Good morning, ladies and gentlemen, and welcome to Pernod Ricard's First Half Fiscal 2019 Sales and Results. We're hosted this morning by Alexandre Ricard and Helene de Tissot, our CEO and Finance Operations and IT Director. We will run through the usual format, take you through a presentation and then leave some time for your questions. Alexandre, over to you.
Well, thank you very much, Giulia. I wouldn't mind having the click through device, which I'm sure is somewhere. Thank you very much. So before we start, you had a picture of our Be a Convivialist campaign, which is our first ever global corporate campaign. And, I would very highly recommend, when and if, you have time that you watch that movie because you would fundamentally really understand throughout that movie what we mean by convivialite, which is our ethos and how we engage with consumers from that point of view.
So with that being said, let's start with our results. So the group delivered a very strong first half, which was somewhat enhanced by phasing, with 7.8% top line growth and 12.8% organic growth for our profit from recurring operations. This is the best first half we've had in almost a decade. I think it's the best first half we've had since 2011. And it is as well the first results of our Transform and Accelerate plan, which was launched approximately 6 months ago.
So you see here continued dynamic growth, thanks to the consistent implementation of our medium term growth and operational excellence roadmap. Good diversified growth, strong price mix of 2.3%, particularly on our strategic international brands, 6% there positive impact of the earlier Chinese New Year, which took place 2 days ago, on February 5, which will unwind in the second half and significant progress of our fiscal year 2016 to 2020, our 4 year operational excellence roadmap. We actually expect to complete our €200,000,000 P and L savings plan by the end of this fiscal year. So by June end, 1 year ahead of plan. From a financial point of view, as well very strong delivery with excellent profit from recurring operations, organic margin improvement, enhanced again by the timing of the Chinese New Year and some A and P phasing.
Negative impact from a currency point of view, specifically coming from emerging market currencies, so minus €26,000,000 on the profit from recurring operations. Recurring free cash flow of €622,000,000 which is close to €70,000,000 lower than last year for the same period, mainly due to increased working capital to support our business our strong business growth. And finally, continued deleveraging with net debt reduction of roughly €200,000,000 versus December of last year, so net debt at €7,200,000,000 and our net debt to EBITDA ratio at 2.6 times versus 2.9 a year ago. You here have the recap of our key figures for this first half. And so from a sales point of view, I think we can say a consolidation of our dynamic growth.
If you look at Americas, we can say it's been robust performance with 4% growth in the Americas and with the U. S. As well up 4%, growing broadly in line with the market. Asia Rest of the World, with strong acceleration, up 16%, thanks to the very strong performance in China, up 28%, and in India, up 24%, both markets somewhat enhanced by technical factors and also a very strong growth in Africa and Middle East. A stable overall European market with continued very good momentum in Eastern Europe, Russia, but as well Poland, we'll see later on, and some contrasted performance in Western Europe.
From a portfolio point of view as well, diversification of our growth with a very strong performance across the portfolio. Our Strategic International Brands are up double digits, 10%, driven by Martell, up 23%, Jameson, up 8%, our scotch strategic scotch portfolio, up 9%, gin up 9%, champagne with PGA up 12% and so on. And very good price mix, as I mentioned earlier, on our Strategic International Brands of roughly 6%. Strategic Local Brands as well up double digit, 11%, with an acceleration, thanks to our Seagrams Indian whiskies and positive pricing as well. Specialty Brands, and I'll get into that later during the presentation, which is a new section of our House of Brands, are up 11%, with very strong growth of Lillet, up 38% Mont Ki, 47%, up 29% and Altos, very strong double digit growth as well.
Our strategic wines are down 8%, clearly down due to the implementation of our value strategy and as well a high comparison basis for Campo Viejo, which was up 23% over the same period a year ago. Here we have our Q2, up 5 point 6%, a slower Q2 again, which was enhanced by phasing and a comparison base. Remember what we said at the end of our Q1, especially regarding India. If we go into regions, I mentioned Americas up 4%, Asia Rest of the World up 16%, Europe flat in more detail starting by Americas. So the U.
S. Clearly strengthening our position in the number one market worldwide following organizational and investment changes made throughout the last 3 years. The performance is broadly in line with the market. We estimate the market to be growing at roughly 4%. We've increased our prices on some of our key brands.
And for H2, our finished goods inventory will be reduced to optimize them at wholesaler level, and this is to clearly deliver operational efficiencies across the whole roughly anywhere between 1 2 weeks in terms of shipments for H2 in the U. S. And the savings and efficiencies will be that will be generated will be redeployed in additional in state activation and investment. From a brand point of view, continued strong growth for Jameson, double digit growth and as well as some price increases across the range. For Absolute, so the Flavors had a good H1 further to the successful launch of Grapefruit, but the brand remains in decline.
In H2, we're launching Planet Earth's Favorite Vodka campaign, and as well, a new innovation called Absolute Juice. Malibu continues to outperform the category. The Pineapple and Lime innovations are performing very strongly. Glenlivet, we've increased as well prices across the range. And Founders Reserve is performing quite well.
We also launched a new 12 year old first fill in October, a few months ago. Our growth relays are gaining momentum. Martell continues to outperform the cognac category in the U. S, with some targeted price increases as well. Blue Swift is clearly building on its success and rolling out nationwide.
The performance is accelerating. And if you look at the latest, NAPKA, we're up close to 50% over the last 26 weeks. Alto and Avion, our 2 premium and super premium tequilas are also continuing to grow strongly with some selected price increases as well. Outside of the U. S, 5% growth in the rest of the Americas region, with Travel Retail Americas up 6%, particularly driven by our scotch portfolio and a positive price and mix.
Good growth as well in Canada, clearly driven by Absolute, Jameson and The Glenlivet and the very successful launch of Absolut's Planet Earth's favorite vodka campaign for the OND October, November December key period ahead of Christmas. Brazil is up 6%. We're outperforming the market, and this is driven by our key strategic focus brands, with the likes of Absolut and Chivas. And we see Beef Eaters and a Gin trend emerge as well in Brazil. Mexico, there's a decline in Mexico related to high comparable base, particularly on Chivas, but the underlying trend is good with our sellout growing as well and our market share growing on some of the key categories we'd like to focus on.
Asia Rest of the World, I was mentioning earlier on, up 16% China, 28%, clearly benefiting from an earlier Chinese New Year, which took place on Tuesday. Very strong performance for Martell across all qualities, double digit increase across all of them, a positive price and mix. No surprise we had announced a year ago that we were increasing our prices for Martell. And you should further expect an additional price increase for Martell in China, which was announced in February, I think a few days ago. The H2, let's be clear, will be and that is a direct impact of our investment strategy that we decided a little bit more than a year ago to reignite the Chivas brand in China, which is one of the most iconic spirit brands in China.
So continued double digit growth with the NBA sponsorship. And Chris Wu, for those who know him or for those who don't, he's both an actor and a singer. His endorsement, which resonates very well with our target consumers in China. So the long term growth relaunch plan is now in its 2nd year and continuing to build momentum. Premium Brands are growing strongly as well, and that's again a direct consequence of our reorganization in China with a second premium brands route to market, which was built approximately 2 years ago.
India, up 24%, with a very good performance across the whole portfolio, whether it's our Scotch whisky brands, whether it's our wines, particularly Jacobs Creek or our Seagram's Indian Whiskey brands, all in strong double digit growth, partly enhanced by an extremely favorable comparison in Q1. Positive pricing as well, positive mix as well from a brand point of view, but also from a stake point of view. We have consolidated our market leadership position. I think we have close to 45% market share in India, and we expect the second half of this fiscal year to be in line with our medium term low and double digit ambition for the market. Africa, Middle East as well in double digit growth, thanks in particular to Turkey, with both strong pricing, of course, but also solid volume growth Nigeria, which is enjoying as well very strong growth, but also South Central and West Africa.
Travel Retail Asia, up 6%, driven by Martell Chivas with some good innovation lunches over the first half. Japan, up double digit, driven by basically our Scotch brands, particular, Chivas, Ballantine's and our champagne with a positive price and mix. Korea is in decline in H1, clearly related to Imperial. The rest of our portfolio is actually growing. And we have made significant changes quite recently in our route to market in Korea.
Imperial Distribution is moving to Drinks International in March 2019, and we streamlined Pernod Ricard we are streamlining, to be more specific, Pernod Ricard Korea to focus on our strategic international brands. As for Australia, declines are driven by the wine portfolio due to the implementation of our value strategy and some destocking at one of our customers. Jameson, The Glenlivet, Bond Plains and Kahlua, by the way, are all performing quite strongly. Stable sales in Europe with contrasted performance, minus 3% in France in H1. And the environment remains difficult and deflationary.
There is pressure specifically on scotch and aniseed. We had strong H1 shipments specifically for Ricard as a brand, ahead of our retailer dispute, which already started at the end of H1. And we should expect H2 to slow as the relationship with one of our customers is a little bit tense as we speak. Spain, down 2%, modest decline in a decelerating market. Shipments and depletions are almost stable in Q2 following some stock correction in the Q1.
And we see a continued good performance of our store gin brand, Seagrams, in Spain. For the U. K, the decline is only driven by our value approach on Wines. As I mentioned earlier, we're actually outperforming on spirits with a double digit sellout and with a particularly strong performance on gin with successful launch as well of Beefeatr Pink and also a great performance of Jameson in the U. K.
Germany, while decline is clearly driven by a commercial dispute, which we expect to continue into the second half, and also some impact of some significant price increases we had for Ramazot in Germany. Lillet and PJ both remain very strong growth. Weaker performance in Travel Retail Europe, driven by the negative environment in Russia and the depreciation in the currency and some reduced promotional activity on Martell. Continued strong momentum in Eastern Europe. Russia, up 7%, strong position there, leadership position, outperformance of the market in Poland up 6% and strong performance in many other Eastern European markets like Ukraine, Romania or Kazakhstan.
Now I mentioned it early on in the presentation. We have a new House of Brands, a sharpened House of Brands, which is part of our 3 year strategic plan called Transform and Accelerate, which I'll dwell into later on in this presentation. We believe one of the unique positions of Pernod Ricard is our unique portfolio of premium brands. It is the most extensive portfolio of brands in the industry. And we've structured our portfolio to be able to basically have a dynamic prioritization framework.
So we have our 13 strategic international brands, I mentioned, that grew double digits. We have our 15 strategic local brands, which grew double digit. We have our premium wines, but now we are also adding something new, which is called specialty. And this is clearly related from a consumer lens as a recognition of a clear incremental and complementary opportunity linked to demand for smaller scale, quote unquote, craft brands that we identify as specialty. I don't like the word craft for the very simple reason that I strongly believe that every single one of our brands is craft.
When you have brands like Martell that go from one generation to another for more than 300 years or Jameson for more than 2 centuries and so on, And that the transmission from one master distiller to another takes on average 15 years. We cannot call them not craft. But we do have specialty brands. These are brands that are crafted at smaller scale with a focus on where, how and by whom they are produced. They have a strong human connection and consumer confidence.
They're often sold in specialty outlets and with, as I mentioned it earlier, a complementary route to market and, in some cases, route to consumer approach. They roughly represent 2% of the industry in terms of Spirits market value. In Pernod Ricard, we over index. They represent 3% of our business. So the answer to the ongoing question we've been having for the last few years, what do you do about market fragmentation?
Is it a threat and opportunity? What are you doing with the raise of Craft? Well, actually, we over index on that front. With our Specialty Brands, and you have them here, So this is our new House of Brands. So we have a number of single malts, with Aberlour, Longmoor and Scapa, or against Strathisla.
We have our Irish single pot fill whiskies, extremely premium. By the way, our specialty brands on average over index from a gross margin point of view versus group average. You have our gins with Monkey 47, Plymouth or again Ungava, our Canadian specialty gin. We have our tequila and mezcal portfolio with Alto, Savion and more recently enriched with our Mescal Del Maguet, our North American whiskies, principally Smooth Ambler, Lot 40 and others with Lillet, Fuse, Oestoye, Pernod and Cognac Auger, the oldest Cognac in the world, 16.43. So very strong H1, with diversified growth across all the key categories.
One key point here, innovation, which is strategic pillar, growth accelerator for Pernod Ricard contributing to delivering 2% incremental growth for our top line. And I mentioned earlier, price and mix up 2.3%. If we look at our Strategic International Brands, which are up 10%, Martell up 23%, with a clear diversification of the sources of growth for the brand. Martell is no longer just a Chinese play. It is becoming increasingly a global play, excellent growth, of course, in China, double digit volumes, but also very positive price and mix, further enhanced, of course, by an earlier Chinese New Year, and as I mentioned it earlier, a price increase of 5%.
Travel Retail Asia, up double digit, very dynamic growth, I mentioned it earlier, in the U. S. We do expect the second half to moderate, to bring volume growth in line with our sustainable growth targets for Martell. Jameson is up 8%, continued very strong momentum across the world. U.
S. Nielsen and NAPCA at double digit. And we've increased our prices, I'd say, globally as well. Some positive mix as well in our globalization strategy. It's gaining momentum with double digit growth in Asia, in South America and high single digit growth in Europe.
I said it, our strategic Scotch whiskies are up 9%, Chivas up 7%, with a very strong price and mix. I think it's 5% on Chivas, Ballantine's up 8%, Declan Levitt up 11%, Royal Salute up double digit as well. Absolut down 1%, slightly down outside of the U. S, which now represents 60% of sales of Absolut. I think when we acquired Absolut, less than 20% was outside the U.
S. Now it's more than 60% outside the U. S, growing 4%, with continued double digit growth in Canada, in Asia, Rest of the World, great growth rates in China, India, for instance, and single digit growth in Europe, including difficult markets such as France. In the U. S, Nielsen down 6%, NAPCA down 4%.
So the brand probably down somewhere 4% or 5%. Decline in category, that remains difficult. As I mentioned, we launched Grapefruit, so successful launch in our first half. And we're launching Planet Earth's Favorite Vodka in the second half of this year, campaign that was tested in Canada in October through to December very successfully, and we're also launching an innovation towards the end of H2 called Absolute Juice. Other brands, good overall growth.
I mentioned Ricard was somewhat boosted by earlier shipments. Malibu down 5%, but that's mainly driven by shipment phasing in the U. S. Where the brand is actually growing single digit. We expect H2 to be stronger.
Beef year, up 9%, growing basically everywhere, Bar of Spain. Havana Club up 1%, driven by Cuba. MUM growing up 2%, driven by Americas, particularly the U. S. And Asia Rest of the World.
PJ, very strong performance, growing basically everywhere, up double digits. Our Strategic Local Brands as well growing double digits, 11%. Our Seagram Indian whiskies are up 23%. Kahlua, up 1%, with some rationalization of the range, especially on the flavor side in the U. S.
Good growth for Seagram's Gin, particularly in Spain, which is offset by weaker performance in the U. S, where the brand is not a strategic brand there. And good performance of Olmeca, particularly in Africa, Middle East. So now our Specialty Brands, as I mentioned, up double digit, but with good performance of Abelour. Lillet up 38%, which, as we mentioned a few months ago, is now one of our big global bets, riding on that wave of low ABV fresh spread drinks.
Monkey 47, strong growth across all regions, double digit performance for Altos and strong sales for Avion in Europe and Asia Rest of the World. You'll see there's decline in the U. S, but that's purely shipment phasing. The sellout is up 2 digits. As I mentioned, Strategic Wines are down 8%, a direct consequence of the implementation of our value strategy.
We do expect a stronger H2. We have, as you can see, a very strong price and mix, up 4%. Some comparable technical reasons for Campo Viejo to be down 9% over the first half. It was up 23% a year ago. A clear value based approach in the U.
K. For J. Fries Creek, we've decided to delist the brand in a number of customers, but continued very strong development in Asia, particularly driven by China and India. Decline for Brancut, driven by Australia and New Zealand. And finally, some shipment phasing for Kenwood in the U.
S. I mentioned it, innovation, one of our key strategic pillars, basically adding 2% to our group top line growth, but also Luxury, which now represents 14%, please for the first half, 14% of our global sales, up 19%. And that's again a direct result of our new prestige and luxury route to market that we've been developing over the last 3 years, 25 dedicated teams across 25 Markets around the world. I'll skip quickly through our marketing, innovation and sustainability and responsibility initiatives, whether it's around Chivas with the new Manchester United partnership, whether it's the partnership around Boiler Room with Ballantine's. I mentioned it as we started as an introduction on our Be a Convivialist, our first ever global corporate campaign.
I think we're now above 40,000,000 views. Again, I encourage you to watch that movie, great movie. Planet Earth's favorite vodka campaign lunch, I mentioned it earlier. So I also mentioned Absolut Grapefruit, innovation around Malibu, Kahlua, ready to drinks, some global initiatives from a sustainability and responsibility point of view. And finally, I'll just spend one second here.
In terms of our we're going to show to you later on our new platform in terms of sustainability and responsibility. We have already almost achieved our 2020 SNR road map, which was targeting 30% reduction in CO2 emissions, 20% reduction in water usage, full reduction. We're at 93% there in terms of waste landfill, and we're almost close to 100 of our production sites to be certified at the highest levels, and same for our Vineyards. And moving on to profit from recurring operations. Helene?
[SPEAKER VERONIQUE LAURY DEROUBAIX:]
Thank you, Alexandre. Good morning, everyone. So let's go back to the figures. You have here the summary of our P and L. So the strong top line growth that Alexandre just commented of plus 7.8%, reported plus 5%.
Significant increase of our gross margin, I'll get back to that in a minute, plus 9% from an organic point of view. A and P are growing by plus 5%, so a little bit lower than the net sales growth in this first half. This is mainly due to phasing. Translating into a contribution after A and P growing at plus 10% and with the profit from recurring operation growing at plus 12.8%, as already mentioned by Alexandre, with a strong operating leverage impact. You have here the figures, 148 bps.
So let's go a bit deeper into the this excellent performance. So very strong top line growth. No need to come back to that. I believe gross margin expansion growing by 71 bps, partly favored by the earlier Chinese New Year. So you have here as well an interesting graph showing the trends at our gross margin improvement since 2016 and showing how strong the improvement is for this first half.
So improvement due to an improved pricing driven by key brands such as Martell, Sea rum and Gin Whiskey as well, Chivas, Jameson and Perrier et, we mentioned it, which is doing a very good performance in this first half. Some negative mix impact due to the acceleration of the Seagram Indian whiskies. You saw the figures for India in this first half. Although it's important to mention their margin is improving. The price increase is able to offset the COGS increase we are having in that key market for us.
So COGS inflationary pressure, mostly offset by operational excellence initiative. I'll come back to this operations roadmap in a minute. A and P growing at plus 5%. So as I mentioned, a bit lower than the top line growth. That's why we had the reduction in the A and P ratio in this first half due to phasing structure cost plus 5%, which is showing the strict discipline we are having on our structure cost and which is reducing the ratio because the growth is below our top line growth.
Then when it comes to the PRO, plus 12.8%, +148 bps, excellent performance in this first half. Time to draw your attention on the faster completion of the €200,000,000 operational excellence roadmap P and L savings we mentioned and we announced a few years ago. This will be done by the end of the year, as Alexandre mentioned, 1 year in advance compared to the original plan. And this is definitely helping in terms of gross margin performance in this first half. H2 margin to be softer due to some key business events of the second half that Alexandre mentioned.
The management of our Martell volume growth in the second half. The optimization we're going to roll out in the U. S. With our wholesalers and A and P phasing. So you have here the figures showing the change in the prior rule from an organic point of view, but as well from a reported point of view with €26,000,000 negative FX impact, which is mainly driven by Turkish lira, Indian rupee and Russian ruble.
We estimate the FX impact of the full year to be positive, circa plus €30,000,000 using the rate projected on the 24th January. And you have here in the footnote the reference for the euroU. S. Dollar rate we use for that estimate. So if we look at the analysis by market type between mature and emerging markets, so slight increase in the weight of the emerging markets, which is obviously driven by the acceleration of Asia Rest of the World.
You see here the figures, plus 44% for the their weight in our sales, which is 3 points stronger than last year at the same period and plus 2% in term of PRO. If we look now at the balance by region, same same course, same consequence. We have here an increase of the Asia Rest of the World weight, both in terms of sales and PRO, and it's driven mainly by the strong dynamism in China and India, sorry, with some positive technical impacts we mentioned as well for those 2 markets. So let's go now through the P and L by region, starting with Americas. We have a strong PRO growth, which is driven by a robust top line growth that Alexandre commented, plus 4%.
Then we have the gross margin rate, which is in slight decline, and this is due to negative mix and the agave cost inflation, which is impacting us due to the performance of our tequila brands in that region. So growing by 3%. A and P, minus 1%. This is clearly one of the phasing elements I was referring to in this H1. We are obviously investing to support our priority brands, and there will be some increase in H2 on that line.
Structure cost increased at plus 1%, which is a very good translation of the strong discipline we are having here, giving a PRO growth of plus 8%, 142 bps positive FX impact in that region linked to the USD strength on this first half. Moving to Asia Rest of the World. So plus 16 percent top line growth, translating into a very strong PRO growth, plus 26%. So top line growth, obviously, with the acceleration driven by China and India, a significant gross margin expansion. You see the gross margin growing by 20%, 186 bps, mainly due to price increases.
We mentioned already the strong contribution of Martell in term of price improvement, but as well as serum Indian Whiskey. So A and P growing by 13%, a bit below top line growth. We are supporting our key campaigns here, particularly on Martell and Chivas in China, but as well investing behind our Serum Indian whiskies. CAB plus 22 percent PRO, as I mentioned, plus 26% with structure costs growth increasing, reflecting our investment in growth relays increasing below top line growth. So 282 bps in term of leverage in that region.
Negative FX impact. That's why the PRO is growing by 22% from a reported point of view, mainly due to the weaker Turkish lira. Turkey is in Asia, Rest of the World, as you know, perimeter and Indian rupee as well. Europe, slight decline in term of PRO driven by contrasted performance we mentioned for the top line performance, but as well A and P phasing. I'll come back to that in a minute.
So stable sales growth. Gross margin increasing, thanks to operational excellence initiative and positive mix in U. K. And Central Europe, especially but as well price, particularly in Germany and U. K.
A and P increasing by 3% in support of Strategic Brands. This is here the reverse trend for Europe, stronger H1 than what's going to be H2, so phasing here. Cap stable and PRO minus 2%. Structure costs as well growing by only sorry, plus 1% with strong discipline here. Negative FX impact, that's why the EPR rule from a reported point of view is down 6%, and this is due to the weaker Russian ruble.
So if we move now to the net profit section, starting with the group share of net profit from recurring operation and EPS. So you can see here the figures. This the group share of net profit from recurring operation is growing by 11% and so is the EPS. This is mainly linked to the excellent improvement of our profit from recurring operation. I was referring to before and reported figures on that line is plus 10.6%.
If we look now at the 2 other items on that slide, the financial expenses, you can see here a minor increase, plus 2%, and this is due to the higher USD interest rates over the period and to a lesser extent to the FX effect on the financial expense. And when it comes to the income tax, this is growing by 14% with the effective tax rate, which is close to 25%. We remind you that our view for the full year is 26%, as mentioned, in the August communication. Moving now to the group share of net profit. So here, I'm going to start by the nonrecurring expenses, minus €66,000,000 expense for this first half.
This is mainly driven by the Allied Domec Fund revaluation. This is a one off and non cash item, which we booked in this first half. This is the estimate of the impact of the equalization reform that happened in the U. K. With a High Court decision back in October.
So on that line, and I will make the same comment on the corporate income tax, we are having a significant negative change mainly due to positive nonrecurring items of last year. So corporate income tax, higher total tax charge, again, mainly driven by non recurring positive one off we had last year. As a reminder, those positive one off were mainly the reimbursement of the French 3 percent tax and dividends and as well the positive impact of the U. S. Tax reform on our deferred tax asset position.
Moving now to cash flow and debt. So you have here all the cash flow statements. Our recurring free cash flow amounts to €622,000,000 I move quickly to the next slide where we have a bit more explanation for this performance. So recurring free cash flow, minus €68,000,000 versus last year. Alexandre mentioned it in the executive summary.
We have this excellent profit from recurring and provision, which is translating into an increase in the working capital requirements, so a negative variation in that line coming from the strong business growth. And we are as well on this first half increasing our strategic inventories to sustain the future of growth. Nonrecurring free cash flow, which is below last year due to non repeat of some of the items I mentioned for the P and L side. We have the cash impact as well. So the one off sale of both scotch inventory in H1 last year and the reimbursement of the French tax.
Looking now at the net debt position. So we have a decrease of the net debt position versus the position we had 1 year ago, a decrease of €152,000,000 despite the increased dividend we paid in this first half and an increase of the net debt versus the June 30% position. You see here the CHF 585,000,000 free cash flow I was referring to. But we have as well some cash out linked to M and A and as well long term incentive plan and the payment of the dividend, which is giving this net cash generation of €192,000,000 and some translation adjustment, meaning negative FX impact linked to the strengthening of this U. S.
Dollar. As you know, the U. S. Dollar denominated debt represents 54% of our gross debt at the end of the year, civil year 2018. So deleveraging, we are continuing to deleverage the balance sheet where the net debt to EBITDA ratio decreased to 2.6.
And I hand over to Alexandre for the conclusion and the outlook.
Thank you very much, Helene. Well, for the conclusion and for the outlook for this ongoing environment that remains uncertain, we do expect to continue to see good and diversified sound growth across all markets. The second half growth is expected to moderate due again to our Martell Sustainable Growth Management on one side, our wholesaler inventory optimization in the U. S. And finally, some commercial disputes that we're having as we speak in France and Germany.
Continuation as well of good price and mix. And as I mentioned it earlier, faster completion, in other words, by the end of this fiscal year of our operational excellence roadmap. We do also expect roughly 50 basis points of organic improvement for our profit of recurring operations margin. And finally, as Helene mentioned it, we expect, based on January 24 exchange rates, an impact a positive impact of roughly €30,000,000 on our profit from recurring operations. All of this is leading us to upgrade our guidance for this fiscal year.
It was previously organic growth of our PRO between +5+7. We're upgrading it to between +6+8¢. I just want to spend a few minutes on our 3 year strategic plan. It's fair to say that last year, which was the last year of our road map, 3 year road map that we had presented to you during Capital Markets Day of June 2015. So last year, approximately 1,000 of our senior managers across Pernod Ricard worldwide worked on that new 3 year strategic plan called Transform and Accelerate.
Before diving into this plan, I just want to sit back for a second and remind you some of the key commitments we had shared with you back in 2015 in June 2015 at Le Centre Georges Pompidou, if I recall correctly. When I stood up, we had barely any growth left in Pernod Ricard. And I stood up saying we have a clear ambition of growing Pernod Ricard 4% to 5 percent medium term. I think one of you asked me what does medium term mean. To be clear, it means 3 to 5 years, 3 years down the road, the business is growing.
And it's good diversified growth. I won't go through all these, but you can go on our website on Capital Markets Day 2015. But when you sit back before going into the next 3 years, it's good to see that we have achieved what we had said we would achieve. Now looking forward, which is what we really like to do in Pernod Ricard. We have clearly worked on a strategic plan, a 3 year strategic plan called Transform and Accelerate, which is basically aiming at leveraging our successful strategy.
Remember, our business model, consumer centric, consumer obsessed model driven by a consumer occasions based obsession with 4 key fundamentals: operational excellence, talent development, sustainability and responsibility, route to market, route to consumer and our 4 key accelerators with our portfolio management, premiumization and luxury, innovation and finally digital acceleration. So about more from the core, about what we've been doing over the last 3 years. And actually, if I had to summarize it, we've been building the foundations of our future growth over the last 3 years. So it's about acceleration more from the core, but also about preparing the future, transformation. Pernod Ricard has a transformational journey, endless transformational journey, if I may say so.
So more from the core, I'd say 80% and preparing the future, I'd say 20%. We believe we are the best place to really capture industry growth going forward. We have 3 key specificities, Pernod Ricard. Pernod Ricard is unique for three reasons. Our portfolio, we have leading brands in basically all key categories.
We have a consumer centric approach, I mentioned We have redesigned our organization to be focused on moments of consumption. We do not look at the industry the old way, the segment way, tequila, gin, whiskey, vodka. We look at it through the consumer lens by moment of consumption, And we have an active Portfolio Management. Our unique distribution network, I'll get back into that, but basically, we have the most extensive wholly owned distribution network in the world across 86 countries, 1 third America, 1 third Europe and 1 third Asia. Half of our business roughly is emerging markets.
The other half is mature markets. But we have this unique dual leadership position in China and India, and I'll get back to that. And finally, and I would say actually most importantly, our culture and values. We have highly experienced committed and renewed management team, highly engaged employees, extremely committed and also our new sustainability and responsibility strategy, which is now fully embedded in our organization, not just at corporate level, but also at brand level. So 3 years ago, I told you we could have as an ambition to grow our business 4% to 5% medium term.
Well, now we extend that kind of ambition to not just 4% to 5%, but probably 4% to 7% range. So mentioning so talk about our unique premium portfolio. I won't go back into that. I presented our new house of brands earlier on. And again, as you can see, it's approximately 20 brands, which are part of our specialty brands, and they've grown 13% last fiscal year and represent 3% of our group sales.
Leveraging our unique geographical exposure with a clear particular focus on our 4 win markets. China, we presented to you at Capital Markets Day in last June, our 3 year strategic plan for Asia, where we believe the middle and affluent consumers in China will grow by roughly €100,000,000 by 2021, where we have that ambition as industry leaders in China to double the industry penetration rate by 2025. So it goes beyond 3 years, of course. We have a long term view. It's already started moving from 1% penetration rate, that volume, by the way, to 1.1% as we speak.
We have a leadership position in China with roughly 45% market share and a second to none route to market. We said it 3.5 years ago when China was in double digit decline, it is a market that can sustainably grow high single, low double. There'll be better years, there'll be worse years, but the consumer dynamics are there. India, well, the legal which is exactly where we operate in India, are accelerating. And in addition to that, GDP is growing 6%, 7%.
So these three key elements lead us to believe as well, as we said it 3 years ago, that India can grow sustainably low double digit. There'll be better years, there'll be worse years, but overall the dynamics are there. And for some reason, we enjoy the same kind of market share as we do in China. By the way, this is specific to Pernod Ricard. It is unique.
In 2018, for the first time in human history, the middle class population now represents more than half of the total world population. We expect an additional 2,000,000,000 middle class people by the end of 2,030 globally. Our current growth engines in terms of the major emerging middle class are China, India and Eastern Europe. Our medium term growth engines from a middle class point of view, which will accumulate with China, India and Eastern Europe are Latin America, specifically Brazil, Mexico and some Southeastern Asian market. And our very long term growth engine will be SoftSaran Africa.
We're investing there for the very long term. It's a 15 year view. The U. S, of course, our number one market. We expect to grow in line with the market.
The market has stabilized its growth rate at around 4%, and we're growing in line with that, with what I believe clear portfolio, a very clear portfolio strategy with our current growth engines, Jameson, The Glenlivet, Malibu. Our growth medium term growth relays with Martell cognac and our 2 tequila brands and also looking towards the long term seeding the long term future in the U. S. With new brands ventures with the likes of Monkey 47, Lillet and many other brands. Global Travel Retail, by the way, 3.5 years ago, we didn't talk about it because it did not exist as a business unit.
Today, it is quite a dynamic business unit for Pernod Ricard. And I mentioned, again, leveraging our unique culture. Blending both performance and convivialite. We view convivialite as a performance accelerator because convivialite means being simple, straightforward and collaborative, no silos. So I won't dwell into all of this, but by the way, we've refreshed our leadership model focusing on 6 leadership attributes.
My favorite one is growth mindset. It's really growth mindset because everything we do as leaders is about growing, growing our performance, both from a financial point of view, but also from a people point of view. So if you look at the numbers, by the way, in terms of Towers Watson, which is an independent third party survey, mentioned earlier on 88% commitment rate in Pernod Ricard and 94% of our employees are proud to be associated to Pernod Ricard, and this is precisely what makes me proud. So I briefly mentioned it earlier. We have a new sustainability and responsibility platform, bringing good times from a good place.
We will launch our 2030 roadmap with very aggressive ambitions around these 4 key pillars early April of 2019, so in a couple of months from today. Of course, digital is now fully embedded in our organization. Again, we have more than 150 digital experts. I won't go through these numbers. The one I like best, by the way, every single week, we sent roughly 500,000,000 messages to approximately 100,000,000 consumers.
I would have said that 3 years ago, I think some people might have said it's wishful thinking. No, it's not. It's happening every single week. Obviously, we said we had finished we plan to finish with 1 year anticipation our operational excellence roadmap, which we had shared with you back in September 2016. So part of our Transform and Accelerate plan is to launch a new operational excellence roadmap for 2020, 2021.
So the next our next two fiscal years, touching on A and P, of course, our structure costs and as well at the COGS or costs of goods line. So how to summarize that in terms of ambition? Well, again, as I said it as an introduction, our Transform and Accelerate plan started back in July, focusing really solely focusing ruthlessly focusing on embedding the dynamic growth and delivering operating leverage in line with our objective to maximize our long term value creation. So basically, if I had to summarize our ambition from a numbers point of view, 4% to 7% top line growth, as I mentioned, with roughly 50 to 60 basis points of operating leverage per annum for next year and the following year. We'll focus on pricing, of course.
I mentioned operational excellence with a clear A and P investment strategy, focusing on our must win key priorities, disciplined approach on our structure costs. And finally, just a reminder of our financial policy. Number 1, as we mentioned it back in April 2018, we'll increase our dividend payout to roughly 50% of net profit from recurring operations by fiscal year 2020. And also, we clearly continue to commit to an active management of our portfolio, both from a buy side and the sell side and value creating M and A, and still committed, of course, to remaining investment grade. Thank you.
Julia, question.
Thank you, Alexandre. Ladies and gentlemen, we'll turn to your questions. We'll start with questions from the room. And just to say, you can ask questions in French
or in
English. No questions from the room, again, in which case, we'll turn to our first callers, please.
Your first question comes from the line of Edward Mundy. Please ask your question.
Good morning, everyone, and Alex, thank you very much for the presentation. Three questions, please. You find a lot of detail in the presentation on sort of the future outlook for Pernod Ricard. If you were to put your finger on exactly what's the key delta on raising the top end of revenue guidance from previously 4% to 6% to 4% to 7%. What do you think would be the key difference for that higher revenue guidance?
The second is on Specialty Brands. Where do you think are the biggest opportunities? Is it on distribution? Is it on prices, on mix, on innovation? And the third question is around the U.
S. Inventory optimization. Can you talk a little bit more about the strategic rationale for this and in particular how this fits into the higher A and P spending in the second half, which is, as you said, due to phasing?
Great. Thank you for your questions. What drove us to revisit our top line ambition framework, should I say, which was 4% to 5% to, let's say, 4% to 7%, is if I had to summarize it, is a star alignment. So if all the stars are correctly aligned, and if I focus on our 4 must win markets, but of course, it doesn't mean the rest of the world doesn't matter, it does as well. But of course, if you have the U.
S. Growing mid single digit, if you have China growing, say, low double digit, if you have India growing double digit, and if you have good growth in Global Travel Retail and all the stores are aligned, You could expect to see us perform at the upper end of that ambition. Now by the way, we do always every year aligned. Sometimes India works better and China less, and sometimes it's the opposite, and so on and so forth. But if all the stars are aligned, we can aim at growing at the higher end of that bracket.
In terms of Specialty Brands, for many years, as I mentioned it earlier, we were challenged and asked if the emergence of craft, as it's been the case for the beer market, was a threat for Pernod Ricard. And the key point here is to say it's actually a wonderful occasions, consumers now have a repertoire of brands, their loyalty. They don't have single brand loyalty aspirations anymore, but they do have a number of brands in their repertoire, which they're loyal. And there's always going to be that little specialty brand. I mentioned it quite briefly, but I'm reiterating the average gross margin per liter metric of our Specialty Brands portfolio is higher than Group average.
We will be driving dynamically that segment of our portfolio, both through innovation, of course, and through partnershipacquisition, Del Maguire features very nicely in there. Monkey 47 features very nicely in there. These are great partnerships. Likewise, Smooth Ambler features quite nicely in there. But in terms of innovations as well, we have Altos that features quite nicely in there.
And in terms of brands that have huge potential like Lilly, they feature quite nicely in there. And Elena, maybe for the 3rd question on the U. S.
So on the U. S, we are currently discussing with our wholesalers about the optimization of the finished good inventory we were mentioning before. So here, the intention is as well to contribute to the operational excellence efficiency of our wholesalers. So we are discussing right now what could be the impact and the allocation as well by brands. What is obviously very important as well is that we're going to have a positive counterpart at all level in terms of wholesalers investment behind our brands and activation.
So the discussion is happening right now. Obviously, execution is going to be key not to disrupt the business. For instance, we would obviously be very careful to avoid any out of stock situation, and we'll be able to have a better view in the coming weeks.
Three questions, please, for me as well. Can I just ask you firstly about the extra €100,000,000 operational excellence savings that you've talked about this morning? Can you talk a little bit more about where they'll be coming from and how they'll perhaps be phased over the next couple of years? Secondly, just on Martell and particularly in China and you're mentioning that we will see some inventory management we've gone into Chinese New Year? And then finally, just on India, you're clearly obviously upbeat medium term still about the consumer dynamic there.
I note also through for the second half this year, you're still quite confident of delivering low double digit sales growth. Your biggest competitor there has been sort of flagging a warning around potential disruptions from elections. Is that something that you don't worry about?
So I'll start with the first one on the €100,000,000 efficiency we're going to deliver in the coming 2 years. So first, I think it's important to put those initiatives in the context of the first operational excellence road map we announced and are going to complete the execution this fiscal year. So this is a continuity, and let's say, we're going to leverage on the first wave of the road map. So in terms of initiatives, as we show that in the presentation, it's going to come from optimization of our COGS as well better efficiency of our A and P and of our structure cost. So when it comes to the phasing, it's a bit early to say exactly what could be the phasing over the next 2 years.
But you can probably estimate that it could be well balanced across those 2 years. So something close to fifty-fifty probably makes sense.
On your question on Martell in China, and by the way, on Martell, more generally speaking, by the way, we clearly need to manage our inventory. We did mention several times that Martell was that one brand in the industry that could grow high single digit from a volume point of view to which you can add some price and mix. Now as we shipped at the end of H1 to prepare for Chinese New Year, which took place 2 years ago, so difficult to say how it's going to perform for Chinese New Year. But again, the objective is to finish the full fiscal year in China with normative inventory levels, and we'll have time to get there and to manage, obviously, the overall fiscal year volume performance of Martell from a sustainable point of view. So you can consider that volumes sustainably can grow high single, maybe slightly low double, but not more than that because we want to be able to do this from a sustainable point of view.
And as for India, Helene, how confident are you in terms of delivering a low double digit second half?
I'm confident. I'm sure you are too. Elections are going to happen obviously in H2, but we don't see that as a threat, very good performance in India.
Thank you. Could I just follow-up, Alan, just on a slightly separate issue around the free cash flow generation, the deleverage we've seen very impressive again. Is there a sort of target level of net debt EBITDA at which you think you might get to where you could consider further cash returns to shareholders?
Yes. So on the cash generation, 1st, as you know, the financial policy is the one that we were reminding in the conclusion, which is the intention to increase the dividend payout up to 50% by 2020. We don't give specific targets in term of deleveraging. The cash flow generation is enabling us to deleverage for sure, and this is giving us flexibility as well in term of, as we mentioned, financial policy and active portfolio management with value creative M and A, which is still one of the of our objective in terms of active portfolio management.
Thank you. Your next question comes from the line of Sanjit Aula. Please ask your question.
Hi. Two questions from me, please. Just coming back to the medium term margin guidance of 50 to 60 basis points. You seem to be more confident on pricing. The €100,000,000 of savings flowing through over 2 years basically gets you to the 50, 60 basis points if that drops through to the bottom line.
And therefore, that guidance assumes no underlying operating leverage. So, how conservative do you think is that margin guidance, 1? And secondly, can you just talk a little bit about underlying depletions in China? And do you think underlying depletions are running ahead of what you're able to supply?
Maybe on the depletions in China. The underlying depletions are double digit depletions, clearly. So the underlying momentum over the first half of our fiscal is robust. For the second half and more specifically for Chinese New Year, which is happening as we speak, we'll have to wait for, I guess, our Q3 income to be able to give you a little taste of what Chinese New Year looked like.
So coming back to the 50 to 60 bps leverage target for the coming years. Well, as you mentioned, we have been working on the pricing improvement for many years, and this obviously will continue. These operational excellence initiatives are going to help us as well to mitigate COGS inflation pressure we are having. This is already happening in the H1, but we need to mention that we have increasing COGS. For sure, for instance, logistic COGS are increasing significantly.
We have as well some COGS increase in terms of wet good, dry good and so on. So those operational excellence initiatives are going to help to mitigate those COGS increase. This is medium term targets. Obviously, this is a strong indication in an environment that remain uncertain, And we want to keep investing behind our brands. That's why we mentioned this A and P ratio, which is probably going to be flat, stable over the years to keep investing for the future for our growth mid term and long term.
Plus, the structure cost discipline that we mentioned, that's how we get to this 50 to 60 bps medium term ambition.
Your next question comes
from the line of
Dasha Afasaneva. Please ask your question. Hello.
Hi. I just wanted to ask I saw that there was that there was a rule operating margin expansion, but that didn't happen in Europe. And I just wanted to ask about the reasons for that. And then my other question was going to be about this corporate governance question. Obviously, there were changes a couple of weeks ago.
Is this something you are monitoring? And what do you sort of say to people who are worried that the Board doesn't have enough independent voices? And wouldn't it be easier to sort of defend your strategy if there were more independent voices on the board? Thanks very much.
Maybe I'll start with Europe. So as I mentioned in the call, the presentation, the margin decline in Europe in this first one is in this first half, sorry, is mainly driven by the A and P phasing because we have a stronger A and P investment in this first half than the top line performance, which is stable. And that's how you get to this margin deterioration. So this again, we're going to have the opposite effect in H2 in terms of A and P phasing because A and P globally in Europe will not grow above net sales.
Yes. And on your second question, by the way, the way I view a Board and to an extent as well an organization, specifically Pernod Ricard, ABORD is a living organism in constant evolution. And Pernod Ricard as an organization as well as a living organism in permanent transformational journey. When I was appointed Chairman and CEO of Pernod Ricard 3.5 years ago, I took immediately two decisions. Number 1, to create a strategic committee to oversee with me some of the key strategic topics for Perneuroy Car.
And I also took the decision to enlarge the scope and responsibilities of the Governance and Nominations Committee to be called Governance, Nominations and Sustainability and Responsibility Committee. Sustainability and Responsibility has been embedded in Pernod Ricard forever, but we wanted and I wanted to give it a lot more importance to make sure that our committee at Board had oversight on S and R. Then, over the last 3 years, what happened at Board level? Year 1, we wanted to reinforce our Board's skill set with a strong financial and insurance background, especially at the Audit Committee level, amongst others, especially with the increasing importance, for instance, of risk mapping, many, many other examples. And so Corey Sorenson joined the Board as an Independent Director.
The year after, basically, I mentioned it earlier in the presentation, one of the key accelerators, key strategic pillars of our strategy is digital. And so the Board decided that it was appropriate to really enrich Board expertise, especially on the digital front. And this is when the Governance Committee ran into Enlange's profile. Enlange, let me remind you, spent more than a decade in the Silicon Valley alongside John Chambers at Cisco and had come back to Europe with an entrepreneurial project around connected objects. By the way, Pernod Ricard was the very first company in the industry to launch a connected bottle with Moom champagne.
Now the price of a connected bottle, the cost, I'm not sure it would please Helene if all our bottles were costly like that. It was €20, but that was 4 years ago. We had a vision, still have that vision one day to have all our bottles connected. The cost now is €0.20 And I believe in 3 to 5 years from now, it will go down as low as $0.02 So we onboarded Alange. That really adds a lot of value on the digital front.
Now last year, as part of our triannual independent assessment review of the Board, a few topics came up. Number 1, we should consider the appointment of a lead independent director, especially in the light of the fact that 80% roughly of Cap 40 companies that have a unified Chairman and CEO have a lead independent director. And second, in terms of enriching our Board's skill set, and again, I mentioned it in the presentation, one of our key strategic pillars as well is premiumization and Luxury, which now represents 14% of our business, which has grown 19% over the first half. And that's where the profile of Patricia Barbizet in July popped up. Patricia has an extensive experience as Lead Independent Director of Total and has a very strong Luxury background.
So we onboarded Patricia during the AGM last November. And at the first Board meeting post that annual shareholder meeting in January, she was quite logically appointed by the Board as our Lead Independent Director. What I'm trying to say is, our Board is committed to continually, well, improve our governance. And this will be, let's be clear, an endless process. Opportunities move, challenges evolve, the environment changes.
And so you should expect the Board to behave like a living organism, which means permanently evolving over time. And we have a clear governance calendar ahead of us for the years years to come, and you should expect the same at Pernod Ricard level from an organization point of view.
Thank you. We'll turn to questions
I have 3, please. 1, on the specialty brands, Is there like a limit you would put to the size these brands can reach in the end for each one? Then the second one would be on acquisition. Is there a space you would be more looking at in terms of in the portfolio to fill it? So should we see more specialty because that's what you've mainly done in the past few years?
So are we continuing on this way or could they be bigger one? And then as India in the midterm is maybe going to be the should be the fastest growing market. Could you give us some color on the profitability trajectory in this market? Because from what I remember, it was below group level.
The limit on Specialty, I'll be quite blunt, it's going to be value creation. Basically, as long as we see opportunities in that space that fit perfectly well from a strategic portfolio approach point of view. Both from an acquisitive point of view, but also from an innovative point of view, we will keep on. We have specific routes to market in many, many markets with, as I mentioned it earlier, it's complementary route to market, but also in some cases, route to consumer approach. And it's boding quite well for a start.
So the limit is basically value creation.
It's a very good transition for M and A. So M and A, as you rightly mentioned, has been a great contributor to the growth of this specialty brand category. It shouldn't be the only target for M and A because obviously, as I just said, value creation is one of the key objective of M and A, meaning that we are looking at premium brands with a high growth profile, strong brand quality and credentials, of course, and to capture growth opportunities. And as Alexandre, remember remind us this earlier, we are really looking at that from a moment of consumption point of view, not only by category. So as you rightly mentioned, M and A could still be looking deeply into specialty brands, let's say, type of brands, but not only.
India, so we don't give the exact margin, as you know, by market. As I mentioned before, even if we always or we often talk about India to talk about negative mix, The picture is much, much, much better than that, obviously, in term of midterm and long term objective, but as well in term of profitability profile because as I mentioned, and this is very true in the H1, the margin are increasing in India, meaning we have a strong value strategy and good pricing increase. Having said that, this is a country where we are in an investment mode, both in term of A and P investment, but as well in organization.
If I may follow-up then what's the moment of consumption you're the most looking
at? We have a very opportunistic approach. So depending on the markets, as you know, for instance, the largest moment of consumption in France from a profit point of view is l'aperitif. In China, it's the meal occasion. You even have subsections to that, such as deal over meals, so business dinners or and so on and so forth.
We market by market, what we do is we map out all the different moments of consumption. We appreciate them profit pool by profit pool. And then we have a clear opportunistic approach. So we're pragmatic.
We have a question up here, I believe.
Could you explain the reasons of the dispute with Leclerc? You did not mention Leclerc, but I'm sure it's Leclerc. What are the brands concerned and what are the consequences in the coming months in terms of sales loss? And more generally, could you comment upon sales negotiations?
So a question about the commercial dispute in France. And is it Leclerc? And if so, what brands does it involve? And can you give a commentary on the overall negotiation framework?
And should I answer in French or?
I think if you need
to answer in English, maybe. Okay.
You're probably right insofar as the client you named. Commercial disputes are part of life, so let's not that's life. And they often happen as we approach the end of February deadline to reach an agreement. Obviously, commercial disputes rely on a different view in terms of pricing and promotional activity. And we believe Pernod Ricard is solid enough to have a negotiation.
And I will not give any additional detail to that because, obviously, discussions are ongoing. But we have a clear view. We're resilient. We're solid. The good news is we do have brands that are strong, high equity and appealing brands to our consumers.
And so hopefully, we'll reach an agreement. And if we don't, so be it. The key point being that our upgraded guidance for this full fiscal year does include, by the way, commercial disputes. We have several commercial disputes every year. It's not something completely new.
So we'll see. Good luck to the team. I support them.
Thank you. Are there any other questions from the room, please? Okay. So we'll go to our final callers, please.
Could you tell us about Elliott? Have you met? Where are you on speaking terms? What is going on?
Can you say about the Elliott Fund? And are you in discussions? Have you accepted to meet?
Yes, absolutely. Well, Elliott is one of our shareholders, and they've been a shareholder since, let's say, November, when they let us know. And since then, of course, we've met with Elliott. We clearly support ongoing dialogues with, by the way, not just Elliott, but all our shareholders, including, of course, Elliott. As far as details go, they are confidential, but we have a relationship and ongoing dialogue with Elliott, of course, and with our other shareholders.
So final questions from callers, please.
Thank you. Your next question comes from the line of Fernando Ferreira. Please ask your question.
Good morning. I have two questions on your new medium term plan, please. First one, one of the 4 key markets you mentioned is global travel retail. Can you discuss how relevant that business unit is for Pernod Ricard today and what ambitions do you have for Global Travel Retail in terms of contribution for the future growth? And then second question, when you talk about focus on pricing, can you maybe lay out some of the actions you're introducing to improve net revenue management?
And where do you benchmark Pernod Ricard in this area versus other CPG? Thank you.
Just on Global Travel Retail. If Global Travel Retail were a country, actually we consider it as a community, the Travelers community that don't have boundaries, business unit boundaries, if it were a market, it would be our 2nd largest market from a profit point of view. So that's how important Global Travel Retail is. We expect travelers to increase in terms of numbers, mainly through airlines, of course. And this is the perfect channel for our brands.
So you should expect to see more and more pop up stores on some of our key brands. So for instance, for the run up to Chinese New Year in key international airports where you see Chinese travelers, We had Martell specific pop up stores and so on and so forth. We have not given any numbered ambition for Global Travel Retail. We have just stated on the slide that we expect to see Global Travel Retail in terms of all Travel Retail sales value, not just in our industry, increased by roughly 5%.
So far, on the pricing, so revenue growth management is obviously a key pillar of our strategy. We've been working on it for many years, and we will keep working on it definitely short and mid term. In term of performance, last year we are roughly around 1% pricing improvement. This in the first half is probably a bit better than that. We are committed to increase our price.
We look at the price both in terms of price increase, but as well, obviously, about we look as well at the effectiveness of our promotion to be sure that we have a good view on how effective they can be, how fast we need to adjust them to make them effective or to stop them if they are not efficient. So this is a priority, and this is going to be a priority as well in the future. In terms of position on this, let's say, growth driver, well, it's difficult to say. It's fair to say that we are benefiting from a strong price increase this year. Martell is a great contributor to that.
We mentioned the new price increase happening a few days ago in China again. I think it's showing our confidence and our ambition and I would say our obsession on the pricing strategy, which is part of the premiumization strategy of the group.
Thanks very much.
Thank you. Next question comes from the line of Nico Von Stackelberg. Please ask your question.
Hello. Yes, three questions, please. One, will you commit to growing free cash flow year over year for FY 2019? 2, you mentioned some commercial disputes in France. Can you remind me, do you have 2 separate sales forces in France?
If so, why do you have the structure? And then finally, you talked about a commitment to active portfolio management. I see that you said what I'm trying to get at here is, look, you said that you would not look to sell your champagne assets, which by all measures are certainly low return assets. Why is the champagne disposal not on the table given that they're holding back your group ROIC? And would you agree that assets that are earning below their cost of capital actually destroy value when they grow?
Thanks.
So maybe I'll let you answer the free cash flow at the end. I'll start. We do have a commercial dispute in France, for sure. If you may recall, 4 years ago, we embarked on a project where we decided to merge our back office functions in Pernod and Ricard. Today, we do have 2 sales divisions in Pernod and Ricard.
And there's a project called Arian, which is looking at how we can basically try and grow in a difficult market in France, leveraging the great portfolio of brands we have and our leadership position in France, which is close to 30%. So this project is currently ongoing. With regards to Champagne, let me just be quite clear, by the way, not to mention the great performance, for instance, of PJ growing basically in all regions, double digit. But champagne is a magnificent door opener for the on trade. If you look so forget a second again at traditional segments, but if you look at the high energy party segment, which by the way is a huge segment, which also doesn't really have any boundaries.
It focuses on high net worth individuals that travel from Puttaderez to Centrope to Courchevel to Dubai and so on and so forth. The key SKU that opens the door to the high energy party accounts is champagne. If you want to sell vodka, you better have a champagne, it helps. It definitely helps. By the way, champagne is profitable as well.
So that's as far as it goes for champagne. And what about our free cash flow, Elena?
So coming back to your question on the cash, it's fair to say that in the first half, we have, as I mentioned, some non repeat of positive cash in that we had last year in term of non recurring. So this is going to be impacting our full year performance. In term of ambition, in term of cash generation, I think we've been very clear. And by the way, thank you for asking the question so that I can remind you that we have as well 2 €100,000,000 cash savings program, which is doing well and which will be fully delivered by 2020. So the ambition here is as well to generate good cash flow.
In terms of other indicators, we are roughly increasing our strategic inventory by more or less €200,000,000 We were slightly below some years. We're probably going to be a bit above this €200,000,000 This year, CapEx more or less accounting for representing, sorry, 4% of the net sales, and we don't anticipate significant change here. So ambition in term of cash flow generation for sure with this year the impact of last year positive non recurring cash in which is impacting let's say our comparable basis.
Can I just clarify on the champagne assets? Are they what is the you guys use ROCE, right? So what is the ROCE for the champagne assets?
We don't disclose ROCE by brands. But I can tell you, we monitor ROCE by brands and by brand market combinations.
Thanks. Mindful of
time, we'll take our final question from the callers, please.
Thank you. Next question comes from Lucas Pitcher. Please ask your question.
Thank you very much. A couple of questions. Firstly, on your commentary around the new management in position, high levels of employee engagement. Are you changing the executive and operating management for remuneration targets in light of your raised top line guidance and a specific margin, I. E, moving away from just profit recurring profit guidance?
And also, is there a deepening equity ownership amongst the operational management level as part of the new plan? And then secondly, sorry, a specific clarification. On the U. S. Destocking impact in the second half, did you say 1 to 2 weeks of stock?
I wasn't sure if you said. And therefore, can you give us an idea of what the quant will be in H2? I know you talked about it at the beginning of the call and apologies if I missed the specific guidance. Thanks.
Well, on the management incentives, every single year, we revisit the incentives for them to be clearly aligned with the kind of objectives we have in mind. And as you may be aware, we have short term incentives, so full year incentives based on our budget. And we also have long term incentive plans, which we disclose openly in our reference document. In terms of employee ownership, we're actually going to be launching in April of this year an employee share ownership plan in April. A lot of our employees have been asking us to do that for many, many, many years.
They want to feel they're part of the Pernod Ricard journey, so we're launching this plan April of this year.
For the U. S. Destocking, so as we mentioned, this is roughly going to be around 1 or 2 weeks of sales in term of, let's say, global envelope. We are discussing right now. So it's too early to be more specific than that.
And it's likely to be done by the end of the year. But as I said, execution is key. So if we need to have some of this happening next year to protect the business continuity, we'll do so.
Ladies and gentlemen, thank you very much. Alexandre Helene, thank you, and have a good day.
Thank you. Thank you,