Welcome to Nestlé's full year 2016 conference call for investors and analysts. I'm here with our CEO, Mark Schneider, and our CFO, François Roger. As usually, we first present our numbers and the background. Afterwards, we'll open up for Q&A. As a reminder, to be put into the queue for Q&A, please press star one on your telephone. To be removed from the Q&A, press star two. With that, I take the disclaimer statement as read, the safe harbor statement. I now hand over to Mark Schneider.
Steffen, thank you. A warm welcome to our investor call participants today. I know this is the first time I'm communicating with most of you. I certainly appreciate the interest in Nestlé. Since it's the first time, what I'd like to do is only touch briefly upon some of the key metrics for 2016. Also towards the end, the outlook for 2017. Focus for the most part of my presentation on some of my initial impressions of what we need to do midterm, our priorities and our commitments, and give you a flavor of where we're headed. I will hand it over to François for a detailed review of our 2016 financials. Let me cut to the chase and the key messages here for 2016. I think in summary, our key organic growth metrics, we ended up at the higher end of industry.
Also, there's no beating around the bush. We were at the lower end of our own expectations. There were only two key factors applying in the second half of 2016. One was the fact that our volume growth in the second half was not as strong as expected. I think across the board, as we look at the consumer goods industry in key markets, we saw somewhat of a slowdown that applied to us as well. When you compare real internal growth for the second half of 2016, it didn't quite reach the first half level. First half, real internal growth was 2.8%. The full year number is 2.4%. You see there was a slowdown in that time frame. In addition to that, pricing did improve somewhat in the second half. Didn't improve quite as fast and not as widespread as we thought.
Hence, we didn't quite reach the full level of 3.5% that we had anticipated. What is giving us encouragement is the solid operating margin improvement for the full year of 2016. We achieved a 20 basis points improvement on a reported basis. There was a currency headwind, most notably coming from the Swiss francs. On a constant currency basis, it was actually a 30 basis point improvement. When you just focus on the core food and beverage business and leave out some of our startup and growth businesses, we achieved a 50 basis point constant currency improvement. I think a solid job in this environment in our core food and beverage business.
What I'd like to do for the 2017 to midterm part of my presentation, really give you my perspective on what I perceive to be continuity and change as it applies to the consumer goods industry. I would like to reaffirm our view that organic growth remains the key long-term value driver in this industry, and I'd like to share with you some of the initiatives we have underway to be sure that our organic growth improves over time. Lastly, I'd also like to reiterate our continued focus on operating efficiency. I think a lot of good things were already announced on that last year as part of the investor day, and I'd like to give you a bit more color on that. With that, just a brief look at the 2006 performance highlights. You will have seen the key data by now.
Sales of CHF 89.5 billion, organic growth 3.2%, real internal growth 2.4%. I think the strong real internal growth should be a source of encouragement. I think we're seeing a good basis here as and when pricing kicks in to build a better organic growth performance going forward. In terms of the trading operating margin, the +30 basis points in constant currency I mentioned earlier. Do keep in mind, these numbers already include some of the higher restructuring expenses that we faced in 2016. Restructuring costs in 2016 were CHF 300 million. That's basically twice the level of 2015. That's already baked into the 30 basis points increase, and I think that points you to a very solid bottom-line job in this difficult year.
Let's talk about my views regarding continuity and change in the consumer goods industry, and let's start with my commitment to nutrition, health, and wellness as our key strategy that the company has been pursuing diligently and patiently for the last several years. What specifically does nutrition, health, and wellness mean? It certainly does not mean, as some people speculated upon my appointment, that we're going to be turning into a pharma biotech company. What it does mean is that we will diligently work in our core business to constantly improve the nutritional profile of our food and beverage offering. For example, lowering the sugar content, lowering salt content, improving nutritional value. All of these projects have incredible value at a time when more and more consumers understand that good and appropriate nutrition is basically the key driver to long-term health outcomes.
At the same time, we will patiently and diligently, with a certain amount of ambition, but also with prudence, we will build up the two new healthcare-related ventures we have. That's Nestlé Health Science, which is mostly medical nutrition, and also Nestlé Skin Health, which of course, is focused on skin health products. Pursuing both of these things certainly is no contradiction. I think we have the resources, we have the management talent, and we have the focus to do all of this without getting distracted. I think it also plays upon each other because when it comes to some of the scientific underpinnings for both sides of the equation, it's really the same. Let me talk about our commitment to long-term value creation.
What I really like to focus on here is that in the consumer goods industry, regardless of some of the recent tendencies we're seeing, we believe that if you want to create value in the long term, it has to happen from the top line and the bottom line at the same time. This is important because recently, you see a lot of players focus on the bottom line only with very aggressive steps, very solid improvements, of course, but clearly, you can also see that organic growth for these players is suffering. Of course, the long-term limitation is that you can cut costs only once. Afterwards, you're still stuck with organic growth that is negative or at best neutral, and hence there's no long-term growth perspective.
On the other side of the spectrum, you're seeing a lot of small, local, either startup companies or mid-size established companies, that basically cater to some of the recent consumer trends, whether it's organic or other healthcare trends related to food and beverage. The problem there is that not all of these trends are scalable. Not all of these trends are really sustainable in the long term. Not everything that looks good from a top-line perspective in the short term is really holding up to that promise longer term.
We believe to steer a middle path, on the one hand, focus on organic growth, bet on the tendencies that really have long-term value, especially when it comes to improving the nutritional value of our food and beverage products and also scaling up the healthcare businesses, then couple that with a strong bottom-line commitment, improving our operating efficiency on a constant basis. I think that's the winning combination. I understand compared to where we are right now, we need to do better on that. We need to offer you a better combination of that. I think we're committed to that. On the following slides, you're seeing some of the steps that the management team over the past years has undertaken and that I'm fully committed to, that we can work out to improve that combination of growth and margin.
Let me also comment on our approach to M&A. The company has done significant M&A in the past, and I have personally done, in my prior job, significant M&A. However, M&A is no panacea. Clearly what I want to dissuade is any potential concerns here that we might be going overboard on M&A spending. In fact, I think right now is probably not the best time to chase big-ticket deals. You're seeing some of the recent multiples being quite frothy. I think right now is the time either for good solid operating management or small to medium-sized deal-making like tuck-under acquisitions that offer an immediate advantage to the company and come at the right price. I just want to dissuade any concerns here that we would resort now to big-ticket deal-making. Right now, the top priority is clearly our operating performance, top and bottom line.
At the right time, at the right moment, for the right price, deal-making would certainly be part of our toolbox when it comes to rounding out our strategic positions. Again, short term, right now, we're not working on any major transactions. In terms of people and leadership, just wanted to give you my first-hand impression after five and a half months on the job with the company, and basically five weeks on the job as CEO, that I'm very impressed with the Nestlé leadership team I've met now at many locations around the globe. I think with this team, we can go places. I'd also like to confirm, contrary to some of the speculation that it appeared in the press, this is the team that will go places. We're not reorganizing, and we're certainly not thinking about key leadership changes.
In terms of transparency with all stakeholders, I think the company has done a phenomenal job over the last few decades communicating at all levels, from local to global, with key stakeholders, whether it's NGOs, governments, regulators. I think part of that, which I'm very proud to step into, of course, is also good and solid and dependable communication with the investor side. Going forward, I would like to assure you that I'm very committed to shareholder-friendly communication. That, first and foremost, also means avoiding surprises and sticking to time-tested policies, including, of course, our long-term growth-oriented dividend policy.
Last but not least, just to drive it home, when it comes to making choices and fast execution, while we are committed to this middle course of top-line growth and bottom-line improvement with operating efficiencies, we do understand that we need to offer you a better combination of these two. We do understand in this fast-changing environment in the consumer goods industry and also facing some of the recent deflationary tendency, we need to work fast to make change happen, adapt to the new environment, and give you an attractive combination of growth and profitability, and we're very committed to doing that. Let's first turn to the growth side of the equation, and let me cut to the chase right away. I do expect that in the midterm, by the year 2020, this company can get to mid-single digit organic sales growth.
This is my assessment after spending a lot of time out in the field with our product development people, with our salespeople, and basically understanding what is the potential that we have in our arsenal. I list below a few of the key initiatives here that apply that the company has embarked on and where I think we'll be executing going forward. The first one clearly is to invest very selectively to support those fast-growing categories and regions that are clearly giving us success right now. When it comes to regions, think about Asia-Pacific. I know that our recent progress there has been masked. It has been masked in the year 2015 by the India noodle situation. It has been masked in the year 2016 by some of our activities in China, for example, Yinlu.
By and large, when you look at all the other markets there and some of the other categories, we've seen amazing success and very good growth in a region that still has a long runway. Clearly, our purpose is to advance everything we can, do everything we can to advance growth in those areas, and that really means committing the necessary resources to markets like these. I'm picking out here, I'm singling out Asia-Pacific, but you find that time and time again, in emerging markets. Do keep in mind, the company derives about 42% of its sales from emerging markets. At a time when some of the growth is more subdued in established economies, I think that strong emerging market posture is going to be a winning position.
I think some of the emerging market slowness that we've seen in 2016, as raw material prices inflate again over time and these economies get going again, they will turn out to be major growth drivers. This was a temporary air pocket. Same thing applies to categories. Think about some of our high-growth categories like coffee, pet food, and water. Clearly, giving these categories all the resources they need to either extend their lead or defend their lead, this is going to be one of our key recipes for mid-single digit organic growth going forward. I would like to focus for a moment on coffee in particular, because I think, in all modesty, in coffee, we really have it all. We don't just have a leadership position, a significant one, but we also have, I think, four major approaches to the market.
We have, with Nescafé, the world's leading, truly iconic brand in coffee, the most recognized brand in that space. We have with Nespresso, not only the most sophisticated, but also the most exclusive cartridge system, and clearly a constant flow of product innovations coming to market in that space and under that brand name. We have with Nescafé Dolce Gusto, a retail cartridge system that's pretty widely available and continues to be rolled out in many regions of the world and find major acceptance. Last but not least, with our professional side of the coffee business that's now managed by each of the regions individually, I think we have a foot in the door when it comes to the out-of-home coffee segment, which of course is very promising down the road.
With all of these amazing brand names and technologies that we can bring to the table, and the sheer scale that we can bring to the table in coffee, I think we're extremely well-positioned to defend and build our leadership position in that space. It's not just a matter of pride. I think this is good business because this is a high-growth area that also offers very good margins. Next, addressing low-growth businesses. I mentioned Yinlu in China earlier. For businesses like that, we will focus very strongly our management efforts on turning those around. I'm very pleased with the efforts that our China management team, under the leadership of Wan Ling, has taken last year to address the situation. These situations will take time, but believe me, we will have a healthy sense of urgency when it comes to addressing those situations and turning them around.
In terms of product and business model innovation and also digital opportunities, I think there is a major upside available to us. On the product innovation, clearly with one-third of our products being renovated year after year, I think there is a significant opportunity here to meet changing consumer tastes. When you put together digital opportunities in the business model innovation, I think there are many opportunities to add a service layer to our products or to engage in a direct conversation with our customers around the globe and intensify that relationship. I'm proud to say, François will report on it later, especially in digital, we have made significant progress last year. I think we're really getting traction in that space, not just on the communication side, also when it comes to rethinking and redesigning some of our business models and gearing them for more growth.
Last but not least, on portfolio management, we will stay committed to that as well. When we do see, for example, that a business no longer fits our strategy or that there's long-term diminished prospects when it comes to growth and profitability, yes, we can also address that through portfolio management, just as we can buy ourselves into faster-growing segments of some of our food and beverage offerings or healthcare offerings. Yes, we will use that tool going forward as well, we will use it with caution, and hence it was no coincidence that I mentioned this one last on the slide.
I just wanted to be sure we're not just resorting here to stock picking to improve our growth, rather we use our operational efficiencies first, where we use our operational steps first to increase our growth, only as a last resort, turn to M&A to solve the situation. With that, let me turn to the next side of things, that's operating efficiency. I think that's the other side that is important to make growth meaningful. Growth without efficiency, that's just basically being busy in the name of customers. Efficiency is the one that really gives the whole thing meaning and value, and hence we are very committed to driving efficiency down the road.
My key statement to you is that I fully support and very much appreciate the steps and the leadership that Paul Bulcke and François Roger have initiated and communicated to you last year when it comes to operating cost savings. When it comes to the at least 200 basis points of structural cost savings that we attempt to achieve by 2020, I fully confirm that target today. I think we had some exciting preparatory work underway in 2016 to make that happen. The good news is, when you look at the margin improvement in 2016, that has not used up any of that 200 basis points yet, this is still to come, this is upside over and above the present situation. I think we have a lot of exciting internal projects underway to make that happen.
As a result of that, as you will see now from the 2017 guidance, we expect an additional increase in our restructuring cost to circa CHF 500 million. I'm sorry. In terms of the outlook for 2017, we expect organic growth in the range of 2%-4%. Mind you that the midpoint of that guidance, about 3%, roughly equals our run rate in terms of organic growth for the past three quarters. I think the midpoint is very well centered on where we are today. If you're wondering about the margin to the left and to the right, do keep in mind that this is a pretty volatile environment right now. On the plus side, there is pricing, and I think there are signs here that pricing is improving. On the minus side, we do have a volatile environment with still some persisting deflationary tendencies.
Frankly, in this very turbulent, volatile situation, it's pretty hard to hang your hat on a very narrow guidance. I think for the moment, to enter the year on that base with a wider bracket makes a lot of sense. We'll define it more closely for you and narrow it as we see fit during the year and as we get more confidence in where things are headed. In terms of the restructuring cost, I mentioned the roughly CHF 500 million we have identified so far. This is investment from my point of view to drive future profitability, and you should take confidence from the fact we're stepping that up from the roughly CHF 300 million we already showed at in 2016. 2016 was a step up from the circa CHF 150 million that we had in 2015.
I think we're on the right path here towards addressing operational efficiency issues, and clearly, that will pay off. We're also committed to keep the trading operating margin stable in that environment. Basically, that implies a 20-25 basis point improvement in our trading operating profit margin before the restructuring cost. We will continue to look for and identify restructuring projects. As a result of that, the final amount may vary, and during the year, we will give you updates, not only on the amount of restructuring that we do expect for 2017, but also on our performance in our trading operating margin before and after those restructuring costs. Last but not least, we're committed, as always, to underlying EPS growth in constant currency and also continued efforts towards improved capital efficiency.
That's my initial take on some of our midterm steps and also the specific outlook for 2017. Hope you appreciate it for two things. One is a sober and realistic assessment of where we are right now, coupled with the ambition here to keep the one thing alive that is a hallmark of the company, and that is driving superior long-term capital returns with sustainable top and bottom line developments. I think that is something that has a lot of runway for us. We're committed to it. We have taken decisive steps towards it already now. Those are starting to pay off. We'll do more of that, and I'm sure we'll get there. Thanks, let me hand it over to François.
Thank you, Mark. Good morning and good afternoon to all. I will walk you through our financial, starting with a summary. The full year 2016 ended on a positive note with a RIG at 2.4%, which puts us at the higher end of the industry. Pricing is starting to come, although it comes a little bit later than expected, we saw some acceleration of pricing in the later part of the year. Our trading operating profit at constant currency stood with a 30 basis points improvement during the year after doubling the restructuring amount that we booked in 2016. It is important to note as well that we had a strong contribution from food and beverages, which accounts for 95% of our sales. The trading operating profit for food and beverages increased by 50 basis points last year.
We had a strong free cash flow, which stood at CHF 10.1 billion, or 11.3% of sales. The improvement is largely coming from our growth, our margin improvement, as well as a significant improvement in terms of working capital. Our underlying earnings per share at 3.4% is at the lower end of our expectations, we are working on it. Moving to some historical perspective on organic growth over the last three years, we saw some acceleration of our RIG. RIG is a combination of volume and mix. We saw some acceleration since we reached the highest level in 2016 over the last three years. This is a good indication of the quality and the sustainability of our growth. RIG is important because this is very much about share of stomach, this is very much about share of shelf space in the trade, both online and offline.
It does reflect as well our capacity to innovate, it does reflect the investment that we have been doing in marketing, in e-commerce, in digital. Pricing was relatively low in 2016 at 0.8%. Although we saw some acceleration, we were at low level, 0.4% in Q2, we ended up the year at 0.9% in Q4. We have already taken additional steps above what we disclosed last year. For example, Brazil. We have recently increased prices in countries like Mexico, in the Philippines, at the end of January in the U.K., as well as we started to implement even price increases on a selective basis in Continental Europe. Moving to the distribution of our sales and growth by geographic areas. The slide that you see here is a slide that shows the growth between geographic areas. It includes our zone and globally managed businesses.
We have a RIG which is well-balanced between the zones, we saw some sequential acceleration during the year in AOA. Our OG is healthy in all the zones. Pricing was negative in MENA, mainly because of deflation in Western Europe, pricing was slightly negative as well in AOA, as we had some pressure on dairy pricing. Pricing was positive, though, in Latin America, mainly because of Brazil. When looking at the breakdown of our growth between developed and emerging markets, we have the same level of RIG between the developed and emerging market. This is good for developed market because it shows our capacity to innovate in markets where the growth is limited. That being said, the level of growth of real internal growth in emerging market at 2.4%, we see that as an opportunity for the future.
In developed market, at 1.7% of OG, this is once again the evidence of our capacity to premiumize, to manage our portfolio, and we saw some acceleration of the RIG, while in emerging markets, our RIG was a little bit slow, once again, because of Brazil, where we put some price increase through, as well as Yinlu. We are very much in the business of innovation, and the illustration of it is the fact that about 30% of our sales are coming from products that were not in the market three years ago or that we renovated over the last three years. You have some illustration of these products on the screen. Let me just walk you through some example. Les Recettes de l'Atelier, for example, which is a premium chocolate offering that is currently marketed in eight countries across Europe.
We grew that product by 22% last year, for example. I could talk of Coffee-mate natural bliss as well, which is really addressing a demand by consumer of more natural and organic product. This product grew by 42% in the U.S. last year. I could talk of Illuma on the right-hand side as well. A lot of the innovation that we bring to the market is scientifically driven. Illuma is a good example of it. Illuma, which did not exist as a product a little bit more than five years ago, reached CHF 900 million of sales in 2016 in China alone and grew last year by 34%. We do invest in innovation, we invest in marketing, we invest in order to premiumize our range of products, but we do invest a lot as well in new channels, and this is really at the core of our strategy.
E-commerce is a good illustration of it, and you can see there that last year in 2016, we reached almost 5% of our total sales coming from the e-commerce channel, while it was at 2.9% in 2012. E-commerce sales grew last year by 18%, which is six times faster than our average growth. If we put Nespresso aside, it's part of the business model. Even without Nespresso, the sales of e-commerce grew by 34% last year. I would like to mention as well that in a certain number of our sales, a sale is a combination of a geographic area and a category. We can track in about 70% of our sales our market share between online and offline. In those sales, we have a higher market share online in 57% of them, which shows that we are doing well in terms of e-commerce.
Let's move now to the breakdown of our performance by zone. I will start with AMS, with sales of CHF 26.4 billion, RIG of 1.3%, and OG of 4.2%. I will break down the analysis there between North America and Latin America, starting with North America. We're facing deflation across categories, actually, in North America, which mean that pricing was negative. That being said, in terms of both RIG and organic growth, we reached the highest level of growth over the last seven years. This has been largely supported by our frozen food franchise in the U.S. with a sustained improvement. This has been driven as well by Coffee-mate. I talked a few minutes ago about the innovation with natural bliss as an example, and this is also coming from the improvement of our pet care business. Beneful is now stabilizing. Moving to Latin America.
There we had the benefit of positive pricing, largely in Brazil where we increased our prices significantly in June last year. This puts a little bit of pressure on RIG in the latter part of the year in Brazil, but we saw some sequential improvement during the year. Mexico did very well as well in 2016. Overall, for zone AMS, our trading operating profit was down by 10 basis points to 19.3%. We increased our restructuring spending there. In Latin America, we had some pressure of additional input costs, largely linked to depreciation of currencies. Moving now to zone EMENA. Sales of CHF 16.2 billion, RIG of 2.7% and OG of 2%. Our RIG was strong in the region. It was the highest level of RIG over the last 10 years. Pricing was negative, largely the consequence of a deflationary environment in Western Europe.
Talking of Western Europe, we had a good level of RIG. We are winning market share. We had good performances with positive momentum in France and Germany as an example, while the U.K. had a tough year. In Central and Eastern Europe, we had a strong RIG as well as a strong OG. In Middle East and Africa, we are facing an unstable environment, but we still achieve growth in terms of sales in spite of the difficult environment. Turkey did well. Margin wise, we increased our trading operating margin by 100 basis points to 16.7%, in spite of increasing the amount of restructuring that we booked as well as an increase of marketing spend.
The portfolio management helped us there a little bit with the creation of Froneri from the beginning of October. We benefited as well from some premiumization in our range as well as obviously the volume growth and some efficiency programs. Moving to zone AOA, with sales of CHF 14.5 billion, RIG of 2.9% and OG of 3.2%. We had an increasing RIG momentum sequentially during the year. In emerging markets, we had a nice growth apart from Yinlu. We had a strong growth in Southeast Asia as well as in sub-Saharan Africa. In China, confectionery and Nescafé did well. Yinlu was in negative territories. As a consequence of that, Yinlu reduced the zone organic growth by 260 basis points. In India, Maggi has been back on the shelf for some time, and we have now reached already 60% market share.
In the developed countries of AOA and more specifically in Japan, we had good growth thanks to innovation. As far as Japan is concerned, mainly coming from confectionery and coffee. For zone AOA, our trading operating profit increased by 60 basis points to 19%. There again, we increased our marketing spend. We benefited from a positive development in terms of growth margin with a lower input cost, with the volume increase that we had, as well as a positive mix. We also spent a higher amount of restructuring during the year. Moving to Nestlé Waters, sales of almost CHF 8 billion, RIG of 4.5%, organic growth of 4.5% as well, so no pricing there. With Nestlé Waters, we are clearly benefiting from a positive category dynamics with a favorable trend for healthier beverages as well as a strong demand for safe drinking.
In emerging markets, we had a high single-digit growth. In North America, it was mid-single digit, especially pulled by international premium brands. Talking of our international premium brands, S.Pellegrino and Perrier, their growth was actually two times faster than the average of waters, which is really driving the mix in a positive direction. In Europe, we had a low single-digit growth. Just remember that we had a significant heat wave in the summer of 2015. For Nestlé Waters, trading operating profit increased by 110 basis points to 11.9%. There again, we increased our marketing spend. We benefited from a positive volume growth as well as further efficiencies. Nestlé Nutrition, CHF 10.3 billion of sales, 0.9% of RIG, and 1.5% of organic growth. We consider that our performance on Nestlé Nutrition is rather resilient in the context.
As far as China is concerned, we have been impacted as the entire industry by the introduction of the new regulation expected at the beginning of next year. As a consequence of this new regulation, we saw some pricing activity. We saw as well some inventory level reduction in the trade. The entire category has been under pressure from a pricing point of view as the milk prices were low. In that context, we did well again with Illuma, that reached CHF 900 million of sales, and whose sales increased by 34% in 2016. We are clearly the market leader in the super premium segment. In China, we increased our market share in the e-commerce part of the business. Moving to the U.S. for Nestlé Nutrition, our growth was limited.
We are working actively in order to refresh the Gerber brand through new packaging, new recipe, and a certain number of other initiatives. In Latin America and Southeast Asia, we had good performances. Overall for Nestlé Nutrition, our trading operating profit increased by 10 basis points to 22.7%, and we increased our marketing spend, and we benefited from low milk prices. Moving now to the last category, other businesses, that includes Nespresso, Nestlé Professional, Nestlé Health Science, and Nestlé Skin Health. Sales combined of CHF 14.1 billion, RIG of 3.4% and organic growth of 3.7%. For Nestlé Professional, we had a good year, mainly in North America as well as in Asia. As you know, we are now merging this business into the three zones.
Nespresso celebrated last year its 30th anniversary. 30 years after its creation, it is still growing in the three regions, in Europe, in the Americas, and in Asia, in spite of compatibles and lower patent protection. The U.S. is now becoming the second-largest market. The Vertuo system, after having been launched in the United States, has been launched at the end of last year in France, to start with in Europe. For Nestlé Health Science, we had a good pace of growth, largely pulled by our consumer care franchise with BOOST on Meritene, while the medical nutrition range experienced a solid growth. For Skin Health, we had a good performance as far as consumer care is concerned.
We decided at the end of the year to adjust our inventories down in the trade by about two weeks, which meant that we were negative in terms of organic growth in the fourth quarter. For Skin Health, we were down as far as prescription drugs are concerned, as we had to face some patent expiry on some products. Overall, for other businesses, our trading operating profit went down by 50 basis points to 15.2%. This has been largely impacted by the de-stocking at Skin Health, which contributed to about 20 basis points at group level, combined with higher restructuring for these other businesses. While on the other hand, we benefited from a positive input cost, especially for Nestlé Professional and Nespresso. Let's look now at the development by product groups. All categories have been positive in terms of organic growth.
I will not cover all the activities because some of them are already talked about. I will start from the left-hand side with the powder, the liquid beverages, which is mainly coffee, as well as some other product classes, Nesquik and so forth. We had a good performance across the board for Nestlé, Nespresso, Nescafé Dolce Gusto, Nescafé, as well as Professional. If I move to the next category, which is milk products and ice cream, we had a lower growth than in the past. It has been largely impacted by Yinlu and by low milk prices. For ice cream, we had a positive growth in the U.S., and we created, at the end of September, a category leader with the joint venture that we have with Froneri.
For prepared dishes, we had a higher RIG than in the past, now that Maggi is back on the shelves in India, and our frozen franchise in the U.S. continues to do well with attractive levels of growth. Confectionery has been negatively impacted by volume, mainly in the United States and in the U.K. On the other hand, we have KitKat, which is still growing nicely, more specifically in emerging markets. Finally, with pet care, we had a good growth across the board, and we are happy now with the situation for Beneful in the U.S., which has been stabilizing. Looking at the profit level between these categories, I won't go into the details, but I just want to mention the fact that we have a good consistency of profitability level between the categories.
Some categories have a lower level of margin, like water, but they provide a higher level of growth in terms of sales, and if the sum of the lower level by category reflect the category structure as well to a certain extent. In some other categories like coffee and pet care, we have a higher level of margin, which is really illustrating the leading position that we have in these categories, as well as our capacity to innovate. We have been investing quite a lot in coffee, and more specifically with Nescafé Dolce Gusto, which continues to grow nicely, along as with Nescafé. We presented that at our Capital Market Day in May, as well as with Nespresso opening new boutiques as an example. Moving to our P&L.
Our gross margin last year increased by 80 basis points. This is pretty much in line with what we had in the past. The main driver of this improvement of gross margin has been through our savings program, starting with NCE, where we delivered north of CHF 1.6 billion of saving again in 2016. We benefited from some commodity tailwind, but to a lesser extent, and portfolio management had some contribution to it, mainly with the disposal of Davigel at the end of 2015, as well as with the creation of Froneri later in the year.
As we did in the past, as we do intend to do still in the future, we are reinvesting part of this efficiency gains into marketing in order to support our higher level of growth. Even if we look at our gross margin, I just talked about it, if we look at it from a historical perspective, it's interesting to see that we have increased our gross margin consistently over the last couple of years, actually by 3.5 percentage points in four years, which is quite a good achievement. This is a consequence of efficiencies, once again, with NCE. This is a consequence of our mix as well, and we are working actively with the mix. This is a consequence of premiumizing some of our ranges. There is a contribution as well from commodity pricing, but it is a lower contribution.
EPS, as I mentioned earlier, the 3.4% is at the lower end of our expectations. We are aware of it. We are working on all levers in order to address it. The two main levers are obviously our organic growth and our margin improvement. Moving to our balance sheet and working capital, we made some significant progress again in 2016. We reduced our working capital by almost two percentage points during the year. I just want to mention that this graph is showing a solid KPI because I'm not talking of the values as at the end of the year, I'm talking of the average value of the last five quarters. The improvement that we had in 2016 is largely coming, but not exclusively, from payables. We have identified for some further areas for improvement in the future.
Moving to CapEx briefly, we have been able to contain our level of CapEx around 4.5% over the last couple of years, which is a good illustration of our capacity to deliver efficiencies in our capital management while being able to support our growth. Our improvement in working capital has been a key contributor to our cash flow generation improvement. We had free cash flow at 11.3% of sales last year, which is a further improvement to the level where we were in the previous years. This is really at the higher end of the industry there. Beyond the level that is attractive, what is good to notice is the consistency of the delivery over time. ROIC, this has been an area of focus over the last couple of years. You can see that the ROIC before goodwill has been increasing significantly.
This shows that we are good at operating our business and using all the levers that we have from growth to margin improvement to working capital management, CapEx discipline, and as well as M&A discipline. M&A discipline is obviously for the lower part of the graph with the return on invested capital after goodwill, which has increased as well over the last two years. In terms of debt level, we have decreased our net debt by CHF 1.5 billion last year. We sold about CHF 1 billion of treasury shares during the year. We have been disciplined in M&A. We acquired some minority stakes of affiliates, as well as we did an investment with the Proactiv company in the U.S. in the acne space in order to gain the leading position in acne in the U.S.
We value shareholder return. The board will propose to the AGM a 22nd consecutive increase of the dividend this year. Just to finish our 2017 priorities, we are working in order to maintain our volume growth. Volume is important. This is what is creating substance for the long term, as Mark indicated earlier. We are working actively as well in terms of pricing. As I indicated, we have already some pricing initiatives that have been put in place recently in countries like the Philippines, Mexico, the U.K., or even in Continental Europe. Cost discipline remains at one of the top items in our agenda. I talked about NCE, Nestlé Continuous Excellence. We are working actively as well with the structural cost initiative. Six out of the eight have already started to be implemented.
You saw, for example, the announcement that we did recently in the U.S. with the consolidation of our sites. Capital efficiency remains on the top of our agenda as well. I won't repeat the guidance because Mark covered it already. I suppose, Steffen, we move to Q&A?
Yes. Thank you very much, François. Thank you very much, Mark. Yes. We move to Q&A. We open the line. The first question comes from Celine Pannuti from JPMorgan. Good afternoon, Celine, please go ahead.
Good afternoon. My first question is on the mid-single-digit growth guidance by 2020. I wanted to understand what kind of RIG should one have in mind. I understood that inflation comes and goes, and I presume that there is probably underlying RIG assumption behind that. You also stated that emerging markets, AOA, and some categories should drive that, but what is it exactly that you feel that you should be addressing there? Is it addressing some of the underperformers like Yinlu and that will get you there or whether there may be a lack of competitivity, a competitivity gap that you need to bridge? My second question is on the margin guidance. I think at some point you said that you want to offer the right combination of growth and margin improvement. You are getting to 20-25% basis points underlying margin for 2017.
We should see the benefit from the structural savings kicking in, I presume, over the next couple of years. What we should be looking at this right combination of top line and margin improvement, should we be looking at 20-25 basis points and on top some of the savings from the structural program? Thank you.
Celine, this is Mark. Thanks for your questions. Let me just point out, the outlook for 2020, mid-single-digit. I think to really get there and keep our growth rates in that range on a sustainable basis, it'll require an effort on both fronts, RIG and pricing. I don't have a detailed indication for you where exactly that's going to be, and I hope that's understandable given that this is several years away. In my terminology, typically when I talk about guidance, it's single-year, and that's why I want to be really, really precise with you. This is a mid-term outlook where I believe we can take the company so that you have faith that over time we can improve when it comes to organic growth. That's the way you should see it.
I can't pinpoint the RIG for you other than to say it'll have to be RIG and pricing to carry that. In terms of the guidance on the margin for this year, so what I'm indicating to you here, as of now, and remember, some of this can still improve, but as of now, we have these CHF 500 million of restructuring projects. They might increase over time. That's why I was saying early days. We can still commit to stable Trading Operating Margins. At the very least, for the stable, for the Trading Operating Margin before the restructuring, this will imply a 20-25 basis points improvement. There may be more. It's not related to the savings program per se. Remember, on the savings program, quite a bit of that will get reinvested into organic growth.
This is what we can do for this year. Also remember that 2017 is still an early year when it comes to that savings program. I think most of the benefits from that program will really start to come to us in 2018, 2019, and 2020. Again, in a year where we're also facing probably a turning point on raw materials prices, it may not look overly aggressive here at the beginning, but again, I do think it takes some work to get there, and I'm confident we'll be doing it and shoulder the higher restructuring cost at the same time.
Okay. Gets us to our next person in line. That's Jean-Philippe Bertschy from Vontobel. Jean-Philippe, your two questions, please.
Good afternoon. The first question will be on Nestlé Skin Health and Nestlé Health Science. Maybe if you can share with us what is your plan in those two business segments. You had a massive hit last year with Nestlé Health Science, I think with Prometheus or Prolytin, and this year is now with Nestlé Skin Health. I guess you divested Pamlab at the beginning of the year, which you acquired a couple of years ago. If you can share with us what's the plan with these two business segments. Related to that, on the second question, you still have more than CHF 3 billion goodwill on Nestlé Skin Health. I can see as well that you lowered your growth estimates with this business from highest double digits to roughly 10%-12%. Maybe if you can share your thoughts on that as well.
Thanks, Jean-Philippe. Let me take the first one and then hand it to François for the second one. In terms of Skin Health and Health Science, look, this is early days, and we keep investing here in growth opportunities. These growth opportunities, in my opinion, are linked to our nutrition, health, and wellness strategy. They are linked to the food and beverage core. Keep in mind, for example, in Health Science, the starting point was medical nutrition, which makes a lot of sense and is very accretive to what we're doing. I think there are numerous connecting items here, and it absolutely makes sense to pursue those. Having said that, in the early days you sometimes recognize things later. You sometimes make mistakes, you correct mistakes. I think what we're doing here is clearly single out the winners.
I think in the Nestlé Health Science space, I'm very encouraged by what I'm seeing about our consumer care efforts. I'm very encouraged by what I'm seeing in our medical nutrition field. Then in the skin care area, again, the consumer side I think looks great. As François indicated, we did suffer, especially in 2015, from some patent expirations that also burdened on our sales growth in 2016. Again, the longer-term direction to me makes absolute sense.
Jean-Philippe, good afternoon. For your question on the goodwill of Nestlé Skin Health, it is indeed a reality that we have some goodwill in our balance sheet, especially so as we acquired 50% of Galderma that we didn't own a few years back. That being said, we carry out impairment test on this business as is with any other business on a yearly basis. We don't see any risk of impairment today. The reason why we don't see any risk of impairment is relatively clear. The adjustment that we did in the inventory in the trade in the month of December 2016 does not give us a negative view of the category and the potential of the business. It's a one-off adjustment, and we remain extremely positive on the outlook for Nestlé Skin Health. This is a category that grows mid-single digit. That remains. Okay. Thank you.
Next in line is Warren Ackerman from Société Générale. Good afternoon, Warren. Please, your question. Your two questions.
Hi, guys. It's Warren Ackerman here at Soc Gen. Mark, we've heard a lot about what you like at Nestlé, and obviously you talk a lot about continuity. Can you spell out what needs to change? As clearly you've been brought in from the outside for a very good reason, and the industry is changing at a record pace. Of course, I'm sure in your due diligence, you've seen that Nestlé's financial performance has not been great. Today you've reset expectations in the short term. Can we talk a little bit about your thought process around that? Then secondly, for François, can you talk about working capital? That was very impressive today, 200 bip improvement year-over-year, it's now below 3%. It looks like it's been driven by a big improvement in payables, I think 15 days. Is that sustainable?
When shouldn't negative working capital now be a target? It's something you've shied away from in the past, but why not? Thanks.
Warren, this is Mark. Let me start off on your first question. I think I was hinting at that in my presentation. What we're seeing here right now is a period of unprecedented, fast moving change in the consumer goods industry. I think it's not surprising, this doesn't apply only to us, but also to other firms, that we need to step up the speed in which we respond to that. I think that's a common theme, and you saw that mentioned as part of my initial slides.
This whole notion of speed of execution, getting stuff done, getting stuff implemented, whether it's on the growth front, for example, recognizing and reacting to a new customer trend, or whether it's on the efficiency front, where we need to capture those efficiencies the minute they present themselves and not wait and push them out and kick the can down the road. I think that is key. I think the pace of change has been kicked up significantly in this industry. The good news, when you compare to many other industries, what you don't have is a complete disappearance of the industry. Like when you compare that to some media sectors or others, where things are totally turned upside down. We're dealing with fast change, but manageable change. We need to rise to that occasion, and I'm sure we will. Warren, good afternoon.
Regarding your question on working capital, this has been an area of focus with, as you could see, good results. In 2016, a significant portion of the improvement came from payables, but this is sustainable. Don't expect that it will reverse tomorrow. A lot has to do with supplier financing, and we still have room to go further in that space. I must say, this improvement in working capital is a very healthy one because we did not do it artificially, for example, by discounting receivables, or we didn't do it by threatening the potential of the business. For example, we are not aggressively reducing inventories if we believe that it could threaten, to a certain extent, our growth. We are very careful with what we do. As I said earlier, I do expect that we have further room for improvement.
That being said, I'm not sure that we will be able to replicate the extent of the improvement that we have experienced in 2016 each and every single year. I can even say that I don't think that it is feasible that we go to the same extent each and every single year, but certainly some further improvements. Okay. Next is James Targett from Berenberg. Good afternoon, James. Your two questions, please.
Good afternoon. My two questions really refer to China. Firstly on Yinlu. You mentioned clearly it's double-digit negative this year, and it's a material drag on zone AOA. We were told to be sort of patient at the Capital Markets Day, so nine months ago, in terms of the pace of recovery. Can you just give a bit of color on what you think is going to drive that recovery and the outlook for the brand operations in 2017? Secondly, just on the nutrition business in China, could you give us some updates and color on how much of a drag to performance in nutrition is the China business? Are you happy with your market share? You mentioned your strong share gains in e-commerce, but are you happy with the gains you're making in the mom and baby store channel? Thanks.
As far as Yinlu is concerned, as I indicated, it has been a drag on the growth performance of AOA for sure. I mentioned the figure of 290 basis points in terms of negative growth contribution for AOA. Wan Ling mentioned in the Capital Markets Day in May that we need some time. Nine months have passed since then. We have seen some progress. We know what we have to do. This is very much about innovation. We put in place as well, new management at Yinlu. We launched quite a lot of new products. When we took other initiative, I think that I'm personally positive about Yinlu for a certain number of reasons. We have a good distribution platform for beverages in China, which very few players have to start with.
Second, I think we are playing in the right category because we are in plant-based protein beverages, which is good because this is a category which is really growing fast in China as in many other markets. We need to, I think push further some innovation, but I'm optimistic as well because when I saw, because it has been launched by Yinlu, what we have done with Shakissimo, which is a ready-to-drink coffee and which is branded under the Nescafé brand, it has gone very well actually, which gave us confidence as well on the capability that we have in terms of innovation. Once again, we need a little bit more time, and we'll provide you some color in the coming months.
As far as nutrition is concerned, in China, the market is not growing in the right direction because of pricing pressure, because of this new legislation that will be enforced from the beginning of 2018. That being said, to be clear, in nutrition, we have slightly gained market share. We are doing better than the market. We still ambition to do more, but I think it's a good starting point. You know that we had lost in the past some market share online. We have started to regain market share online as well, which is a good indication, and we are really innovating on what we do with Illuma is a good indication of what we can do.
We remain positive on the category. We keep on investing on innovation with really an ambition to keep on owning the super premium market, given that we have almost entirely left the mainstream category in China, which is essentially driven by a price war. We are not interested in participating.
All right. Thank you. Next on the line is Mitch Collett from Goldman Sachs. Good afternoon, Mitch. Your two questions, please.
Hi there. Firstly, I'd like to ask about the AA rating. Mark, are you convinced that Nestlé needs to hold on to that? Secondly, you obviously said that with asset prices being full now may not be the best time to consider major M&A. Would you perhaps apply the same logic to divestments? I appreciate you've already commented on the L'Oréal stake earlier today, but if now is a time of full asset prices, is it not also the perfect time to consider divestment? Thank you.
Thanks, Mitch. Look, as of today, really, we have no change to announce when it comes to our credit rating. I think our first and primary focus is when it comes to our balance sheet strength to support future growth. We are also very interested in supporting that very long-term, sustainable growth-oriented dividend policy that I think has stood us in good stead, and that was particularly appreciated by our long-term shareholders because it's the best way to share financial success with the shareholder base that is long-term oriented rather than a one-time buyback. As of this point, we have no change to announce. When it comes to M&A, look, there's really two reasons why this may not be the best point in time. One clearly is simply the price levels we see out there, and I think that doesn't take a whole lot of additional arguments.
You'll see that with the multiples that are being announced. Also do keep in mind this is a time where I'm still basically finding my way into the organization, where I'm working with a new team, where I'm basically having to learn some of the fundamentals. Every time you make a major M&A decision, it's a major commitment. That's the way I see it. We're using shareholder money then with very long-term effects that cannot be corrected short-term anymore if you make a mistake. I've always taken that very seriously, and I continue to do that going forward. Hence, I think a certain amount of caution before you start with major transactions is the right way to go. The same, of course, on the flip side applies to divestments of any sort.
Again, you have to think it through very carefully before you start acting, because once you push that button, you can't take it back.
Okay, thanks. Next in line is David Hayes from Bank of America Merrill Lynch. Good afternoon, David. Your two questions, please.
Good afternoon, everyone. Thank you. Firstly, just on CapEx levels moving forward, you talked, I think, today in some of the interviews about reconfiguration of the plants and so forth. I wonder whether you're thinking more about outsourcing of production, and I guess related to that, whether you see that 4.5% of sales in terms of CapEx coming down as that process takes place. Secondly, a broad question for you, Mr. Schneider, if I can. You've been at Nestlé, as you say, for five and a half months now. I guess if you stand back and look at what one thing has changed at Nestlé since your arrival due to what you've implemented and what you've addressed, can you just run through what that might be? Thanks very much.
Let me answer the question on CapEx. François speaking. You are asking if we want to outsource some of the manufacturing. We do it already because we use already an extensive network of co-packers. This is something that we are doing on a selective basis whenever it makes sense. On the CapEx side, we had provided an indication in the past that we wanted to be within 4%-5%, which gives us a little bit of flexibility. CapEx is not necessarily negative, by the way, because it can drive growth as well. We are really supporting as much as we can the CapEx that is driving growth with good returns.
David, this is Mark. With regards to your second question, let me point out I did join September 1, but I only took over the CEO responsibility January 1. The fall was really dedicated to getting to know the Nestlé organization, the people, the markets, and really finding my way into the company. On those things, I tend to be fairly diligent. It's all about looking first, thinking second, and then finally acting third. Is there anything I can point to that I would have changed? No. By the way, this is not about I, it's about us. It's about the entire company. It's about building consensus. Clearly, the first priority was to arrive at this organization, be sure that with the executive board, with the leadership team, we are acting in harmony.
Now we basically roll up the sleeves, and we will embark on the things we're telling you.
Next in line is Jon Cox from Kepler Cheuvreux. Good afternoon, Jon. Your two questions, please.
Good afternoon, guys. Jon Cox, Kepler Cheuvreux. First question actually to come back to the Nestlé Skin Health in the fourth quarter. It looks like it really fell off a bit of a cliff. You mentioned that there was some de-stocking. Why don't you just give us a bit of an idea of the magnitude of that on the group as a whole, if there was one? It certainly seemed to drag down the nutrition and skin business quite pronounced. You mentioned, I think, a 20 basis point impact on group margin. Was that the case? The second question, really back to the sort of working capital CapEx equation with free cash flow. You're now at 11.3% of sales, free cash flow to sales.
Can you actually maintain that level, or do you actually think we can continue to nudge up 10 basis points a year or so? Thank you.
Nestlé Skin Health. I do confirm that indeed the impact at the trading operating profit level for the group is about 20 basis points on this adjustment. The adjustment is corresponding to a decrease of about two weeks of inventory in the trade. For the cash flow, working capital on CapEx at 11.3%, I think that as you can see, we have been able to maintain that level in a consistent way between 10% and 11%. I don't want to give any guidance for the future, obviously this is something that we aim at maintaining a high level of CapEx in the industry as we have been doing over the last couple of years.
Okay. Thank you. Next one is Martin Deboo from Jefferies. Good afternoon, Martin. Your two questions, please.
Good morning, everybody. It's two questions from Mark. I guess the first might be a plea disguised as a question, is on the long-term guidance. Mark, I'm intrigued why, given the chance to think again, you've gone for a sales value guidance when pricing is, to a large extent, out of your control, and François-Xavier has pointed out that RIG is really the measure of the progress you're making. I just value your commentary on why you've tied yourself to a long-term sales value growth target. The second question is on the interaction between the one-off costs and the structural savings. You're increasing the upfront investment in saving, but you're not changing the long-term guidance. You've asked us to take confidence from the fact that you're identifying incremental projects, but not to a point that you're willing to change the structural savings guidance.
Again, I'd just appreciate your comments on that. Thank you.
Thanks, Martin. Look, on organic growth, I do believe, and this is independent of Nestlé, this is a general thought, that there is no truer and better yardstick of how your products and services are appreciated than organic growth, including the value side of things. It basically means how much and how many of your products are being demanded by customers, and how much are they willing to pay for that. Yes, there are moments where pricing is better, there are moments where pricing is worse. At the end of the day, you need to watch both sides of the equation, the quantity, and also what people are willing to pay for your product. There is no escaping from that.
If that means right now in an environment where pricing is low, we have to live up to that reality, and we have to see how we can differentiate our products and develop our products and services in ways that over time we can improve pricing. There is no escaping from that. If the news is unpleasant, it's unpleasant. We'll face it. That's basically where we are, and I believe that with some of the actions I outlined, with some of the initiatives I've seen inside the company, we have good ways to increase, not only the attractiveness of our products and the pricing associated with that, but also the quantity side of the equation, and that's the RIG.
I think there's good prospects here, and you're catching us right now at a very difficult moment where I think you have a bit of a perfect storm between the deflationary environment in key markets that we have seen in 2016, and then also some of these significant changes in the consumer goods industries, where some of the key players have gone clearly for what I call commoditization of their brands, and that's clearly a difficult moment in time. Going forward, let me just clarify. For the single year, we're stepping up these restructuring costs, and I use that first of all as an example of our commitment here to improve margins.
Second, also to show you that when you step them up by the amount we're indicating, that even if you only commit to a stable trading operating profit margin, there is some underlying progress here, and that's something that should be appreciated. Overall, I think what I'm saying is very consistent with the message that Paul Bulcke and François-Xavier have articulated last year. Remember, there was nowhere an indication that these savings would come for free. In fact, they would be associated with a one-time cost, and now we're basically getting into the period when these one-time costs have to be recorded, and 2017 will be one of them, and I'm sure there'll be more in 2018 and 2019. Do keep in mind, those are investments in the future and they will pay off.
Believe me, we wouldn't go into those if they wouldn't make absolute sense for this organization.
Okay. Thank you very much. Next in line is Patrik Schwendimann from Zürcher Kantonalbank. Good afternoon, Patrik.
Good afternoon, everybody. A very warm welcome to Mark Schneider. As the new CEO, where do you see the biggest improvement potential in terms of regions and in terms of product categories? That's my first question. Secondly, what will be the phasing of this 200 basis point structural cost savings, and what's your best guess of the retention rate of it? Thank you.
Thanks, Patrik. Look, I think in terms of above average growth, everything related to Asia Pacific, and emerging markets in general is still my long-term bet. I think this is where we're well-positioned and where you will see continued progress. You will have ups and downs. Think about Latin America and how recently under some of the weakness we've seen in raw materials prices, that continent has been struggling. Nonetheless, I think emerging markets are a very safe bet. That's where a lot of the RIG improvement over the years will come from. Whereas I think in the established markets, it's more premiumization and differentiation game. So the balance growth between these two going forward, is going to be of interest.
In terms of categories, I hinted about in my presentation, I think that coffee, pet food, and water in particular, in addition to our new healthcare ventures, are areas where we can see above average growth. We're clearly interested in advancing that growth wherever we can. In terms of the phasing of the cost savings program, I mentioned none of this has accrued in 2016 yet, it's fully available still, which is good news. A lot of preparation has gone in. You will see a little bit of savings kick in this year, but then it'll start to come in to a larger extent in 2018, 2019. It's not like you have to wait and switch off the light till 2020. You will see continued progress in this direction, and we'll keep you updated starting from this year through 2018 and 2019 into 2020.
Okay. Next in line is Jeremy Fialko from Redburn. Good afternoon, Jeremy. Your two questions, please.
Hi. I've just got one, actually. Thank you for taking all of these questions. It's really about the structure of the business. Obviously, Nestlé is quite a complicated organization. You have the zones, you have the globally managed businesses, you have some regionally managed businesses, you have certain power in the countries and the categories overlapping it. Perhaps, if Mark could give a bit of perspective on how well he thinks that structure is working and where he thinks the main potential for improvement will be in terms of making Nestlé this more responsive organization. Thanks.
Jeremy, thanks. Yes, as someone that had a fairly steep learning curve since September, I do appreciate that question and understand the background for asking it. Do keep in mind the sheer size of the company. At that size level, if you do a simple, straightforward line organization, it simply is no longer sufficient. We are having in our portfolio businesses that clearly have a very different geographic horizon from local to regional to global. Hence, you need some flexibility, and I think that's only symbolized in the various organizational structures we employ. I think we have taken a big step now towards the end of 2016, beginning of 2017, with the new reporting structure regarding Nestlé Skin Health and Nestlé Health Science. That's a good step.
Wherever it does make sense, we will certainly work towards simplified, fast structures to be sure that we can respond to the markets fast. Do keep in mind, again, especially for a business that has a global outlook or regional outlook, a certain amount of coordination will be necessary and is simply the price of scale. There's also plenty of benefits to scale, simply it's not only a negative here when you run a regional global business. We will use organizational complexity where appropriate, but we'll certainly simplify where we can.
Okay. Next one is Alain Oberhuber from MainFirst. Good afternoon, Alain. Your two questions, please.
Yes. Good afternoon, gentlemen. Mark, I have one question regarding RIG and then commodities. Did I understand you right that the RIG is gradually improving in AOA, remaining stable in Europe and later also in the year improving in Latin America? My second question is regarding the input costs. Do you expect an acceleration of input costs? When I listen to some of your competitors, they guide for the second half of gradually or even steep increase of input costs. Do you see a similar situation for Nestlé?
Alain, thanks for your question. Maybe I can get started on the input cost and then hand it to François on the regional view. I think without sort of going into it raw material by raw material, the signs are pointing towards a flipping point here where we've seen a tailwind coming from raw materials, including last year, where I think this may be turning into a slight headwind for this year. There's always a delay because, of course, we're using prudent hedging, so in a sense, it's not hitting you directly. I do think the tide is turning when it comes to raw materials. It either has turned or is about to turn.
That also is one reason why I think all our efficiency efforts going forward are very important because we will be facing a little bit of a headwind on the raw materials side once the cover that we have from hedging has run out.
Alain, good afternoon. François speaking.
Your question on the RIG by zones. Indeed for zone Europe and zone EMENA, we saw a good level of RIG because this is the highest level that we experienced over a very long time. In AMS, there was a slight slowdown in terms of RIG, which is mainly coming from Brazil. As you know, we did some price increases at the end of June, which had a negative impact in Q3, but it started to improve in the latter part of the year on Brazil being a large country for us. Obviously, it put some pressure overall. In zone AOA, we saw a sequential acceleration of our volume throughout the year, which is positive.
Overall, as far as the RIG is concerned, we had the best level of RIG over the last three years with, as mentioned by Mark earlier, a little bit less in the latter part of the year, though.
Okay. That gets us to Toby McCullagh from Macquarie. Good afternoon, Toby. Your two questions, please.
Hi there. Good afternoon. Just the two. Going back firstly to the structural savings. You've given or you've confirmed the size of the gross savings and given guidance on the phasing of the structural savings. Could you also give any more of an indication of your current thinking of the retention rate by 2020? Is the 15% retention rate that you flagged at the Capital Markets Day last year for NCE to date a useful guide with a medium-term view? The second question, it's a short-term one just on the phasing of growth through 2017. Can you give us some help about how we ought to think about Q1? I appreciate that's quite short-termist, but in the absence of the leap year benefit, the later Easter, and also any sort of impact from the pull-forward effect of an earlier Chinese New Year.
Should these any other technical factors make 1Q meaningfully weaker than the rest of the year, just thinking about the profile of 2017? Thanks a lot.
Okay. Thank you, Toby, for your question. As far as the retention saving for the growth savings, indeed, when I talked at the Capital Markets Day in May, I indicated that over the last three years, we let flow to the bottom line about 15% of them, one five. You have noticed that in 2016, out of 80 basis points of margin improvement at gross margin level, we reinvested 50 basis points. That gives you an indication of what we have done in the past and what we have done recently. I don't want to give any indication in the future because it depends of a large number of factors from our pricing capabilities to commodity pricing and so forth, as well as, we don't necessarily have a full visibility on the need for investment in innovation, for example, for an horizon of 2019 of 2020.
We need to keep a little bit of flexibility there. You mentioned a certain number of factors that may impact the short term. These factors are real. You talked about the leap year last year. You talked about Chinese New Year. Indeed, it is true that to a certain extent, we had something like two Chinese New Year last year, and we may have somewhat zero this year for some businesses which are more impacted by Chinese New Year, like our confectionery franchise in China. That being said, we don't provide any guidance by quarter, but what you said is absolutely correct on the fact that some factors may influence more some periods than others.
All right. That gets us to the last question from Alex Smith from Barclays. Alex, good afternoon.
Hi, good afternoon. Maybe we could just go back to your earlier comments on the pricing environment. I think you said in the latter half of the year, pricing didn't come through as quickly or as strongly as you expected. I was just wondering if you could be a bit more specific as to where the pushback on that was, either by category or by geography. Was it the trade? Was it consumer resistance? Is it competition being unhelpful? I guess what makes you confident it'll be different in 2017, given that's where you're expecting the growth really to pick up? Perhaps maybe you could just comment on how you feel about the pricing power of the Nestlé portfolio today. I guess it seems like some of your competitors were perhaps a bit more successful in getting pricing through in the second half.
A second question, just quickly on marketing, I guess something we haven't discussed. I don't know, Mark, if you had the chance to look at the levels of marketing across your categories or geographies. I think you referenced Asia as being an area you might be prepared to spend a little bit more, but I guess how do you think about marketing in terms of the return on investment you're generating? Is there enough in digital? Is there enough consumer pull in the marketing? Thanks.
Let me answer on the pricing side. It came a little bit later than expected indeed, and to a lower extent as well. It's a little bit difficult to answer that question because pricing is a local decision, which means that we don't decide in Switzerland the level of pricing and when we do the price increases. It is left to the appreciation of our local affiliates, which is important because it is largely linked to market forces and market condition in a given market, not even in a given market, but by category in a given market. I would say I'm a little bit less worried about the timing of it, but the important thing is that it is eventually coming, and we saw some sequential acceleration from 0.4% of contribution in Q2 to 0.9% in Q4, and then we have put in place some additional pricing.
It is really coming. We see that part of it is coming naturally as well with competition because what we just mentioned a few minutes ago about the commodity cycles moving up now is something that will contribute to it, not only for us but for our competitors as well. We need to make those decisions in a local context, not in a global context.
Alex, this is Mark. When I was referring earlier to this more selective backing of our growth categories and regions, I was not only referring to our marketing spend. This really applies to the full value chain from product development, some of the manufacturing investments, distribution, and yes, marketing is included as well, where appropriate. Again, it's basically putting our horsepower where we see the best payoff for that. Again when it comes to regions, certainly Asia Pacific is one of the top contenders. When it comes to categories, I had mentioned as examples coffee and pet food and water. I think it's really about the full spectrum here, wherever we can help, whether it's CapEx or OpEx, to support the growth in those spaces.
Specifically, when it comes to that part of your question, traditional marketing spends versus digital, I think we have ramped up digital significantly, and we're seeing good traction, good progress on that, as François had pointed out. I'm very comfortable with that. I think, again, where we can, establishing a direct channel of communication with our consumers is going to be important down the road to be sure that they have the service levels, the communication, and sometimes even the direct transactions that they want. We're focusing on that.
Okay, that brings us to the end of our Q&A. Mark, would you like to summarize from your point of view?
Yeah. First of all, really appreciate your attention and spending the time with us. I just want to be very clear, when it comes to the guidance for this year, to the extent that that's being seen as conservative by some, we're strong believers in a strict meet or exceed culture. See that as a backdrop here to our commitments. We really want to be sure you can trust in what we say. Going forward, if you sensed midterm enthusiasm in some of the things I was describing to you when it comes to our efforts to ramp up organic growth, or when it comes to some of our efforts to improve operating efficiency, yes, that's what it is. I'm truly encouraged by what I'm seeing, and this is an organization that's stepping up to the plate.
There's a lot of good things underway and happening, and we will reinforce those and step into those. We will basically make that happen for you, and I'm sure you won't be disappointed. I certainly was very encouraged by what I saw.
Thank you very much, Mark. Thank you very much to everybody on the line who attended our call this afternoon or this morning, depending on which time zone you're in. If we couldn't answer all your questions or if you need detailed follow-up, you know where you reach us in Investor Relations. You have all our numbers and email addresses. If not, we see you in one of the upcoming road shows or at the occasion of our Q1 earnings release. Thank you very much and goodbye.