Good morning, ladies and gentlemen. Welcome to the 2018 results press conference. My name is Christoph Meier. This conference will be held in English. If you watch the webcast, you can choose a French and German translation by clicking on the respective link on your screen. With me today are our Chief Executive Officer, Mark Schneider, and our Chief Financial Officer, François-Xavier Roger. In the room, we have several members of the group executive board, our three zone heads, Laurent Freixe, Americas, Chris Johnson, Asia, Oceania, and Sub-Saharan Africa, Marco Settembri, Europe, Middle East, and North Africa. We also have our head of the strategic business units, marketing, sales, and Nespresso, Patrice Bula, as well as our Chief Technology Officer, Stefan Palzer. I take the safe harbor statement as read. Let's start now, and I'm handing over to Mark Schneider. Thank you.
Christoph, thank you, and a warm welcome to the press conference participants this morning, to everyone who joined us here in the room, and also everyone who's taking the time out there on the web to follow this event. We certainly appreciate your interest in our company, and we appreciate the opportunity to update you on the significant progress that has been made at Nestlé over the past year. This is also an opportunity, and we will follow with this at 10:00 A.M. for everyone who joined us here in the room to showcase some of the products that are under development or about to be launched. This should also signal to you this strong commitment the company has to continued meaningful innovation in the food and beverage space. Exciting must-have products sold under strong brands that really carry the day.
We hope that we'll be able to showcase some of this to you at the event after 10:00 A.M. Moving on with the key messages. What I was stressing to you on previous occasions, the fact that this industry is changing very fast and that it requires that we change fast to stay in lockstep with it and continue with our lead. I think that has really happened in 2018. You're seeing significant, meaningful progress on all fronts with our accelerated value creation model that we outlined in the June of 2017. The key metric, of course, is organic growth, as you know. I think this is the biggest long-term value driver the company has, and I'm proud to say that it jumped back to about 3% from 2.4% in 2017.
We were also very encouraged by the strong second half of the year, and particularly the strong fourth quarter. As you can see from the slide, this is driven by progress in two of our largest markets, the United States and China, and also in a very significant category, and that is infant nutrition. As you know, we've put considerable efforts in all of those three areas. We've had a new leadership team take charge in China in 2016. We changed the leadership team in the United States last year, and we did a massive reorganization in our infant nutrition business, which was transformed from a globally managed business in 2017 to one that is handled by the zones. This transition was managed between November 2017 and January 2018, and I think it's delivering results in all three zones.
I'm very encouraged by what I'm seeing, not just on the growth front, but also on this more granular, direct way of handling the business and market share gains in key markets. We've seen a strong improvement in the underlying trading operating profit margin, 50 basis points. W ith our growth and with the margin, we are fully on track towards the 2020 targets that we outlined at our London investor seminar in September 2017. You also see that reflected in our 2019 guidance, which we will explain later. You've seen strong progress with our portfolio development. Clearly, we were able to complete some reviews that we had announced to you earlier. Most notably, of course, just at the beginning of the year, U.S. confectionery. At the very end of the year, the Gerber Life Insurance business, which got completed literally the last day of the year.
We announced a review of our Nestlé Skin Health business, and just this morning, as you know, with the press release, we announced a strategic review of our Herta Charcuterie business. V ery disciplined portfolio adjustment in line with where market trends are going and where we see growth opportunities going forward. Strong underlying earnings per share growth, strong return of cash to our shareholders, I think two other key metrics that I'll focus on later. Let me add one key message here, and that is thank you to all the more than 300,000 Nestlé associates around the world that made this happen. I talked on earlier occasions about something that really puts this company apart, and that is at all levels in all locations, the sheer will to win.
I think that really shown through in that year, and it carried the day, and we very much appreciate it. It also gives us hope and confidence when it comes to the future. François will handle the financials in more detail, but let me just show you that at the group level, all the key metrics are pointing up, some of them actually quite strongly. In particular, when you look at the first three ones from left to right, it vindicates our balanced approach to growth and margin. YO u're seeing good improvement on organic growth. You're seeing good improvement on the underlying trading operating profit margin. When those two things come together, very good things happen for underlying earnings per share. Yes, that number of 13.9% for 2018, it did benefit some from U.S. tax reform, we all know that.
Even if you strip out some of these unusual items, you see that essentially the underlying earnings per share doubled from 2017 to 2018. Hence, that balanced approach between top line and bottom line, that key hallmark of Nestlé, I think it really shone through in 2018. The next item, free cash flow, if you see that as a proxy for capital efficiency and balance sheet efficiency, I think that also improved very strongly. When all of that comes together, like strong underlying earnings per share and then capital and balance sheet efficiency, yes, then you're seeing strong uplift in return on invested capital, and you're seeing this bounce here from 9.1% to 12.1%.
Yes, again, some of this was aided by the fact that last year was unusually low with our Nestlé Skin Health write-off, but a lot of that is also just solid underlying improvement, and that is what's giving us hope for the future. Delivering on our commitments on a whole lot of fronts, not just the financials. I won't spend a lot of time on all of these items, but let me talk about this sharpening of our strategic focus, because on early occasions, we talked about the fact that in our view, strategy is not a one-shot thing. It's not a photo. Strategy is a movie, something that unfolds over time, a consistent set of actions that gets the company from one place to another in the face of a changing environment.
I think this is essentially what we've done over the past several years in a very consistent manner. This whole focus on our core food and beverage and nutritional health products range, I think that is really shining through now. W hen we talk about that, especially after announcing the review on Nestlé Skin Health, I think it becomes clearer what we really mean. Inside food and beverage, when you think about today's announcement on Herta, it also shows you how we position the company towards benefiting from higher growth future areas such as plant-based offerings that are very much in trend with where the consumers are going. T his whole portfolio evolution happens at a very disciplined pace. As you know, each and every one of these steps is, in the case of an acquisition, a significant integration effort.
In the case of a sellout, it's also a significant carve-out effort. All of that needs to be handled operationally in a very diligent and prudent manner, and that dictates the pace. T hat disciplined pace, to hurry on this, but not to haste, I think this is something that the majority of our investors have really taken heart to, and we will remain committed to that going forward. At the very bottom of the slide, let me also point out our strong commitment and the key essence that really defines Nestlé on creating shared value. I have a slide on this at the end of my presentation and give you some of the key priorities for 2019.
This slide you've seen two years ago, the outline of the slide, basically the actual organic growth on the left-hand side, and then the three drivers that are getting us to our 2020 target of mid-single digit organic growth. Now, I also updated that slide for you last year, and we'll continue to update it for you. What I'm going to do now is for the next few slides, give you more details on each of these three buckets. I think those are the three drivers that really help our organic growth over time. It's fixing the base business, portfolio management, and then continued focus on high-growth categories. F ixing the base business, just three examples here, and there's many more inside the company, but three that certainly you have followed and reported on from the outside over the past few years.
Let me start here, a little unusual perhaps, with Nestlé Skin Health, because as you know, Nestlé Skin Health is also a business that we have under review, but c redit where credit is due. W hat we have seen here over the last two years is a stunning turnaround. This business has been going back to very solid organic growth over the past year. The business has been put on a very competitive cost base. M ore importantly, we have defined three clear winning segments in this business and have a very well-defined strategy in each of them, and we have a strong management team that now executes on these three strategies in those three sub-segments. Those sub-segments, as you know, are consumer, aesthetic and corrective, and prescriptive. W e are winning in all three of them and doing very well.
The company has gone through a significant restructuring in the years 2017 and 2018. We are now accomplishing a larger business volume with one quarter of the workforce less. C learly, the business enters this review of strategic options from a position of strength. T hat is a hallmark from us as well. We are committed to portfolio management, but when we do portfolio management, when we do reviews, let's do them from a position of strength. Gerber, the center of the slide. Here we return to positive organic growth in Q4 2018. We are committed to this ongoing expansion of the organic range and new packaging materials. I think we also communicated this whole new approach with a new campaign called Anything for Baby.
On a lighter note, anyone who has a soft spot for kids and babies, spend a bit of time, look it up on the web. I can tell you these ads will put a smile on your face. V ery nicely done in communicating that new approach to the Gerber business. T hen Yinlu, as you know, that business had given us quite some grief in 2015 and 2016 with strongly negative growth rates. We stabilized the business in 2017, and we returned to better growth in 2018. As you know, one of the signature product ranges, peanut milk, remains a challenged category in China. W e have been able to reposition the business to a strongly growing segment, and that is ready-to-drink coffee products that are very much in demand in China and that use the existing Yinlu capacity.
A good way of pivoting this business in line with the changing market conditions in China, and again, another testament to the fact that when we focus on a business and we are committed to a turnaround, we can make it happen. Next, developing our portfolio. I have 2 slides on this. First, a more general outline that you see on this page, and then specifically some information on our Herta review that we announced this morning. Looking back over the past year, the total deal volume for 2018 was roundabout CHF 14 billion. Pretty significant when you add up the buying and selling. You are seeing here on the sell side, the U.S. confectionery and global life insurance businesses I referred to earlier. Under review, we have now the Nestlé Skin Health business and the Herta business, which I cover on the next slide.
Then you see under the acquisition headline, quite a few deals, some of them very significant, such as Starbucks and Atrium. Some of them in the small to mid-size category, such as Blue Bottle, Sweet Earth, Terrafertil, and acquisition of a majority stake in Tails.com, and also Chameleon Cold-Brew Coffee in the United States. V ery much along the lines of products in food and beverage that are on trend, rising strongly in the market, and also in growth categories where we intend to accelerate going forward. On Herta, what we put under review is the Herta Charcuterie side of the business. T hat covers cold cuts and meat-based products. It is a sales volume of about CHF 680 million . This is based on 2018 numbers. The main country for our Herta range is France, where this is an iconic meat-based products company.
In addition to that, with operations in Germany, Belgium, Luxembourg, U.K., and Ireland, a total of about 2,100 employees and three factories. I t is important for me, as part of this announcement, to underline our commitment to the food sector and to food products going forward. W ithin food products, we see significantly better growth opportunity for plant-based offerings. We have very strong brands to carry such plant-based offerings. For example, the Garden Gourmet range in Europe or Sweet Earth in the United States. I think this is very much on trend as more and more consumers look at balancing their protein intake and as they are also getting increasingly concerned about the environmental consequences of their food intake. I think that whole focus on plant-based offerings is very much on trend and will be with us for years to come.
Last but not least, supporting growth through innovation. I will not spend a lot of time on these three specific examples. They are stunning success stories, but what is more important to me is to describe the backdrop here, and especially with our Chief Technology Officer, Stefan Palzer, present, let me say, I tip my hat to the research and development community at Nestlé for the significant retooling we have seen in 2018. This is a strong, vibrant organization that now has significantly cut cycle times, significantly improved bang for the buck when it comes to using the world's largest budget in research and development when it comes to food and beverage, and really translating that into a continued stream of exciting must-have products. That is what it is all about.
When we talk about sustained organic growth performance, what we ultimately talk about is improved products that really carry the day with consumers, and that has to be supported by a strong innovation engine, and that is happening right now out of R&D. T he pipeline is refilling as we speak, doing very well on this. Again, I am very impressed with the changes that happened in a short order of time. When it comes to the 2019 guidance, we are seeing continued improvement in our organic sales growth, so this means over and above the 3% of 2018, and also continued improvement in the underlying trading operating profit margin, that means over and above the 17% you saw for 2018, and absolutely in line with the 2020 targets that we had outlined at our London investor event in September 2017.
Just as a reminder, this calls for mid-single digit organic sales growth, and this calls for an underlying trading operating profit margin of 17.5%-18.5% for the year 2020. The year 2019 will be a long step towards that, and we're confirming all of the things that have been said in this direction before. As of now, we're expecting restructuring costs of around CHF 700 million, and we will update you on that as we go through the year so that you have good visibility on what our restructuring activity will mean for the bottom line development. Then we also continue, of course, to expect underlying earnings per share to improve in constant currency and capital efficiency to improve as well.
This is the point where usually I would hand it off to our CFO for a more detailed look at our operating performance and financial performance. W hat I'd like to do today is to spend a few minutes on a broader agenda here of sustainability and social good that the company stands for. The credo here, business as a force for good, is one that I'd really like to bring home in a more detailed way to you. Let me say, on a personal note, having joined Nestlé about 2. 5 years ago, many times I've been deeply moved, deeply struck, and sometimes humbled by the strong commitment that I'm seeing from hundreds and thousands of colleagues at all levels, all geographies of the organization, in really making business as a force for good come to life.
The strong commitment to sustainability, to creating shared value as an approach to doing business, I think this is something that goes right back right to the inception of the company. In so many of our categories, dealing when it comes to supply with fragile agricultural communities that are exposed to the elements and exposed to varying prices, and really being a partner for the long term to these communities and being very much devoted to sustainability. Then downstream in the communities where we're active and the communities we're catering to, being a long-term, reliable, and dependable partner and good citizen wherever we do business. As I said, it resonated very strongly with me, and it also reminded me why 35 years ago, I was interested in a career in business.
That was not just a paycheck and a job, but it was this whole notion that when business gets done right, it can be a force for the good, and I think that's increasingly recognized. This notion, this credo is important, and it's getting more important every day because I think consumers are taking an increasing interest not just in what they buy, but they also want to know how the products that they buy are being made and what are the business practices of the companies that they buy from. Among NGOs and governments, the enlightened NGOs and the enlightened governments are also more and more interested in having business have a seat at the table when it comes to finding solutions that really get traction on the ground, that are not just ideas.
To make it happen, business needs to have a seat at the table. I also see in this context a renewed opportunity for big business because when you look at the past few years, it seemed like small is beautiful seemed to be an ubiquitous mantra. Big business can have big impact. Big business can make big strides towards having a development to the better. I think that notion shines through more and more. We can be a role model. We can bring scale and technologies and know-how to the table on a level that small companies simply cannot do. A good and specific example on this from last year, you may remember our announcement from the September of 2018 that we are using now satellite tracking technology to be sure that when we source palm oil, that our suppliers live up to their commitment of no deforestation.
We were the first food company to do this. I am personally convinced, give it a bit more time, this will become the operating standard in the industry. We trust our suppliers, but frankly, verifying from above is a whole new level of doing business and really enforces honesty in the supply chain over and above the documentation and audit approach that have been used before. That sort of spearheading, that sort of pioneering, I think that is something that big business can do in a better way than smaller companies can. Hence, I think this is a responsibility we want to live up to. This is our approach going forward.
It has always been our approach, and it is something that is worth highlighting and something that in the future we will want to stress more as part of our press conferences and also as part of our earnings. Because even within the investment community, I think there is more and more interest in being sure that these results are achieved in a sustainable manner and not just a sustained manner. When it comes specifically to the agenda for 2019, I would like to highlight three areas of focus. One is contributing to healthier lives. We launched our Nestlé for Healthier Kids campaign in May 2018, a significant campaign over several years that really tries to make an impact and tries to have an impact at an age when nutrition habits are formed, and that is in childhood. It is a whole set of activities. It is global.
It will have an impact on the products we offer. It will have an impact on partnerships that we strike with schools and with educational institutions around the world. It will also have an impact on just providing better information so that people can make informed choices. That campaign continues to get scaled up in 2019. At the center of the slide, you have seen our commitments and our specific actions from last year when it comes to a waste-free future, especially when it comes to tackling the problem of plastics waste. A significant amount of activity is going into that, and I hope you appreciate it.
When we made this detailed announcement at the beginning of 2019, it was not just high-level commitments, it was not just longer-range commitments, but it was also very specific things that we are doing right now and that we will be launching later this year to contribute to a waste-free future. It was also a commitment to lead by example when it comes to solving some of the problems that have been created in the waste area in the past. Last but not least, when it comes to inside Nestlé, we are proud that when it comes to diversity and inclusion, in particular gender balance, we were able to achieve a rate of 30% of female senior executives in our company last year. W e also recognize that is not enough. The right thing is to go beyond that.
We will have an accelerated gender balance plan put out to you in March. There will be a separate event on this March 4th. Between the years 2019 and 2022, you will see, just like with the Nestlé for Healthier Kids campaign, a very consistent set of actions at all levels in the company that are designed to drive up gender participation and gender equality at Nestlé. It is the right thing to do, it is the right thing for the business, but more importantly, morally, it is the right thing to do. It has been too long, and we have to act on this. Those are three areas that we will focus on in 2019 in particular.
Let me say, over and above these areas of focus, what usually does not get the credit is at the ground level, those many, many occasions, many, many places where Nestlé colleagues, Nestlé associates, do good things to their surrounding communities each and every day. I think that is also something that we need to point attention to because I think it sets the company apart. Let me close with that and hand it over to François.
Thank you, Mark, and good morning to all. I will start my presentation with a high-level review of our portfolio. We have a well-diversified and balanced portfolio in terms of geographies and market. We are not overly dependent on any single market. AMS contributes 45% of our sales, EMENA 29%, and AOA 26%. All three geographies have contributed to the growth last year. AMS has been the largest contributor to the improvement of the growth from 2017 to 2018. EMENA did a solid year with 2.1% of growth, especially when taking into consideration the deflationary environment that we are facing in Western Europe. AOA has been able to deliver the highest level of growth. We have a strong footprint in emerging market. Emerging markets contribute to 42% of our total sales. They are driving growth. Actually, last year, they grew three times faster than the developed markets.
Emerging markets are actually attractive not only because they bring growth, but they bring margin as well, given that we have a higher margin on average in emerging markets. We have a well-diversified portfolio in our business in terms of categories as well. There again, we are not overly dependent on any single category. Our largest category, which is powdered and liquid beverages, which is mainly coffee, contributes 24% of our total sales. Second one is nutrition and health science with 18%, and we have two other ones, pet care and milk product and ice cream contributing 14%. Our growth has been broad-based across categories. All categories have contributed to the growth. Obviously, what we define as high-growth categories, and I will mention more specifically coffee, pet care, infant nutrition, and consumer healthcare, have been growing two times faster than the rest of the other categories.
The other categories may have been assigned different roles, starting with cash flow generation or margin improvement. We were pleased last year to see that we had revived growth in our two largest markets, namely the U.S. and China, especially after a soft year in 2017 in these two markets. In the United States, we improved our growth from 0.2% in 2017 to 2.6% in 2018. This came mainly from coffee, pet care, Coffee-mate, and to a lesser extent, even pizza. In China, we accelerated our growth, and our growth in 2018 was 3 x higher than the previous year at 5%, and it happened across categories. Last year, in 2018, we reached CHF 91.4 billion CHF of sales. That is equivalent to a reported sales growth of 2.1%.
The main component and the main driver of that growth is our organic growth at 3%, which was made of RIG at 2.5% on pricing at 0.5%. Organic growth, as Mark mentioned earlier, increased in 2018 by 60 basis points over 2017. RIG at 2.5% remains at the higher end of the industry, and it has been the case for quite some time. RIG, you know that is a combination of volume and mix. Volume is important because we are talking of share of stomach for consumers, and mix is also very important because this illustrates very well our capacity to innovate and our capacity to premiumize as well. Pricing was soft at 0.5%, but also it accelerated during the year. We started the first half at 0.3% of pricing and concluded the year at 0.9% in H2. Net M&A had a positive contribution of 0.7%.
This is a net impact of acquisitions, mainly the Starbucks license as well as Atrium Innovations, less the disposals. The main one has been U.S. confectionery. We had a negative impact of foreign exchange by 1.6%, which is mainly coming from depreciation of emerging market currencies. Our underlying trading operating profit margin increased by 50 basis points last year. This is the second year in a row that we have been at that level of increase. The main driver has been the improvement of the gross margin by 50 basis points. This came as a consequence of pricing, so we have a good capacity to price up. This came as a consequence as well of our product mix. We have been able to reduce our fixed cost, fixed industrial cost.
For example, our fixed industrial cost have reduced last year by 2.1% in absolute value, and we have been able to deliver operational efficiencies as well. Our gross margin has been increasing in five out of the last six years, which shows the quality of our portfolio as well. We had some headwind in terms of distribution cost. This is mainly coming from higher transportation cost. This happened mainly in the U.S. and hit mainly our water business, but it went even further than that, because it started to hit as well some other categories in the U.S. and some other markets, like in Japan or even some European markets. We delivered some significant efficiencies as well in administration, and we have been able to achieve some interesting efficiencies in our marketing spend and R&D spend.
As far as marketing and R&D is concerned, we have reinvested a significant portion of these savings. To complete my presentation, just a quick highlight on our cash flow. It was a very strong cash flow last year, CHF 10.8 billion. You can see that we have been fairly consistent in our cash flow delivery over the last couple of years with even more than 11% of sales in most cases. This is really the outcome of all the positive evolution of our key financial KPIs. We have been able to drive growth and accelerate our growth. We improved our margin. We have been very disciplined in managing our CapEx. We have reduced our working capital, so all of these contributed to the strong cash flow generation.
This strong cash flow generation leads us to the point where we want to accelerate our share buyback program, and we expect to complete it as a consequence by the end of 2019. Initially, we had the thought of completing it by the middle of 2020, so we will complete it six months ahead of the original schedule as a consequence of this strong cash flow generation. That completes my presentation, and I'm now handing over to Christoph for the Q&A.
Thank you, François. We will now take questions from the room. May I ask you to ask one question at a time so that we can give everyone the opportunity to ask questions? Yes, Mr. Hoch, AWP.
We hear a lot about recessions everywhere. Do you see in any of the signs of recessions anywhere in your markets?
The microphone, yes sir.
Sorry, we can hear a lot about recession everywhere. Do you see in any of your markets signs of a major slowdown or signs of recession? Thanks.
Yes, I think globally, GDP growth has slowed a little, in some countries more than in others. I t is important, and I think this shown through this presentation, while of course no company is totally decoupled from GDP growth, we're not selling GDP. Our job is within a given market to do as well as we can. That means new and improved products, working on efficiencies, and really winning with the consumer every day. The progress you're seeing in 2018 is not a macro progress, is not something the world economy was doing better. The progress happened because at the ground level, we were putting a lot of things in place that paid off. That to me, when it comes to 2019 and 2020, from whatever I can see now, should also carry the day. Of course, we're watching the macro environment.
We're watching with concern some discussions, take the Brexit debate and making sure that no matter what happens, we can live up to our promise to the U.K. consumer and be able to supply. Nonetheless, at the end of the day, it's micro steps, it's business steps that we're taking to position our business the best we can no matter what the overall economy is doing.
Next question, Angelika Gruber, Reuters.
You already mentioned Brexit. Are there any specific steps you took to make sure you can supply your customers there? I would have a second question since the U.S. and China are your biggest markets, do you see any negative effects from the debate about the trade dispute? Thanks.
On the first one, we had commented on previous occasions that the way that a business can prepare for this is, of course, to increase inventories, because if there is going to be some disruption, it'll be about import handling, and it'll be about trucking and freight. Hence, the best way to counter that is with more local warehousing, and so we're preparing along those lines. When it comes to U.S. and China, do keep in mind that we have very few shipments going from one market to another. Of course, we don't want a trade dispute. As a company, we're very much committed to open trade and free markets. S pecifically, we're not shipping very much from one market to another. Hence, while we're watching with interest, it is not something that's giving us specifically at Nestlé, deep concern.
Next question, please.
Yes, Erich Bürgler, SonntagsZeitung. Talking about pet care, we have seen above average growth there. Where does that growth come from? In which areas? Are acquisitions a priority there? Where do you go with innovations there? What kind of new products? Do you also go towards plant-based products there, maybe?
Pet care is one of our growth areas we are very committed to. The good news when you look at 2018 was that we had a fairly even successful development across all geographies. The key geographies, of course, are the U.S. and Europe. This is a growing category pretty much all throughout, and we are very committed. In fact, this is one of those long-term success stories where over almost two decades now, we have been patiently building our global position and really making the most of a long-term opportunity.
As acquisitions opportunities arise, of course, we are always interested, but there is nothing specific I can point you to. We did invest, as you know, last year in Tails.com. We acquired a majority stake in that company. That is an exciting company because it stands for personalization in pet care, which I think is a key trend going forward to be sure that you have a direct relationship with the consumer and that you tailor the product exactly to the needs of the pet. I think this is an exciting development, and we are looking to scale that up over time. Another question? Otherwise, looks everything is clear.
One question, Mr. Zvior, NDR.
Yeah, good morning, Mr. Schneider and Mr. Roger. I have a question on packaging. I just saw this packaging here on the table. This used to be an Nespresso capsule. Yeah, I was a little bit surprised because we're doing research right now on packaging, and we bought 100 products of Nestlé last week in the supermarket, for example, this or some others. We talked to Mr. Braungart, the professor who invented the cradle to cradle theory. We let Mr. Braungart check it, and he said in the end, the majority of these products, they are not really useful for sustainable recycling. Either it's because of composite material or it's colored plastic. The question is why don't you stop producing these packages? These are clearly harmful for the environment.
Look, it's very hard to comment now on the spot on what a professor said somewhere. Let me just say very clearly that our first priority is food safety and food quality. These products were not invented over the past decades with the goal of polluting the environment. They were invented because we wanted to be sure that when it comes to shelf life, when it comes to food safety, and giving you the food with the best properties and quality, that we do the best we can. This doesn't apply only to us, it also applies to everyone else. Collectively then, over a long period of time, we see now that a packaging waste problem has built up, especially around plastic packaging. Now, based on what we all know and what we collectively learned, it's about how do we take action.
This is again, where you separate the snapshot, which is yes, there is an issue from the movie, and the movie is what are we going to do about it going forward and how are we going to improve? This is where we issue then our commitment to have products be recyclable or reusable, the packaging by 2025. We outlined specific steps. We founded an institute of packaging science to make sure that we're not only dependent on what our packaging suppliers give us, but rather that we can drive some of these innovations as well. It's not about the snapshot right now. It is about the future and making sure that we can maintain the same level of food safety and food quality, and yet at the same time have something that can be recycled more easily or avoids waste in the first place.
This is what we should be judged on going forward, and hence we gave this commitment. I think just going shopping last week and saying, "Okay, there's a problem." Yes, we know there's a problem. That's why we work on it. That's not good enough.
Other questions? Yves Genier, La Liberté.
Yes. Climate has become a top agenda issue, and I wanted to know what kind of work you are doing to reduce your CO2 impact by your production processes, executive travels, any kind.
You are right. I think climate concerns are another major sustainability area. Here I am proud to say that over several years now, we have been making consistent effort to reduce the CO2 footprint. We can give you the specific numbers of the reductions that we have accomplished over the past years, and we are committed to reducing even further towards 2020 and beyond. This happens at all levels. It happens from the sites that we occupy, the manufacturing processes we use, and also wherever we can encourage better personal behavior, we also do that.
Yes, Greta, SonntagsZeitung.
Water is not performing well. What will you do? S orry, did you hear it?
Yes.
I think I have a loud voice. Water is not performing well. What will you do?
On water specifically, it is important that we do appreciate the significant cost increase that happened last year on U.S. distribution and also on PET, which is the material for the plastic bottles. Because with oil prices rising, PET increased significantly. Then in the U.S., over and above the distribution increases that we have seen elsewhere, I think we had a pretty traumatic situation following some of the hurricanes in the fall of 2017, where in all categories, we are seeing significantly higher distribution costs. Y ou can imagine for bulky and heavy products such as water, the distribution expense component is particularly strong. The reason I am talking about this in such amount of detail is when you compare our business to other water businesses elsewhere, do keep in mind we are 60% U.S.
We are much more exposed to that situation, that geographic problem, than someone who may have a different geographic footprint. That is important for me just to stay fair. We know we have an issue. We know we had to reduce our costs, and we have done that in a very disciplined way in 2018. A s you compare now the operating metrics and operating performance, it is important to understand that our geographic mix is so much more focused on the one area that is giving us the problems. That is not something we can change short term. We are committed to addressing this with better efficiencies. We also noticed that, of course, on our premium products, we are a little less exposed to that than on our value-priced products.
Hence, I think the continued success on premium products in waters is going to be one of the ways to achieve better growth rates and also better profitability.
Corinne Gretler, Bloomberg News.
I would just like to touch or circle back to the water. I understand that the bulk of your business coming from the U.S., and that is facing challenges. I know you are not going to make any overnight changes to your geographical sales. Do you think you might want to push a little bit more expanding into maybe emerging markets, considering the challenges in the U.S.? I understand not overnight, but is that something you are thinking about to maybe push more in other regions like emerging markets?
Look, in the waters business, what you have to avoid is what I would call creating islands. That is to just say, "T his market is attractive. Let me buy something small there." Because scale is very important to have some distribution efficiencies. Hence, the fact that we have such a strong position in the U.S. market, most of the times, people would have seen that as a good thing. It just happens in a particular year when you have all these pressures on the packaging and the distribution, yes, it works against you. I t is important to me while we are working on efficiencies not to over-interpret this thing.
The waters is a cyclical business. When you go back with Nestlé over the past 10 years, you are seeing years when the margin has been improving quite nicely in line with, for example, lower energy cost and lower plastics cost. In some other years, it has been working against us. In 2018, as we outlined in some of the quarterly conference calls, it was a particularly difficult year because you had these input cost increases, and then some of the price increases only started to kick in at around mid-year, the price increases that we put in place to offset that effect. Hence, you are getting the full year effect when it comes to the cost side, but you are only getting a partial year relief when it comes to the revenue side.
Next question from Silke.
Silke Koltrowitz, Reuters. I know I already asked about the guidance. You are guiding for more than 3% organic growth this year and also an improvement in margin. We have last year's performance. We know what your 2020 targets are, so there is only this one year, 2019, in between. Maybe can you still give us a bit more granularity on, is this going to be a steady improvement towards your target? Can we expect this year to be sort of at the midpoint between last year and the target? Can you just give a bit more on what to expect really this year? Is it going to be rather back-loaded? What do you see?
I can only reiterate what we said on earlier occasions, and that is to expect more of a steady improvement on the cost and margin because this is something we have better under our control. You saw us, even in 2017, make progress on this faster, and that any benefit on the sales side is something that is a bit more back-loaded. Here again, especially last year when we had a disappointing organic growth performance, we told you that anything we did in 2017 would take some time to actually translate into better organic growth. Of course, the same applies now, even on the back of a very encouraging organic growth number. Anything we did in 2018 to help our organic growth going forward takes some time to kick in.
If it's internal growth, if it's new products, for example, it's something that needs to be developed, launched, and scaled up in the market. If it's M&A, you have to find those transactions, you have to close them because here's another disconnect. Many of you start counting the sales from the moment we announce a transaction. I n fact, first you have to close it because only then do you become the owner. In most cases, we have to wait under our accounting rules for a period of time before then that organic growth from those acquisitions gets counted. T here's time delays no matter what you do, and hence the organic growth number we told people from the beginning was going to be a bit more back-loaded as we ramp up towards the 2020 targets.
Next question from Corinne Gretler, Bloomberg News.
I also just wanted to follow up on Silke's question on the guidance. Does it make sense then to expect 4% organic growth and 18% margin this year, since that would be midpoint of 2018 and 2020 targets?
I would love to help. I would love to be transparent, but for now, we have to stick to what we wrote. I think you have a very precise set of targets for the year 2020. That range of 17.5%-18.5% for the underlying trading operating profit margin and mid-single digit organic growth. We're saying that 2019 is going to be an improvement over 2018 towards those targets. C ompare that to many companies out there's only very few that offer that level of clarity.
Erich Bürgler, SonntagsZeitung.
You gave an estimate of the restructuring costs for this year. Will there be further closures of production sites in Europe, for example?
Restructuring related costs are not only plant closures. It is very important to underline that, so that is not seen as a proxy here for the number of plant closures. As you can imagine, when you operate 413 facilities worldwide, even in years when there is no significant restructuring, there is always a certain amount of facilities that you get out of. There is also always a number of facilities you newly get into, either because you start them up or because you acquire them as part of an M&A deal. It was interesting while last year, a lot of the media attention was highlighting the number of plant closures. When you compare the number of plants at the end of 2017, it was 413. 2018 was 413 as well. A ctually, for whatever we lost, we also gained new plants.
This kind of development is an ongoing thing. That means, yes, there will be closures as we make these adjustments going forward. They always happen, so this is not news. We will also acquire new facilities as we start up new activities or acquire new companies.
Any further questions? Mr. Hoch, AWP, and afterwards Seraina Gross. Mr. Hoch first.
Do you think investor pressure will a bit fade away with results you're showing now?
In all modesty, I would call it investor interest, and it's been always very strong. I think a majority of our investors is very happy with the changes they're seeing in our company and the development they're seeing in the company. As you know, we have a huge share of super long-term investors who have been faring extremely well with Nestlé over long periods of time. I think you will see continued investor interest, but that had always been the case, and I think the people who stayed with us for the long term have been very richly rewarded.
Seraina Gross, Handelszeitung.
Could you elaborate a bit more on what made you take the decision to do a strategic review of Herta?
In Herta, again, the key point is plant-based offerings clearly offer a much, much better growth rate than meat-based offerings. I n meat-based, in addition to a low growth rate, you have an enormous cyclicality because meat supply is a very cyclical supply. Here you have a business that is not in line with our long-term nutrition, health, and wellness ambition when it comes to food. I t is a business that also from a growth perspective was just not living up to its potential because, again, the consumer had moved on towards more plant-based offerings, and this is where we want to be. It is one of those cases where the strategy and also the financial results pretty much tell you that the focus should be elsewhere.
Any other question? Mr. Zvior again.
Again, just one more. I have a little quote from the NZZ where it says that environmental protection is a huge topic for your company. O n the main agenda, there are activities to reduce, to reuse, or to recycle the packaging. T his quote is from 1944. The question is, you talked about your new agenda, and the question is why should the consumer believe that now environmental protection is important to the company?
I don't see a contradiction because look, a lot has been done already, and if you're focusing on Nestlé products, then I would also invite you to focus on what's out there in the market. I think for what has been accomplished already, I think we compare very favorably. W e are recognizant of the fact that more can be done. This is what the commitment is about. That's why I invite you also to read very carefully the press statement from January, because again, it is not only longer-range commitments, it is also specific steps that we have undertaken or that we are undertaking right now to actually move towards better solutions.
I think you have things that you can follow, and that's why I'm saying it's not one of those things where a snapshot should decide. It's where a consistent set of actions over time should carry the day.
We're getting close to the end. Yes, Corinne Gretler, please. Bloomberg News.
I just have a question on pricing. I know we talked earlier a little bit about some reinflation coming back. D o you see any signs of inflation returning to Europe? How confident are you about your pricing ability given the tough retail environment?
Even within Europe, of course, the picture is differentiated, so it's pretty hard to give one answer for Europe overall. I think where you see specific input cost increases, then yes, you have to have a pricing conversation. I think these days, rather than using a price increase as a regular tool, I think more and more what people expect is that you have a specific conversation about what has increased and why do you have to increase prices. W here that's justified, we do it and do our best to explain that.
There's room for one more question. Doesn't seem to be the case.
W e assume that you can't wait to sample our products, so I understand where you're coming from.
Thank you very much for your interest. We're closing the press conference, and as always, you can send your follow-up questions to our mailbox or call us this afternoon or this morning as well. Thank you.