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Nestle Sa Reg Shrs S (OTCPK:NSRGY)

October 18, 2012 3:30 am ET

Executives

Roddy Child-Villiers

Analysts

Warren Ackerman - Societe Generale Cross Asset Research

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

Alain-Sebastian Oberhuber - MainFirst Bank AG, Research Division

Jon Cox - Kepler Capital Markets, Research Division

Eileen Khoo - Morgan Stanley, Research Division

Robert Waldschmidt - BofA Merrill Lynch, Research Division

Patrik Schwendimann - Zurcher Kantonalbank AG, Research Division

Jeremy Fialko - Redburn Partners LLP, Research Division

Pedro Gil - Grupo Santander, Research Division

Roddy Child-Villiers

Good morning, everyone, and welcome to the Nestlé 2012 9 Months Sales Conference Call. For your information, this is being recorded as well as webcast. As usual, I will start with the presentation and then we will take your questions. I am sure that some of you have already heard the press conference. In fact, I think it's running over a bit but anyway, we need to start. Hopefully, I can give you a bit more detail than you have on the press conference.

I will start by taking the Safe Harbor statement as read and go straight to the highlights. Total sales increased by 11.1% in the 9 months to CHF 67.6 billion. We benefited, for the first time in several years, from a positive evolution of foreign exchange, as well as from the inclusion in the numbers of our Chinese partnerships. RIG, or real internal growth, momentum was robust, unchanged at 2.9%, contributing to organic growth of 6.1%. And we continue to grow both in developed and emerging markets. Looking forward, we do not see the third quarter as a good guide to the full year. There are a number of events, which I will touch on that will not repeat or that will balance out favorably in the fourth quarter. I will touch on these, as I go through my presentation.

On the next slide, you can see the detail of the makeup of our sales growth with, for the first time since 2007, all elements being positive. We had a 2.7% positive impact from acquisitions, net of divestitures, and a 2.2% from foreign exchange. You should be aware that Yinlu will no longer be included in the acquisition line from December 2012.

I will now start to dig deeper into our performance with a regional overview of our total food and beverage business. All 3 regions achieved positive growth, both organic and real internal growth. Europe reported 2.5% organic growth and 1.1% real internal growth. Clearly, the environment in Europe remains particularly challenging with low consumer confidence, the general economic malaise and the accompanying austerity programs. This performance is, therefore, notable relative to the environment in which it was achieved.

The Americas achieved 6.1% organic growth and 1.5% real internal growth. Again, the environment, particularly in the north is not conducive to growth. So this performance, continuing positive growth in the U.S.A. should be seen in that context.

The Asia, Oceania and Africa region achieved 10.8% organic growth and 7.5% real internal growth. This region was the only of the 3 not to report higher RIG in the period than in the first half. I'll go into the detail when I review the operating segments.

On this next slide is another way of looking at our overall performance. Emerging markets and within that, the BRIC markets, are growing double digit. As I've already said, the developed markets are also growing, but Portugal, Italy, Greece and Spain remain a slight drag on growth. Although those markets are not growing, our performance share -- our market share performance there is pretty good. Globally, our popularly positioned products or PPPs are also growing double digit. The fact that their growth is slightly below the level achieved by emerging markets is to be expected, as we have PPPs in developed markets, too.

Let's now look at the operating segments, all of which are delivering positive growth. I will start with Zone Americas. The Zone achieved 5.5% organic growth and 0.4% real internal growth. The real internal growth has returned to positive territory after being minus 0.1% at the half year. This is wholly due to an improvement in the RIG in North America. In North America, our organic growth has improved slightly, as the improvement in the RIG has outweighed the decline in pricing. Pricing was lower in the quarter in all categories to varying degrees. The improving performance is also broad-based and is generally supported by the latest market share data. You might remember that we had already seen an improvement in RIG at the half year, and we would expect this trend of improvement to continue into the final quarter.

Frozen food continues to be challenged as a category. Our performance, measured by share, is slightly better than the category for both Stouffer's and Lean Cuisine. The pizza category also continues to be challenged. Here, the regional expansion of the JACK'S brand has gone well. Exciting for us is that we have meaningful launches in the coming months for both Lean Cuisine and pizza. We have also seen an improvement in RIG in ice cream in the last quarter, again, continuing the trend of improvements seen earlier in the year. The category saw high pricing at the start of the year, you might remember. The impact of volumes across the category -- this impacted volumes across the category and contributed to share gains in premium by private label. We are seeing better performances in snacks, brands such as Häagen-Dazs and Drumstick. The Slow Churned relaunch has also helped. The Coffee-Mate and Nescafé businesses are seeing positive growth. Both categories have seen new entrants. In the case of creamers, where we are the leader with over half the market, our share was initially impacted, but has trended better in recent months. The soluble coffee, we have gained share with good performances from the Nescafé variance, Clásico and Memento. Our U.S. chocolate business is also performing well, with growth and share gains.

In Latin America, we have seen growth in all categories and good performances from almost all regions and countries. Brazil had a slower third quarter as it has pushed its confectionery shipments for the Christmas season into the fourth quarter. It should, therefore, have a strong final quarter. That said it is achieving high single-digit growth for the 9 months in any event. Mexico is also performing well.

Next is Zone Europe. Real internal growth [ph] has accelerated during the third quarter, but organic growth is down due to pricing easing. As you might have heard from the retailers, the quarter was short 1 shopping day, which obviously had on impact on our organic growth. This will be recovered in the final quarter. In Western Europe, we are seeing good -- continued good momentum in soluble coffee and PetCare, as well as a good third quarter in ice cream.

Looking at the markets, Germany has been tough all year and continues to be. France is rather more resilient, though the recently announced austerity measures there could be a risk factor for growth going forward. Nescafé, Herta, Maggi, Buitoni and the chocolate business are all among the highlights.

The U.K. is also growing well, with the big 2 categories, confectionery and soluble coffee, both contributing, as well as the -- as well as ambient culinary, the Maggi/Juicy range. For Nescafé, I'd highlight the refill packs as a particular success story. This is a value proposition well aligned to today's environment. Among the PIGS, I pull out the performance of Greece. I think the decisive factor is the local nature of our business there, including our decentralized management, as well as our strength in key categories such as soluble coffee. This has enabled us to grow in Greece.

In Eastern Europe, Russia has continued its positive momentum, reflecting decisive action to rebalance the pricing between the different segments of the soluble coffee category.

Other categories are also performing well, confectionery, ice cream and Nesquik included.

Zone Asia, Oceania and Africa slowed somewhat in the third quarter. Despite this, they reported a still impressive organic growth of 9.4% and real internal growth of 6.3% for the 9 months. It's interesting to note also that the reported sales are up 25.9% from the corresponding period in 2011 due to the inclusion of the Chinese partnerships this year. We often call Zone AOA Zone CNN. It is the Zone's feeling that the third quarter was particularly impacted by issues beyond its control. Specific examples would be the demonstrations in Pakistan, that caused 5 days in lost distribution and the typhoons in the Philippines that resulted in a week's factory closing. Beyond this, there was disruption from the election in Egypt and other aftershocks from the Arab Spring, as well as the impact of the sanctions in Iran. Issues will not be present in Q4.

Let's turn now to the business performance in the Zone. The emerging markets have continued to deliver double-digit growth. China also reported growth in the high teens with most categories double digit. The Philippines had a weak quarter for reasons I just mentioned. The Malaysia, Singapore market, on the other hand, is performing well this year, with double-digit growth heavily weighted to RIG. Dairy, Milo and Maggi were among the highlights there.

The South Asia region, which includes India, is running near double digit, culinary, chocolate and milk beverages are among the highlights. We have seen extremely good growth in Africa in the high teens for the 9 months. The third quarter number is meaningfully weaker, though, than the half year, as we are cycling the Côte d'Ivoire recovery in 2011.

Growth in Japan also continued to be positive, Nescafé and Kit Kat both doing well. Among the zones categories, dairy, culinary, powdered and ready-to-drink beverages and ice cream were double digit.

On the next slide is Nestlé Nutrition. The organic growth of 6.6% and real internal growth of 2.4% reflect increased RIG and pricing over the half year numbers. We have continued to see strong growth in emerging markets in both formula and cereals, double-digit in AOA, as well as in Russia and most Latin American markets. This continues to reflect the benefit of our broad-based innovation programs in both the cereal and formula categories.

You may have seen last week's headlines about U.S. birth rates being at all-time lows. This makes for a tough environment in which to grow our business. That said, we continue to see improving momentum quarter-on-quarter. The first key driver here is the pouch category for our Gerber Graduates brand. We entered the category relatively recently. We have already taken leadership. The second driver is our rollout of our anti-colic formula. The European environment is somewhat similar to that in the U.S, with birth rates down generally in Western Europe and particularly in the southern countries. In this environment, our performance is relatively good measured by generally positive market share performances, including in France where we are growing the business. The trends in the 2 smaller businesses in the division are unchanged. Performance continues to grow, Weight Management doesn't.

Nestlé Waters is next. They reported accelerated real internal growth to 4% and organic growth to 5.8%. In North America, we are seeing good growth in the 9 months. The international brands S. Pellegrino and Perrier, as well as regional brands, Zephyrhills, Ice Mountain and Poland Spring have contributed well. Our market share story is less strong but this simply reflects that we have responded to higher PET costs by pricing up. We have been able to do this ahead of competition, much of whom have longer-term supply contracts than us. We are protecting our margins even if this is costing us some share short term.

The European business had a good quarter. France, Italy and then U.K. all contributed, as did a number of smaller markets. I think our U.K. business is worthy of note. A few years ago, we had no meaningful presence. Today, we have a market share in the mid-teens and are continuing to see impressive share growth. We have a good domestic brand, Buxton with a well-situated source, plus our international Waters and Nestlé Pure Life are also performing well. The emerging market will continue to see double-digit growth both in Asia and Latin America.

Next is other activities incorporating Nestlé Professional, Nespresso, Nestle Health Sciences and our joint ventures. Nestlé Professional has maintained its growth momentum from the first half, with accelerated real internal growth compensating for a lower level of positive pricing. This performance is certainly strong relative to its industry, the out-of-home sector being under pressure in the current economic environment. Professional has delivered double-digit growth in the emerging markets, with double-digit growth also in North America, with only Western Europe being slightly negative. The legacy beverage and ingredients businesses are proving to be defensive in the current environment, providing good value alternatives for operators. But we are also seeing strong growth in our beverage systems business, as well as in our services to chefs within the food area.

Nespresso continued to deliver double-digit growth. Its innovation programs are running at pace with 3 limited edition coffees and 2 machines launched in the first 9 months, and it is on track to have over 300 boutiques by the year end, with about 30 openings this year.

Nestle Health Sciences has performed well. There was good growth in the U.S. and Canada where Boost is a highlight and in Northern Europe, as well as in AOA and Latin America. The acquisitions announced in the last couple of years are all performing well. The joint ventures are all performing broadly in line with their markets.

The next slide is the overview of the product categories. Just a few comments to build on my Zone commentary. Powdered & Liquid Beverages are near double-digit. The Milo and Nespresso Billionaire Brands, are double-digit and Nescafé is high single-digit. Perhaps you might be interested by the 2 of the overlooked Nescafé businesses. First is Nescafé ready-to-drink. This is doing extremely well in emerging markets such as China. Second is the legacy Nescafé large can business in Nestlé Professional. This is growing near double-digit. Nescafé Dolce Gusto meanwhile is now the #1 coffee system in Europe in the retail channel. Nespresso is, of course, the overall market leader. Also it is small but Special Tea by Nestlé available in France and Switzerland has been rolled out into 5 new countries in Europe, Germany, Belgium, Austria, the Netherlands and Luxembourg.

Dairy and ice cream is mid-single-digit. In dairy, our adult premium milks are performing extremely well, as their benefit platforms resonate clearly with consumers.

The family cereals businesses brands, such as Golden Morn, are also growing rapidly. Our ability also to support our PPP dairy range with claims is also a clear differentiator, enhancing our nutritional profile within the category.

In ice cream, our global cone business has continued to perform well. So our local adaptations, such as cups in Greece, and international innovations like peelable ice cream. Peelable is now in Europe and in the Americas, as well as in Zone AOA where it was created and is now available in various flavors.

Prepared Dishes & Cooking Aids is growing slightly, having had a small increase in pricing in the third quarter. The ambient business, generally Maggi, has continued to grow double digit in AOA, and I've already touched on some of the key markets. This is despite a sharp slowdown in the big Central/West Africa region, which was lapping the period in 2011 where it had strong growth following the war in Côte d'Ivoire. The European market is tough, though interesting is the continued success of introduction of the Maggi brand in the U.K., as part of our international rollout of the Juicy Roasting concept.

I have discussed the U.S. frozen business, perhaps it is just worth reminding you that we took a decision to reduce our level of promotional activity in the start the year. We knew this would impact our growth and so it is proven but it will also improve the economics of the category for us, particularly as we enhance product loyalty, drive innovation and restore growth to the category.

I've already talked about confectionery. The quarter was impacted by the changed shipping pattern in Brazil, which is our biggest confectionery market, but growth picked up pace in Russia, the U.K. and Japan.

PetCare delivered 7.8% organic growth in the 9 months. We grew share in all major regions and all major segments. Growth in emerging markets continued to be strong, driven by double-digit growth in Latin America and in Central and Eastern Europe. The North American market was weak, growing about 2%, but we continued to outpace category growth, driven by good performances in cat food and dry dog. Innovations included Beneful Baked Delights, a new line of baked dog treats and Fancy Feast Morning Medleys. In addition, Be Happy, our new mainstream dry brand was launched within the mass and grocery channels targeted at value-conscious consumers.

In Europe, Felix, Purina ONE, dry cat and Pro Plan all delivered strong results. In addition, Felix Party Mix cat snacks has now been launched in 10 markets and is gaining market share. In Russia, we are also seeing share gains helped by the Felix Wet Cat single-serve rollout.

That concludes my presentation. As I think is clear from my speech, Q3 is not a good guide to Q4. A range of things from the Brazilian Christmas supply to the missing trading day in Europe, to the pickup in the North American business to some one-offs in AOA point to Q3 being the year's weakest quarter. Importantly, with a trend in pricing reflecting an easing in a number of raw material costs, our real internal growth is solid and even improving in some areas. In conclusion, therefore, we are confirming our guidance for the full year. Thank you for your attention, and let's now open up for discussion. I'll pass the call over to Roanne, the operator. Thank you, Roanne.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Warren Ackerman from Société Générale.

Warren Ackerman - Societe Generale Cross Asset Research

Roddy, it's Warren Ackerman here at Soc Gen. Can I go back to the one-offs you mentioned in Zone AOA? You obviously talked about flat in Philippines, Iran, Pakistan, Egypt. If you had to aggregate all those issues, what drag would there have been on growth? I know you probably haven't work it out, but just wondering what would be your best estimate, because you said that Q3 Zone AOA is not a good guide to Q4. Just wondering, which of those issues do you think will not reoccur in Q4 compared to Q3? And then is there any reason to think that the Q4 Zone AOA growth won't go back to sort of double-digit growth that we saw in the first half? So what I'm really trying to ask, Roddy, is bigger picture, can you confirm that there's no underlying slowdown in your emerging market business?

Roddy Child-Villiers

Thanks, Warren. Sure. So I don't have a sort of a basis point impact number for the one-offs in Zone AOA. But I think if you look at the one-offs in the group, including the European trading day and everything else, it's certainly north of 100 basis points. In the Zone, in particular, I mean, I think those of you who listened to the press conference will also have heard Nandu asking a similar question from one of the media and he was expressing his confidence that the Zone will bounce back in Q4 and, indeed, next year as well. Now it's clearly, and we didn't call Zone AOA Zone CNN for no good reason and every quarter has issues and so to strip out the particular issues of this quarter, I think, is difficult. But it is clear talking to the Zone that they're feeling is that it was extremely impactful. If I look across the -- all the markets, it is evident that there is a broad slowdown of, maybe 100, 150 basis points across the different markets, emerging markets, Asia and Japan improved. And the exception is Africa that was more like a 500 basis point dip for the 9 months relative to the half year. And that really is a result of central west Africa region and the Côte d'Ivoire, comparative from the prior year. So that's a pretty big move in itself. So I mean that's a bit more depth for you, but I haven't got a precise number.

Warren Ackerman - Societe Generale Cross Asset Research

Okay. So Roddy, you said -- so you said north of 100 basis points. So can I interpret that as if I kind of look at the Q3 organic growth in isolation, which was around 5%, that would kind of in underlying terms sort of be slightly above the 6%, is that what you're saying?

Roddy Child-Villiers

Well, what I said was the north of 100 basis points is for the group as a whole, including the European Zone. I haven't worked out a number from AOA. But I think the AOA impact is probably bigger than that, if you think about 500 basis points in Africa.

Warren Ackerman - Societe Generale Cross Asset Research

Okay. And I'm sorry, Roddy, just on this 100 to 150 basis points slowdown in emerging market growth. What would that go from and to then in terms of the absolute percentages do you think, roughly?

Roddy Child-Villiers

Well, I mean, we are still slightly over double digit for emerging markets in the Zone. So it's gone from the very low teens to just below the low teens.

Operator

The next question comes from David Hayes from Nomura.

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

Just a couple of quick questions. Just to follow up on the AOA discussion in terms of the one-offs and sort of just taking the point about the not being there. But I guess, some of them may well reverse in the fourth quarter in terms of catch-ups, whether you can talk about, which ones you've mentioned where you actually see a benefit in the fourth quarter because it's just a lag effectively? And then also in terms of Europe, we heard from one of your competitors yesterday that since September, particularly in Southern Europe, things have got a little bit worse partly around Spain, I guess, with the VAT rise. I just wonder whether you would say that you saw that impact, or whether you think that may affect that PIGS dynamic in the fourth quarter as well?

Roddy Child-Villiers

Thanks, David and thank you, Warren, for your kind welcome back. AOA, I mean, I think in Africa, it's -- Africa is cycling a quarter of issues, so that's a clear result of something that should bounce back a bit. Elections that I have mentioned have happened, so hopefully that will bounce back. We're back in operations in the Philippines. We're back in operation in Pakistan. Those are very clearly incidents related only to the quarter. Now we're never going to make the sales we lost. But it doesn't mean we won't see growth coming back in the fourth quarter. So I think a lot of those issues are very specific to the third quarter only. In the Portugal, Greece, Spain, the PIGS, we saw a slight slowdown in the 9 months relative to the first half in Spain. And we're consistent with our competitor in that comment. But we're not -- I mean we are not seeing dramatically negative numbers in this country -- in these countries. You see -- we published a number for you for the PIGS, so you saw it. And in fact, Greece is 4% positive, which is the smaller of the -- smallest of the 4 countries but nonetheless, it's positive. In Spain, a highlight there is coffee, which is doing well, curiously Dolce Gusto, as well as doing well in Spain despite being a very premium offer. I know also that the Nestle Health Science business is struggling a bit in Spain because of the reimbursement changes that have happened there. And I think that's also a consistent message from what you've heard already this reporting season. So that would be my comment on Spain.

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

If I could just be cheeky and just do one follow-up on Nespresso. I mean, obviously, you give these kind of broader sort of growth levels. I mean taking those as numbers, if you like, you may conclude that the third quarter growth would have slowed to around 6%, 7% on the basis of saying high double-digit in the first half, now double-digit. Is that the kind of thinking that we should have, or is that just a sort of nuance of the definitions and actually third quarter also was double-digit growth for Nespresso?

Roddy Child-Villiers

That's all right, David. No, that would be pessimistic on Nespresso. The slowdown in other is more due to the joint ventures than it is to the Nespresso or Professional or Health Sciences.

Operator

The next question comes from Alain Oberhuber from MainFirst.

Alain-Sebastian Oberhuber - MainFirst Bank AG, Research Division

Roddy, Alain Oberhuber from MainFirst. Two questions. First question is about Germany. Could you elaborate a little bit more on the German development, which practically were weak which were good and what we could expect the second or for the last call? And the other question is also about Europe. Excluding this 1 day weak period you had, what would have been the underlying growth there? Would that be similar to Q2 for Europe?

Roddy Child-Villiers

Thanks, Alain. Basically, Germany was weak, more or less, across the board. We are not -- we are very focused on ensuring that we are achieving value with our retailers, and we are not willing to be overly promotional in that market. And that has impacted our growth across, basically, all the categories. The -- I mean, I think you can work out the impact of a trading day in Europe. I mean it's 1 day out of 3 months, so it's a relatively straightforward piece of math for you to do, I think.

Operator

The next question is from Jon Cox from Kepler.

Jon Cox - Kepler Capital Markets, Research Division

It's actually Kepler Capital Markets, soon to be Kepler Cheuvreux. I have a couple of questions for you. Just on the commodities side of things. Basically, you seem to be alluding to the fact that there actually could be a little bit better tailwinds in the latter part of the year than maybe you implied in the first half. That's just the first question. Just on the -- just second question. I know you're probably a bit bored of talking about Nespresso. I think Wan Ling alluded to the fact that there could be some sort of security-type innovations coming through with Nespresso. I'm just wondering if you have any sort of time frame, should we be expecting a machine with a chip reader anytime soon? You alluded to a couple of new machines being launched. Now I'm just wondering on the sort of the time frame of some ways to sort of block copycats other than legal measures?

Roddy Child-Villiers

Thanks, Jon. I think, I mean if you look at our guidance of the first half, we already talked there about input cost easing in the second half. So this is not a piece of a new guidance. It's the same wording we used at the first half that we expected input costs to ease in the second half of the year. And I guess the only changes really to input costs that are meaningful for us are actually probably more on the less good news side than the good news side in that we've seen input cost pressure a little bit in Nutrition and also in PetCare as well, with the grains going up. Nespresso, I didn't hear the Wan Ling comment, so I'm not aware of what she said. But in terms of chips, all I know about chips is we have in the boutique in France, we're using the RFID chip in the one of the boutiques, which is something new that we're doing to get a better feel for consumer behavior in the boutique. But I don't know about anything we're doing around security on machines and anyway, I wouldn't really want to talk about coming innovations. The 2 machines that I talked about in my speech that we've launched are already out. One is the U and one is the Maestria machine but they're already out -- they're already on the market.

Operator

The next question comes from Eileen Khoo from Morgan Stanley.

Eileen Khoo - Morgan Stanley, Research Division

Eileen Khoo here from Morgan Stanley. I just had a very quick question on pricing, actually. So it looks like pricing this region or the other categories, apart from Nutrition where it seemed to be really strong, almost 7%, could you give us some color on this? And can maybe just comment, in general, on pricing, given the outlook for input costs, were there actually any price reductions in the third quarter, or was it just a lower pass-through effect? And what should we expect for the remaining of the year?

Roddy Child-Villiers

Thanks, Eileen. I mean clearly, the big impact on our reported pricing is that the pricing we took in 2011 is, obviously, now falling out of the numbers; effectively it's rollover pricing disappearing. Then when you look at individual categories, you clearly have categories where either we've increased promotions or we've adjusted prices. An example of that would be for example, soluble coffee in Russia. And I don't know whether you know but we have a fairly standard price gap between our superpremium Nescafé and the premium Nescafé. And that's pretty standard across the world. In Russia, however, the price gap was a lot bigger than anywhere else. And we've, effectively, brought our price gap down by lowering the price of the superpremium Nescafé. And that's clearly helping us to drive growth in that market in Russia, in that category in Russia. So that would be an example where we have adjusted pricing. Beyond that, I mean, as you know, pricing decisions are taken locally, and I'm not surprised to see the pricing coming off because apart from the rollover effect, we clearly have less input cost pressure this year than last year and, therefore, less need to take pricing. As you say, Nutrition is going up also. PetCare, as I just mentioned, has got some raw material pressure and they've taken pricing so there are places where we're taking pricing but broadly, there's not much pricing we've taken this year.

Operator

The next question comes from Robert Waldschmidt.

Robert Waldschmidt - BofA Merrill Lynch, Research Division

Roddy, my question relates to the Americas region, in particular in North America, where it seems like we're seeing a little bit of signs of improvement, albeit perhaps at increased price, or sorry, reduced price or promotional activity. Can you just give us a flavor in terms of how you see North America, as a whole, in Q4 beyond just the frozen area?

Roddy Child-Villiers

Sure. First of all, I mean if one looks at market shares with the exception of Waters and Nutrition, all our shares are either up or they're on an improving trend from having been negative. So broad based, our share performance is improving. The reason for our weakness in the water market share, I've already touched on, which basically is that we've taken pricing private label supplies are locked in on their contracts, contract pricing, and in a somewhat price-sensitive category we are losing share. But clearly, we are prioritizing the bottom line. Looking at the categories individually, I touched on these in my call, but looking at the Frozen Aisle, first of all, the category remains weak, and I mean you can put that into Frozen Aisle, pizza, frozen entrées, Lean Cuisine, even ice cream. I mean the categories are weak. We are seeing improving trends. We also have -- you asked about Q4 and next year, we also have some big innovations in the frozen meals and pizza businesses coming through end of this year, into next year. They've tested very, very well, so we're excited about that and we need some innovation to bring some growth and consumer excitement back into those categories. We're also working on broad -- on a broad communication strategy, not product-specific, but category-specific, addressing perceptions about the relative healthiness of frozen against fresh and hopefully, that will also start to impact the categories positively as well. PetCare is doing well in terms of market share. That's true, by the way, across the world and actually even in Germany from the earlier question, PetCare is doing well in Germany as well, and probably the exception there. But in North America, PetCare is performing well across all categories relative to the market. The weak category and the reason for the slight dip in PetCare in North America in the third quarter is the wet dog category, which is weak as a category and also weak for us. Chocolate is, obviously, is a small market share business for us but it's doing well. You know the story there, Skinny Cow continues to perform well. I touched already on soluble coffee, not much more to say there, both the Hispanic business, Clásico and the newly launched premium Memento doing very well. Nestlé Professional is a standout, I think, in North America. I mean for an out-of-home business in North America to be growing double-digit is pretty extraordinary, and all credit to them for doing that. Also, Health Sciences is growing high-single digit in North America. So it's broadly a very good story. Nutrition, I mentioned the birth rate issue, but again, within the context that we're operating, we're doing okay, and the recent innovations I mentioned on my -- in my speech are certainly driving growth already and will continue to do so. Does that answer the question, Robert?

Robert Waldschmidt - BofA Merrill Lynch, Research Division

Yes, that's very helpful.

Operator

The next question comes from Patrik Schwendimann from Switzerland.

Patrik Schwendimann - Zurcher Kantonalbank AG, Research Division

Patrik Schwendimann from the Kantonalbank. Firstly, again on the U.S., did I get this right that overall you say, you would expect some more improvements in the quarter 4 in the U.S. compared to quarter 3? And secondly, regarding input cost, could you give us a first idea what your expectations are for 2013?

Roddy Child-Villiers

Patrik, thank you. Yes, we expect the U.S. to be better in Q4 than Q3. On input costs for next year, I would rather wait until February to give you the guidance. As I always say, it's hard to guide in input costs and the later we leave it, the more likely we are to be accurate. So we'll do that in February.

Operator

The next question comes from Jeremy Fialko from Redburn.

Jeremy Fialko - Redburn Partners LLP, Research Division

Jeremy Fialko, Redburn here. A couple of things from me. First of all, on the press conference, I think Nandu talked about some trading issues in Australia. So if you could talk about what they were, what the impact might have been in Q3, and whether you see some resolution of those in Q4? And the second thing is that the FX has now turned positive for you, which is a bit of an unusual thing. Can you say whether that is going to have a positive effect on your margins this year and what that might be? Obviously, I know that's independent of the guidance you're giving but just some sort of indication would still be helpful.

Roddy Child-Villiers

Thanks, Jeremy. In Australia, I mean, I didn't know if you know the Australian retail market, but I mean there are basically 2 large food retailers, and it's somewhat like the U.K. market in terms of the level of competitive activity between those 2 players. Also a number of the managers down there come out of the U.K. market. So there are quite some similarities between Australia and the U.K. for us, food manufacturers. And we have had some tough negotiations with those players. The negotiations are resolved and hopefully, therefore, that's another relative positive for Q4 over Q3. In terms of the FX, I mean, you're right. It's certainly relatively unusual in recent times for us to have positive FX. I mean, I think you can work it out for yourself. I mean, you know that we have different levels of profitability in different markets. You know to what extent -- you know which markets are higher margin and lower margin. And you know what the currencies have done. Our results are always characterized by a mix effect. Whether that mix effect will be different in 2012 than 2011, I don't know. But it doesn't change our guidance, which obviously is improved margin in constant currency.

Operator

The next question is from Pedro Gil from Santander.

Pedro Gil - Grupo Santander, Research Division

My question has been covered already.

Operator

We have another question from Alain Oberhuber from MainFirst.

Alain-Sebastian Oberhuber - MainFirst Bank AG, Research Division

Just, Roddy, coming back. You mentioned a couple of specific issues why AOA growth was lower. But you also mention in your presentation that the emerging market growth was at 11.5% almost similar to the previous quarters. Could you help me on that, why are -- emerging market was still stated to be strong, whereas in AOA it was slower?

Roddy Child-Villiers

Yes, we had a good improvement in Eastern Europe. LatAm was fundamentally unchanged. And I think the globally managed businesses also contributed. Nutrition contributed positively to the AOA result so -- which obviously is not in the Zone number. Water has continued to perform well. But I think the big -- I mean the big swing factor probably was Eastern Europe and Nutrition.

Operator

There are no more questions in the queue. I will hand you back to Mr. Child-Villiers. Thank you.

Roddy Child-Villiers

Well, thank you. First of all thank you very much, everybody, for making – well, for your very kind remarks. But also thank you for joining us today and for your questions. As I said, the Q3 growth performance will prove to be the weakest of the year, and we reconfirm our guidance for the full year unchanged from February. Thank you, again. It's also very nice to be back, and I look forward talking to you soon. Goodbye.

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Source: Nestlé S.A., Nine Months 2012 Sales/ Trading Statement Call, Oct 18, 2012
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