Steffen Kindler - Head, IR François Roger - Chief Financial Officer

Eileen Khoo - Morgan Stanley Warren Ackerman - Societe Generale Alain Oberhuber - MainFirst Patrik Schwendimann - Zürcher Kantonalbank Celine Pannuti - JP Morgan Jon Cox - Kepler Jean-Philippe Bertschy - Vontobel Gerry Gallagher - Deutsche Bank John Revill - Wall Street Journal

Good morning, everyone. And welcome to Nestlé's Half-Year Results Conference and Webcast. My name is Steffen Kindler. I'm the Head of Investor Relations and I'm here with François Roger, the Nestlé CFO. As usual, we will start the call with a presentation and then open up for Q&A. [Operator Instructions]. I will take the Safe Harbor as read. And with that, I now hand over to François Roger. François Roger: Good morning, everyone. Before I start, let me introduce myself. I'm François-Xavier Roger, Nestlé’s Chief Financial Officer since July 1st this year. It's my great pleasure and privilege to be presenting to you for my first time Nestlé's half-year results followed by a Q&A. In the first half of year, we had solid results in spite of difficult circumstances. We reached sales of CHF 42.8 billion with organic growth of 4.5%. Growth was attractive across all geographies. These results are consistent with Nestlé's strong track record in the last couple of years and they are fully in line with our expectations. Our real internal growth reached 1.7%. Wherever necessary, we have taken price increases either in response to input cost inflation or as a result of some significant currency depreciation we have seen. On a constant currency basis, we saw our trading operating profit increase by 20 basis points and our underlying earnings per share, in constant currencies, are up by 7.3%. The Group generated free cash flow of CHF 2.4 billion. Now let's look at the details behind our performance by geography and by category. Here, we summarize the performance in our three geographies. This includes the sales of our three zones as well as our globally managed businesses. Organic growth was 6.6% in Zone AMS; 3.4% in EMENA and 2.2% in AOA. Real internal growth was positive in the three zones at 1.7% in Zone AMS and 2.4% in EMENA. AOA finished the first half at 0.6%, recovering from the slight negative start that we had at the beginning of the year. I will explain these results in more detail in the coming slides, as we discuss the zones and globally managed businesses. Let's now look at the split between developed and emerging markets. Developed markets contributed 56% of the Group sales and emerging markets 44%, which is quite consistent with the split that we had last year. Looking at developed markets, organic growth was 2.2% for the first half. The positive momentum that we have seen in developed markets over the last two years has continued. We have shown our ability to sustain growth in these mature markets, despite a challenging economic environment. This has been achieved through a combination of innovation, premiumization, and portfolio management. I believe that our positive RIG also proves that we have the right strategy as well as the capability to execute. Organic growth in emerging markets is still strong, reaching 7.3% in the first half. While this is a lower pace than what have seen historically, it is an encouraging result given the economic and political volatility in some countries. Now, let's look in more detail at our zones on globally managed businesses starting with Zone AMS where we delivered sales of CHF 12 billion, an organic growth of 5.2% and real internal growth of 0.1%. Organic growth for the Zone was solid, driven by improvement in several key markets. RIG also recovered from the slow start at the beginning of the year, coming in slightly positive, thanks to improvements in many markets and especially in Latin America. Drilling into key markets and starting with North America, organic growth showed gradual improvement. First, I’ll cover our frozen business. As you know, we have been taking actions to restore growth in that franchise, including product renovation and improving all elements of the marketing mix. We expect gradual improvement throughout the year. And although growth was still soft in the first half, the trends are improving. We are seeing positive early signs from the launch of the new Lean Cuisine Marketplace and Stouffer's Fit Kitchen lines, which are performing in line with our expectations. They were rolled out in the second quarter of the year. And we will add communication support in the third quarter. In frozen snacks, innovation such as Hot Pockets, Snack Bites did well and contributed to the good organic growth of Hot Pockets, also helped by favorable comps. Looking at the rest of our North American business, many of the brands that we highlighted during the Q1 conference, continued to do well. Coffee-mate creamer sustained a good performance, helped by the entry into new distribution channels and innovation, like Natural Bliss and Coffee-mate 2Go. Ice cream had a solid performance, as we entered the summer season with Haagen-Dazs, Outshine Fruit Bars and Drumstick growing nicely. In pet care, highlights were Fancy Feast cat food, Pro Plan for dogs and cat litter. Our innovation capabilities in pet care continued to be a key driver. However, the Beneful case impacted our sales momentum in H1. Moving on to Latin America now, despite the pressure of the challenging economic environment, we achieved good broad-based organic growth, fully in line with our expectations. Price increases were implemented to offset inflationary pressures and currency depreciation. Mexico did well with good performance across most categories after difficult 2014. Brazil was soft but improved, driven by investments behind our growth platform, I will name a few: Nescau; Kit Kat; Nescafé Dolce Gusto; Nesfit; and Passatempo. The majority of our smaller markets across Latin America also performed well. Looking now at Purina, our Latin American business continued to be a very good growth driver. And moreover, in -- additional production capacity in both Mexico and Argentina will help us to supply the strong demand, as we had a little bit of difficulty to supply demand -- to meet demand in the last couple of months. And finally, Nescafé Dolce Gusto continues its good momentum across Latin America. The Zone's trade operating profit margin increased by 10 basis points. This was made up of a few factors: Operational improvements, to start with, had a positive effect; the optimization of price points had a positive impact as well in some businesses in North America. Combined, these factors partially offset the higher restructuring costs. Next is Zone EMENA. Sales were CHF 7.9 billion and growth was good, both organically at 3.8% and with RIG at 2%. Like we saw at the beginning of the year, all three regions contributed positively to the growth, Western Europe; Eastern Europe; as well as Middle East and North Africa. The environment across the Zone remains volatile, with inflationary conditions in certain European markets -- Eastern European markets, leading to price increases and volume pressure. On the other hand, in many parts of Western Europe, our organic growth was mainly driven by volume, as pricing was negative in a deflationary environment. Additionally, political and economic uncertainties in parts of Eastern Europe and Middle East were also challenging. In that context, EMENA's results were strong in the first half of the year. They prove that our strategy and the investment that we make behind innovation, behind renovation and premiumization, pay off in spite of the macro environment. Looking at the growth drivers by category, many of the positives we mentioned in our Q1 conference continued their momentum. Pet care remained a highlight across Europe, driven by Felix, Gourmet and ONE. Nescafé Dolce Gusto grew well across the Zone and continues to drive a positive momentum in many of the key markets. Soluble coffee also did very well in most markets. And finally, frozen pizza sustained its strong contribution, supported by successful innovation and supported by our strong brands, Buitoni and Wagner. Looking at the dynamics by country, France; Benelux; and the Nordics did well. Germany; UK; and Italy were more challenging. Switzerland was impacted by the strength of the Swiss franc and the business in Greece also continues to be challenged, given the political and economic conditions. In Russia, we were able to adapt our prices to protect our competitiveness in an inflationary environment. Ukraine also continued to perform well, with very good growth in most categories. There were also solid performances from the Adriatic region, Bulgaria and Hungary. And finally, in the Middle East and North Africa, we delivered solid growth. Despite continued challenges in Iraq and Yemen, we had a solid performance in the other Middle East countries as well as in Turkey. Coffee and confectionary sustained the good performance we had in the first three months. Trading operating profit was up 80 basis points. Input costs for the Zone were favorable and especially dairy. Product mix and fixed cost control also had a positive impact, which allowed for increased investment in consumer facing marketing spend. Now turning to Zone AOA, sales reached CHF 7.1 billion and 0.8% of organic growth. RIG remained in negative territory at minus 0.8%. While performance is still soft, this improvement shows the zone is gradually recovering in line with our plans. We saw strong results in developed markets and gradual improvements in emerging markets. The results of zone AOA are however impacted by the issues around Maggi noodles in India. The impact of these events on organic growth and on RIG were approximately 10 to 20 basis points at a Group level and about 100 to 120 basis points at zone AOA level. The cost of the withdrawal was CHF 66 million in H1. As we have said before, we are fully engaged with the authorities to bring back the product on shelves. The impact of this case will continue until production and sales resume. Let's move to China now. The overall economic situation is difficult and I'm sure that you have read and seen that as well. That also impacts our business there. Nevertheless, we continued our efforts to update our portfolio in line with fast changing consumer expectations. The process of the turnaround is on track and the business has shown some encouraging results with more categories showing signs of initial improvement. We did say however that the recovery will be a continuous process throughout 2015. For H1, in China, ambient dairy; confectionary; and soluble coffee all contributed to growth. Nescafé ready-to-drink beverages delivered double-digit growth and ambient culinary made a solid contribution. Moving to Africa and more specifically to Sub-Saharan Africa, we returned to positive territory after a difficult start of the year. You may remember from our three months earnings call that we chose to secure receivables given the volatile trading condition in the region and that it had impacted our sales in Q1. In the last three months, the region recovered well, driven by Central West Africa and particularly Nigeria. Ambient dairy, culinary and Nescafé all contributed. The majority of our other emerging markets across AOA performed well. Moving to developed markets within AOA, Japan continued too with solid growth, helped by the launch of coffee innovation such as the premium ready-to-drink Nescafé Gold. The business in Oceania continues to move towards moderate growth after the difficult 2014 in an extremely competitive trading environment. Meanwhile, Kit Kat sustained its performance as a growth driver in both Japan and Oceania. The trading operating profit was 18.2%, down 60 basis points. The Zone's margin was significantly impacted by the Maggi withdrawal and the product destruction cost. Moving on to our globally managed businesses and I will start with Nestlé Waters. The growth for the first half was broad-based across geographies and across brands. As the consumer demand shifts towards healthier beverage options and safe drinking water, we continue to see encouraging category momentum. Sales reached CHF 3.8 billion with an organic growth of 5.3% and a RIG of 5.6%. In developed markets, we had mid-single-digit growth in North America, led by Nestlé Pure Life and regional brands, especially Poland Spring and Ozarka. In Europe, the UK finished strong helped by its local brand Buxton. Germany and Italy were also solid. In emerging markets, we achieved double-digit growth led by our local brands; Nestlé Pure Life was strong and our local brands also continued to do well. I will just name a few: Erikli in Turkey; Al Manhal in the Middle East; Yunnan Shan Quan in China; La Vie in Vietnam and Eco de los Andes in Argentina. And finally, our international sparkling waters San Pellegrino and Perrier continued to be the highlights. Trading operating profit increased by 110 basis points to 11.5%. While we did increase our consumer marketing investments, this was more than offset by rigorous cost management, lower PET cost and leverage from sales volume increase. Looking now at Nestlé Nutrition, with 3.9% organic growth and 1.3% RIG, our business delivered broad-based growth across geographies and brands. This growth was comparatively lower than in the past. High comparatives in Asia and volatility in several markets in the Middle East slowed down our overall progress. Wyeth Infant Nutrition continued to do very well, particularly in China while our super premium brand Illuma sustained its strong performance and accelerated its e-commerce presence and geographic expansion. From an e-commerce standpoint, our focus in China has been on the B2C channel where we have a strong position. In terms of other emerging markets, there were solid performances in South Asia region, Mexico and Philippines, thanks to innovation on cheese under the Nido, Nan and Cerelac brands. In the Middle East, we had a difficult first half due to volatile political circumstances in countries such as Iraq, Syria and Yemen. In North America, infant and cereals sustained good growth, supported by innovations in the Gerber range. Meals and drinks also contributed with new products in puree and organic pouches. Trading operating profit rose 140 basis points in the first half; lower dairy costs had a favorable impact as did our efforts to control structural cost. Portfolio rationalization, particularly in the U.S. and in Western Europe also had a positive impact. This allowed us to increase the support behind our brands while also increasing the profitability. Finally, let me move to our other businesses, which includes Nestlé Professional, Nespresso, Nestlé Health Science, and Nestlé Skin Health. Together these businesses achieved sales of CHF 6.8 billion, with an organic growth of 8.1% and a RIG of 4.9%. In the first half of 2015, Nestlé Professional regained its growth momentum. The business benefits from its portfolio restructuring and benefits as well from investment in our new growth platforms. It had to balance growth contribution coming from both the food and the beverage business lines. Emerging markets were the main growth driver, with LatAm, Asia and Eastern Europe being highlights. Developed markets remained slower due to the continued challenging consumer environments. Next is Nespresso whose growth continued to be accretive to the Group. We are pleased with the performance despite growing competition, especially in Europe. Nespresso drives the premium portion coffee segment and continues to differentiate from its competitors via quality, innovation and direct access to the consumer via our boutiques and e-commerce platform. This year, we launched several limited edition coffees. Again, the brand's global presence continued to expand, with 20 new boutiques opened worldwide and with the roll-out of the Nespresso Cube. In terms geographies, Zone AMS was a good growth driver, helped by the VertuoLine system in the U.S. Nestlé Health Science also delivered good broad-based growth. Performance was strong in the consumer care franchise, supported by the successful launch of Boost Compact in the U.S. The highlights we spoke about during our three-month conference, such as Meritene, Vitaflo and Pamlab, continued to do very well. And lastly, Nestlé Skin Health finished the first half of the year with a very good performance, continuing its role as a growth driver for the Group. All three segments were helped by innovation, prescription, eye aesthetics and correctives, as well as self-medication. The trading operation profit for the other businesses was down by 250 basis points at 15.8%. Higher coffee prices put some pressure on Nestlé Professional as well as on Nespresso margins. In addition, the consolidation of Nestlé Skin Health was dilutive in H1, as both sales and profitability are weighted to the second half of the year. As you’ll recall from our full year conference back in February, we mentioned that this business is seasonal. Next, we look at our business performance across our product categories. I have explained much of this already when I talked about the zones. Powdered and liquid beverages had mid single-digit organic growth driven by coffee and more specifically coffee systems. RIG was moderate, following the impact of the coffee pricing taken from the second half of 2014. As a consequence, the margin decline of 130 basis points was mainly due to net higher input costs. I will not discuss water, as we already covered it a few slides ago. Milk product and ice creams were still slow but showed improvements in the first three months. Ambient dairy continues to be affected by soft growth in China and Brazil, but as mentioned in our review of the zones, we saw gradual improvement, lately. We benefited from lower dairy cost and some overhead cost improvements and we reinvested some of this in consumer marketing, while managing to increase our margin by 160 basis points. Nutrition and health science continued to benefit from the good performance of Nestlé Health Science and Nestlé Skin Health. The margin decline of 160 basis points was mainly due to the consolidation of Galderma, as I mentioned previously. Note that we expect this effect to normalize from this period onwards. Looking now at prepared dishes and cooking aids, we had some positive trends in U.S. frozen. However, the Indian noodle case had a significant impact on both growth and margins, and affected trading operating profit. Confectionary experienced strong organic growth, driven by pricing in emerging markets. Kit Kat sustained its good momentum in most countries. Margin improvement of 50-basis-point was a consequence of price increases along with favorable input cost with the exception of cocoa. Pet care continued with good organic growth while RIG was affected by lower Beneful sales and capacity constraints in Latin America, as I mentioned earlier. The 110 basis points margin improvement was helped by the leverage of good growth and cost discipline. That wraps up our business review and I propose that we now move at the Group overall trading operating profit in the first six months. As you can see, it is flat on a reported basis at 15%, and plus 20 basis points in constant currencies. The most notable changes were a decrease in cost of goods sold and an increase in marketing and administration expenses. Cost of goods sold decreased by 160 basis points due to the continued effort to drive efficiencies in operations along with new neutral input cost. The reduction was also driven by mix effects and most notably, by the consolidation of Nestlé Skin Health whose cost of goods is lower than the average of Nestlé. Distribution cost decreased by 10 basis points, mainly driven by lower fuel cost. Marketing and administration expenses rose by 150 basis points. Consumer facing marketing spend increased by 17.3% in constant currencies mainly to support growth. The increase in research and development reflects our investment in innovation for the long-term development of the company to support our nutrition, health and wellness strategy. And finally, please note the increase in net other trading items that was largely due to the Indian noodle case. Next is income statement from trading operating profit to net profit. Operating items increased 20 basis points. This was partially due to a net loss on disposals in the first half of 2015 compared with a gain from disposals last year. Net financial are nearly unchanged versus the same period of last year; the slight increase is caused by lower financial income. Taxes were slightly favorable due to one-off items. Income from associates was down due to our reduced shareholding in L'Oreal combined with the impact of the Swiss franc appreciation versus the euro. Finally, our basic EPS for the first half was down 1.4% in Swiss franc but underlying EPS rose 7.3% in constant currencies. The Group free cash flow finished at CHF 2.4 billion for the first half. It was impacted by several factors. Operating profit was lower due to the appreciation of the Swiss franc; in addition, we had lower dividend income from L'Oreal due to our reduced shareholding as well as an unfavorable impact from the timing of tax payments. These elements more than offset the favorable evolution in working capital. I would like to highlight that we continue to focus on improving working capital in all dimensions. As a percentage of sales, average working capital decreased by 50 basis points versus the same period of the prior year. Let me now summarize the first half of the year. Once again, our results are broad-based, sustainable, and consistent; they are in line with our expectations. They were achieved despite some difficult circumstances in the global operating environment and some headwinds. After six weeks in the job, I've been really impressed by the capacity of Nestlé to deliver on more than one dimension, both short and long-term, across geographies, both in terms of strategy and execution and to work on, both the P&L as well as the balance sheet, and the cash flow. The first half is in my opinion an excellent illustration of this unique capability. Let me just provide a few examples. We have delivered both top and bottom line. Growth was in developed and emerging markets and across all three zones. We have been able to drive efficiencies and we have been able to reinvest in the business in the form of consumer facing marketing activities as well as R&D. We improved operating performance and working capital. We saw good performances from zone EMENA; Nestlé Waters; Nestlé Health Science; Nestlé Skin Health; Nestlé Professional; pet care; and beverage systems. Our areas of focus, especially China and U.S. frozen, are showing early positive signs of improvement and we will stay really focused for the second half 2015. So, altogether, I believe that these results allow us to confirm the outlook for the full year and I'll repeat what the outlook is. We aim to achieve organic growth of around 5% with improvement in margins with improvement in underlying earnings per share in constant currencies as well as improvement in capital efficiency. That brings us to the end of the presentation. We will now open the lines for Q&A. A - Steffen Kindler: Thank you, François. [Operator Instructions]. Now, let's take the first question. It is Eileen Khoo from Morgan Stanley. Good morning, Eileen. Your question please?

Thanks for taking my questions; I've got two questions. So, the first is on coffee, particularly Dolce Gusto and Nespresso. It sounds like you're still achieving solid growth, which is impressive, given the challenges faced by some of your competitors, particularly in the U.S. Can you give us some color on what you think is driving your performance here? And then on the margins for this business, you mentioned margin pressure due to high coffee prices. Is this due to the competitive landscape becoming more intense? If you could give some color around that as well that would be great. And then the second question is maybe on Zone AMS. Can you tell us whether, both U.S. and LatAm had positive RIG and like for like and whether your U.S. frozen business is back to stability? And there was very strong pricing in the quarter as well at 6.3%. Can you talk about the drivers of this; is it purely due to LatAm and is this driven by hyperinflation at all? François Roger: I will answer the first question regarding the momentum that we keep enjoying with Dolce Gusto and Nespresso. Indeed we are pleased to see that we continue growing with these solutions. The growth is a little bit lower than what it was in the past but we continue to enjoy growth and with strong momentum in the Americas and in Asia and in AOA, which is very good. But still in Europe, thanks to premiumization, thanks to innovation as well, launching new, opening new boutiques and launching some new innovations allow us to continue to keep a strong momentum even in Europe. The margin indeed has been a little bit on the low side and actually the margin in coffee has decreased due to the increase of coffee prices which is a consequence of high coffee prices to start with combined with the hedging position that we have taken as well as foreign exchange. So that's what we can say about that. In AMS, indeed we had the benefit of some pricing, which was fairly strong during the first half of year. This is a consequence of pricing that we took in some categories; we just talked about coffee where we passed on to consumers some price increase in raw material that we had in coffee, combined with price increases that we put through in some emerging markets to reflect pressure coming from foreign exchange and depreciation of some currencies, more specifically in Latin America as far as AMS is concerned, but we find the same pressure in some countries in Eastern Europe for example. Steffen, do you want to add something?

Yes. You asked also on U.S. frozen, Eileen. Look, we have, as we said previously, we have reformulated the business. We addressed all elements of the marketing mix in the first quarter of this year. The products were rolled out in the second quarter, especially in Lean Cuisine and Stouffer's with the Fit Kitchen and Marketplace platforms. The first signs we're seeing are positive. We're happy with what we're seeing right now. We're adding communication in the third quarter. And that is hopefully to be updated in the nine months call. So right now, first signs are good; communication is going to come, so this is going to put another leverage on it; and then I'd to update in the nine-month how this really impacts results.

Okay. Thank you very much.

Alright. Gets us to Warren Ackerman from Societe Generale. Good morning, Warren. Please go ahead.

Two questions from me. The first one, could you just clarify your comments around accelerating developed market growth, which was one of the headlines? It's not that clear to me where the acceleration is coming from because it seems like the EMENA volume slowed in Q2 versus Q1. So if you could flesh out where that acceleration is coming from. And maybe tell us North America, the organic growth Q2 versus Q1, is that where it's coming from and how sustainable do you see it? And then just secondly on China, you gave us some nice color, but can you tell us what the organic growth was in China overall in the first half and specifically what Wyeth's organic growth was? It seems to me that some of the headwinds in China that you've had, like coffee and confectionary, seem to be improving. Interested to know why that's happening. And longer-term, is your ambition still to get Zone AOA back to high-single-digit growth? François Roger: Yes. Regarding the growth in developed markets, I will not comment on the quarter in itself. But if you look at the trend from 2013 to 2015 and we saw it in the first half of 2015, we clearly see an improvement of the growth, I'm talking OG, in developed markets, which happens both in North America as well as in Europe. So this is not, once again, my comment is not on the quarter itself, but if we look at the last two and a half years, there is clearly an improvement, which I see as something very positive because that means that we are not dependent on emerging markets. We are very, extremely positive about emerging markets, but that demonstrates the capability of Nestlé to grow both in emerging markets and in developed markets and we are not dependent on only one of the factors. Regarding China, we are experiencing an interesting growth. Actually, if you look at the last three months we were having mid-single-digit growth in China, which is good, which is satisfactory. And there, once again, we see an improvement, which we are very pleased with, post cleaning of some inventory issues. So we are pleased with that. That being said, I want to be careful. As you saw and as you read and as you heard over the last couple of days, there is a lot of volatility today in China. So we are satisfied with what we have seen and the turnaround that we see in China. That being said, we are very careful about the outlook, given the volatile trading environment. And AOA, I confirm absolutely that we have ambitions to grow further. This may take a little bit of time. We need to have a little bit more visibility maybe on some issues. China is one of the topics that I mentioned. India obviously is another one that will impact our future growth, but the ambition is clearly there.

And just to clarify, you say the improvement in developed markets in OG 2013 to 2015, would there also have been an improvement in RIG over that same period or is the improvement driven by pricing? François Roger: It's both, actually I don't think that it's limited only to volume or pricing; it's a combination of both. You have momentum that are quite different. I would say there is probably more volume growth in Europe and less pricing. Actually Europe is a little bit more in a deflationary environment while it is a little bit different in the U.S. where we have less RIG and more pricing. So it differs very much from one part to the other.

Thank you.

So next one is Alain Oberhuber from MainFirst. Good morning. Alain, please your question?

I have two questions. The first is regarding pricing. Pricing was really strong. In which product category was pricing much and how much was the mix in this pricing? And if you look into the future, could we expect a similar pricing for the next quarters? And the second question is about the ice cream business in North America you said that Haagen Dazs was doing well. That was also the case in Q2. But could you give us a little bit more insight about the other soft categories in ice cream in the U.S., if we could see now a turnaround in the mass market as well as in drier? François Roger: I will let Steffen take the second question but I will answer the first one on pricing. So, we had a pricing impact of 2.8% for the first half of 2015, which was driven by three factors. First, it is linked to pricing coming from input costs and mainly coffee, but we saw it as well in confectionary and culinary. As I mentioned earlier, we have this impact is coming as well from currency depreciation in emerging markets. There we are talking more specifically of Latin America and Eastern Europe as I mentioned earlier. And finally, in developed markets, as I said, we have more of a deflationary pressure, but we still passed on to consumer some pricing related to costs, to input costs, for example culinary in the U.S. and in Germany; you asked what is the level of visibility that we have on pricing for the coming months. We don't guide on pricing. Pricing is a local decision, which is much more related to competitive forces in a given market, so we don't provide any guidance on pricing. Steffen, do you want to take the second question?

Yes. Ice cream North America, we said we have good growth and we are also growing ahead of the category there. The different trends, super premium, as we said, is doing very, very well as well as the new products. There are yogurt bars, there's Drumstick, Butterfinger. Bulk and premium improved thanks to increased distribution. And of course we also benefited here from a product recall of a large competitor. So the improvement is really across the portfolio, in super premium, in Drumstick, in Outshine bars in all of these things; it's driven by our own innovation, renovation in the premium and in bulk certain advantage due to quality issues with a competitor.

Thank you very much.

Alright. That gets us to our next question with Patrik Schwendimann from Zürcher Kantonalbank. Good morning Patrick, please go ahead.

Regarding input costs you were mentioning that you had a neutral effect on margin in H1, also due to some hedging for costs here, for example. Is it a fair assumption to assume that for H2 you will have lower input costs? That's my first question. And second question, regarding your guidance for the organic growth for the full year of around 5%. In H1 you have 4.5%. You were mentioning some hopes of acceleration in frozen, some acceleration in China. And I guess also the summer weather in Europe is helping for categories like water, ice cream and sunscreen. So, would it be a fair assumption to say that you are expecting better organic growth in H2? François Roger: Regarding the input costs, indeed I confirm it was neutral net in H1 while it was we had some pressure in coffee and we benefited from lower pricing in dairy, for example. So obviously it impacted different categories in a different way. What I said earlier is that there are three factors contributing to the input cost in our P&L. One of them is obviously the price of commodities, but it is not reflected straight into our P&L because of the hedging, as I mentioned and because of the time price reach our P&L because of the inventory that we carry. It may take some time before we benefit or suffer from any benefit in terms of commodity prices. We don't guide in terms of commodity prices. That being said, the trend is maybe a little bit more positive for the second half that it could be for the first half but it's still difficult to say. And we expect it to be once again for the full year, basically flat in 2015 against 2014. Might be a little bit better in the second half but let's be careful there because there is volatility as well. You referred to the guidance for the full year. You mentioned some positives like this hot summer in Europe; there are other negatives as well. So, I mentioned China, we need to be cautious. We are indeed happy with the latest development that we saw with frozen food in the U.S. It's net-net, I think that we feel comfortable of maintaining our guidance around 5%. There are pluses and minuses. So, we are comfortable to reiterate our initial guidance of around 5%. I don't have any specific comment to make, if H2 will be better than H1.

4.5% for the full year would be also around 5%? François Roger: After that -- I don't know, Steffen, he way you handled it in the past. It would be on the lower end I would say. Is it a fair comment, Steffen?

Yes.

Thanks a lot.

Celine Pannuti from JP Morgan. Good morning, Celine.

My two questions, so maybe first one to continue on the outlook. You were mentioning that you expect margin to rise at constant currency for the year. I was wondering whether we should expect margin to rise reported in H2 given that maybe you will have a bit lower raw-mat. In fact also could you give me, in the gross margin expansion that you showed, there was an impact of the consolidation. What would have been gross margin performance excluding that impact, please? And then my second point is on nutrition. We've seen a deceleration and obviously some of your peers have mentioned pricing competition, I think that the U.S. as well is shaping up as being maybe competitive from a weak standpoint. I just wanted if you could elaborate of what kind of growth rate we should be expecting for that division in the second half of the year and if indeed the lower raw material prices are putting pressure on the total performance for the division. François Roger: I will take the first question and let Steffen answer to the second one again. On the first one, so the outlook once again we confirm around 5% and as we said 4.5% will be obviously at the lower end of what we expect to reach. There are positives, once again maybe marginal benefit from raw materials, but there are other factors. So, net-net, once again around 5% in light of all the items that we know of the future and of the business. You were asking a question regarding the improvement in margin. Indeed, we had an improvement of gross margin by about 150 basis points; part of it is linked to cost efficiencies, which is very positive. There was no impact as we said, coming from input cost. And there was an impact, which was fairly significant, from the consolidation of Galderma. So, we don't quantify it per se, but it is a fairly significant impact in the total and the rest of it is rather coming from input cost. The important thing as well, as you noted is that we have decided to reinvest most of these benefits and largely in marketing initiatives in order to support future growth. I think it makes a lot of sense. While we have kept part of it as well in order to improve the operating margin. And that's the reason why we have improved our trading operating margin by 20 basis points. Steffen, do you want to take the question on nutrition?

Yes, sure. So we think that our growth was broad-based, yet, as you see, it was comparatively a little lower than what you see in this division in the past years. We had more headwinds in some of the more volatile regions such as the Middle East and LatAm, and also we had little less tailwinds in growth markets, such as China. The emerging markets had solid growth, as I said, a little less than last year, but please keep in mind the comps in Asia were also really, really tough. Middle East is impacted by the political situation in Iraq and Yemen and LatAm helped with positive organic growth and pricing, Russia also. Developed market has a positive contribution. I want to point out North America where pouches, organic pouches and also cereals helped us a lot. As for the outlook, we would expect a slight pick-up for the rest of the year. But again, Nestlé Nutrition is one of our key businesses and they are going to contribute to the around 5% organic growth target for the end of the year.

Thank you.

Alright. That gets us to the next caller. That's Jon Cox from Kepler. Good morning, Jon.

Thanks Steffen and welcome to François-Xavier. Obviously you've timed it very well, with a decent set of figures on your release. A couple of questions for you, just to come back to that gross margin. It was clearly a beat and I think it took everyone by surprise. You say Galderma was a substantial part of that. Can you just remind us what the Galderma gross margin was previously? If not, when you say substantial, should we assume that the gross margin improvement is around two-thirds of that 150 basis points or so improvement from Galderma? And then just on the remaining third there, you seem to be saying actually input costs weren't helping at all, but obviously there is a contribution to the gross margin. Maybe you can just sort of put a bit of color on that. And then a second question really for François-Xavier. Just, you gave a bit of preamble on what you've been doing since you've come and what your focus will be, I wonder if you'd just elaborate a little bit more on that. You mentioned working capital. Previously I think Nestlé has always said you're never going to move to negative working capital unlike your peers. I'm wondering if you've sort of looked at that and actually maybe we could move to negative working capital. François Roger: Thanks Jon. On the Galderma side, when you mention a figure of two-thirds of the contribution of Galderma in the improvement of the gross margin, you are too high; so, it's lower than that. It is a significant contribution, but not up to two-thirds. Just want to mention one thing, is that this Nestlé Skin Health business has a different profile from a P&L point view. It's a little bit different from the classical food and beverages business insofar as it has a higher growth margin, but it requires as well more marketing investment and a little bit more admin expenses as well. So it is clearly accretive in terms of growth for Nestlé on the top line in terms of sales. It is accretive as well in terms of gross margin. But it contributes to a higher level of spending as well. So, it has some impact in the global P&L. Obviously this impact -- in addition to that, it's a little bit different between H1 and H2 because this is a business which is somewhat a little bit seasonal. So the level of profit is actually much, much lower in H1 than it will be in H2. So it has impacted a little bit of P&L, but it will normalize from now on, so this is the good news. Talking about the question on, if I understand properly, what will be my priorities. Clearly I want to first make sure that I support and secure growth on the top line, not only growth, but secure profitable growth both at operating level and for shareholders. I'm talking more of EPS. Securing growth and profitable growth means certainly to work heavily on resource allocation and capital allocation. By resource allocation I mean making sure that we spend our resources properly from a marketing point of view in terms of R&D, that we support the right sales growth opportunities, that we make choice between the short-term and the long-term. I think that we need to -- I will focus certainly a lot on returns as well, starting with obviously operating profit, as I mentioned earlier, making sure that we deliver a continuous improvement in operating margin. And I will continue what my predecessor Wan Ling Martello has extremely well done, which is to introduce that discipline of return on invested capital. And what I saw of the models that she developed, I've been extremely interested and seduced by it. And it is clearly my intention to use that model as a decision-making tool with my colleagues of the executive team to contribute to margin improvement. So capital efficiency will be also at the top of my agenda by capital efficiency I'm talking of CapEx. CapEx, I see it as something positive. CapEx is a way to invest for growth while we need to make sure that we secure proper returns. You mentioned working capital it is clearly on the top of my agenda. I want to make sure that there is no misunderstanding there. I don't think that Nestlé will reach a negative working capital. We need to look at it by category, but some categories you can -- when you are in the fresh business you have less inventories so you can in such categories reach a negative working capital. For some other categories it is more complicated. So I think that I've been interested by the recent development in working capital and what we saw in the first half with an improvement in payables. So we will continue acting both on payables and inventories and receivables in order to improve, and I'm aware of the fact that there are ways to improve that. Finally, just maybe one word. Obviously we will work on cost discipline. We will work on portfolio management. All of these topics are hot topics into this world. I was extremely pleased to see that Nestlé obviously didn't wait for my arrival to be on the top of it and Nestlé has been extremely active on these topic of portfolio management and cost discipline. I've been pleased to notice many initiatives and we can elaborate more on it. And it is clearly my intention to pursue these efforts.

Just to follow up a little bit on the gross margin side and what you are saying about Galderma. There was a big gross margin gain at the same time is a big step-up in marketing spending. Are you saying a fair proportion of that is actually caused by Galderma as well? And then just to come back to this input costs being lower and the impact on the gross margin gain, I wonder if you could just elaborate a little bit on that. François Roger: So, to be more precise, the improvement in gross margin roughly speaking, it’s half Galderma and half efficiency improvement. The improvement in -- the increase in terms of marketing expenses, which is 17% in the semester, you have a significant part of it which is coming from Nestlé Skin Health. Roughly speaking, you can consider that it is another half as well. Just to avoid any misunderstanding input costs in H1 is neutral and it's not positive. What I said is that might it improve marginally in H2, though it's still early to say, but we have interesting early signs moving in that direction. But in H1 it was neutral. It was positive for some raw materials, negative from other, net-net neutral.

So, the H1 gross margin improvement ex Galderma is actually improvements from the Continuous Excellence program? François Roger: Absolutely, which is very positive and which is really leveraging on what I mentioned earlier, which is many initiatives that are taking place at Nestlé at operating level in order to improve cost efficiency. Not only on gross margin the way; it happens as well in marketing spending. It happens in administration spending as well.

Jon, another thing you've got to keep in mind is that there is a pricing effect also in relative COGS. Jon Cox, Kepler: Thanks.

That gets us to our next caller that's David Hayes from Nomura. Good morning David. David?

Thanks for the questions. Hi gentlemen. So just carrying on with Jon's comments on the margin front, I just wonder in terms of the underlying brand support, taking out that skin care element. Is it more likely phased to the first half? Obviously a lot of investment going back into the business, just trying to understand whether there's an element of first half spending which will be a little bit less in the second half. And then just also on that bridge, the €66 million I think you called out on the cost of the Maggi food scare issue, just to understand, that's the one-off costs that were incurred for actually dealing with the recall, just to understand that, rather than the loss of profitability. And then the second question was just on prep dishes, you obviously talked about the relaunch and the early success. Looking at the RIG of prep dishes second quarter, it looks about it was down 3.5%. I just wondered whether you could give us some kind of indication quantitatively how much better it was maybe at the back end of the quarter versus the beginning of the quarter to try and get a feel for that change that we are seeing as it comes through with the re-communication. François Roger: I'll take the first question and let Steffen address the second one. On the margin, on the spending and the phasing of the spending for Galderma, the phasing is more on sales actually than spending. So it's more than sales are more back-loaded in the second part of the year, but the spending is fairly well distributed between the two parts of the year. Regarding your second question about India, the €66 million cost that we incurred in H1, I confirm this is a one-off only. In addition to that, obviously we have lost sales or missing sales that have been happening over the last couple of weeks and that will continue till we get the products back on the shelves. And I mentioned earlier in my presentation what the impact is in addition to the €66 million in terms of sales momentum both for AOA as well as for Nestlé Global. I will let Steffen answer the second question.

Yes, for prepared dishes the RIG has in the last two months of course been very affected by the events in India, because the Maggi noodles affect prepared dishes. I think that was your question on RIG for prepared.

Just a follow-up on the Maggi situation, clearly obviously it was focused in India and, to that broader point, on prep dishes. Have you seen impact outside of that market particularly in terms of the brand equity and that news traveling, if you like, or has generally that been contained to the specific market issues?

Yes. If you go through the constituents of that business, when you look at ambient culinary, it's positive, but again it's slowing in Q2 due to the noodles recall. When you look at frozen, here we have the U.S. and clearly we are seeing progress here. What I said earlier to Eileen Khoo's question about U.S. frozen, that we've seen first positive signs, we see first positive signs also in here. And then chilled, chilled is stable with the Herta brand especially in France doing well. Okay?

Thanks.

Next is Jean-Philippe Bertschy from Vontobel. Good morning, Jean-Philippe. Jean-Philippe Bertschy: I would have like two questions, the first one to bounce back on Maggi noodles. Have you seen an impact on other product categories in India from that product recall? The second one would be on the portfolio management and you have seen an improvement of nutrition's operating profit margin thanks to product rationalization in the U.S. and in Europe. Shall we expect an acceleration of this streamlining or portfolio management in the second part of the year, respectively in the coming years? And the third one would be on the share buyback. I think it's slightly in excess of CHF 5 billion. You commented to complete the CHF 3 billion which remain to complete the CHF 8 billion buyback until the end of the year. François Roger: I will take the question on share buyback. We have continued to execute the program. We had an objective of CHF 8 billion by the end of 2015. We are left with around CHF 2.8 billion to be done by the end of the year. It is our intention to complete the program by the end of the year 2015, provided that market conditions allow it, but I'm positive about it. Steffen, you want to talk about the impact of Maggi on other products?

Yes. We've seen a little bit of an adverse impact on other products in South Asia, some non-noodle products, that's Masala Magic and things like that. But it was, on a Group level it was really, really limited. So the impact that Jean-François -- that François Roger has given you before on both the Group's and the Zone's RIG is the impact we are seeing altogether. So impacts on other product categories, yes, we see some, but it's very, very limited at this point. Jean-Philippe Bertschy: And the one on the portfolio management?

What was that question again? Would you please repeat it? Jean-Philippe Bertschy: You were talking about product rationalization in nutrition in the U.S. and in Western Europe that led to an improvement of the operating profit margin. You were announcing Davigel and probably some other brands like in the pipeline, if you will take a more aggressive view on portfolio management.

The factual answer, what was in nutrition from a portfolio management standpoint, was the divestment last year of meals and drinks in Germany and also of the nutrition businesses in North America. That was PowerBar and that was Jenny Craig. So of course we are now seeing the positive impact of the portfolio cleansing that we've done in the numbers. So this is a good news. François Roger: Maybe I can add something because if I look at the model that has been designed in order to assess the performing and less performing assets of the company according to a certain set of criteria and KPIs, which are not only limited to returns on profitability, I think that it addresses questions like growth and the opportunity of future growth, profitability, returns and so forth. I've been quite impressed by the model and its power. I think that it has to be crossed with strategy. And I think it allows proper decision making, which is not only disposal, by the way. It has to deal first with, if we have less performing assets, we have to fix it, which is what has been done with frozen food by reworking on the category with some early results that are very encouraging, which I think is very positive. It can be disposals, and you were mentioning Davigel. I went to Mexico during my induction and saw that there we took a certain number of actions. For example, in ice cream or we even made a partnership. We combined our business for water with a stronger player locally, which is another way to address less performing issues if we lack critical size. It can be as well, the model is not only about divesting; it can be about investing further in some categories. So, I saw already some actions that have been derived from this model and really put into action, which is interesting. There will be certainly more. But, once again, it's not only about divestments.

Next is Gerry Gallagher from Deutsche Bank. Good morning, Gerry.

A couple from me, one of them clarification. The first one though just in terms of the organic growth guidance for the full year. Appreciate you don't give comments on price per individual market because that's an individual market decision, but when you formulate the guidance at the beginning of the year clearly you have a group view as to the split between RIG and price. Could you give us a sense -- and obviously nothing stays static. Could you give us a sense of where you are now in terms of the relative split between RIG and price for the full year at 5% in terms of where you are now in that split, and where perhaps you were are the beginning of the year, if you can give us a sense of where your heads are on that. And then just secondly, could you just give us the -- I missed them. Could you give us the numbers of the RIG impact of the Maggi recall, both in the Zone and for the Group again please? François Roger: For the organic growth for the full year, so we confirm around 5%. We don't break it down between RIG and pricing, the reason being mainly that pricing is a local decision. So it's a little bit difficult to comment on that, especially for the future. And it's a local decision because it's essentially driven by competitive forces locally, which makes it a little bit difficult to make a statement about it. To clarify and to give you the figure again on the impact of the Maggi noodle withdrawal, which is once again only the one-off, what I mentioned earlier is 10 to 20 basis points in terms of both organic growth and real internal growth at Group level in sales obviously, and about 100 basis points to 120 basis points on a Zone AOA level, both in terms of organic growth and RIG. And the one-off cost of the withdrawal, and I just share it with you again, CHF 66 million in the first half.

If I could just come back on the organic growth, I fully understand that you don't give specifics. But in terms of where you thought the split would be in terms of RIG and price -- sorry, RIG and price at the beginning of the year and where we are today, is it fair to say that maybe price is a bigger component today for the full year than perhaps you thought it would be at the beginning of the year?

Look, Gerry, we are operating in an environment where we've got places around the world with deflationary conditions. We've got places with inflationary conditions. And this is also why we always say pricing is a local decision is because we have to act within the local conditions. We have to act within the local strength of our brand, within actions of our competitors, within the strategies of the retailers as well. So, there are many components that go into pricing. What we set out is our ambition and our guidance to grow around 5% organically for the full year, but then the exact split between real internal growth and pricing is something that we manage throughout the year as we go on and as we see the environment development. So, there is no hard and fast answer to this question.

Thank you. François Roger: If I maybe add one comment, obviously this first half we have more pricing and less RIG, but this is not something that we see as negative. To have more pricing is not negative. We need to look at where its coming from, what is driving it, which we explained earlier. It's linked to input costs for some part. It's linked to competitive forces and another dimension or to foreign exchange as well. We don't see that necessarily as negative. RIG is attractive and pricing is attractive. And I think the 4.5% organic growth that we achieved in H1 is in line with our expectation and we are satisfied with that level.

Next one is Jeremy Fialko from Redburn. [Ph] Good morning, Jeremy.

Sorry to keep on banging on about this pricing point, but just one point you made about North America which was quite interesting. You said you had less RIG and more pricing. Now clearly when we look across this whole range of food commodities. I know there are one or two exceptions. But generally speaking you've got food commodities at record low prices now. And clearly North America is a market where there is no adverse currency effects which would cause any degree of inflation. So really what I wanted to get a sense of is why are you confident that the pricing can be maintained in the North American market and why that is not going to become deflationary in the same way that Europe has done. François Roger: I would say first of all there is one matter that is contributing to it, which is the fact that there is more inflation in North America than there is in Europe to start with from a macroeconomic point of view. The other thing is that it's a little bit difficult to answer that question because it depends very much from one business to the other. Let me give you an example. We put through some price increases with our Nestlé Skin Health franchise in North America on prescription products, so which is very specific to that category in that market. So, it's a little bit difficult to draw a conclusion globally. That being said, you have a point that with overall decline of commodities, there might be some price pressure, which we see for example in China in nutrition. So it depends very much from one category to the other. It's a little bit difficult to draw any conclusion. We need to look at global figures. But we look at it much more category-by-category and market-by-market, which is the reason why, once again, pricing is a local decision.

Next is John Revill from the Wall Street Journal. Good morning, John.

A couple of points. In terms of the emerging market situation, although its continues to grow in the half, there has been a bit of deceleration from last year. So, could you tell us -- obviously I know you have one-offs like the Maggi situation and things like that, but could you just give us a bit more color on what's the plan moving forward to get AOA and emerging markets to perform a little better in the future? That's my first point. And the second one on currency, obviously you've been hit by the Swiss franc again and that's not very much you can do about. But is there any plans or anything you are doing to deal with this? And are you expecting further hits especially after the devaluation of the RMB this week? Is that going to cause you -- affect you sales from your China business? So in the second, half are you expecting a bigger currency hit, basically? François Roger: You are talking about declaration in emerging market, but let's put things in perspective. We still grow by more than 7%. So I think it was 8% maybe two years ago, but we still have a strong momentum and we were at 7.3% in the first half, which is good. You mentioned one of the reasons for the deceleration, by the way the one-off in India, which I mentioned in terms of impact. So, we remain with a strong dynamic, a strong momentum in emerging market but the good news is that we are not only dependent on emerging market, we benefit as well from a strong growth in developed markets. I think that the way to secure a high level of growth in emerging market is to make sure that we offer products that are relevant to consumers and this is what we are working upon in emerging markets. It is the same, exactly the same objective that we have in developed market. And we see, for example in China, we have taken a lot of initiatives to make sure that our product offering is fully relevant to consumers, given that in emerging market as well we noticed some changes in consumer behavior and the expectation that consumers have of food has evolved over the last couple of years. Moving to the question on foreign exchange, we have some pressure from the Swiss franc, but we have recovered some of it already, because the Swiss franc revalued by 20 points. And actually, we had till yesterday night I think recovered 9 -- almost 9 of the 20 points. So, it went a little bit more in the right direction for us given that our reporting currency is the Swiss franc. I think that's a fact of life. There are a certain number of decisions we can make to address it, which is to make sure that we keep on maintaining a high level of productivity in our cost base, which happens to be in Switzerland, which is something that we are working upon.

Okay. That was our last question. Thank you very much François. As always, we’re happy to take any follow up questions via email, ir.nestle.com for investors, and media relations, at nestle.com, for journalists. For those who called in with a question that we’ll not be able to take, we'll get back to you shortly. And anyway, you know our contact data in Investor Relations. So thank you very much to all and have a great day. Bye, bye. François Roger: Thank you.