Nestle SA Management Discusses Nine Months Sales Call Transcript

Oct.20.11 | About: Nestle S.A. (NSRGY)

Nestle SA (OTCPK:NSRGY) Nine Months Sales Call October 20, 2011 9:30 AM ET

Executives

Roddy Child-Villiers - IR

Analysts

David Hayes - Nomura

Alain Oberhuber - MainFirst Bank

James Edwards Jones - RBS

Susanne Seibel - Barclays Capital

Patrik Schwendimann - Zurcher Kantonalbank

Jeremy Fialko - Redburn Partners

Robert Waldschmidt - Bank of America - Merrill Lynch

Warren Ackerman - Société Générale

Jeff Stent - Exane BNP Paribas

Thomas Russo - Gardner Russo & Gardner

Pierre Tegner - Natixis Securities

Simon Marshall - Lockyer Jefferies & Company

Jon Cox - Kepler

Roddy Child-Villiers

Good morning everyone. Welcome to the Nestlé nine months sales call. My presentation will be short as I think you are all aware of the trends in our business. I will start by taking the Safe Harbor is read. As you have seen from our press release, our top-line growth remains solid. We've seen a continued pick up in pricing and an easing in our real internal growth or volume as we expected.

This Group dynamic between pricing and RIG is repeated in our primary reporting segments and all continued to deliver positive growth. This dynamic is the same also in most product categories, exceptions being Confectionery and PetCare. The RIG for Confectionery was unchanged from H1 and the pricing increased while as PetCare delivered both increased RIG and increased pricing.

Currencies have remained a major headwind on our reported numbers. Our outlook is that we now expect to slightly outperform our long-term 5% to 6% organic growth range and we continue to strive for margin improvement in constant currencies.

Next, the key elements of sales. Organic growth was 7.3% with RIG at 4.1%. Currencies had a negative impact of 15.1% due to the continued strength of the Swiss franc. Also our reported numbers include an impact from the sale of Alcon resulting in a 5.7% reduction from divestitures net of acquisitions.

Looking briefly at the sales development by region, we achieved 5% organic growth in Europe, 5.8% in Americas and 13.1% in Asia, Oceania and Africa. This demonstrates how broad spread is our growth. And it demonstrates our ability to deliver growth even in the most difficult, more constrained markets.

On this next slide, you can see a bit more granularity. As I was just saying, we are delivering growth in more growth constrained markets such as the PIGS with 3.7% organic growth and in the more dynamic market such as the BRICS with 12.3%. Emerging markets as a whole grew by 13.1% and the developed by 4%. Let’s now have a look at the zones and globally managed businesses.

Here is the overview chart and you can see that we have continued to grow in all our operating segments. I will now go into the detail of our performance starting with the Americas. Organic growth was unchanged at 5.6% with increased pricing. Growth in North America picked up, in Latin America it remains above 10%.

Looking at North America first, the biggest category PetCare had a good third quarter as promised. Those categories remain subdued. Market shares have improved, innovations are driving this outperformance. The recently launched ONE beyOnd in particular is going well.

In Ice Cream, the pricing accelerated in the quarter due to the super premium and snacks. Market shares were above flat. Growth [Technical Difficulty] changed although the category has if anything slowed further. That said, our innovation such as snacks for Lean Cuisine, have been well received.

Pizza continues to perform well and gain market share. It is worth noting that the Home Delivery Pizza segment has slowed somewhat. So the players there have increased their promotional activity. In Chocolate, the Skinny Cow launch is doing well with early indicators very positive.

In CoffeeMate, the Natural Bliss launch is exceeding our expectations. This is an important launch as it takes CoffeeMate into dairy creaming rather than being exclusively a non-diary creamer. Diary creaming is about 30% of the coffee cup market which was previously not open to CoffeeMate. The other recently launched CoffeeMate range, Café Collections is also performing well.

Turning to Latin America, we are continuing to achieve double-digit growth in those markets. Categories and brands going double-digit include Nescafé, Chocolate, Maggi, PetCare, and powdered beverages. The biggest category in the region is dairy which is growing high single-digit.

Among brands, I will highlight the rollout of Nestlé Nido liquid milk with probiotics, Nescau powdered beverage in Brazil, Nestea and Nescafé Mexico and Maggi in Venezuela.

Next is Zone Europe. As you would expect, with organic growth of 3.8% for the Zone and positive RIG in all western European markets, our market share performance has been good. The Zone achieved another quarter of positive growth and this was even with the poor ice cream season. Ice cream’s most important month is July, which had its worst weather in 30 years. Our ability to deliver growth in the zone as a whole regardless of the impact from ice cream demonstrates the strength and the sustainability of our growth in Europe.

I think you know well by now the Nestlé theme in Europe, compelling innovation targeted at specific consumer segments. For example, look at the success in Juicy Roasting in the U.K. Maggi is not an established brand in the U.K. So Juicy Roasting’s success there demonstrates the integrity of the concept. Equally in France we are selling [Technical Difficulty]. Juicy Roasting is now rolled out across much of Europe as well as in other markets around the world. It’s interesting to note that Juicy Roasting is the start point for innovation in this category. I look forward to briefing you on the coming innovation in the months and years ahead.

Equally Nescafé continues to benefit from range of innovation, from super premium, Nescafé Dolce Gusto, to renovation on the premium Nescafé Gold Blend to the continued rollout out of Nescafé Green Blend with its Health and Wellness messaging around anti-oxidants to PPPs, such as Nescafé 3 in 1, and sachets launched successfully in number of Western European countries.

Turning now to the Zone’s markets, France has continued to perform at a high level. The U.K. has accelerated from the first half as competitors have increased pricing particularly in soluble coffee. Eastern Europe remains a mixed picture where Russia and Poland experiencing subdued trading, with Ukraine and Adriatic region enjoying double-digit growth.

Culinary and powdered beverages, as well as PetCare are performing well in the east. Among the Zone’s categories, I would highlight the growth of soluble coffee, culinary, pizza, sugar confectionery and chilled culinary, particularly Herta in chilled. Also the pan-European PetCare business has accelerated in the third quarter with rollouts of Felix, One and Pro Plan amongst highlights. Our drive for growth in market share in Eastern Europe is growing particularly well.

Next is Zone AOA. Organic growth was unchanged from the previous quarter 11.7% there with higher pricing. RIG remains an impressive 8.2% for the nine months. The Japan and Oceania region has continued to deliver positive growth. Japan has had a very resilient year. Coffee is performing well, innovations include for two Nescafé systems Dolce Gusto and Barista as well as new variants in soluble coffee.

In Chocolates, KitKat is performing well, a new launch is KitKat Black, which is a KitKat with a very dark, slightly powdery, textured coating and tastes fantastic. It is aimed at all mature consumers than the standard KitKat which is perhaps why I like it.

In Oceania, the retail environment, with basically just two pairs, is very price competitive, making for tough trading conditions. The Zone’s emerging markets have continued to perform well with most double-digits. Greater China, the Middle East, Africa, Indochina, South Asia and the Philippines are all performing well.

Growth in the category is consistent with trends earlier in the year. The biggest are achieving double-digit organic growth and have high levels of RIG, dairy, soluble coffee, culinary are all contributing well as are smaller categories such as ready-to-drink beverages and ice cream. Brands to highlight include Nido, Nescafé, Milo and Maggi.

Finally on the Zone I have no news for now on the closing of the two transactions in China.

Next is Nestlé Nutrition, Infant Nutrition is the biggest division. The division achieved high single-digit growth for the nine months, 9% plus, with a slight slowdown in Q3, which was up against a very strong comparative quarter in 2010.

In the US, we were lapping the stocking of a new WIC contract from the third quarter of 2010 as well as the competitive recall. Also the baby food category there was under pressure due to the weak economic environment.

Europe continued to grow with France particularly strong. Growth continued double-digit in the emerging markets in all three zones. All the sub-divisions being formula cereals and baby food contributed well. Highlights for the nine months included Russia, China, Africa, South Asia as well as a number of Latin American markets. Recent innovations, be those colic and infant formula or probiotics and infant cereals for example, are performing well.

Just a word on BabyNes, the launch has had a good past few months and 92% of customers have recommended to friends and family; so a good start.

Both the other divisions, Jenny Craig and Performance Nutrition enjoyed strong growth internationally. Jenny in France in particular, and Performance in AOA though were held back by continued subdued trading in the U.S. Both are impacted by the poor economic situation there.

Next is Nestlé Waters; organic growth was 4.7% for the nine months. The North America business continued to be price disadvantaged following its price increases in Q2 which impacted volumes and shares. We continue to see good growth, however, for Perrier and San Pellegrino in the U.S. We’ve also now seen a few quarters of improving momentum in the U.S. Home & Office Delivery business which is benefiting from an improved value proposition with Nestlé Pure Life.

The European Water business performed well in a subdued market gaining share in all key markets. The emerging market business continued to deliver double-digit growth; the international brands were the key drivers of growth with Nestlé Pure Life, San Pellegrino and Perrier, Acqua Panna and Vittel all performing well.

Next is our Other Segment which includes Nestlé Professional and Nespresso, Nestlé Health Science and the Joint Ventures. Nestlé Professional is having a good year with high single-digit growth. The emerging markets are growing double-digit while its growth is positive also in the developed markets.

The Beverage division is the key growth driver as we would expect with double-digit growth. The new premium machines such as Milano and the new super premium machine Viaggi had a good reception with customers and are building their presence. As an example, we have placed about 3,000 Milano machines with a QSR in North America.

The Food Division is performing well relative to its industry with mid-single digit growth and is growing in all parts of the world. And common with Beverages, pricing actions had some impacts on RIG, but these are necessary to ensure we start 2012 at the right price points.

One thing to highlight is our work with hospitals. We are now able to demonstrate concretely within hospitals where Nestlé Professional is providing customized food solutions to patients to improve nutritional content with contributing to shorter recovery periods. This is a measurable benefit for hospitals as it demonstrates that we don’t just improve supply-chain management, but we also contribute to beds being freed up faster than previously. Beds or so called hotel costs are amongst the highest costs for hospitals.

Nespresso continues to grow around 20% and is on-track to have around 250 boutiques opened by the year-end.

Nestlé Health Science is integrating its recent acquisitions; it is seeing good growth in its existing health and nutrition business and is gaining market share.

The Food and Beverage joint ventures, Cereal Partners Worldwide and Beverage Partners Worldwide contributed mid-single digit growth.

I won’t spend long on the Product groups. The key message on this slide is the continued broad spread growth with all categories contributing. Powdered & Liquid Beverages saw a slight acceleration in the third quarter and delivered 12.6% organic growth for the nine months. The Product groups constituents, soluble coffee, powdered beverages, liquid beverages and Nespresso all contributed to the strong performance. Growth was double-digit in Zone AOA and Zone Americas and high single-digit in Zone Europe and Nestlé Professional.

Just about our Nescafé Dolce Gusto, it has sold 4 billion capsules since launch; it is achieving about 50% organic growth. It’s in 41 countries and is already market leader in 20 countries.

In Milk Products & Ice Cream, I will highlight the continued strong performance of dairy which is growing double-digit. Even if increased pricing has had some impacts on RIG. Highlights include the strong performances of all our PPPs of our higher value-add growing-up milks, and the launch in Latin America of liquid milk with probiotics.

To mention just a few countries and regions, China, Pakistan, Africa and Mexico are among highlights. Ice Cream, I’ve already covered. It was a reasonable performance in a weak season.

Moving to Prepared Dishes & Cooking Aids, ambient culinary which is predominantly Maggi continues to deliver strong growth and good market share performance generally. I mentioned Juicy Roasting earlier, some KPIs for you. We have sold 200 million packs in 2011 globally, with organic growth of about 50%. We are the leader in 32 out of 34 markets and have 88% share overall of the category.

I’ve already discussed frozen pizza in the U.S. Confectionary is next. I’ll just remind you that Q2 is positively impacted by the late Easter, so the right comparative for Q3 is the first half number. With that in mind, 4.4% organic growth for the nine months reflects a slight increase in pricing and unchanged RIG. The emerging markets continue to perform well with double-digit growth in Asia and Latin America and high-single digit in Africa.

In Europe, France and Germany are performing; whilst we gained share in the subdued UK market. Finally, in confectionary, we today announced the launch of Maison Cailler, which is a direct consumer online model offering the highest quality chocolates tailored to customers’ individual tastes. There will be more on this at our press conference after my call.

I have already discussed PetCare’s improved performance. We grew market share in all regions on all major segments. Growth in emerging markets continued strong with, for example, double-digit growth in Latin America and Central and Eastern Europe.

The Q3 acceleration was inline with the promise we made you on our first half call.

That concludes my presentation. To summarize, we continue to grow at a good level with 7.8% organic growth in an environment which is tough particularly in the developed markets. With that said, we expect to slightly outperform our 5% to 6% long-term run rate at the full year. Equally, we are striving for an improvement in the margin and constant currencies.

Thanks very much for listening and let’s go to the questions.

Question-and-Answer Session

Operator

One moment please for the first question. Thank you [Technical Difficulty] is from Mr. David Hayes of Nomura. Please ask.

David Hayes - Nomura

Just two things. Firstly just on the depth -- some detail on the outlook. Obviously, you missed word slightly above five to six, I don’t want to get too specific about how you define things, but I was just wondering how do you feel that you are comfortable with, I guess, consensus which is around 7% or whether that slightly word would suggest that you were defined by slightly above that six level.

And then similarly on the margin you moved to saying you are striving for margin uplift and you talked about A&P uplift just pull innovations in the release. Again I was wondering whether you are confident now as you are at the first half on the margin side and whether that will boast the trading profit level and the old definition of operating profit level.

And then the second question is just on, despite the October sales numbers, but just on the cash flow as we talked about in the first half, obviously inventory was up substantially in the first half. There wasn’t other cash outflow, so I just wonder whether you can give us any indications on trending cash flow in the second half and whether some of that inventory has been unwinding? Thanks very much Roddy.

Roddy Child-Villiers

Thanks David and good questions as usual. On the outlook, I am not going to get into a discussion about how many basis points slightly means. We’ve given you our guidance on the top-line, and you know where we are at the moment with our organic growth. We believe we are going to slightly exceed our long range run rate.

Now on the question about striving to achieve, I think it’s also a good question, you know the key message here is that we are committed to the Nestlé model. And we have already discussed, and we discussed on my call significant specific issues in the third quarter, the other things that have changed since the first half results, no question that consumer sentiment has turned down in Europe, it’s turned down in the U.S, equally the emerging market currencies are weaker against the U.S. dollar and Swiss Franc.

So I think our guidance about striving is simply being sensitive to the environment that we are in. But as I say we are still committed to delivering the Nestlé model. Now you asked on which margin we are guiding. Our press release guidance has always been on the old EBIT, underlying EBIT margin. So that's where we are guiding. On cash flow I am not going to go into any detail on cash flow on a sales call. I will reiterate what we said at the half year, which is the reason for, one of the reasons for our cash flow performance setting aside the currency impact and the impact of selling Alcon was that we were using our cash flows as a way to hedge input costs, hence as you say, the high inventories. We did say to you at the half year that our cash flow performance would improve in second half of the year and what we are seeing year-to-date underlines our confidence that, that will indeed be the case.

Operator

You next question will come from the line of Alain Oberhuber.

Alain Oberhuber - MainFirst Bank

Following question about PPP, strong growth rate again. Could you breakup which areas of you are currently now in, how much is proportion of PPP when you look at Asia, Latin America and Europe. On the other side, I am interested in the US home and office delivery water business, could you elaborate a little bit what did you exactly do in order to get the traction again and if the market environment for HOD has clearly.

Roddy Child-Villiers

Thanks, I will just repeat the questions in case you wouldn't hear, as I could hardly hear them. The first one was on PPPs and I think it was the regional split between the PPPs, we haven’t given the regional split. I mean we said that we had around 11 billion of sales in PPPs last year. They are growing, as I showed you on the chart, they are growing low single digit. The bulk of the PPP is clearly in AOA and the Americas. It’s a growing part of the European business, our PPPs in Europe are growing meaningly faster than the European average but I am not go into a split of PPPs by region.

On the HOD business, I mean as you, I think you are all aware the U.S. Home Office Delivery Water business suffered quite severely following the downturn in 2008 and what we’ve done is we’ve moved the mix of products in the lorries so that we now have Nestlé Pure Life in the lorries, we have bottles, smaller bottles as well as the 5 gallon tanks. So it really changed the offer to consumers. We have made it a more affordable proposition for consumers and that has been a catalyst for getting growth back into that segment for us. I can’t tell you and I don’t know I am afraid whether the segment as a whole is enjoying better trading environment, but certainly our business in the segment is.

Operator

Thank you for your question. The next question will come from the line of Mr. James Edwards Jones of RBS. Sir, please go ahead.

James Edwards Jones - RBS

Good morning, Roddy, just picking up on your comment about declining consumer sentiment in Europe and the US. Can you say anything about the trajectory of the your performance through the quarter and as the economic news got worse, did that have any discernible impact on your business momentum?

Roddy Child-Villiers

It’s hard to say, I mean in Europe, our weakest month was clearly July because of the ice cream business. And in fact, if you take ice-cream out of the European numbers, then there’s no slowdown at all in Europe in Q3 from H1. But you know, consumer sentiment doesn’t just impact the top line, it impacts the business as a whole. Plus I say, I think, you know, it’s important that we should be sensitive to the environment that we’re operating in and giving you our guidance and that’s why we’re slightly adjusted the guidance. In North America there’s no particular variation month-on-month in terms of performance.

Operator

Thank you. Our next question will come from the line Ms. Susanne Seibel of Barclays Capital.

Susanne Seibel - Barclays Capital

Roddy, can you talk us a little bit more in detail through the nutrition business? On a quarterly basis, the RIG is down to 2.5% in Q3. I assume that it wasn’t all down to Jenny Craig. Could you give a little bit more detail on that performance please?

Roddy Child-Villiers

Sure. Thanks Susanne, question on nutrition. I think I mean the starting point is the tough comparative. In Q3 2010, nutrition had 8% RIG. So we’re always going to be up against that as a tough comparative. The slowdown has got, actually got nothing to do with Jenny Craig. Jenny Craig’s performance isn’t good, but it’s no worse in Q3 than H1. So Jenny Craig is a net no impact on the quarter. So the slowdown is really due to infant nutrition. It is weaker in the US. The issue is in US. We had, obviously, part of the tough comp relates to the competitor recall last year. Last year we also won a WIC contract which we were stocking in Q3 of last year. We don't have the same benefit this year. There is a slowdown in baby food which we think is a bit related to the economy as well. So those are the main reasons. We think that Q4 will be a better quarter than Q3 because of the comp issue in Q3.

Operator

Thank you. Our next question will come from the line of Patrik Schwendimann of ZK Bank.

Patrik Schwendimann - Zurcher Kantonalbank

Patrik Schwendimann from Kantonalbank. First question regarding the coffee beverages business, which still has outstanding performance across 12.6% off the nine months. Was there any extraordinary in here or can we expect a similar performance in the near future? That’s my first question. And secondly regarding the emerging markets as still growing very nicely, here again not any slowdown here, even nothing impressive, thank you.

Roddy Child-Villiers

Yes, there are no extraordinaries in the coffee business, apart from the extraordinary achievements of Nescafé, of Dolce Gusto and of Nespresso. But they are not unusual and Nescafé, total soluble coffee Nescafé is growing double-digit of near 11 billion base. It was doing so in the first half of the year. It was doing so for the nine-months and that is actually is fairly accelerated. Nespresso continues to perform at the same level as it did in the first half of the year. And within that Nescafé number you have Dolce Gusto doing over 50% organic growth, so the whole coffee business is really performing extremely well and if you go back to our growth drivers and you think about what those are? The nutrition health and wellness we’ve got good augmentation around Green Blend.

The PPP business is going terrifically well in the emerging markets. We also had a lot of success launching these 3 in 1 sachets in Western Europe. Thinking about the out-of-home business I mentioned the Milano machines in my presentation, Viaggi. The out-of-home business is doing very well and that’s growing double digit in soluble coffee. And premiumization of course is Dolce Gusto and even more so Nespresso and again growing double digit. So I think what is interesting in that sort of a coffee is that it sort of the post for child of how to drive, the great drivers that we talk about in our presentation at the group level. So nothing unusual in the quarter, just consistent go to strong performance.

On the emerging markets, no I mean, there is no consistent theme, you look to Africa you are seeing higher RIG and higher pricing, look at the rest of the Asian emerging markets. There is pricing, pricings up in almost all of them. Some have got higher RIG, some haven’t. Latin America good performances across the regions and then two big markets, Venezuela and Mexico also putting their weights. So there is no sign of a slowdown really in the business.

Operator

Thank you. Our next question will come from Jeremy Fialko of Redburn. Please proceed sir.

Jeremy Fialko - Redburn Partners

Good morning, everybody, Jeremy Fialko here with Redburn, a couple of questions. Firstly on pricing, clearly we've seen quite of those commodities come off. Are there any areas where you kind of – you do have more kind of spot-related stuff in diary, or you could see some sort of pricing reduction towards the end of the year? And secondly, on the Americas, it looks like the RIG, if you were looking at just North America, would have been negative in the quarter and kind of what’s the outlook there when do you think that might start to turn positive again? Thanks.

Roddy Child-Villiers

Yeah, thanks Jeremy. Good questions. Pricing [Technical Difficulty] I mean fundamentally on raw materials we are done for the year in terms of our cost base, and we are also effectively done for the year in terms of pricing. And I don’t think you are going to see any impacts on our numbers in terms of pricing coming off, and we are not expecting to see pricing coming off in any of these categories.

So I think bearing in mind that the pricing number you see is based on the 2011 quarter against the comparable 2010 quarter, you are still going to see increased pricing in the final quarter of this year rather than a reduction in pricing. So I don't think you are going to see any reduced pricing.

The North American RIG actually improved slightly in the third quarter which was primarily due to the very strong performance of PetCare. So there wasn’t a slowdown in the North America RIG. Okay, Jeremy?

Jeremy Fialko - Redburn Partners

Okay, but it was still negative in the quarter?

Roddy Child-Villiers

Well for the business in the zone it was negative, yeah.

Jeremy Fialko - Redburn Partners

I was just wondering, do you think that will become positive towards the end of the year, next year, any comments there?

Roddy Child-Villiers

Well, we would certainly like to make it positive, but I think it’s a tough call in one quarter to turn that RIG into a positive RIG. So hopefully it will be next year rather than the end of this year.

Operator

Thank you. Our next question will come from Mr. Robert Waldschmidt of Merrill Lynch. Sir, please go ahead.

Robert Waldschmidt - Bank of America - Merrill Lynch

Good morning Roddy and just to come back on the input cost, can you just remind us where you are with respect to the absolute increases, its still the tough end of the range and then in light of what Jeremy said in terms of input cost coming down, do you have an early read on where we might be heading into 2012?

And then two, in terms of US and Europe, can you [Technical Difficulty] promotional situation in the UK Tesco’s clearly been trying to be more aggressive on pricing, and what, if any, impact they are having on your business? Thank you.

Roddy Child-Villiers

Yeah thanks Robert. On the input cost guidance, we guided to CHF 2.5 billion to CHF 3 billion of incremental cost; we said we would be at the higher end of that range and that’s good guidance; there is no change in the guidance.

2012, I think when the environment is as volatile as it is, the best way to give good guidance is to give late guidance, and I am not planning to give any guidance for 2012 in October 2011. Assuming that those are an issue in 2012 then we will obviously give you some guidance in February next year but not until then.

On the retail promotional side, yeah, I mean you are right. That’s clear there is an increased level of price promotional activity in the retail as in UK. The question is really just who – we’re not paying for that whether it will be – they are more like customers equally it’s not necessarily across all categories not necessarily across all brands, but obviously it is as part of my, you know, that goes to my earlier comments about weakening consumer sentiments in Europe and in North America and that’s one of the ways that our customers are responding to that sentiment, so as part of what I said earlier about us responding to the environment in which we are operating.

Robert Waldschmidt - Bank of America - Merrill Lynch

Okay, and just to build on that, I mean we’ve seen that the promotional activity increase in UK, you have seen that in – also in concrete form in areas like France and Germany?

Roddy Child-Villiers

The French business, I mean we are having a fantastic year in France. We are gaining share in every category, and all our categories are positive in France. Even Ice Cream is positive in France despite the summer. Germany is certainly is tough and the culinary category is tough, but I mean when wasn’t the culinary category tough in Germany. The Ice Cream business is – I think Ice Cream business is the weakest business in Germany, but then again that relates to July. So I mean I have no specific comments on Germany beyond my earlier comments in the sense consumer trend is weaker.

And actually I think, I mean you guys must follow the VIX Index, you know sometime it’s known as the Fair Index, and if you look at that back at the end of June, it was at 16, and now while this week it’s at 32, so the VIX Index has doubled which tells you a lot about how the markets are thinking about risks in terms of macro risks and that’s the environment that we’re in. So, you know, not surprisingly that there has been more promotional activity.

Operator

Our next question will come from the line of Mr. Warren Ackerman of Société Générale. Sir?

Warren Ackerman - Société Générale

Good morning, everybody, it’s Warren, here. Can I get back to an earlier question, I think it was a question from Jeremy, and can you just clarify your comment about the pricing, did you say that pricing will be higher in Q4 than Q3? Now I think Q3 pricing was around 4.2% so are you saying that Q4 pricing could be higher than 4.2% and how does that kind of tally with your comments that most of your pricing is actually being done and does it therefore follow the you think the RIG will continue to decelerate in the final quarters specially given I think quite tough comp you’ve got I think its 5% the final quarter, I think Europe also had a very strong final quarter, can you just clarify that please? Thanks.

Roddy Child-Villiers

Sure. I wasn't making a specific comment, but what I was saying is the numbers that we report are obviously – the comparable period is the relevant – you know the Q4 2010 is the benchmark for the Q4 2011 not Q3. It’s pricing on pricing from the prior year. So we are clearly going to see positive pricing relative to where we were last year because of the raw material situation.

We’ve said all along that we expected pricing to increase over the course of the year. Now frankly whether it increases by more or less in Q4 than it did in Q3, I don’t know. But it will continue to increase, we expect, over the course of the year. But it may be at a lower rate than in Q3 and we don’t measure pricing totally as you know on a backward-looking basis, we measure it cumulatively, equally we don’t do the pricing in the center, its done in the markets and equally as based of, you know, the prior year quarters.

So trying to work out in advance where the quarterly pricing is going to be a few basis points is not really worth the effort. But the trend is clearly for improved pricing and you’ve seen already this year that as you’ve taken improved pricing, the RIG has come down a bit. So that’s all taking you to our guidance of slightly outperforming our 6% long-term run rate.

Warren Ackerman - Société Générale

So would you expect the RIG to continue to decelerate in the final quarter, the trend for the year, given the comp?

Roddy Child-Villiers

Well there is always a risk in the term that your RIG comes down when your pricing goes up. On the other hand, Q3 was going to be a – was a weak quarter for RIG because of the ice cream season. So, again, it’s not necessarily saying it’s going to be weaker than it was in Q3, but there is a risk that pricing will impact RIG.

Warren Ackerman - Société Générale

Okay. And do you have any kind of special factors, you would highlight for Q4, I know that Europe had a very strong – and for the year the RIG was up almost by 3%. So is there any other factors you would point please?

Roddy Child-Villiers

I don’t think so, no. I don’t think there are any particular Q4 issues. No.

Operator

Thank you. Our next question will come from the line of Mr. Jeff Stent of Exane. Sir, please go ahead.

Jeff Stent - Exane BNP Paribas

Good morning Roddy, I am just thinking about pricing again, and if you so think sequentially are there any areas of the business where sequential prices have actually been sort of slipping there most as opposed to outlook? Thanks.

Roddy Child-Villiers

No.

Operator

Thank you, sir (inaudible) line of Mr. Thomas Russo of Gardner Russo & Gardner. Sir please proceed.

Thomas Russo - Gardner Russo & Gardner

Roddy, couple of quick questions. First, North Americas, the frozen integration, how is that coming along?

Roddy Child-Villiers

Well, we are still in the midst of it [Technical Difficulty] I mean in terms of the head office integration that's done, but in terms of the nitty-gritty of integrating the pizza direct store delivery with the ice cream delivery its still pretty early days. And I think we are going to be well into next year before we have concrete evidence of benefits coming through from that.

Thomas Russo - Gardner Russo & Gardner

And then just an update on the ability to commit the capital spending in developing and emerging markets, I think its I mean you said that the numbers would go from 1 billion to 2.5 billion in 2011, I am curious how that spending increase has been effective thus far?

Roddy Child-Villiers

Yeah I mean we have been and we've been I think if you heard me, you’ve been following us on website no doubt you saw for example a couple of days ago the announcement of the new soluble factory in Russia, another one a diary factory in Nigeria, so the investments are going through as planned and as quickly as one can you know effectively manage the capital price as in terms of actually building the facilities.

And clearly the way that the currencies have moved, our original 5.5 billion Swiss Franc number is a high number and you know we are still committing to the same amount of if you like incremental volume you know capacity, but obviously in Swiss Franc’s its costing us less. But you know we are going to be somewhere around you know 5 billion number I would guess by the year end for the group as a whole.

Thomas Russo - Gardner Russo & Gardner

Thank you. And then the Maison Cailler was quite interesting, you said it was home delivery direct customized to consumer. What markets would that role out to and what are your thoughts on that?

Roddy Child-Villiers

Well my thoughts obviously are I am very excited as a chocolate lover. I mean the concept is that you will be sent or you will send your loved one a selection of particular flavored chocolates from which she would then be able to design her preferred – well Maison Cailler would got to design her taste preference and then tailor chocolates to her particular desires. And which to me is like a pretty exciting concept, and I am not fully up to speed on which markets it’s going to be launched in, I mean we intend to do this online, potentially online launches you know in the domestic markets first and then go from there, so I guess the European launch and then expand thereafter.

Operator

Thank you. Our next question will come from the line of Mr. Pierre Tegner of Natixis. Sir, please go ahead.

Pierre Tegner - Natixis Securities

Hi Roddy and I have just a question coming back on North America. We understood that probably nutrition business and pet foods are quite sensitive or are showed sensitivity to different consumer environments. Are you seeing order categories where you are surprised by positive or negative sensitivity regarding the decrease in consumer confidence? And I am referring to what you were seeing two years ago when the environment in terms of consumer was quite tough? Out there from then relative to two years ago and what are the key categories where sensitivities particularly are accepted for the nutrition business and (inaudible)? Thanks.

Roddy Child-Villiers

Thanks Pierre. I think it’s what I have outlined I think the question was about categories most impacted by consumer sentiments in North America. Well, I think if I start from nutrition clear that Jenny Craig has been very heavily impacted and the reasons for that are really around the fact that it is a ready to be high-cost approached rate management because it’s based of a one-on-one consultative service. And another area also Performance Nutrition has been somewhat impacted as clearly a discretionary category.

Going into frozen, the increasing and the higher value or the higher priced more super premium, premium, single serve dishes have been impacted. The increase is a bit of the same dynamic as Jenny Craig and that it’s generally bought by housewives who are tending to prioritize their other family members over themselves and they are shopping.

So Lean Cuisine, Performance Nutrition and the premium segment of Ice Cream and premium in the U.S. is same as mass in the Europe, but the premium segment of the U.S. ice cream market is impacted by private label gains. And then the PetCare category has certainly slowed the number of – the pets replacement rates has come down. That said, we have had a very strong third quarter and are gaining sure in the category. And I think those are the main categories that are impacted and of course I mean HOD Water we talked about already or that we seem to have found a relatively good response to challenges there. So think those are the main categories that are impacted.

Pierre Tegner - Natixis Securities

Okay thank you. And a small question on the Water business in Europe; can you give us an indication of the trend you had in Q3 for the Water business in Europe?

Roddy Child-Villiers

Well I mean the reason that the total water business was down was more than a 100% because of Europe, because we had a good performance in North America and AOA in the third quarter. So basically Europe is the reason for the slowdown. And I think you know the key thing for us is that we gained share in every and all of our key markets and so even if because of the whole July weather, the water market as a whole was down outperformance relative to the market was very good.

Operator

Our next question will come from Mr. Simon Marshall-Lockyer of Jefferies. Sir, please proceed.

Simon Marshall - Lockyer Jefferies & Company

Yes, good morning Roddy, just a couple of follow ups in terms of sort of geographies. Can you give us may be a little bit more detail on China and particularly whether you have seen any slowdown you mentioned sort of slightly slow performance overall in baby within nutrition. Was there anything to do with the China business, have you seen any indication of a slowdown may be in the exiting months of the quarter there?

Can you also remind us of the status on Yinlu and Hsu Fu Chi in terms of the consolidation prospects, what the dates are or estimates? Also could you give us some data points or are there any valuable data points to give either on the launch of BabyNes and I know it’s a very small product you launched in Switzerland, but any updates on that and how that’s going and same thing on the Viaggi machine?

Roddy Child-Villiers

Thank Simon and, okay, BabyNes as I said on my call BabyNes is going very well. It is only in Switzerland. It's a very narrow distribution, so the numbers are not meaningful, apart from the numbers I quoted which is 92% of customers would recommend the system to their friends and family. So clearly the reception received from parents has been fantastic. So BabyNes is going very well. Viaggi, things to remember about Viaggi is that it is super premium. So you know whereas we've got 3000 Milano machines into one quick service restaurant in North America in one hitch, that's not going to happen with Viaggi. Viaggi is going to be built machine by machine as we get it into upscale bars and cafes and hotels.

But that said, the progress we are making with Viaggi is very good. Yinlu, Hsu Fu Chi haven’t got an update. We are still waiting for the final occurrences for those transactions and I would rather not give you a deadline, and I gave it the timeline because frankly doing these transactions in China is a new experience for us and we just need to go through the process and hopefully get a closure.

Trading in China I mean it is not very much to say since in Q3 relative to H1, business has continued to perform at a high level, it is great double digit, the ready to drink business which by the way Yinlu is the co-packer on ready to drink business is going very well, ice cream is going very well, soluble coffee is going well, dairy is doing well, culinary is a little bit slower, well nothing to worry about. I mean business is performing well. In the nutrition business in China, we are well into double digits on infant and performing well.

So I wouldn't say there's any sign of a slowdown in China and we are, I mean we are going to be around, we are certainly over 20% organic growth in China for the total business including the Zone nutrition and the other business that we have in China. So good performance in China I think. I would like just on Maison Cailler, just say that I mean little bit head of the game, is going to be launched in Switzerland initially, not Switzerland and France, Switzerland initially just to clarify.

Operator

Our next question will come from Mr. Jon Cox of Kepler.

Jon Cox - Kepler

But obviously just on the concerns about the, you know this guidance on the margin, is it right to say, it’s not so much input cost. If you are basically just bracing yourself for a further weakening of consumer sentiment and potentially a sort of bloody pitched battle in terms of A&P, is that what you are basically signaling there and then just on the environment in general and obviously we, none of us have a crystal ball that, do you think there is any danger next year that you would actually maybe mix the 5 to 6% target as you did in [Technical Difficulty] conditions now are totally different? Thank you.

Roddy Child-Villiers

Okay going back to the 2011 guidance, I think as I keep saying I think we are just being sensitive to environment in which we are operating and you know we can’t ignore the fact that things have changed since the first half of the year but we are not giving ourselves a holiday from delivering margin improvement. You know we are still out there 28,000 people around the world working in all countries in the world to deliver margin improvements. We are striving to do so, but it will be I think naïve of us to pretend that the world hasn’t change a bit, it has.

And you’re right. We’re not saying there’s been a big change in input environment. So you know what has changed clearly the level of promotional, of competitive intensity has increased. And we had examples of that from one of the previous questions. So that’s simply the basis of our comment. You know we’re not talking about a miss. We’re just saying that we are going to strive to achieve it. It’s, the environment is a bit tougher than it was. Yeah and for 2012, I'm not going give guidance for 2012, but we will be committing to the Nestle model as we always do, but I'm not going to give some start giving guidance on what the actual numbers are going to be. It will our intention as it always to deliver the Nestle model.

Operator

Thank you sir, that was the last question. There are no more question in the queue now. I will hand you over to Mr. Child-Villiers now.

Roddy Child-Villiers

Thanks very much everybody for your questions. We will be doing our press conference 10 o’clock Swiss time, 9 o’ clock U.K. time. Webcast details are on our website. Paul Bulcke and Jim Singh will host it and there will also be a presentation from Laurent Freixe who is our Head of Zone in Europe. Don’t read anything too big in Paris, you might remember the last year it was held in New York, this year, it’s being held in Paris. Thanks very much indeed for your interest in Nestle and your attention today. Good morning and thank you.

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