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Nestle Sa Reg Shrs S (OTCPK:NSRGY)

April 20, 2012 2:30 am ET

Executives

Roddy Child-Villiers -

Analysts

Warren Ackerman - Societe Generale Cross Asset Research

Jon Cox - Kepler Capital Markets, Research Division

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

Alain-Sebastian Oberhuber - MainFirst Bank AG, Research Division

Pablo E. Zuanic - Liberum Capital Limited, Research Division

Patrik Schwendimann - Zurcher Kantonalbank AG, Research Division

Jeremy Fialko - Redburn Partners LLP, Research Division

Jane Gelfand - Barclays Capital, Research Division

Xavier Croquez - CA Cheuvreux, Research Division

Robert Dickinson - Citigroup Inc, Research Division

Pierre Tegner - Natixis S.A., Research Division

Pedro Gil - Grupo Santander, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Nestlé 2012 First Quarter Sales Conference Call hosted by Roddy Child-Villiers, Head of Investor Relations. As usual, there will be first a presentation and then we will open the call for question-and-answer session. My name is Miley, and I'll be your coordinator for this morning. [Operator Instructions] I would like to advise all parties that this call is being recorded and webcast. And now, I'd like to hand the call over to Mr. Child-Villiers. You may now begin.

Roddy Child-Villiers

Thank you, Miley. Good morning, and welcome to our first quarter sales conference call. As usual, I would take the Safe Harbor statement as read and go straight to the key numbers.

Sales were up 5.6% to CHF 21.4 billion. Organic growth was 7.2%. The major contributor, as you would expect following the 2011 evolution, was pricing at 4.4%. Real internal growth, or RIG, was solid at 2.8% coming on top of a very strong 4.9% in the first quarter of 2011. We had a positive evolution from acquisitions of 3% net of divestitures, this being mainly the 2 partnerships finalized by the end of last year in China, Yinlu and Hsu Fu Chi. Foreign exchange, on the other hand, continued to be a drag at 4.6%.

A couple of points to make on guidance. We are still seeing an impact on our business from the 2011 raw material pressures. I know that a number of you were assuming an immediate cost benefit. But there's always a time lag of several months even if we don't have any hedging before the spot price is reflected in our business. So any benefit from raw materials will be felt more in the second half. Also we still expect low- to mid-single-digit input costs inflation for the year as a whole.

Looking forward to the end of the year, we are confirming our guidance of delivering the Nestlé Model of 5% to 6% organic growth, as well as an improvement in the year-end trading operating profit margin and underlying earnings per share in constant currencies.

Nestlé has again grown in all 3 regions. The Americas grew 6.8%; Europe 3.4%; and Asia, Oceania and Africa by 12.2%. The emerging markets grew by 13% and the developed markets by 3%. Those numbers are for all our businesses, including the zones and the globally managed runs such as nutrition water professional and Nespresso. As such, this is a real like-for-like view to benchmark with our peers.

Let's now look at the performance of the individual businesses. Zone Americas achieved 6.2% organic growth but minus 0.4% RIG. Pricing was strong in both North America where it has impacted RIG and in Latin America where RIG has proved more resilient.

Let's start with North America. Food category volumes in North America are generally down, as people are not literally eating less. This seems to reflect cash-constrained households being more careful in terms of spend, but also being more careful to ensure that less food goes unnecessarily to waste. The frozen category remains in decline in the first quarter. Entrees are down mid-single-digit, single-serve a little less and handheld up slightly. Our performance broadly reflects these market trends.

The pizza segment is also down. The restaurant carryout delivery segment is running very high levels of price promotions and media spend. This is impacting the frozen pizza market. Our innovations, particularly pizza plus and Italian favorites, have led to share gains though our growth is down. Ice cream was flat in terms of organic growth as high levels of pricing by the level of industry, particularly in the premium segment, balanced out weaker volume.

In super premium, Häagen-Dazs is performing well, whilst in the snacks business, I'd highlight fruit bars, drumsticks and the Häagen-Dazs bars. The chocolate business gained share. The Skinny Cow launch into chocolate is going well, actually running at double our expectations since launch and with good levels of repeat purchase.

For Coffee-mate, our new Natural Bliss range is building good momentum a year on from its launch and is driving growth in liquid coffee enhancers. Nescafé also had a strong start to the year, with double-digit growth and share gains. The PetCare business is performing well, continuing its improving momentum seen during 2011 and gaining shares in its segments.

In Latin America, we are seeing strong starts from both Mexico and Brazil, as well as a number of the other regions. Almost all categories achieved positive RIG, even though meaningful pricing was taken in a number of categories including powdered beverages, soluble coffee, ice cream and chocolate.

Next is Zone Europe. The zone achieved 0.2% RIG and 2.3% organic growth. This is the same level of organic growth as in the first quarter of 2011 that is more weighted to price in 2012. In Western Europe where the economic environment is poor and the consumer sentiment is weak, we have continued to see growth in most markets. Germany's first quarter was flat impacted by some now resolved retail and negotiations. Plus where we continue to see positive momentum in the business building on the growth in the first quarter of 2012. Amongst categories, I would highlight PetCare, soluble coffee, culinary chilled and frozen pizza.

Eastern Europe is a mixed picture with generally good performances in the region, but no growth in Russia. The Russian business has certainly impacted by the economic environment there, but we've also been realigning our distribution. This should hopefully enable a better performance going forward.

Zone Asia, Oceania and Africa achieved organic growth of 11.4%, with RIG of 7.2%. The emerging markets continue to deliver double-digit growth, among them Greater China, Africa, the Middle East and the South Asia region, which includes India. In each case, this is double-digit growth on top of double-digit growth in the first quarter of 2011, so we have strong momentum in the zone's emerging markets generally.

This performance is reflected in a number of the categories including ambient culinary, ambient milk, chocolate, powdered beverages and ready-to-drink beverages. Japan and Oceania had a slow start to the year partly due to the strong comparatives in the first quarter of 2011 and partly due to the economic environment in those markets.

Next is Nestlé Nutrition. It achieved 5.8% organic growth and 2% RIG. The biggest division, Infant Nutrition, had a good start to the year with above mid-single-digit growth on top of double-digit growth in the first quarter of 2011.

Many of the emerging markets in AOA and Latin America were double-digit including the Middle East, South Asia, Africa, Mexico and Brazil, with good performances from both the formula and Infant Cereals divisions.

The developed markets were more subdued, as one would expect, with low but positive birthrates in some countries and declining birthrates in others. These markets were, however, positive contributors to the division's growth. Innovation is playing a role here with, for example, our successful launch of baby food pouches in the U.S. being the fastest selling SKU in that space and graduates organics also doing well in the U.S.

Rate management continues to be impacted in the U.S. by aggressive competition as well as constrained consumer spending. We clearly still have work to do here to change the dynamics. More positively, the European launches are making steady progress.

In Performance Nutrition, our initiatives in 2011 to refocus the business back on to its core athletic client base, core products and communication themes are showing good early returns with an improved performance in North America. The smaller international business continues to perform well.

Next is Nestlé Waters. The division reported organic growth of 8% and RIG of 5%. The North American market has continued to evolve positive in 2012 after its growth in 2011. We have seen good performances across the business from Nestlé Pure Life, from the regional waters and from the international brands. Our home and office business also continued the positive growth trend seen in 2011. Europe is also seeing growth. We had a strong performance in France with share gains. We also gained share in Italy and had double-digit growth in the U.K. due to Buxton and Nestlé Pure Life and in Germany with retail performing well. The emerging markets also achieved double-digit growth. In Asia, I'd highlight Vietnam, the Middle East, Turkey and Egypt, and in Latin America and Mexico and Argentina. Nestlé Pure Life, a big brand, in the emerging markets, as well as in North America, grew double-digit globally.

I will now wrap up the segment reporting with our final category, other. Nestlé Professional continues to deliver positive growth around mid-single-digit globally, fueled by double-digit growth in emerging markets. The beverage division, focused on premium and super premium systems and services, is building good momentum. As examples, a key account in North America is taking several thousand Nescafé Milano machines. Viaggi, our super premium system, is now in 4 European markets, whilst in the other end of the spectrum, Nescafé Alegria, our more mass-market machine, has now been launched in 60 markets.

The standard pure soluble and dairy businesses are also performing well. The Food business also saw good growth, again double-digit in emerging markets. The culinary flavor solutions approach, products such as bouillons, sauces, seasonings, soups, desserts is resonating well with customers. Nespresso continued to perform at a similar level to that in 2011, boutique openings continue and club numbers continue to grow. Nestlé Health Sciences has started its second year well, particularly in Asia and the Americas. Last year's acquisitions are performing to plan.

Beverage Partners Worldwide is starting the process of realigning its markets. Many of its Latin American businesses are now being integrated into the zone, with the AOA ones following later in the year.

Cereal Partners Worldwide saw strong growth in emerging markets, but this was somewhat mitigated by the weaker consumer sentiment in the developed world. Overall though, the business achieved positive growth.

On the next slide is the overview of our product category performance. I have touched on most of this already in my zone comments, so it will be brief. We can always come back for more detail in the Q&A. All product groups were positive from an organic growth perspective and any other one didn't deliver positive RIG. Again, this underlines that we are performing well in terms of growth on a broad basis.

Powdered and liquid beverages has had a good start to the year in view of its near double-digit RIG in the first quarter of 2011. As you will remember, this was driven by a number of factors including imminent pricing in soluble coffee. The different product group constituents have all contributed well in the first quarter of 2012. Nescafé Dolce Gusto and Nespresso continue to be key growth drivers. Milo has also had a strong start with double-digit growth. Note production ice cream is showing 8.5% organic growth with 7.2% pricing. The pricing is in both dairy and the ice cream business and has impacted real internal growth particularly in ice cream.

The dairy business, which is predominantly an emerging market business, is performing well in AOA, where I would highlight China, Pakistan and the Middle East; and in Latin America, including in Brazil and Mexico. Ice cream has started the year well in Europe, though it is the off season. In North America, the business is flat overall.

Prepared dishes and cooking aids is a mixed picture. I've already discussed the frozen business. The ambient business, mainly Maggi, is performing well globally. It continues to be one of the key emerging market growth drivers. Herta, mainly in France, also deserves a mention, as they to continue to achieve mid-single-digit growth in the chilled category.

Confectionery achieved 7.1% organic growth. There are some benefit from Easter falling earlier than in 2011, so the first half number would be a better guide in Q1 to the underlying growth performance. Double-digit growth in Confectionery in Zone AOA, where Easter isn't a material factor, demonstrates that the business is continuing to perform well, with highlights including China and the Middle East. The business also grew double-digit in Latin America.

PetCare delivered organic growth of 7.7% driven by good growth in both developed and emerging markets. Nestlé grew market share in all its regions and across all major pet food segments. In addition, growth in emerging markets continue to be strong, driven by double-digit growth in Latin America and Central and Eastern Europe. In the U.S., the pet food category appears to have stabilized from the early 2011 negative trend, with indications of some early recovery in pet population trends.

We continue to grow share, driven by good performance in cat food, dog food and new product launches including Beneful Baked Delights, a new line of dog treats, and an expanded premium line for Wet Cat. In Europe, continued momentum on Felix Purina ONE and Purina Pro Plan continued to -- contributed to the Q1 growth. In addition, Felix cat snacks was rolled out in Germany, France, Holland, Belgium and Spain. We also continue to grow market share in Central and Eastern Europe.

A final slide then just to summarize. The year has started well from a growth perspective. The first quarter is a bit impacted by the Easter timing. As ever therefore, the first half numbers will be a better read through to our underlying sales performance in the first quarter. The business environment is tough in developed markets with consumer confidence under pressure and, if anything, lower than in 2011. We will be investing in our brands and innovations and we'll be focused on realizing the growth opportunities that we know exist in developed markets.

On the other hand, the emerging markets continue to be dynamic, and we are very focused on driving distribution in those markets to increase our exposure from PPP to premium. Our 2012 outlook is unchanged, delivery of the Nestlé model for the full year, as I've already said.

That concludes my presentation. Let's now go to the Q&A.

Question-and-Answer Session

Operator

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

Warren Ackerman - Societe Generale Cross Asset Research

It's Warren here at SocGen. Couple of questions. The first one is -- I appreciate it's not easy. But I was just wondering whether you're able to give us a feel for the group impact on organic growth of the leap year and also the early Easter, which you touched on in your Confectionery commentary? I was wondering whether you can kind of aggregate both those impacts up at the group level. That would be really useful. And the second one is the M&A. The M&A line was higher than consensus, quite a lot higher than consensus mainly due to Yinlu and Hsu Fu Chi. I'm just wondering how big pro forma will China be after those acquisitions? It looks like it's going to be a maybe a doubling of your Chinese business. And are you able to talk about how those acquisitions will impact your capabilities generally in China?

Roddy Child-Villiers

Thanks, Warren. Yes, on the Q1 impact, I think as you say, it's a quite difficult question. I think we need to start with 2011. And of course, back in 2011, we had the Arab Spring, we had the tsunami in Japan. We had some customers buying in ahead of price increases. On the other hand, we didn't have an Easter. So there are a whole number of things that went on in Q1 last year that are quite different from Q1 this year. This year, as you say we had the leap year. We did have the Easter. We didn't have customers buying in ahead of price increases, but we did have some disruption of customers in Europe around price negotiations. So there's a whole bunch of moving pieces in both quarters, and we haven't attempted to try to sort of aggregate out what that would mean in terms of basis points. I mean, clearly you can do the leap year math yourself, it's about 1% simplistically, but there's a bunch of other stuff in there as well. So I'm not sure it's hugely meaningful to do it. We haven't done it. On the M&A side, I mean, I guess the reason the M&A number has come out higher than consensus is because the Chinese businesses -- or perhaps the Chinese businesses, the partnerships that we signed at the end of last year, are probably growing faster than people imagined. Remember that there is no RIG or organic growth from those acquisitions. It's all included in the acquisition number. In terms of the impact of those businesses on China, well, it's very early days. And I mean, clearly, yes, a few heads had been out there. They've met the businesses. They've talked about what we can bring in terms of marketing expertise. Equally, they're keen to learn from the Chinese businesses about their capabilities. You asked about capabilities. We're very excited in particular about Hsu Fu Chi's distribution capabilities into retail, also Yinlu's aseptic packaging capabilities, which are as good as anything we've seen anywhere in the world. So they are certainly bringing a lot to us in terms of capabilities, and that's one of the reasons that they're so attractive apart from obviously the categories that they're in. And of course, the other thing that we're excited about is that it takes us into local Chinese diets rather than just more European-focused business. I'm a bit reluctant to give a sort of pro forma Chinese number for the current year, but I mean, it's clearly going to be somewhere around 4% to 5% of sales. So the Chinese business is quite material, which actually reminds me that when it comes to the 2013 Q1, you're not only going to have the Easter and leap year impact, you're also going to have the Chinese New Year impact, because Chinese New Year is the peak season for Hsu Fu Chi. So the Q1 in 2013 and thereafter is going to be a pretty poor guide, I think, to the underlying trends in the business.

Warren Ackerman - Societe Generale Cross Asset Research

And Roddy, just in terms of a point of clarification, you said something at the beginning of your speech about the raw material issues being a bit of a lag. I was just wondering whether there was a bit of a message in there that margin delivery will therefore be maybe a bit more H2 weighted compared to H1?

Roddy Child-Villiers

Well, Warren, there's always a message. There's always a message. And, I mean, that's a good read through, yes.

Operator

Our next question comes from Jon Cox of Kepler.

Jon Cox - Kepler Capital Markets, Research Division

Good set of figures there, probably much better than everybody expected. But just to come back to this Easter issue. It looks like you're a bit reluctant to talk about an overall impact. But just wondering on Confectionery specifically, do you think maybe it added maybe a point to organic growth and as a result, maybe a point less organic growth in Confectionery in Q2? That's the first question. Second question, just on the -- on sort of coffee generally and the system business. This is obviously tremendously important for you in terms of Nespresso and the Dolce Gusto. I wondered if you a, could actually just mention something about Dolce Gusto, how the trends are there, but also wondering if you're seeing anything that worries you from a competition perspective, given the fact that there seems to be a lot of competitors getting into it and trying to obviously grab some of that fast-growing market. Is there anything that gives you cause for concern? Or are you pretty relaxed for the time being?

Roddy Child-Villiers

Thanks, Jon. Yes, I mean, you're probably broadly right on your Easter assumption. But again, there are a lot of moving parts even in Confectionery. On the coffee business, well, we continue to see a very good development of both the Dolce Gusto and the Nespresso retail systems and as I said also with the Nestlé Professional, with their systems. So that broad business segment continues to be a key growth driver. You talk about new entrants into the market. I think at this stage, the new entrants are still actually talking about it rather than doing it. But it's clearly something that's coming. No, we're not relaxed. We're never relaxed. We are very focused on ensuring that we are doing all the right things to continue to drive the business forward as successfully as we have been doing so far. So we're certainly not relaxed. The other business, I mean, there's not much more to say about it. Dolce Gusto continues to build on its presence. It's now in nearly 60 markets. Growth is --growth,I mean, the organic growth is lower than it was last year. But I mean, it's coming off of a much bigger base, so it's hardly surprising and it's still the fastest-growing big brand that we have, I guess, by a fair way. And as I said earlier on, Nespresso is also performing very well.

Operator

Next question comes from David Hayes of Nomura.

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

Just 2 areas, please. First on the pricing levels. I just wondered whether there was any category where you notably took out pricing sequentially from the fourth to the first quarter? And then just looking forward, looking at kind of the way you talk about the outlook, it feels like you're saying that the pricing is taken and that will obviously sort of reside through the rest of the year rather than pricing to go up substantially or at all through the year. I just wondered whether that is the kind of the interpretation that we should have? And then the second question is just in terms of, again, sequential trends. You obviously talked about the U.S. being a little bit lackluster and then also other companies, I think you guys have also said obviously emerging markets may be a little bit slower as well. I just wondered whether you have seen a slowdown between the fourth and the first quarter in either the U.S. or any key emerging markets? Or whether that's just a commentary, which is a continuation of what you're already saying at the end of last year?

Roddy Child-Villiers

Thanks, David, good questions. Starting with the second question, I mean, we don't tend to look at the Q1 off the Q4 base, because the Q1 is also very much driven by the comps in the prior year Q1. But we're not seeing, I mean if we were to do it, I don't think we would see dramatic changes in pattern of growth between Q4 and Q1. Looking at the U.S. in particular, yes, clearly, consumer sentiment is lackluster. Clearly, it's impacting our categories and our business. I think what we will see in the U.S. though is the pricing effects from last year will obviously come off later in this year and with luck and innovation, should be somewhat replaced by increasing RIG. The emerging markets, I don't think we're -- I don't think we're seeing a dramatic slowdown. I mean, we were 13% this year. I think from memory, we were about 13% in the fourth quarter and I think we were 12% in Q1 last year. So I think the emerging markets are performing at a similar level to where they were last year. Now clearly, one can have a debate about the microenvironment in emerging markets and is there a slow down or not. But we are far more focused on what we are doing to drive our growth in those markets. We're not seeking to be a market growth business in the emerging markets. That's why we're investing heavily and increasing our distribution of our products in Africa and Asia and other such regions. On pricing, yes, we have taken pricing. I think dairy would be an example. Soluble coffee would be an example. Water will be an example. PetCare will be an example. And in the U.S. in frozen, we've taken pricing in the sense of a change in promotional behavior. So we're no longer doing 5 for $10. We're doing 4 for $10, which is a quite significant pricing change, which has not necessarily been followed by all of our competitors, which go some way towards explaining our market share performance in the Stouffer's business.

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

Okay, and then for the rest of the year, I mean, I guess you might just take pricing in some categories that you don't know necessarily. But you're not trying to send to say that that's it for pricing and that's not kind of the message that we should take? It could be [indiscernible].

Roddy Child-Villiers

As you know, David, we take -- the pricing decisions are made locally around the world, [indiscernible] around the categories in the markets, and they would do what they need to do. The way that the raw material picture is looking, it doesn't allow me to take in the level of pricing we have taken last year. As I said in the previous Q&A, the impact is more H1 than H2. I think that's actually also reflected in the consensus.

Operator

Another question from Alain-Sebastian Oberhuber of MainFirst.

Alain-Sebastian Oberhuber - MainFirst Bank AG, Research Division

Just 2 questions. First is about currencies. If we assume, because the number was much weaker than the market was expecting just about the proportion, if we assume that all the currencies will remain constant, when do you expect a positive impact of currencies in your results? And secondly, if you look at the growth rate in Latin America, I assume that, in particular Mexico and Brazil, was at least as good as emerging markets growth, i.e., at 13%. Is that a fair assumption? And if not, was it a positive momentum in these 2 markets versus Q4?

Roddy Child-Villiers

Thanks, Alain. I think your first question on currency is rather difficult to answer, because we don't tend to assume that nothing's going to change in terms of currencies. But it's clear that if things stay as they are, the currency impact for -- the negative currency impact will reduce over the course of the year. But we haven't done a model that says what will it be at the end of the year based on today's rates. In Latin America, no, you would be aggressive if you were assuming that Brazil and Mexico were growing at 13%. They are growing very well. They're not growing at that level.

Alain-Sebastian Oberhuber - MainFirst Bank AG, Research Division

But there is positive momentum versus Q4 in both markets?

Roddy Child-Villiers

They are both performing -- well, Brazil is certainly above where it was in Q4. Mexico had a very strong year last year and continues to be very strong.

Operator

Our next question comes from Mr. Pablo Zuanic of Liberum Capital.

Pablo E. Zuanic - Liberum Capital Limited, Research Division

Two questions, one more on market and one broad specific. Are there, in your portfolio, any categories that we should think of as pass-through categories? We've seen roast and ground, margarine, yogurt, fluid milk, prices go up and down with underlying commodity. Are there product lines in Nestlé at all where we should think about that, like for example in powdered milk? That's one question. And the second one obviously is more around the single-serve coffee platform. Can you just -- I have 2 very brief questions there. I'm hearing that the Nescafé Dolce Gusto type of coffee in North America, because it's more milky and foamy, doesn't really go with the type of brewed, black coffee that the market looks for, for example, Green Mountain Coffee roasters sell. And that's why NDG is not growing so well in North America. And I understand that can be irrelevant, given that 85% of the business is still in Europe and it's growing at 60% last year, but if you can comment on that? And the second question, in I guess the single-serve coffee in Europe. Is the category growing much? And I'm talking about the non-Nespresso category, if I can differentiate it that way, meaning the category where Senseo, Tassimo and Nescafé Dolce Gusto compete? It seems to me from the way I'm looking at that the category may be flattish at best growing single-digits. Can you comment on that please?

Roddy Child-Villiers

Thanks, Pablo. Good question. Yes, I mean the way you describe Dolce Gusto in the U.S. as not being the classic American black coffee is accurate. And one can say the same for Nespresso of course, and it hasn't stopped Nespresso building a successful business in the U.S. So I don't think the issue for Dolce Gusto is that it's making -- it's offering the wrong product. And to support that, we know that where we've been successful in selling Dolce Gusto machines, the use per machine is very high. It's above average use per machine. So the people who are buying the machines are enjoying the product. So I think we're as successful in converting the traditional American coffee consumption moment we're enjoying success, not as I say also [indiscernible] Nespresso. On the European market, we have -- I mean I don't have a number for the European market x Nespresso. But the European market is still growing very nicely and we are still growing our share. You were at the cage when Fiona Kendrick [ph] presented and we showed you a share chart, and I think the terms on that share chart remain accurate today as they were then. On the pass-through categories, I mean, clearly our strategy is all about added value. And the more you add value, the less you have pass-through, I suppose. You cited dairy, I mean the reason that our dairy business has been so successful over the last 10 years and more is because we've moved that business from an effectively plain powdered milk business into a business that is segmented by consumer benefit, whether it's for children between 1 and 3, 3 and 6 or above 8, or indeed now into adult milks and milks with other specific nutritional benefits. So the whole secret of our success in milk has been to create value from what would otherwise be a commodity pass-through category, and I could take you through other examples. You mentioned roast and ground. Roast and ground is clearly a pass-through category, which is why we don't, as a rule, play there, albeit we have 1 or 2 small businesses. And then, of course, obviously the systems business. Nespresso is quite different. I guess the pass-through category that we do have would be water, where clearly, the water pricing is very driven by raw material costs particularly by PET and oil. Does that answer the question, Pablo?

Pablo E. Zuanic - Liberum Capital Limited, Research Division

Yes, that's very helpful.

Operator

Another question comes from Patrik Schwendimann of Zurcher Kantonalbank.

Patrik Schwendimann - Zurcher Kantonalbank AG, Research Division

Patrik Schwendimann Zurcher Kantonalbank. Firstly, regarding your input costs, you mentioned for the full year a low single-digit increase. What should we assume for the H1, H2 pattern? So should we assume a high single-digit increase in H1 and a decrease in H2? That's my first question. And secondly, regarding your performance in North America, could you give us the organic number for North America for Q1 and also your best guess estimate for the full year? You are already mentioning that probably the RIG should be better later in the year, maybe pricing less. So at the end of the day, what would you expect from the organic growth?

Roddy Child-Villiers

Thanks, Patrik. On the raw material, no, I'm not going to, I'm not going to -- our guidance for the full year is low- to mid-single-digit. I'm not going to give you guidance for the half year, but what we said is that it's first half weighted. Therefore, if it's low to mid for the full year, it's going to be higher for the first half. I'm not going to give you a number. We also don't disclose the North American organic growth, but it was positive and made up of negative RIG positive pricing to get positive organic growth overall.

Patrik Schwendimann - Zurcher Kantonalbank AG, Research Division

Just for flavor, for the full year, should we expect any improvement here overall in organic growth North America?

Roddy Child-Villiers

We'll wait and see. I'm not going to give a forecast from organic growth for all the zones or in all the regions. So we'll wait and see. Okay?

Operator

Another question from Mr. Jeremy Fialko of Redburn.

Jeremy Fialko - Redburn Partners LLP, Research Division

Jeremy Fialko, Redburn here. Just a question on Russia for you, Roddy. Can you talk in a bit more detail about the distribution changes that you've made are? And is this sort of a one quarter impact that you've got from influencing the changes? Or is it going to be something that's going to act as a drag for most of the year within Russia and then when you hope to see some sort of improvement?

Roddy Child-Villiers

Thanks very much. Yes, Russia, as I think you are aware, has been a bit of a challenge for us for a couple of years now, particularly in the zone businesses. It's been rather better for us in the last couple of years in Infant Nutrition. Also the PetCare business is doing very well. What we've been doing in Russia, we have just recently opened a major new Nescafé plant, which is obviously bringing us in line with some of our competition who already had local manufacturing there whereas we didn't, and that's important in view of import duties. In terms of distribution, it simply just realigning our distribution to make it more effective. I'm not going to go into the nitty gritty aspect because it's a little bit competitive. Is it a one-year -- is it a one-quarter hit? No, it's not a one-quarter hit. We're not expecting a sudden recovery in Q2, and I think frankly that the issues in Russia are deeper than that. First off, the economy isn't the best. So hopefully, what we're doing in our distribution will give added momentum to the business and will contribute to an improving performance over the course of the year, not necessarily in Q2.

Operator

Another question from Ms. Jane Gelfand of Barclays.

Jane Gelfand - Barclays Capital, Research Division

A quick question on how you see competitive dynamics perhaps developing into the back half. A couple of sort of innovation or ingredient partners have talked about seeing a greater pipeline of new products slated to come up and online in the back half, particularly in North America. And I guess I'm wondering what you're expecting from kind of a promotional versus true marketing standpoint in the back half especially as commodities decline? A couple of years ago, we saw sort of similar trends at the start of the year, meaning RIG definitely impacted by price mix not just for Nestlé but for the industry as a whole. And in the back half, we've got -- we went into sort of a downward spiral from a promotional perspective. So I'm just wondering whether you expect the industry to be more rational in the back half this year, maybe backed up by true innovation? Or we have to kind of hold our breath and potentially brace ourselves for less rational dynamics?

Roddy Child-Villiers

Thanks, Jane. It's a good question. I think it is all about North America, so that's how I'll answer it. First of all, I don't think that we would suggest the competitive dynamics have not been rational. I think our competition do stuff because they believe it's rational to do it. Certainly, we do stuff because we believe it's rational to do it. So I think the competitive environment is rational. Now in terms of coming innovation, I'm not obviously aware of what the competition is up to and how that might change the competitive dynamic. We have some interesting stuff coming through in a number of categories. Some of it is already out there. I mentioned PetCare. I mentioned some of the stuff we've done in pizza as well, also in Coffee-mate with our Natural Bliss. So we've got a lot of stuff out there that's already happening, Skinny Cow, I mentioned. There's also stuff coming through, which I haven't talked about, and which I'm not going to talk about until its happened. So I'm hopeful that there is some innovation that will bring some dynamism into the market for us, at least in the second half of the year. In terms of the mix between pricing and promotion and marketing and so on, I cited a one example in frozen of going from 5 for $10 to 4 for $10, but it's up to the individual guys running the individual businesses in the States how they want to play that. We're not going to micro manage that from here. But clearly, if there is an easing in raw material pressure, that provides an opportunity for them to look at how they're going to market.

Jane Gelfand - Barclays Capital, Research Division

Roddy, if I could just follow up quickly about Nespresso patents. Yesterday during the AGM, there were some comments about the patents being upheld. I'm just wondering whether that was a change relative to what you've said previously, whether that's allowed you to pursue any other legal avenues from a sort of an injunction standpoint? Or whether it's kind of more of the same, and you have to continue to fight the individual legal battles?

Roddy Child-Villiers

Yes, Jane, there is a press release that went out yesterday just confirming that we had won ruling in the European Court. And it doesn't -- I mean, it's not -- I mean that's what it was. It's a press release from the European Court. So effectively what it means is that we won that ruling and that puts us in a good position as we now pursue our core cases in the individual European markets. The -- I think what we have always said, and perhaps this will resonate more on the back of a victory than when we were in the middle of a court case. What we've always said is that Nespresso is going to win in the market because it's got a better product, better customer service, better design because of the whole secret of Nespresso system, not because of what happens in courts. And as I say, perhaps that message will now resonate more strongly in the back of a victory rather than fighting a court case. But I think the change, if there is a change, is there is a net benefit, it's a net positive for us as we go into these local court cases.

Operator

Our next question comes from Mr. Xavier Croquez from Cheuvreux.

Xavier Croquez - CA Cheuvreux, Research Division

Two small questions. The first one is, I was a bit surprised by the level of pricing in your milk and ice cream category. I knew you could see that coming into the quarter because there was a buildup from last year. But with the type of raw material price evolution, and I take your point on the lead time, I was still quite surprised on how strong the pricing has been. Is there anything else than rumors behind this pricing? Is the ice cream business pushing pricing up? Or is there a mix effect? What is behind this very important pricing factor in that category overall? The second question is a smaller question. If, by any chance, you could give us the RIG numbers in emerging markets and developed markets, it would be helpful.

Roddy Child-Villiers

Thanks, Xavier. Yes, I mean, I think there are 2 fundamental things answering your first question on milk and ice cream. One, there's cost pressures so we're taking price. Second, in the U.S., the premium ice cream segment, which in Europe would be the mass ice cream segment, has always been so very heavily on promotion. And we have changed our strategy, our promotional strategy, to make it less promotional lead. And that has had a positive impact on pricing, which is quite dramatic. And that I think you'll see that's true across the industry.

Xavier Croquez - CA Cheuvreux, Research Division

Okay, but -- sorry, could you get a timing sense of this? This is what is behind the numbers since mid-2011? Or is this something relatively new?

Roddy Child-Villiers

No, it's more this year than last year. Last year's pricing would have reflected fundamentally the raw material cost pressure. This year -- this year's pricing reflects the carry-through of last year's pricing of raw materials and what we're doing on ice cream. I don't think we normally giving you the RIG numbers on emerging and developed markets, but the merging market RIG was between 5 and 10 and the developed RIG was also positive.

Xavier Croquez - CA Cheuvreux, Research Division

You didn't give it, but it was a suggestion.

Roddy Child-Villiers

No, it's always good to try.

Operator

Our next question comes from Mr. Robert Dickinson of Citi.

Robert Dickinson - Citigroup Inc, Research Division

Could you give an indication of the performance of the business in some of the tougher European markets such as Spain and Italy and whether that had any impact on Zone Europe's RIG? I know last year, you highlighted that some of those tougher markets have been performing pretty resiliently. So any help there would be great.

Roddy Child-Villiers

Sure, Robert. Well, the Portugal, Spain, Italy, Greece, combination continued to deliver positive organic growth for us, not at quite the levels it was last year but still positive. So we're still eking out growth even in those tough markets. But I think it's fair to say that the environment there is tougher than it was last year. I mean, Italy -- actually we're doing pretty well. I think we talked last year about how we've made some changes there. The business is performing well. Market shares are good. Actually, market shares are good fundamentally broadly across the whole of Western Europe. So I think we're still outperforming our peers. I think we're still doing pretty well. There are, I mean, there are issues. For example, the quite significant increase in VAT in Portugal, as an example, is a bit of a challenge. If you take, as an example, you take Nescafé Dolce Gusto, the impact of the VAT increases to push the price of a box of Dolce Gusto capsules over EUR 5, which is quite a challenging price point. So there are issues that are, in those markets, which we need to manage. But as I said overall, we're still eking out some growth and I think that's a pretty good effort by our people.

Operator

Our next question comes from Mr. Pierre Tegner of Natixis.

Pierre Tegner - Natixis S.A., Research Division

I would like to come back to David's question on pricing, due to the second sort of price increase we can see specifically on AOA and on emerging markets between Q4 and Q1. Do you consider that you are quite at peace with the level of price you have now at the end of Q1? Or of which we'd expect there's a small price increases during the next quarters? And the last question is my feeling is that you have a big focus of price increases specifically in emerging market and in sequential [indiscernible], we have much more lower price increases between Q4 and Q1 on the water and nutrition and Europe. Is it the effect of the challenging trending environment? Or is it much more initially policy to preserve your competitivity in these mature markets?

Roddy Child-Villiers

Thanks, Pierre. If I understand, your question is about the trend of pricing in Q4 versus Q1 in AOA, generally? I think first of all, the pricing in any given quarter reflects the pricing taken in the prior year. So it's clear that there is pricing in Q4, really have a pricing in Q4 that is no longer there in Q1, because the year has passed. So the Q1 number does not include really the pricing that was in Q4. Equally, there would have been pricing taken in Q4 and there's pricing taken in Q1. So you can't just do a Q4, Q1 price comparison and say, "Good heavens, the pricing will come down dramatically and Nestlé will have to reduce their prices." It's just the result of rolling over pricing in Q4 not rolling over into Q1.

Pierre Tegner - Natixis S.A., Research Division

Yes, but on these points, can we expect further pricing actions in sequential terms in Q2 versus Q1 and in Q3 versus Q2 in the course of the year?

Roddy Child-Villiers

Well, I mean, as I said earlier on, Pierre, the pricing decisions are taken in the markets locally by the category heads. And it's clear that where we have cost pressure in those markets, they'll be taking pricing. We have taken pricing already in Q1 in some categories in some markets. As and when the market -- the category heads feel they pricing, they will do so. I'd be astonished if there was no more pricing in 2012, particularly in emerging markets. I'm sure there will be more pricing, yes. All right?

Pierre Tegner - Natixis S.A., Research Division

Okay.

Operator

Another question from Mr. Jon Cox of Kepler.

Jon Cox - Kepler Capital Markets, Research Division

Just being -- just looking at the sort of net trading income line for this year, looking at consensus around CHF 700 million. I seem to remember your guidance was restructuring and legal and all of this stuff that comes in that line is actually going to be closer to 0.5 point of revenues for the year. Is that still the case? I'm just trying to work out why on consensus at least, you have a sort of -- there's a CHF 716 million figure there in that line, which leads me into the second point. I know your guidance now is for the trading operating profit margin to come up, and I can see that's plus 20 basis points on consensus. On your old operating profit, would you think you would actually get a margin increase there at all? Or would you say no, given the fact that you're guiding for maybe only 0.5 point of net trade income line? Actually that margin is likely to be flat, if not somewhat lower?

Roddy Child-Villiers

Good question, Jon. Even cheekier, I think, to come out second time and ask that question. I mean, there's no reason why our guidance on the net non-trading and all that should have changed from the full year to the first quarter. So you can assume that the guidance we gave at the first quarter is still good guidance. In response to the requests from the market, we have changed our reporting, gone to net-net sales, try to bring ourselves in line with our peers, try to make comparisons with our peers easier. And in line with that, we've now changed how we guide and you're now asking me to guide on a number that we didn't even report. So I'm not going to do that. Our guidance is based off constant currency improvement and trading operating profit margin and underlying earnings per share. So I'm not going to give you guidance on the old EBIT.

Jon Cox - Kepler Capital Markets, Research Division

Okay, and then are you pretty comfortable that with plus 20 basis points, that trading operating profit?

Roddy Child-Villiers

I beg your pardon?

Jon Cox - Kepler Capital Markets, Research Division

Are you comfortable with the trading operating profits consensus plus 20 basis points?

Roddy Child-Villiers

Well the consensus is what it is. As you know, we don't endorse it. It is what it is. I think that what the consensus is telling us is that we're going to have a tougher first half than second half, but we're going to deliver on the Nestlé Model. We've said we're going to deliver on the Nestlé Model. So at least directionally, we, in the consensus are in the right place.

Jon Cox - Kepler Capital Markets, Research Division

Okay, because the tone of the call overall has been maybe certainly on the margin, watch our H1. Don't get too carried away. I guess you're not trying to push consensus down at all.

Roddy Child-Villiers

Jon, the consensus will do what it would do. I think all we're doing is we're saying the consumer environment in Western Europe is tough. This is no surprise, we all know that. It's perhaps a bit tougher than it was last year. The emerging markets remain dynamic. Again, I think we know that, and we're very focused on being better than market in terms of our growth performance in emerging markets. The raw material environment remains, I think, perhaps a little bit tougher than some of you guys are writing about because we still have cost pressure in the market. And as we say, it's more H1 weighted than H2 weighted. The consensus are already saying that. So I think that we and the consensus are broadly aligned. But I'm not going to get into a basis point discussion on consensus. Any more questions?

Operator

We do have another question coming from Mr. Pedro Gil of Santander.

Pedro Gil - Grupo Santander, Research Division

I have a question on your Nutrition business. Could you give us some color on the rate of organic growth that you're seeing in Infant Nutrition in your emerging markets as compared to your developed markets?

Roddy Child-Villiers

Sure. The Infant Nutrition business is growing double digit in emerging markets and is growing low single-digit in developed.

Operator

[Operator Instructions]

Roddy Child-Villiers

Okay, if there are no more questions...

Operator

Okay, sir. There are no more questions in the queue. I will hand the call back to you, Mr. Child-Villiers.

Roddy Child-Villiers

Thanks very much. I've been told that we apparently had some technical problems earlier on in the call, for which I apologize. If you missed anything, there's always the replay, which hopefully will work.

Thank you very much for listening. As I say, we've reconfirmed our commitment to deliver the Nestlé model for the full year 2012. Thank you for your interest in Nestlé. Thank you for your questions and for your time. Goodbye.

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Source: Nestlé S.A., Q1 2012 Sales/ Trading Statement Call, Apr 20, 2012
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