Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group 2019 First Half Results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Bob Kunze-Concewitz, CEO of the Campari Group. Please go ahead, Sir.
Thank you. Good afternoon, welcome to our first half-year call. As you can see from our press releases and the rest, the first half has been pretty good with consistent solid performance across all of our key underlying indicators, driven by the strong sales momentum. If you have the presentation under your eyes, if you can move on to page four, I'll start commenting on the key highlights. Importantly, continued sales mix improvement drove key high margin global and regional priorities in core developed markets, with also a nice recovery in emerging markets. Net sales, you'll recall that we had a strong start to the year where we're up by 9.6% in Q1. Actually, Q2 was also pretty good, this is important given that it's a high seasonality quarter for aperitifs. Net- to- net, we were up 6.9%.
This, yes, on the one hand, was helped by the late Easter effect, but on the other hand, we had quite a challenging comp pace. Last year, we were up by 8%. As you all know, also from our other peers as well as brewers, the weather was pretty bad in May, that had a negative effect. Net- to- net, feel pretty good about the results. Looking at it by brand, we have positive growth across all of our brand clusters. The global priorities outperformed. They were up almost double digit, 9.8%. Despite the tough comp pace, last year they were up by 8.7%. Behind the key suspects, Aperol, Campari, Grand Marnier, as well as the Brown Spirits, while SKYY, as we programmed it, continued declining in line with our destocking exercise.
The regional priorities, they were up nicely double digit, 10.8%, gaining momentum driven by Espolòn, Averna, and Licor 43. Local priorities returned to growth up by 4%. Looking at it on a geography basis, positive growth across all of our regions, with very solid growth across our high margin developed markets, particularly North America and Western Europe. On the other hand, lower margin emerging markets continued a positive trend, notwithstanding the quite impactful volatility from a macro as well as economic and political standpoint in those regions. Reported a net sales change of 9%, reflected a slightly negative perimeter effect, which was -1.4%. That was the tail end of the discontinuation of the Brown-Forman distribution entity, which was more than compensated by quite positive FX, driven by the dollar of +2.3%.
Looking at EBIT on an adjusted basis, we had a very nice organic growth of 10.6%, so this is ahead of the organic sales growth, leading to a 50 basis points margin accretion, and this is clearly driven by the strong organic gross margin expansion of 90 basis points, thanks to the positive sales mix by both brand and market. This, it's important to underline, despite the dilutive effect of the emerging market recovery, and the worse than expected agave impact. Looking at reported change, that was up 12.3%, and this takes into account the negative effect of disposals, as well as the positive Forex. Net profit on an adjusted basis was up 11.8%, on a reported basis was down by 16.6%.
To close off the highlights, net financial debt stood at EUR 937 million, which is an increase of EUR 90.9 million versus the beginning of the year, and this is mostly driven by the first time adoption of the IFRS 16 leases accounting principle. Net- to- net, this brings us to a net debt to EBITDA pro forma ratio of 2.1 x at the end of June. I'm not going to dwell much on page number five because I'm going to go into the details, but it's always nice to see all of the regions and all of the brand clusters growing. Moving on to page number eight, we're underlining the fact that the U.S. now accounts for 29.3% of our total sales, so it's by far the most important and nicely growing region.
On that note, I'll move on to page nine, analyzing the Americas, where you can see a nice overall growth, organic growth of 9.9%. Forex also helped with a 5.5% positive impact. Looking at it by subcontinent, North America was up double-digit, 10.3%, led by the U.S. up 10.9%. Very nice half-year performance with a strong Q2, up 10.7%, driven by the continued outperformance of Espolón, Aperol, Campari, the Wild Turkey portfolio, all grew at double digit rates. We also had the positive contribution of Grand Marnier as well as the Jamaican rum portfolio. SKYY, as I commented earlier, the portfolio declined by 5.8% as it continues to be affected till the end of Q3 by the destocking exercise. Jamaica, very strong, up 18.6%, continued very positive mix driven by the high margin Wray & Nephew Overproof up almost 20% and Campari up almost 16%.
If you look at the rest of the region, it was only up by 1.9%. Canada did quite nicely, up 7.4%, largely thanks to Aperol, but also SKYY Vodka and Campari, whereas Mexico declined slightly. This despite the core, the main largest brand, SKYY Ready to Drink, doing quite nicely, but was impacted temporarily by the weakness in the Jamaican rums. Moving on to the Southern cone. South America was up 6%, with Brazil up 6.9%, with positive growth in the first half, albeit on the back of a pretty easy comp base. You'll recall we were down 27% last year. The good news is that again here, the mix is quite positive with Aperol, SKYY Vodka, and Campari doing very nicely. Argentina, up double digit. This after accounting for hyperinflation, up 14.2%.
A positive performance, largely due to Cinzano Vermouth, as well as to the growing importance of the SKYY brand and again of Aperol. The rest of the region down 17%. This is our partnership market, so it's mostly shift and phasing. Moving on to Southern Europe, Middle East and Africa on the following page, up 7.7% organically. Quite impressive results in Italy, up 6.7%, very solid, with continued growth in Q2 despite the very poor weather in May. In Q2, we were up 6.9%. Here it's the core aperitifs business driving it. With double digit strong growth behind Aperol, 12.2%, followed by solid growth on Campari. I'm also pleased to see our mono dose, small size aperitifs, Crodino and Campari returning to robust health, with Crodino up by 3.2% and Campari Soda by 5.8%.
The rest of the region was up double digit, 10.9%, with a very strong performance in France, up 26%. Mostly driven by Aperol and then obviously Riccadonna, which builds a tandem with Aperol and the Aperol Spritz. Spain grew low- single digit. Nice growth behind Aperol and Cinzano Vermouth. Some temporary phasings on promotion slots on Campari, the brand most affected there is BULLDOG, due to the commoditization of the gin category. Looking into the African markets, Nigeria, although the market is not all that healthy, we grew nicely, 22.2%, behind Campari and American Honey. South Africa also grew, thanks to SKYY and BULLDOG. GTR was flattish at 1%, this is on the one hand due to the comp base with last year, that business being up 15.3%.
Continued positive trends in Aperol and Glen Grant and Appleton Estate. Some phasings on the promo slots on the rest of the portfolio. Moving on to the rest of Europe, North, Central, and Eastern Europe up 7%. Very nice performance in Germany, up almost 4%. Here, clearly, the weather was very impactful and slowed down our aperitifs business quite a bit in May. Bear in mind that we also had quite a tough comp base in this area as we grew by 14.9% last year. Aperol doing nicely, again, positive trends across most of the portfolio, SKYY Vodka, Frangelico, Advocaat, and Glen Grant. This helped offset the negative trends on the Cinzano portfolio and Ouzo 12. Campari also returned to growth, following the significant price increase we put through in January of this year.
U.K. continuing to grow double digit, 14%, very solid results. Aperol doing very nicely, up by 25.8%, as well as the whole Jamaican brand portfolio up by a cumulative 35%. Russia also up by 10.9%. This is one of the markets where the comp base is quite easy. Last year, we were down by 25.2%. We have nice growth behind Aperol, which is really becoming a significant brand in that market. Cinzano and Vermouth, as well as Sparkling Wines, doing a little bit better in quite a highly volatile market, especially when looking at mainstream brands. The rest of the region was up 8.4%, with very strong performances across Austria, Benelux, Scandinavia, and most of it, again, was driven by aperitifs. Not only Aperol and Campari, but also Crodino, which is becoming a meaningful brand in those areas. To close up the regions, Asia Pac up 1.1%.
The largest market, Australia, doing nicely, up 3.5%. We're actually doing quite nicely because bear in mind that last year we had a comp base of 10.7%. We're growing twice as fast as the market across categories, so taking share. Again, Aperol doing very nicely, growing double digit, 26%. We're doing also pretty well in the Wild Turkey brand, both on the Ready to Drink as well as on the bourbon, with the premiumization helping marginality. The rest of the region was down 4.3%. This is mostly due to a double-digit decline in Japan. This again is something driven by both comp bases as well as phasings. China was back up around 17.5%. This is an area we'll pay more and more attention to looking forward.
Looking on page number 13, the only thing worth underlining is that the global priorities now account for 59% of our sales, which is a nice 200 basis points increase versus last year. Looking at into detail by a brand, kicking off with our largest brand, Aperol now accounts for 20% of our sales, growing in the first half on an organic basis by a very robust 22%. This despite the bad weather impacting the core European markets. We're continuing to grow double digit in those markets, and by a very strong double digit in our high potential and seeding markets across the globe. Campari up 5.8%, solid performance again in Italy, double digit in very profitable markets like the U.S., Jamaica, Brazil, and Austria.
Flattish performance in the key market, Germany, where we took a big price increase in January, so we had quite a few declines in the first few months of the year, and we're now recovering ground. Moving on to our Bourbon portfolio, up 11.4%. This is across the core U.S., which has grown by 15%, as well as Australia. Both of these markets, also through their premiumization and the success of Longbranch, help offset the temporary decline in Japan. American Honey registered double digit growth in the U.S., as well as in some other key markets, particularly Nigeria. Now, the one brand which is suffering on a shipments basis is SKYY Vodka, which is down by 3%. This, you all know, has been piloted by us. The U.S. down 5.8%, whereas we're having very nice positive growth in the rest of the world.
Our rum portfolio up 7%, and the heroes being Wray & Nephew Overproof, up 14.5%. Solid trends, not only in Jamaica, but particularly in the U.S. and in the U.K. and in Canada. Appleton Estate, on the other hand, grew a little bit slower, 2.9%, with Canada, which is its second-largest market, actually slowing it down due to a price repositioning. Sticking to our regional priorities. Espolòn, very strong, up 46.5%. Clearly, this is driven by the core U.S. market, which is up by a healthy 50%, and it saw an acceleration in Q2. We're also seeding very effectively in other markets, particularly Australia, Italy, and Canada. BULLDOG, as I said earlier, is impacted by what's happening in its core market of Spain, but also Belgium. These are two markets impacted by the craft gins. We think that the brand will weather this out.
On the other hand, we're continuing to do very nicely in all other regions. Glen Grant, on the other hand, is down 11%, and this again is a choice we took. We've put all of our markets on reduced volume allocations as we're transforming the brand from a non-aged into longer-aged premium expressions, and this is something which will continue. Forty Creek slowed a little bit down, 1%, and this is some temporary weakness in the core market of Canada, but we expect it to return to nice sustained growth in the second half of the year. Moving on to the bitters, the Amari, up 1%. This is mostly driven by Braulio, where we again took a robust price increase in Italy, and it slowed us down a little bit.
There's some weakness in Cynar in core Italy and seeding U.S., we were able to compensate via Switzerland, Brazil, and France. Averna, on the other hand, positive results, not only in Italy, particularly in the more profitable German and U.S. markets. Last but not least, flattish performance on Frangelico, where good growth in Germany was offset by weakness in the U.S., Spain, and Australia. Cinzano down 1.1% with the Vermouth being relatively flattish. Positive growth in core markets such as Russia, Argentina, and the Czech Republic, offset by weakness due to the relaunch of the brand and the repositioning price in the rest of Europe. Our Sparkling Wines were down 1.9% due to the weakness in the core markets of Germany and Italy, whereas Russia turned positive.
Moving on to Mondoro and Riccadonna, our other sparkling wines, up double-digit, where Riccadonna more than compensated some weakness in Mondoro. Last but not least, our local priorities. Very pleased to see Campari Soda growing by 5.8%. Again, this is all driven by Italy. Crodino has a balance of a nice return to positive performance in Italy, but also strong growth in our seeding markets, particularly in Benelux, Germany, and the Czech Republic. On the Bourbon Ready to Drink in Australia, Wild Turkey, we're taking market share and accelerating. The Brazilian brands are up to a modest growth, but slowed down in Q2, so this will remain a challenged area of the business. Not the case on Ouzo 12, which is more impacted by the scheduling of promo slots. Slightly up 0.7%, but if you look at it by the end of July, it reverts to trend.
Cabo, to close it all up by a nice 5.9%, accelerating in Q2. This is it on the commercial overview, and now I pass on to Paolo for detailed financials.
Thank you, Bob. If you follow me to page 20, you have the analysis of net sales and EBIT by region. There we can see that the Americas remained the group's largest region in terms of both net sales and profitability, with regional net sales at 45% of group net sales and regional EBIT at 42% of the group's EBIT. As we can see in the following slide, page 21, the performance in the largest region in Americas has been, in H1, quite robust with an organic top line growth of 9.9% and an EBIT organic growth of 8.5% in value. With 20 basis point dilution, as you can see to the right-hand side of the slide, driven by both gross margin and A&P dilution, partially offset by SG&A.
More particularly, looking at the gross profit, the gross profit expanded in value by 9.5%, showing a 20 basis point margin dilution, which was driven by two factors. First and foremost, the increase in the agave price that create a massive dilution impact in the region, as well as in group's result, as we will discuss later. Second factor was, the recovery in emerging markets, most notably Brazil and Argentina. With regards to the A&P, A&P in the region grew in value by 15.8%, driving 100 basis point margin dilution, totally driven by different phasing of A&P investments in the region behind key global brands. With regards to the SG&A, on the contrary, the increase in value in existing business accounted for 4.5%, well below the top-line growth, driving 100 basis point margin accretion as a consequence of the downsizing of the local structures in South America.
On a reported basis, EBIT grew by 15.6% year-on-year, achieving 19.8% of sales at EUR 76.1 million. Moving on to page 22, we have the analysis of the performance of the EMEA region. Again, also here, a very solid performance with organic net sales growth of 7.7% and an organic EBIT increase of 14.9% in value. This proportionate increase of EBIT drove 130 basis points accretion at the EBIT level, driven by gross margin expansion, A&P containment as a percentage of sales, partially offset by SG&A dilution effect. Looking at the gross profit, the very robust gross margin expansion, which accounted for 110 basis points, was clearly driven by a solid performance of high-margin aperitif portfolio, particularly Aperol and Campari in high-margin markets. A&P grew in the first half by 1.5% in value, driving 90 basis points accretion.
This, contrary to the Americas region, was driven by a phasing effect, which had a lighter impact of A&P in H1 vis-à-vis H2. With regards to the SG&A, the increase in the region in value accounted for 10.4%, leading to 70 basis point dilution, and was primarily attributable to the strengthening of central structure at group level. On a reported basis, EBIT grew by 11.7% year-on-year, achieving 20.2% of sales with 150 basis point EBIT margin expansion. Moving on to page 23, we have the analysis on Central & Eastern Europe. Also for this region, a very solid organic top-line performance, net sales up 7% in value and a robust bottom-line increase of the EBIT at 6.9% in value, with basically neutral impact on margin driven by very strong gross margin expansion, totally offset by dilutive effect, which is visible at both A&P and SG&A level.
With regards to the gross profit, gross profit grew ahead of net sales, 10.1% in value, driving 190 basis point expansion on the back of a very solid sales mix improvement led by the positive performance of the high-margin aperitif portfolio, in particular Aperol, which grew by double-digit in core high-margin markets such as Germany and the U.K. The A&P increase, which was 11.7% in value, drove 80 basis points dilution on the back of stronger support on the aperitif portfolio in the key seasonality period. SG&A, again, they grew quite strongly in H1 at 14.2%, driving 110 basis point dilution, reflecting the enhancement of sales organization in selective high-potential markets. These are the markets where we open up our own distribution company.
On a reported basis, EBIT grew in value by 6.9% and also doing achieve 29.7% of net sales at EUR 49 million. Moving on to the last region, APAC, page 24. The region delivered in existing business a moderate top line growth of 1.1%, but a very solid bottom line performance with an increase of EBIT in value of 35%, driving also 3% EBIT margin expansion, 290 basis points precisely, with gross margin and A&P driving accretive effect at the EBIT level, partly offset by the dilutive effect due to the increase of SG&A ahead of top line. Gross profit expansion, 280 basis points, was driven by the positive sales mix, in particular the biggest market, Australia, performed nicely in the first half.
With regards to the A&P, in that region, we had a decline of A&P due to different phasing of our marketing initiatives, which drove 190 basis points accretion. On the contrary, SG&A grew by 9.1% below top line growth, driving 180 basis points margin dilution totally driven by lower absorption of fixed cost, given the contained top line growth. That was due also to the combined effect of the enhancing of our sales organization in our largest market, Australia. Looking at the overall performance on a reported basis, the regional EBIT expanded by 26% in value, achieving 11% of net sales. Moving on to the full year results, as Bob has just highlighted, page 26, we have the P&L in one page. Most notably, top line organic growth of 8%, coupled with an EBIT adjusted organic growth of 10.6%, is to be seen as a very robust performance.
Taking into consideration H1 of last year, the EBIT adjusted increase in value accounted for 9.5%. 10.6% over 9.5% is a remarkable performance. More in detail, as we can see on page 27, we have, starting from gross profit. On a reported basis, gross profit grew in value by 11.4% to 62% on sales, driving on an overall basis, 140 basis points accretion. Looking at the organic performance, the increase in gross profit in value accounted for 9.5%, showing a 90 basis point gross profit expansion. The organic growth of gross profit well ahead top line, was due to the particularly favorable sales mix by both brand and market, that was achieved despite the dilutive effect of EMs, emerging markets, particularly South America, which performed nicely. As well as due to the increasingly more adverse effect of the aggregate purchase pricing.
In the first half, the dilutive impact of still rising agave prices accounted for roughly 30 basis points, which is a lot considering that we deliver in the first six months, a 90 basis point organic expansion of gross margin, which would have been 120 basis points. On the A&P front, on a reported basis, A&P grew in value by 5.3%, achieving 17.9% on sales with 60 basis point dilution. In existing business, the increase of A&P accounted for 9.4% in value above the top line growth, thus leading to 30 basis point margin dilution at the level of A&P, which reflected the higher marketing investments, particularly behind global brands such as Aperol, Campari, SKYY and Grand Marnier, as well as certain selected regional priority brands, particularly Espolòn, which is positively reacting to the A&P stimulus.
With regards to the SG&A, on a reported basis, SG&A grew in value by 9.9%, achieving 22.9% on sales and leading to 20 basis point dilution. More in particular, looking at the existing business, SG&A organic growth in the first six months of the year accounted for 8.6% in value, slightly above top line growth, leading to 10 basis points margin dilution. With regards to the EBIT adjusted on a reported basis, first half delivered an increase of EBIT on a reported basis of 4.3% in value, with EBIT on sales at 21.3% and driving 70 basis point EBIT margin expansion.
Looking at the existing business, the organic performance was quite solid with an EBIT adjusted increase in value of 10.6% above top line and still 50 basis point margin accretion, notwithstanding the 30 basis point aggregate negative impact in the first half, and notwithstanding the reinvestments in the A&P line, which as said before, accounted for in existing business, 30 basis points. With regards to the EBITDA adjusted, the performance was even more robust, with an increase in value of 14.4%- 25.4% on net sales. Bear in mind that the disproportionate increase in EBITDA adjusted versus EBIT is attributable to the incremental depreciation that we have in 2019 due to the first-time adoption of IFRS 16 on leases. The organic performance of EBIT adjusted was quite strong, with an increase of 12.7% in value and with a very solid 100 basis point margin expansion. Page 28.
We have the breakdown of the waterfall for EBIT adjusted from EUR 160 million- EUR 180 million, coming from organic and a little bit of Forex. Organic EUR 17 million uplift, corresponding to 10.6% of increase as a percentage with 50 basis points. The Forex is positive as well with EUR 4.3 million uplift at EBIT level, 10 basis points accretion. This is driven by U.S. dollar and euro in the second half of the year. U.S. dollar will be still positive, although, with a less meaningful impact, and then we will suffer from the adverse compound emerging market currencies in peak season. The EUR 4 million uplift contribution from Forex at EBIT level in H1 has to be seen as the overall contribution that we are currently expecting for the full year.
Again, perimeter is quite tiny and solely attributable to the termination of certain distribution agreements in Italy, which on one end drove EUR 1.5 million EBIT erosion. On the other end, was accretive to the EBIT line. Moving on to page 29. We have the analysis of financial charges, which stood at EUR 15.1 million versus EUR 14.8 million of last year, so more or less unchanged, despite the lower average indebtedness, EUR 892 million this year versus EUR 955 million for last year average indebtedness, with an average cost of net debt of 3.7%, which is reflecting the negative carry on excess cash. On top of that, we have the negative effect of the first-time application of the IFRS 16, which accounted for EUR 1.7 million.
Worthwhile noting the EUR 3 million charge in the line put option earnout and hyperinflation effect are primarily driven by hyperinflation effects in Argentina, which accounted for EUR 2.3 million. If you look at page 30, we have the analysis of the group net profit with the year-on-year performance. The level of pre-tax profit, EUR 162 million versus EUR 145 million for last year, still is a double digit performance at the level of pre-tax profit, up 12.1% in value. The group net profit adjusted is still up 11.8% at EUR 116.7 million. If you look at the comp in terms of total adjustments this year, we have a EUR 6.1 million positive effect, which clearly takes into consideration the positive impact of Patent Box, EUR 1.5 million.
Which more than offset the negative impact of operating adjustments and the relating fiscal effects, respectively EUR 8.6 million and EUR 2.2 million. Last year, clearly, we had in the first half EUR 42.8 million of positive one-offs, primarily driven by, again, Patent Box, but also the disposal of Lemonsoda.
We have a meaningful delta, which creates a shortfall at the level of group net profits, once we factor in the adjustments of 16.6% in value. If we move on to page 32, we have the analysis of free cash flow. In the first half, free cash flow reported came in at EUR 81.2 million, down EUR 29.7 million versus last year on a reported basis, with a recurring free cash flow, that is what we see as sustainable cash flow at EUR 86.2 million, meaningfully down versus last year, EUR 52.3 million. The key drivers were the increase in EBITDA. The underlying EBITDA was a positive factor with an uplift of EBITDA in the first half of EUR 27.1 million, which was totally more than offset by a temporary bigger variation in operating working capital of EUR 66 million.
Primarily driven by lower change in receivable, which accounted for EUR 66.4 million due to the shift in sales orders from May to the back end of Q2. That was clearly, as already highlighted, linked to the adverse weather conditions in May and the beginning of the quarter. On the other end, we still had as a negative impact, a higher increase in inventory, which generated a negative impact of EUR 4.9 million, that was partly offset by an increase in delta payables of EUR 15.2 million versus last year, which is a positive, still in total, the delta change in operating working capital accounted in the first half for EUR 56 million. This is a temporary effect that will be absorbed by year-end. Page 33, we have the operating working capital. Operating working capital at June end came in at EUR 718 versus EUR 636 of December end.
An organic expansion of EUR 77.2 million with changes in inventory payables and receivables that are totally attributable to the peak and the seasonal factor. Worthwhile highlighting the change in receivable, on a like-for-like basis versus June of last year, as I have just explained before, which accounted for EUR 66 million of the EUR 77 million that we see here. For the year-end, we confirm basically the target of achieving a working capital on sales in line with prior year, which stood at 37.2%. Moving on to page 34, we have the net financial debt, which stood at EUR 937.1 million, up by EUR 90.9 million versus last year due to the impact of first-time adoption of IFRS 16, which clearly also lifted the net debt to EBITDA pro forma ratio from 1.9% of last year to 2.1%.
Sorry, 1.9 x of last year to the level of 2.1 x of June end this year. Page 35, we have the debt maturity profile, quite solid, long term gross debt of EUR 1.2 billion, while exceeding the overall indebtedness of EUR 937 million. At the short end of the maturity curve, you see that net of the Euro bond that is to expire in October of this year, accounting for almost EUR 220 million, we still have in excess of EUR 500 million of cash available to fund potential acquisitions. I think this is it on numbers. Bob, I would hand it back to you for the comments on marketing initiatives and developments.
Thanks, Paolo. A quick marketing recap before moving on to conclusions, most importantly, your questions. This year is an important year for us. We have two major celebrations, 100 years of Aperol, which we kicked off with a big bash in Venice. We had a live concert in St. Mark's Square. Lots of influencers, journalists, customers that went on TV afterwards, and we duplicated to a certain extent that in many other markets. Campari, on the other hand, benefited from the 100 years of the Negroni cocktail. The Negroni, as you know, is our proprietary cocktail, and it's the second cocktail, in terms of sales in premium bars. The Negroni Week this year was very successful. We reached almost 13,000 venues, and it's becoming much, much more international, so this will have a nice impact on Campari when we move into the second half.
On SKYY, we're continuing on the diversity agenda, as well as innovating on the flavor side, doing the right things on the gin, and relaunching Averna behind its Sicilianity. To round it up, some very nice awards collected recently on our brown spirits, and clearly the one we're most proud of is Glen Grant 18 Year Old, which was voted by Jim Murray as the best whisky in the world for the second year in a row, and this clearly vindicates our aging and premiumization strategy on the brand. With regards to conclusion and outlook, I think it's quite clear this is a very strong first half, driven by combination of both positive underlying sales momentum in core developed markets, and thanks to really the high margin global and regional priority brands, but as well enhanced by recovery in emerging markets.
For the full year, our outlook remains actually fairly balanced in terms of risk and opportunities. Looking at it from an organic perspective, we expect the positive business momentum to continue. Clearly, we wouldn't be surprised if there's volatility in emerging markets in their key seasonality periods. As you know, Argentina, Russia, as well as Brazil are pretty skewed to Q4. On the EBIT front, we see sustained value growth in EBIT driven by the positive business momentum. Our EBIT margin expansion will be moderated by the higher than expected increase in agave purchase price, which at the same time is exacerbated by the outperformance of the Espolòn brand. The strengthening of the U.S. dollar against the euro, as Paolo was saying earlier, is expected to lessen in the rest of the year.
On the other hand, emerging markets' currencies are expected to remain volatile during the second half peak season. Tail end and perimeter effects will phase out during the second half of the year. The reported net profit is expected to benefit both from the net positive adjustments of approximately EUR 14 million, driven by the Patent Box tax relief in the year 2019, which will be its fifth and final year, net of restructuring provisions as well as related fiscal effects. Net to net, we remain confident in delivering a positive performance across all of our key underlying indicators on a full year basis. At this stage, open it up to your questions.
Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Edward Mundy with Jefferies. Please go ahead.
Afternoon, Bob. Afternoon, Paolo. Three, please. First is on Aperol, still growing at a very good clip, but slightly slower in Q2 versus Q1. I appreciate that we shouldn't take one quarter out of context, and I appreciate that comps are also tougher. Was it really just weather that was a main drag on Aperol within Q2? The second question is on rum. I appreciate that the potential Martinique-based rum business is pretty small and is more about getting critical mass in France, but I was interested in what you're seeing at the grassroots level in rum and how the brand may complement Appleton. Then the third is on, Paolo, on margins. I think in the outlook today, you're flagging that EBIT margin expansion will be moderated by higher than expected increases in agave purchase price, which you flagged at sort of 30 basis points in the first half.
I was wondering whether you could flesh out how you see margins for the full year, enlightened from this outlook piece?
Hi, Ed. Yeah, I'll take the first two. On Aperol, very quick answer, yes, it is clearly weather, because we saw the brand do very well till the end of April, slow down significantly in May, and then pick back up, returning to normal growth rates in June, and seeing very nice progression in July. It's very healthy, very sustained growth on the Aperol brand. With regards to rum, we're believers in rum. We think that rum, high quality, dark aged rums, as well as craft rums like Martinique rums will do well, and they're growing and taking share, and mixologists are behind it. There is the return of premium tiki. We're starting to see some action there, and it was a nice complement to our rum portfolio. As you said, in the foreseeable future, it's going to impact more our critical mass in France.
With regards to the margin, you're right. We wanted to call out the agave effect. It was unexpected at the beginning of this year, we were expecting to have a neutral impact of agave this year. As you know, last year, we had a major increase in agave price, which overall cost EUR 10 million at EBIT level. On the contrary, we believe the 30 basis points margin dilution, gross margin, EBIT margin dilution coming from agave is expected to continue to be there in the second half of the year. For the full year, we're expecting adverse agave effect of 30 basis points, corresponding to EUR 5.5 million, call it EUR 6 million negative impact at both gross margin and EBIT level. In order to recap where we are on margins overall, we've said that the underlying EBIT margin expansion trajectory is 120 basis points.
That has been confirmed both in 2017 and 2018. From there, a number of haircuts. The first one is the comeback of EMs, so emerging markets that, as we said, are costing us about 30 basis points with a more visible impact in H2, clearly, where the EMs have their peak season. We have further 30 basis points that are coming from agave. We end up with a potential net gross margin uplift of about 60 basis points. Probably we may have a little bit of drift in A&P and SG&A on accumulated basis. I do not have the crystal ball, but I would assess in the region of 30 basis points. The EBIT margin expansion this year, unfortunately, is not big.
I would like to underline with regards to agave that if we applied the 2016 agave prices to the 2019 volumes in our business, both Espolòn for sure, but also Cabo Wabo in total, we are talking of a EUR 30 million negative impact at EBIT level that potentially we see that as an opportunity going forward. Clearly, in the short run, agave is not favoring us at all. In the long run, clearly as our tequila business expands further, the opportunity becomes bigger and bigger if and when the agave price will eventually come back.
Thanks. Very clear. I appreciate you don't have a crystal ball, but do you have a sense as to when or if the agave price may come back?
We believe that 2020 at least should be neutral, and hopefully marginally positive. Seeing the further lift in agave, basically we're shifting everything by six to 12 months. For the time being, assumption is neutral, full year 2020, with clearly H1 negative impact and H2 positive, as the price will start coming down, neutral for the full year, and thereafter 2021, accretive impact. From 2021 onwards, we believe, if the analyst forecasts are met, that the agave price will fall quite dramatically. It won't take much to go back to normality, but the inflection point is not yet achieved. That's the point. Not in 2019.
Very clear. Thanks so much.
You're welcome.
The next question is from Trevor Stirling with Bernstein. Please go ahead.
Morning, Bob and Paolo. Two questions on my side, please. One is, I wonder, Bob, can you just give us a little bit more color on Aperol in the U.S., where has there been a weather impact there as well, the beer companies have been talking about that. Secondly, Paolo, just looking at the phasing of the margins, it looks as if there is maybe flat margins in Q2, maybe slightly down, but also looks a lot of that was the ramp-up in A&P and the sales enhancements. Is that the right way to look at it?
Yeah, I'll take the first one. Hi, Trevor. There was a slight slowdown in May. Aperol is growing at a very strong rate in the U.S., and we were especially very pleased to see, you might have noticed that there was quite a negative press clipping, an article which came out in a major national newspaper, and then within 48 hours, really thousands of our consumers, celebrity and normal people, retaliated very, very fiercely, defending the brand and underlining their love for the brand. That really encouraged us to think that we've got a bright future in the U.S. We're growing in under 45%-50% clips, which is quite nice because every year the base is getting bigger.
With regards to the margin progression in the second quarter of this year, we clearly had an acceleration of growth in existing business of gross profit expansions. In Q1, the group achieved 20 basis points. In Q2, the gross profit expansion accounted for 130 basis points. Quite a change, and that was clearly driven by the operating portfolio in high-margin geographies. On the other end, as we have guided in March, the A&P phasing is quite adverse in Q2 and Q3, so the step up of A&P in the second quarter was strong. That drove to a lower EBIT margin expansion in the second quarter of this year.
Great. Thank you very much, Bob and Paolo.
You're welcome.
The next question is from Marion Boucheron with Main First. Please go ahead.
Hi. Good morning. Three questions from me, please. The first one, just following up on A&P, I take there is a phase in Q2, Q3, but in full year, are we still looking for a flattish level, give or take 20 basis points? The other question is on rum. You mentioned that you reached critical mass in France. Does this imply that you could open your own routes to market there once the deal is finalized? Just on Aperol, when you were saying that June, you were back to normal growth level, what do you really call normal growth level there? Is it more than 25%? What we're getting somehow used to see last year and then in the beginning of the year?
Yeah, let me start with the last question you had. Aperol, if you look at markets like Germany, on a half-year basis, it ended up growing by 10%. If you look at it now, at the end of July, we're back to about 18% growth. On a market-by-market basis, there's clearly a nice boost to it. Yeah. I'm not going to comment on the overall number because it's going to be a strong, sustained double digit growth going forward. It's exactly difficult to pinpoint. The good thing on the brand is that if you look at its core markets, 15 years down the road, Italy is continuing to grow double digit, and that's thanks to, it's benefiting from the meal occasion. The strategy is working, and this more and more is being picked up across other markets in Europe. We feel pretty good about the market.
With regards to France, I didn't actually say that the rum house has reached critical mass. I said it helps add to our critical mass in France. At the end of the day, France is clearly a large and strategic market for us. When we reach critical mass, we'll end up having our own route to market. The question is not if, it's more when and how. With regards to A&P, yes, pretty much we confirm the in line with last year, give or take 20 basis points, 25 basis points either way.
Okay, great. Thank you.
The next question is from Nico von Stackelberg with Liberum. Please go ahead.
Hi, guys. Some really strong results out of Italy and the U.S.A. for the first half. If you look at the first half growth versus the last three, four years' worth of organics, it's roughly double for both of these two markets. I was just wondering how much of this is shipment phasing and as we think about the full year growth for these two big important markets, should we expect some deceleration?
Yeah. We'd expect markets to normalize. Looking at Italy, we'd expect Italy on a full year basis to be low to mid- single digit growth, which is excellent in this market, and the U.S. to normalize around mid- single digits.
Okay. Thanks. I guess just one more question on the free cash flow. A little bit softer than maybe it was at least last year for the first half. Could you just comment again? What you're guiding for is really just the operating working capital as a percentage of sales to be in line with the previous years. Is that right? Is there anything else you can provide to help us model that free cash flow for the full year? Thanks.
Thank you for the question. Yes, we confirmed the guidance of targeting for full year, the 39.2% on sales that was last year. What we've seen in H1 is due to different weather conditions in a peak quarter. Q2 has to be seen as a temporary effect. It is not structural. It will not impact the full year performance of free cash flow.
Okay, thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Paola Carboni with EQUITA SIM. Please go ahead.
We were expecting the question.
Yeah. In fact here I am. How are you?
Chiara was a little bit disappointed not hearing from you.
Okay. Just a very quick one on the margin indication you gave for the year. Actually, if I got it right, you said a 60 basis points gross margin uplift could become something more in the tune of + 30 basis points at EBIT level, which would imply a 30 basis points dilution from A&P and SG&A. You affirmed that A&P could be flattish on a full year basis, and also if I think back to the latest call in May, you seemed to allow for possibly a flattish incidence of both of these two lines in light of the quite robust top line growth, which is being confirmed at the end of the day. I was wondering whether we can still hope for a flattish A&P and SG&A incidence on revenues, given the healthy top line? Thank you.
Paola, with regards to the gross margin, I confirm that 60 basis points net gross margin uplift is at the moment the best case scenario. There are upside and downside risks, but these are fairly measured and balanced. There is an opportunity sitting on Aperol, but we do realize that there are also certain risks that we need to be able to manage. I think the 60 basis points, including the dilutive effect of Emerging Markets accounting for 30 basis points and the unexpected agave impact of the 30 basis points is a fair estimate and guess at this stage of 2019. With regards to A&P and SG&A, we're exploiting the very solid top line momentum to take the opportunities that we see on our aperitif and Global Priority brands.
Clearly the guideline is flattish on sales, but we believe that between A&P and investment in on-premise capabilities and go to market, there could be a chance of seeing accumulated 30 basis point dilution on a full year basis. You've seen the trajectory in H1 has been quite indicative of that. The point is clearly, when we look at A&P and SG&A as a percentage of sales, this is a function of the top line development. It all depends on how quickly our top line will develop in the second half. That's still the question mark, whilst we plan A&P and SG&A in value terms. That's still too early to call, but we flagged that risk.
Okay. Sorry, just a follow-up on said on Grand Marnier. You commented the Q2 weakness with material phasing. I would be more interested in understanding what's the state of the art for your business in Europe, where, clearly the relaunch is a bit delayed compared to the U.S., which instead is growing nicely. I was wondering what is going on in Europe at the moment and what the next steps will be?
No, actually, Paola, Europe is going according to plan, and some markets slightly better than planned. We've always said that it's going to take a lot longer to go from the dessert plate back into the cocktail glass in Europe. We're taking our time, we're doing the right things, and we feel very good about the brand.
Okay, thanks.
The next question is from Andrea Pistacchi with Deutsche Bank. Please go ahead.
Yes. Hi, Bob. Hi, Paolo. A couple of questions, please. The first one, just if you could give a bit more color on the U.S., on some of the phasing aspects of the U.S. in Q2 and think for the rest of the year. Espolòn was very strong in Q2. There's good underlying momentum. What do you think is the underlying momentum of Espolòn? If there was a phasing affecting Q2. What drove this? Second question, please. If you could give a little bit more color on the opportunity that you see for Espolòn, particularly outside of the U.S. I think in the presentation you mentioned seeding markets like Italy, Australia, Canada. If you can give a bit of color on the progress that you're making there and the opportunity. The final question, again, probably phasing things, but Latin America, you had a strong Q1.
Q2 seemed to be down double digit, in some markets particularly Brazil. Is this mainly phasing or are you seeing a bit of a sort of underlying deterioration in the business in the markets there? You had seen a bit of improvement, now is it getting a bit worse again, maybe?
Well, Andrea, on LatAm, well we see volatility. Frankly, we're going to have ups and downs throughout the year. Having said that, on a full year basis, we'd expect the whole region to come in mid-single digit. Nothing to worry about, but we can't also expect miracles from the region. With regards to Espolòn in the U.S., Espolòn is, if you look at NABCA and Nielsen, is running anywhere between 35%, 40%, sometimes a little bit higher than that percent. There is a little bit of a shipment phasing in Q2 as we have a major marketing campaign, which kicked off last week actually behind the brand. We wanted to ensure we had the stocks in place throughout the three-tier channel. The brand is developing very, very nicely outside of the U.S. If you look at the likes of Italy, it's the largest tequila brand in Italy.
Having said that, the tequila category is still small. The brand is doing a very nice job. You know that tequila is concentrated in the U.S. and Mexico, and it'll probably take a few years for the international numbers of Espolòn to impact the overall brand.
Okay, thanks.
The next question is a follow-up from Nico von Stackelberg with Liberum. Please go ahead.
Hi, guys. Can you just give me a quick breakdown in the U.S., the rough just portfolio? Can you just tell us how big is SKYY now? How big is Espolòn? How big is Aperol? Maybe some of the big trademarks, roughly by sales, please?
This is not anything off top of the mind, Nico. We'll have to look at some of the data.
Okay, no worries. Thank you, guys.
Grand Marnier is roughly about, on a value basis, around 21%. SKYY is about 18%, Wild Turkey is around 13%, Espolòn 13%, American Honey seven%, Aperol six%, Campari five%. We can go on and on.
That's as of the half year?
Yes.
Okay. No, thanks, guys. Really appreciate that.
Yeah. We have a pretty balanced portfolio now in the U.S. We've come really a long, long way.
Yeah, absolutely. Thank you.
Mr. Kunze-Concewitz, there are no more questions registered at this time.
Thank you all for joining us. We wish you a wonderful summer with lots of Aperol Spritzes and Negronis, looking forward to catching up after we've been back from vacation. Thanks. Bye.
Bye-bye.