal exercise that you've been carrying out in terms of benchmarking returns? How -- what the progress is there? And then on cash as well, pretty good performance in operating cash flow. Just wondered whether you could update us on your thoughts in terms of cash returns? And then second question is on Nutrition. I was wondering why there's this big deceleration in RIG. It surely can't all just be Weight Management given the strong double-digit performance in certain [ph] baby nutrition? And then on coffee, I understand that you've taken actually price increases for Nespresso in the U.S. recently. Could you just confirm this, and also just update us on how your price reductions in soluble have helped your market share in some markets like Philippines, for example?

Wan Ling Martello

Yes. Eileen, let me answer the first question as I think most -- a lot of you have heard that we are -- there's renewed focus in terms of -- on return. And so we've talked about, I think, at CAGE and at different road show that we have, an enhanced sort of like portfolio management tool that has been rolled out to the rest of the organization. This was started last year and completely rolled out now, sometime, I think, a couple of months ago. It's been really, really good to see how it's been embraced by the organization. I've talked about this many times. What it does is it provides us a common language across the organizations. So whether you are managing coffee in the Philippines or you're managing coffee in China, and up and down the organization, whether you're somebody sitting at the EB level or you're a BEM, which is a Business Executive Manager, running a category in a geography. And it's great to see because we just finished our -- what we call our MBS season, which is Market Business Strategy. And we have seen, I mean, Chris Johnson who runs our Zone Americas will tell you that we -- it's great to see that markets coming in, saying that, "Look, we were going to ask for investment in x, y, and z, but we've run this exercise and we know it's actually not really value accretive". So to your question about how it's like, this renewed focus on returns. I'm really happy to say that it's gaining traction and, clearly, it's an exercise. It's not an end all and be all tool but it provides a common language, and it provides a common framework so that discussions don't get too emotional. I'm not saying it's still not emotional. And so now, we're seeing sort of like a bottoms-up analysis being done and obviously top-down. At the Executive Board level, we're also doing analysis, looking at bigger sales, bigger across -- on a broader base -- on a broad base basis. So that's going really well. On your question -- do you want to take the third question?

Roddy Child-Villiers

Sure. On Nespresso, I mean, frankly, I don't know what the Nespresso pricing strategy is in different countries around the world. But I do hope you're right. I do hope they have taken pricing in the U.S. because I know that when you compared our capsules to the competitor capsules from other manufacturers, we represent extremely good value, so if that caves in the value cap, that's good news. On Nutrition, the -- right at the Q1 call, I did call out China as having organic growth above 40%. I did say at that time that, that was not a sustainable level of growth, and so that has come off a bit. That's obviously impacted the Infant Nutrition growth number. Also, we've seen -- I mean there's volatility, we've got a little bit lower growth in Russia and Brazil, though still double-digit, still very strong. We picked up a bit in France and Germany so there's different levels of performance. But the big swing really is China, but China continues to be growing very, very strongly indeed, and we continue to gain share. And your other question was on -- just on the cash returns piece. But I mean, clearly, if we had any new measures on cash returns, it will be in the press release we. And so obviously we don't at the moment.

Wan Ling Martello

So but I -- we know -- I do want come back to nutrition, it's -- we're very, very pleased with the Nutrition business across all of our geographies.

Operator

Our next question is from Eric Chow from Value Partners.

Chow Yik Cheung - Value Partners Limited

We are investors or existing shareholders based in Hong Kong. And first of all, I'd like to thank Roddy and his teammates, taking the time to visit Hong Kong in May and meeting us. We hope you come back soon. We got 2 questions. First of all, related to China, your Nutrition team has been very fast in terms of responding to the recent investigation of the Chinese government related to the settlements. And as a result, they escaped -- or they don't need to pay for any penalty, which are now other competitors are facing. But I just wonder in terms of the internal decision making, for the decisions to commit to cutting prices and cooperating with the Chinese government, did they need to come back to Nestle for approval or they could have just make it to such a fast decision because they were clearly, the first company making such changes? And also as a result to the price cut they committed to, do you see that the margin or profit growth we projected would be changed in, for example, in the near future? That's our first question. Second part is that, given your 5% EPS growth target, and we also grew our dividend per share by 5% earlier this year when we announced last year results. Looking ahead, should we expect the growth in the dividend per share lagging behind the EPS growth given that we still carry about CHF 20 billion net debt, and the expectation globally is about -- greatly increased in terms of the interest rate looking ahead, so just like to learn from you regarding these 2 aspects.

Wan Ling Martello

Thank you, Eric, and thank you, and I look forward to seeing with you when I come to Asia meeting investors, so I look forward to doing that. Let me answer your first question in terms of Nutrition business in China. First of all, I don't want to comment on the NDRC decision. I would say that the facts obviously have been published in their announcement. I will say though, it's -- compliance is one of our core business principle at Nestlé, so compliance is number 1 regardless of where we operate. And so we hold all of our business managers very much accountable for making sure that we're complying to the local laws and regulations. In terms of your question about, is this an internal decision? What you've seen on what has happened between -- the interaction between the market in China and the center here in Vevey, speaks to how -- speaks to one of the great strengths of Nestlé. We're very matrix from an organization standpoint, and yet, we can be agile when it comes to quick decisions that have to be made. So what has transpired in this example is clearly a manifestation of how we are able to collaborate with the team in China, with the team here in Vevey. It's just -- it really attests to that. Now in terms of your question on margin impact, you have to remember our Nutrition business in China has a great portfolio, whether it's locally manufactured with local source milk supply to imported supply, locally manufactured to, what is this imported product from Germany, so we have a good portfolio, a good mix. So we can -- with what happen in terms of price reduction, we can manage that through portfolio management. We also, don't forget, have a good meaningful business in China across many categories. So we -- this is a case where if you do have to do some adjustment in 1 category or even in 1 product within a portfolio of that within that category, you can offset it with others in the portfolio or in other categories. In terms of dividend, I just wanted to -- you said 5% dividend. You meant 5% -- around 5% organic growth is our guidance. Now, we do not -- we've always said in terms of our dividend policy, we guide -- and we have a sustainable dividend policy, which is that if you look back in the last 50 years, we have never ever lowered our dividends. So -- in absolute terms. So whether in times like in 2011 where our EPS number was severely impacted by FX. You all see -- saw that the dividend in absolute amount went up. So our guidance in terms of dividend is in absolute amount. And in the last 50 years, it's never gone down. So we want to make it a sustainable policy so that you know what to expect.

Operator

Our next question is from Jeremy Fialko from Redburn.

Jeremy Fialko - Redburn Partners LLP, Research Division

Jeremy Fialko, Redburn here. A couple of questions. The first one is coming back to this issue on the 5% full year underlying sales guidance. I think, obviously, it's important that you relook [ph] into your guidance that you think you're going to make it but at the same time, you describe it as being a bit of a stretch. So perhaps what you could do is talk about what are the kind of assumptions that you're making in terms of the second half. Where you think there's kind of the greatest sensitivity in terms of you actually not making the 5% ARPU. Perhaps you could you talk around that a little bit more. And then the second point would be on your Weight Management business, that has been fairly persistent underperformer in your portfolio, so I really want to know how much longer do you think that you can keep this business underperforming as it has been before you might need to start considering a divestment?

Wan Ling Martello

Jeremy, I -- that is a fair challenge in terms of Jenny Craig, Weight Management in the U.S, and look, are we happy with the performance? The whole industry is contracting, but we're not going to hide behind that. It's clearly something we need to fix, and so we are trying different things. And I can tell you that it's not something that I'm sure by the 9-month sales forecast that you'll be able to say that we're seeing improvement. And so it's -- look, we're painfully aware that it's a problem that we need to address. And it's -- I can just tell you that it's very much on our radar, and Luis Cantarell who heads up Nutrition as well as Nestlé Health Science is very much on top of that. That's all -- that's what I can tell you. On -- in terms of the 5% -- around 5% organic growth, clearly, it's -- we would have loved to have a higher organic growth in H1, so we're not saying that we're not -- that we're happy with the 4.1%. But having said that, we're very pleased with the RIG acceleration. We're very pleased with the quality set of numbers that we've delivered top and bottom line. What goes into H2, again, lots of moving parts, with the economy slowing and emerging market, that we have to take into consideration. The good weather now will help us in terms of water and ice cream, if you look at categories. Pricing, if inflation continues to persist, we should be able to take pricing in high inflationary markets. And so yes, I said it earlier. It is a stretch. Some of my colleagues are very committed -- I mean, not some, everybody's very committed to delivering the organic growth for the balance of the year. Some of my colleagues are quite optimistic. I think it's a stretch. So...

Roddy Child-Villiers

I think, I mean, it's quite hard to go through all the different zones and talk about risks and opportunities. But we're clearly counting on, as we said before, AOA picking up in H2. We're assuming we're going to continue to deliver positive growth in developed markets. And again, we saw a bit of a pickup in the RIG in Europe in the second quarter. But there's enough momentum in the business for us to be comfortable in the guidance that we've given. But I think there isn't a lot of value in us going through each of the zones and GMBs and saying "Here's a risk. Here's an opportunity" because broadly, we're going to be around 5%.

Operator

Our next question is from Patrik Schwendimann of ZKB.

Patrik Schwendimann - Zurcher Kantonalbank AG, Research Division

I have a question regarding your marketing expenses, which were up 60 basis points in H1. What shall we expect as a best guess for H2? Is it more increase or would you say maybe after the strong [indiscernible] a little bit lower increase in marketing? That's my first question. And secondly, regarding the EBIT margin development in Confectionery, which was down minus 110 basis points. You gave us some reasons for it but I'm still a little bit surprised because I would assume that the gross margin in Confectionery was strongly up in H1 because of the lower cocoa prices. Could you give us some more ideas and also what your expectations are here for the future?

Wan Ling Martello

Yes. Thank you, Patrik. Let me address the question on marketing, up 60 basis points. First of all, I have to characterize it. In terms of marketing spend, our digital spend, which I don't think I mentioned in my presentation earlier, was actually -- has been up 30 basis points. So we're really pleased on that. And marketing spend, in general, our expectation of the market is to make sure that marketing spend is never sacrificed in order to deliver margin, and that's, again, one of the core things that we hold our market management responsible for. And so it's going to depend. If you see -- depending on market product launches, in terms of launches going into new markets, a lot depends. Are we going to introduce new systems? So it's a lot of moving parts, depending on what's happening. I remember in H1 last year, I was talking about how the year before we had celebration of 100 years in Singapore, in Philippines, 90 years in Brazil. So a lot depends on product launches, market celebration. You saw -- and this ties back to your question in terms of Confectionery. One of the reasons why confectionery margins was down, well, first of all, generally, very competitive environment but also we, in Latin America, invested a lot in terms of marketing to for -- what do you call it? I'm not a football fan, World Cup?

Roddy Child-Villiers

The World Cup, but also the Confederations Cup.

Wan Ling Martello

Confederations Cup? I don't know what the difference is between the 2. But anyway, I think it's FIFA or something. So anyway, you see depending on opportunities to invest behind the brands like the sports event, and so that's it. So that's also the reason behind our Confectionery margins being down. So it should improve in the second half.

Roddy Child-Villiers

I mean, we don't run a group marketing budget, marketing spend is decided locally. Just one detail, correction to what Wan Ling said. The digital spend is up 30%, not 30 basis points.

Wan Ling Martello

That's right, that's right, 30%.

Roddy Child-Villiers

And just -- and also on the -- you mentioned that you thought that cocoa would be a help to the gross margin. It's just what we're pointing out as we said earlier, that in Latin America, in Brazil, for example, which is our, I think, our biggest cocoa market by volume, we did not have a raw material benefit because the dollar for in the cocoa price was wiped out by the weakness of the real, so it's not as straightforward as you're saying, the cocoa price is off, that should help. So that's also part of the issue that we face as well as the other things that Wan Ling mentioned.

Wan Ling Martello

But that's why we're able to price, on the other hand.

Operator

Our next question is from [indiscernible] of [indiscernible].

Unknown Attendee

I'm afraid I dropped out of the call a little earlier, so apologies if I'm repeating anything. Just first of all, I wanted to return your comment that you want more focus on your portfolio management. I wondered if you could give any detail on what you meant by that? Will you be looking at SKUs? Could we see reduction? Are you considering any disposals? Or should we think about it more in terms of asset allocation? And then going back again to your outlook, you're saying that it's going to be a stretch to hit the low end of the Nestlé Model this year, but do you remain committed to a 5% to 6% organic growth in the longer term?

Wan Ling Martello

Yes. Let me answer the question in terms of the Nestlé Model. Let me be very clear, categorically, we are committed to the Nestlé Model. So if you look, our CEO, Paul Bulcke, always talks about this in whether it's a presentation or in road shows that it's the 5% to 6% organic growth is a line we want to walk over time. Because if you look at the last 10 years, we averaged 6%, over 6%, of organic growth. So there are times that we might come lower than 5%. But over time, it's going to be 5% and 6%, and we're very committed to that. And we're obviously very -- also very committed to the other components of the Nestlé Model, which is trading operating profit improvement, capital efficiency, EPS on an underlying basis improvement, so those, no change whatsoever. I want to go back to your first question in terms of portfolio. It's very important for a company like Nestlé, we're very fortunate, thanks to the very good work of the people, the earlier generation who has handed over to this generation a great business, with the breadth and depth in terms of categories, geographic footprint. We have operations in 184 or so countries. We sell in a lot more virtually in every country on earth. So the thing that we need to be careful of is, how do you then, when it comes to asset allocation, on resource allocation, whether it's money, people, marketing spend, R&D, whatever, whatever resource it is, how do you compare noodles in India versus pizza in the U.S. versus coffee in China? And so the ability to have or -- having the tool, having a common language that looks at all the cells, which is basically category in a geography, on an -- putting it -- everything on an equal footing is very important for us to do. It's not used for performance management. It is again used for asset allocation. So not just knowing where we sort of like need to say -- so for instance, we had a business that came in and presented to the Executive Board, what they call a global business strategy, and we said, "Look, this is not -- this business has been struggling", we give it whether it's 2 years, 3 years and saying you've got to get to this point. If not, there's going to be a sell/buy day. And so having, knowing where we need to not just cut our losses but also where we need to accelerate is very important for a company that's been blessed with the kinds -- the breadth and depth of categories, and then the geographic footprint that we're in. So it's an asset allocation -- it's a resource allocation tool. And was I missing anything else? That's it.

Operator

Our next question is from Alex Molloy of Credit Suisse.

Alex Molloy - Crédit Suisse AG, Research Division

My question is firstly on the U.S. I think you said in the past that the macro environment has been tough, of course, but Nestlé also could have done things a little better. You upped promotions in some categories. You cut advertising. If we look at those 2 factors, promotions and advertising, is advertising now going back up in the Nestlé U.S.A. businesses?

Wan Ling Martello

I will -- let me answer your question this way. First of all, in terms of -- I mean, maybe let me come back to this. Innovation, it's not just in advertising that we could have done better in the past in terms of our Nestlé U.S. business. We could have done more in terms of innovation. And so when it comes to innovation, I had touched on this earlier, on my trip with Paul Greenwood, I was really, really pleased to see the number of products in the pipeline. If you think about the new launch in pizza in our U.S. pizza business, Pizzeria!, it's fantastic and it's doing quite well. We're very, very pleased with the early feedback we are getting from the market. So it's not just advertising, it's innovation. In terms of advertising, one of the things that we have changed in the U.S. bonus system is you cannot -- you can no longer overachieve if you hit your margin improvement, if you do not improve your market share. And so there is a bit of a -- what do you call it? A gate, yes, before you can hit your full bonus potential. So that's something that, more importantly, it's not just a message sent to our colleagues in the U.S. but it's also going to drive a behavior change. And so you see a step up in spending in terms of behind our brands.

Alex Molloy - Crédit Suisse AG, Research Division

And -- sorry, my second question if I may is, following on from 1 -- the questions someone asked earlier. On weeding out underperformers, and just, for example, using Jenny Craig as the example, I mean that's been underperforming for about 5 years now. So the question really is, what does a business actually have to do to be weeded out?

Wan Ling Martello

I -- again, what does the business have to do? Again, we -- every business that is challenged today has to come in and present a turnaround plan. And so then it's our assessment. Luis -- in the case of Jenny Craig, it's Luis Cantarell. It's Paul Bulcke, it's myself to see if the turnaround plan is credible, and if we -- in assessing the risks and opportunities. And so I don't want to get into a lot of details in terms of the Jenny Craig turnaround plan. You've seen what we've done. I think I've mentioned this in the presentation. We've closed down some centers. We have -- we're shifting the focus to e-comm. And so we're looking at a whole host of stuff. But this is, like I said, something that we are painfully aware of and something very much on our radar screen, not just on Luis' but it's also on Paul's, myself, so. We're actively addressing it. I just cannot tell you other details.

Operator

Our next question is from Thomas Russo from Gardner Russo & Gardner.

Thomas Adrian Russo - Gardner Russo & Gardner

Just 2. One, I wanted the allocation of funds to share repurchase and where we stand on that now and looking forward? And the second, Wan Ling, is the priority for capital spending for the second half of this year and for 2014? What regions or categories are receiving increase in heavied up capital spending?

Wan Ling Martello

Thomas, good to hear from you. In terms of share repurchase, we do not -- we have said that we do not have any program today. But having said that, obviously, share repurchase, we're not saying that it's off the table. That's what we've always said. And so it's something that we will look at more on an opportunistic basis versus the dividend policy, which is more sustainable year in and year out. In terms of priority for capital spend, we've gone through our exercise in terms of portfolio, looking at where we need to spend. Clearly, if you look at our categories like PetCare, we're completely under indexed. We've talked about this before, in emerging markets. We're completely under indexed in Latin America and parts of Asia, so PetCare clearly will get a good -- a meaningful chunk of our capital spend. Our systems technology center, our coffee behind, with our systems, that's going to get a good -- Nutrition is we'll get -- we'll also -- so a lot depends also on what the business is and what our R&D, as well as our SBUs, which is the strategic business units come up with in terms of innovation. So that also depends on that. But what we have guided at the beginning of the year that our CapEx spend is going to be around 5.7% of sales, we will come in slightly lower than that, Thomas. And I've said this before. If you see in our CapEx spend in the last few years, it was stepped up because we had to do a lot of catch-up in terms of capacity in a lot of our emerging markets. So as we have done the catching up, we also, over time, should see that normalize, that trend normalize from a CapEx spending perspective. So again, but this year, we'll come in a bit lower than last year in terms of percentage of sales.

Thomas Adrian Russo - Gardner Russo & Gardner

How about the region of Africa in general for the capital spending for this and next?

Roddy Child-Villiers

I mean, it is an area of focus, but we haven't been putting big facilities into Africa. We've been putting more greenfield facilities, which we can then expand rather than putting in major facilities. But it's certainly an area of focus, modular factories, that's the word. We're putting modular factories. So these are not big ticket factories. These are getting in close to consumers, finishing product close to consumers, the idea being that as we have established the market, we can then put more substantial capital behind them.

Wan Ling Martello

Yes. Thomas, we typically do not say how much of sales, but we are spending a meaningful amount, I mean, 5% circa, something like that.

Operator

Our next question is from Eric Berkler [ph] of Sun Tai Viten [ph].

Unknown Attendee

A couple of questions to Jenny Craig again. Is it correct that you did withdraw from the U.K. market, and are you planning to go out of other markets? And is the business loss-making or profitable? And are we seeing the same patterns with Jenny Craig as we see with Lean Cuisine? Are you facing the same challenges there?

Wan Ling Martello

Yes. It's like in my presentation, I had said in sort of like in the nutritional diet kind of a segment, it is -- the dynamics we're seeing is similar between Jenny Craig and Lean Cuisine. We have -- you are correct, Eric, that we have closed down our U.K. operations. And so the big operations in Jenny Craig is obviously in the U.S. We do not disclose profit by businesses. But I will tell you that the Jenny Craig business in the last -- this year, as well as last year was very much below our expectations and below what they have been able to do in the last few years. And so again, we are -- it's -- we're dealing with it, is what we can tell you.

Unknown Attendee

And how about the European business, are you planning to go out to further markets?

Roddy Child-Villiers

We don't really have a big European business. I mean, the Jenny Craig, when we bought it, was basically a U.S. and Australian business. We still have a good Australian business. We opened the U.K. operation, it was fundamentally an online operation, not a store-driven operation. And we have a small operation in France and that continues.

Operator

Our next question is from Robert Waldschmidt from Merrill Lynch.

Robert Waldschmidt - BofA Merrill Lynch, Research Division

I just wanted to come back in terms of top line in second half. We've seen a lot of announcements on the aforementioned CapEx, which had been in EMs in particular coming on stream with plants in places like China, Vietnam, et cetera. So I guess would it be fair to say that volume or RIG can accelerate in the second half, in the -- just based on the fact that you've got these new plants coming and they're going to be filling up, and also the easier comps? And then two, within second half Europe as well, we know Europe was a bit tough in Q2. Can you extrapolate what is weather versus what is macro, if at all possible for us? And then on margin, I just wanted to clarify the comments that were made earlier about not extrapolating 1H performance. Does that mean that 2H would not be as strong as 1H, or that it would be more balanced and say, plus 20 basis points could be achievable in both halves?

Wan Ling Martello

Robert, let me answer your last question first. In terms of margin, you know we guide in terms of margin improvement and trading operating margin for the full year. So what I wanted to do when I guided was I wanted to make sure, much like I did in H1 of last year, when I guided saying, "Please don't extrapolate our good performance in cash flow in H1 and sort of extrapolate it for the rest of the year". What I wanted to do the same thing this time, this H1, is to do the same thing from a margin perspective because we have done a nice job in H1, and it's -- there will be things like we've talked about earlier in my presentation given that we will be doing some more focus on portfolio, there will be some increase in other income and expenses, and so that will offset some of it. But having said that, the margin should improve year-on-year on a full year basis. So that's the last question.

Roddy Child-Villiers

Well, on AOA, I mean, I wouldn't draw too much of a straight line between the factory announcements and the growth. I mean, some of these factory announcements are announcing the building of a factory as opposed to the completion of the building of the factory, so there's not a straight-line connection between the 2. I would just come back to our earlier comment that we've got the relatively easier comps in the second half in AOA, and we would expect to see continued pickup in the RIG in there [ph] in the second half of the year. On Europe, we haven't tried to do the math to break out how much of our growth is weather or non weather. Whenever anybody does that, they always get criticized for making excuses, so we haven't done it. But hopefully, the weather will be better in H2 than it was in H1.

Wan Ling Martello

By that -- I mean, that said -- it's not just, I mean, people get criticized internally when they use the weather. So the weather being an excuse is not permitted internally within our own organization. I think, Roddy, is that the last question?

Roddy Child-Villiers

Yes, it's the last -- yes, absolutely.

Wan Ling Martello

That's the last question. Okay, I wanted to thank you very much for all of your questions. As I said, so far this year, we have delivered a well-balanced, good quality set of results that leave us well-placed to continue to make progress in the second half. Thank you very much for your time this morning, and as always, for your interest in Nestlé. Thank you.

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