Good morning, ladies and gentlemen, and welcome to Pernod Ricard's fiscal 2018 sales and results presentation. We are adopting a new format this morning in doing a joint press conference and analyst and investor meeting. We are hosted this morning by Alexandre Ricard and Hélène de Tissot, our Chief Executive Officer and Chairman of the Board, and our Finance Director in charge of IT and operations also. Without further ado, I will hand over to you, Alexandre.
Thank you very much, Julia, and good morning to all of you. Let's dive directly into our sales and results presentation. A very strong year for Pernod Ricard with a clear sales acceleration. Organic growth of our top line was +6%, a bit less than double what it was last year. This is a direct consequence of our strategic implementation with, and I think it is worth noting, strong diversified growth, both from a geographical point of view as well as from a brands point of view. An improving price and mix of slightly more than 2%. A financial delivery, very strong numbers as well, with profit from recurring operations growing slightly above 6% organically, which is in line with the revised annual guidance we had given.
There has been some margin improvement, up +14 basis points, while at the same time increasing behind our must-win battlegrounds, we call them, with brands and markets and specific projects to drive our future growth. Currency mainly impacted by the U.S. dollar, as expected, with a negative EUR 180 million impact on profit from recurring operations, but also a positive EUR 91 million impact on our net debt. Net profit is up 13%, thanks in particular to the reduction in our financial expenses. Very strong year as well for our free cash flow, which is up 10%, leading therefore to net debt decrease of almost EUR 1 billion. We now have our net debt below the EUR 7 billion mark. Our net debt to EBITDA ratio is down 0.4 to 2.6 times.
We also will be proposing at our AGM in November to increase the dividend to 41% payouts versus 37% this past fiscal. Therefore, we will propose a dividend per share of EUR 2.36, in line with our policy to gradually increase our payout to roughly 50% by fiscal year 2020. There you have all the figures, both organic and reported, with mature markets growing 2%, emerging markets growing 13%. I mentioned it a few minutes ago, diversification of the sources of our growth and from a wide spectrum of markets. Continued dynamism in Americas, up 6% with the U.S. now growing broadly in line with the market and the acceleration of Mexico and Brazil. Acceleration of Asia and the rest of the world up 9%, thanks to return to strong growth in our two big heavyweight emerging markets, China and India.
Modest growth in Europe, up 2%, with good momentum in Germany, in Eastern Europe, Germany and U.K., but difficulties in France and Spain. Finally, travel retailing, good growth, actually growing across all regions. This is a clear consequence as well of the new organization and leading to value market share gains. Well, from a broad spectrum of brands, our strategic international brands have accelerated their performance, this year growing 7%. 11 out of the 13 are growing, and 6 are improving their trends. Very strong performance of both Martell and Jameson, growing 14%. Improving trends for our Scotch portfolio, the entire portfolio growing 3%, and our strategic international Scotch brands growing 5%. Chivas 5%, but Ballantine's as well, and Glenlivet as well.
Absolut up 2%, thanks to the success of the performance outside of the U.S., up 6%, with the U.S. market, vodka market still extremely competitive. Significant improvement for our Seagram's Indian whisky brands, all three of them growing up 13% versus 3% the previous year. Finally, clearly in line with our strategy, innovation is still contributing heavily to our top line growth. Here you have our full year sales results, growing 6%. You see here the FX impact of EUR 530 million for our top line. Q4 sales are up 5%, which is broadly consistent with the nine-month underlying trends. You see the sales, as I mentioned it earlier, growing from all regions. You see quite a balance of our presence across the key geographies in the world. If we dive into the regions, one after the other, starting with Americas up 6%.
First of all, the U.S., continued dynamism for the market with the growth of Pernod Ricard in line with the growth of the market. Our assumption is the market is growing roughly at 4%, with spirits continuing to gain share in total alcoholic beverages. We do see the continuation of premiumization, which is driven entirely by mix and therefore trade up, and tequila, whiskey, and innovation are the key market drivers. In a market growing 4%, we have grown 4% as well. You have here some of our Nielsen and NABCA numbers. In detail, Jameson, strong and double-digit growth, just like previous years, enhanced as well by innovation and the continued success of Jameson Caskmates. We launched Jameson Caskmates IPA. Previous year was Jameson Caskmates Stout edition. Absolut, as I mentioned it earlier, is still in decline in a difficult category.
Lime, which was launched 18 months ago, is now the number 2 flavor, just behind citron. We know there's a clear consumer trend for citrus-based cocktails in the U.S. Good growth for Malibu, which is outperforming the category. The Glenlivet is stable in the U.S. after a transition year, and very strong double-digit growth for Martell, with price increases, market share gains, and clearly the successful execution of our innovation strategy behind that specific brand with Martell Blue Swift and Martell VS Single Distillery. Our agave-based portfolio is also performing quite dynamically with Avión, Altos, and our latest acquisition in the U.S., which is Del Maguey. From a wine portfolio point of view, it's worth mentioning the very strong development of Campo Viejo in the U.S.
Outside of the U.S. and the Americas region, you see acceleration of our performance in travel retail Americas, driven by our strategic international brand portfolio, in particular Chivas. Canada is stable, with overall good performance of Jameson and our wines, offset by Absolut and local Canadian brands. Mexico, double-digit increase for strategic portfolio. Strong pricing as well, and this is thanks to basically the refocus of the entire organization in Mexico on our strategic brands and the disposal of our local brands, which were our local Mexican brandies. Return to growth in Brazil, in a context which is somewhat improving, and this is again driven by our strategic portfolio, which is our key focus investment play in Brazil. Continued strong dynamism in Cuba, which is driven for the third year in a row by the increase in tourism.
Moving into Asia, rest of the world, where we clearly see a strong acceleration. Starting with China, +17%. Previous year was +2%, so it is a significant acceleration, confirming the return to strong growth. Martell grew in line with China, +17% across the whole range, VS, VSOP, XO, and above. Our volume market share of cognac has been maintained at roughly 44%. Return to growth of Chivas, following a first year of activation behind our basketball platform, with a significant increase in marketing investment to support Chivas, the key SKU, and introduce Chivas 12 Extra. Our premium brands portfolio is growing strongly as well, double digits, and this is following the first full year of execution of our new sales and marketing organization.
As you may recall, we set up a brand new route to market focusing on our premium brands portfolio to capture the opportunity of middle-class Chinese consumers. India up 14%. We can talk about acceleration versus just +1% the previous year. This is partly enhanced by a clear favorable comparison. You remember all of the environmental headwinds we had the previous year. We maintained our market leadership at roughly 45% of the value of the market. Travel retail Asia, as well, is undergoing some acceleration, driven by our strategic brands, and in particular, Martell. Continued strong growth, exactly the same as previous year for Japan, driven by our Scotch whiskies and Perrier-Jouët with a favorable price mix. Korea is still in decline, but trends are improving. Last year, it was double-digit decline. This year, it's -5%.
It's driven by the difficult performance for Imperial, although we have been active on the innovation front behind that specific brand. Our strategic international brands are back to growth. Dynamic growth in Africa and Middle East, with our focus brands all growing, in particular Chivas, Jameson, Ballantine's. We could also mention Martell. Australia is in slight growth, with our strategic brands as well accelerating. Declining in our wines because we are focusing on value more than volume. Difficulties in Taiwan, which is in decline. This is clearly driven by our Scotch portfolio there. In Europe, the market for Pernod Ricard is up 2%. We'll start with the difficult markets in Western Europe, which overall is stable. France is down 4%. Market remains challenging with a very tough pricing environment, especially with the off-trade.
Decline of Ricard, Pastis 51, and the whiskeys in categories which are as well in decline. Quite good performance of our growth relays with the likes of Absolut and Havana Club. Spain is down 5%. This is in particular due to a slowdown in the market, which was as well for our performance, amplified by some destocking and further impacted as well by the situation in Catalonia. The whiskey category itself is in decline, we launched Beefeater Pink in last March, and we expect this to help improve our overall gin performance in the current fiscal year. Continued dynamic performance in the U.K., which is up 6%, driven principally by Absolut, as well by Jameson and Beefeater, where we also launched Beefeater Pink, which is doing quite well.
Our wine portfolio is continuing to premiumize, with a clear focus on Campo Viejo and with good pricing across both wines and spirits. A clear value-driven strategy for the U.K. market. Continued good performance as well in Germany, driven by Lillet which is undergoing a significant growth, also our focus whiskey brands, Jameson and Chivas, and as well Havana Club. Positive pricing and extremely successful development in Monkey 47. Dynamic momentum as well in Ireland, driven by our focus brands, in particular our key brand in Ireland, which is Jameson, which is its home market, and driving premiumization as well across the range. Return to growth of Travel Retail Europe, driven by our whiskey portfolio. Good momentum in Eastern Europe overall, growing 10%, with continued double-digit growth in Russia, driven by strong local strategic brands like Ararat and Olmeca, also our strategic brands.
Good performance, or should I say, continued good performance in Poland. Basically, if you look by type of brands, you see the acceleration of our strategic international brands. We'll talk about Martell and Jameson in particular, also acceleration of our strategic local brands driven by our Indian whiskeys, as well Olmeca and Altos. Strategic wines, a value-driven strategy with very good performance, particularly of Campo Viejo. Others, which is growing, driven particularly by Monkey 47 and Lillet. Innovation delivering 2% of our total, +6% organic top-line growth, and price mix slightly above +2%. Our strategic international brands, I mentioned Jameson grew 14%. Obviously very strong performance in the U.S., including our innovation strategy, also very strong performance in Europe, where we grew double digit, driven by the likes of Eastern Europe, as well Ireland, Germany or Poland.
Continued double-digit growth as well in Africa and Middle East. The brand is on path to become one of our global brands.
Ladies and gentlemen, we're experiencing a momentary interruption to today's conference call. Thank you for your patience, and please continue to hold.
We're continuing to internationalize as well Martell with China, Asia on one side, travel retail on the other, clearly.
Also the U.S. and to a certain extent, Africa as well. We had a small power cut which is gradually being restored. We will resume.
Ladies and gentlemen, we're experiencing a momentary interruption in today's conference call. Thank you for your patience and please continue to hold. Ladies and gentlemen, we're experiencing a momentary interruption in today's conference call. Thank you for your patience and please continue to hold.
Okay, ladies and gentlemen, we will resume the presentation. Apologies, we had a small power cut here in Paris. Alexandre, over to you.
Thank you, Julia. I'll start over to Jameson, up 14% with a clear execution of our globalization strategy for the brand, with double-digit growth in the U.S., in Europe and in Africa and Middle East. Martell as well, internationalization of the brand up 14% with a focus on China, Asia, global travel retail, the U.S. and to some extent as well, Africa. Brand that grew 14%, of which 12% volume, which is slightly above what we had mentioned, which is a supply strategy which can allow us to grow the brand volume-wise high single digits. Up 17% in China with back to strong growth, with volume market share maintained at 44%, but also good growth outside of China. As I mentioned, internationalization of brand in travel retail and the U.S.
It's worth mentioning that for the new fiscal year, fiscal year 2019, we will be impacted by the price increases, mid-single digits, and particularly in China, but that will be partly offset as well by significant increases in our cost of goods due to using some eau de vie which were purchased at the higher market prices during the previous boom years of the cognac category. Absolut up 2% with confirmed return to growth, with a very strong performance outside of the U.S., which is now more than the majority of the business for the brand. It's up 6% and this is driven by our two heavyweight emerging markets, China and India, but as well across Latin America and Europe. U.S. is still in decline for the brand, approximately down 4% in a category which remains extremely competitive. Scotch whiskies, improving trends up 5% across Chivas, Glenlivet and Ballantine's.
Chivas, I mentioned the rebound in China, there's very strong performance in India, Eastern Europe, Latin America. Growth as well in travel retail. Glenlivet is up 5% with acceleration following the transition year last year with strong performance across Asia and Eastern Europe, and improving trends as well for Glenlivet in Western Europe. Ballantine's, the performance is improving, driven by Asia, Eastern Europe, Africa and Middle East. With regards to our other brands, Ricard is down 6% in a difficult category. Ricard Plantes Fraîches was launched just before summer to inject some newness behind the brand. Beefeater is up 4%. Good performance driven by the U.K., as well Latin America, which is offsetting the decline in Spain. Havana Club up 6%. Basically continuation of good growth, thanks mainly to Cuba. Malibu up 6% driven by the U.S., and very successful and simple summer activations.
Mumm up 1%. Stronger performance in Australia, one of our key markets, as well Americas, one of our investment markets as well as Asia. Offset primarily by the weaker U.K. performance, which is driven by ourselves as we have a value-oriented strategy on champagne and absolutely not volume. [Audio distortion] up 6% with strong performance in Japan, China, which are both in double-digit growth. On our strategic local brands, the key point here is the acceleration of our Seagram's Indian whiskies, double-digit growth versus a weaker previous year. Part of that performance is indeed favored by a good favorable basis of comparison. Improving trends but a continued decline for Imperial in Korea. We've injected as well quite a bit of innovation with lower proof alcohol Imperial variants. Continued dynamism of our tequila brand, Olmeca Altos, driven by the U.S., but also Russia, China, sub-Saharan Africa and Turkey.
Kahlúa is in modest growth, and this is mainly driven by China and travel retail Americas. On our wines, we have a clear value strategy for our wines with positive pricing. Growth driven principally by the great performance of Campo Viejo, specifically in the U.S. and in the U.K. Brancott is in decline due to a very competitive environment, especially in Pacific. Deceleration for Jacob's Creek, that again, is driven by the implementation of a value strategy in the U.K. Innovation and luxury, two of our business accelerators. Innovation, we see a continued strong momentum behind the big bets. You have here pictures of our Caskmates, Extra, Blue Swift, Altos, Lillet, Double Barrel, Jacob's Creek, and Monkey 47. All growing very nicely. Luxury, Le Cercle portfolio, which is growing at a much faster pace than overall group average with plus 10% growth.
I'm not going to spend time on some of the examples of activations we have around our brands and markets, I think it might be worthwhile just saying that, regarding sustainability and responsibility back in 2010 We had focus on a clear roadmap with clear objectives to achieve by 2020. As we approach that date, we're already starting to work on our 2030 roadmap. It's worth mentioning that we have achieved or are going to overachieve on our five key environmental commitments by 2020. Our 2030 roadmap, which we will present later on during the fiscal year, will be quite ambitious. This is something we have at heart and which our consumers, our employees, and overall our stakeholders have to heart as well. Therefore, I'll pass on to Hélène for the financials.
Thank you, Alexandre. Good morning, everybody. Let's go back to the figures with the profit from recurring operations. Looking at our P&L, the profit from recurring operation is improving by 6.3% from an organic point of view, thanks to strong sales growth that Alexandre commented, plus 6% organically. A&P investments that are growing by 7% and a tight control of our structural costs. Profit growing organically by 6.3% and on a reported basis, minus 1.5% due to negative FX impact that was mentioned before. I will come back to that. We want to highlight the good progress we are making on the operational excellence roadmap. We are delivering two-thirds of our savings, targeted savings here, both from a P&L point of view and cash point of view.
The amount at stake for FY 2018 is EUR 60 million favorable P&L impact, mainly from cost of goods sold and A&P. I remind you that we are committed to reinvest half of the savings into A&P. A quick word on the operating margin, improving by 14 basis points, and this is driven by the gross margin improvement. I will comment in a minute, and structural cost discipline. Just a comment on the IFRS 15 impact for us that are going to be implemented from FY 2019. You have the details in the appendix that are very consistent with the estimate we shared with you before. In summary, this will have an impact on our sales by 3%, no impact on our profit from recurring operation, and our operating margin will be up by 80 basis points. You have the detail again in the appendix.
Let's start now with the gross margin. Growing by 6% with an improvement of our ratio of 15 basis points. You have here the impact of our operational excellence savings that we delivered that are limiting the impact of cost of goods increases we had in FY 2018, in particular agave cost and GST in India. We want to highlight that in FY 2019, our gross margin is going to be impacted by increasing input cost. Alexandre already mentioned the one on cognac. We'll have as well inflation and commodities, and again, some agave cost increase in FY 2019. Back to the gross margin 2018. Strong growth for Martell and Jameson contributing positively to the gross margin, but negative mix from growth in Seagram's, Indian whiskies, and decline of Ricard. Pricing is improving this year, as we mentioned already.
If we move to the A&P expenses, growing by 7%, a bit faster than the net sales growth. This is key to prepare future growth. We are investing behind our key innovation project, but as well, we have some accelerated spend to internationalize Martell to support the new Chivas platform in China. As I mentioned, we are reinvesting half of the operational excellence savings here. Ratio broadly stable at 19%. Structural costs increasing by 5%, excluding other income and expenses, the growth is 4%. Translating the strong discipline we have here and while investing in a targeted way in emerging markets and growth relays. If we look at the change in profit from a recurring operation, you had the 6.3% organic growth I just commented. Group structure not very significant and it's mainly linked to the Mexican brandies.
We saw the impact on the net sales before, the negative FX impact that we mentioned already, EUR 180 million. We have the detail on the following slide. It's mainly coming from US dollar, but as well CNY, Indian rupee, and Japanese yen. It's lower than the estimate we shared with you at the time of the Q3 communication. At the time, we estimated that impact to EUR 200 million, mainly due to the strengthening of the US dollar during Q4. If we move now to the performance by region, starting first with the balance between emerging and mature markets. As we mentioned, we had quite a healthy geographical balance here with no significant change as is the previous year. Just highlighting mature markets that their weight in the net sales is 60% and in the profit from a recurring operation is 62%.
As Alexandre mentioned, both nature of markets are contributing to growth in fiscal year 2018. If we look at the analysis by region, we had already a view on the net sales. Again, quite healthy and well balanced between three regions and no significant change in the profit from recurring operation in fiscal year 2018. Moving to the detailed performance by region, starting with Americas. We are delivering a good performance driven by top-line growth. I would not come back to the top-line growth because Alexandre just commented it. It's growing by 6%. Gross margins are growing by 5% with a deterioration of our ratio by 51 basis points. This is driven by the U.S. due to the increased agave cost that is impacting our performance in that region.
The lower weight of Absolut more than offsetting positive pricing and increasing weight of Jameson. A&P, broadly stable, growing by 5%. Reflecting continued investment to support our core priorities. Structural cost increase below that of sales with showing strong discipline there, giving a profit from recurring operation growth of +7% from an organic point of view, -7% on a reported basis due to unfavorable U.S. dollar movements. Let's look at Asia rest of the world now. Growth acceleration clearly in that part of the world, driven by China, India, and travel retail. Travel retail supported by A&P, as you can see on that slide.
Net sales growth growing by 9%, gross margin improving, with gross margin increasing by 10 points, by 10%, and the ratio by 42 basis points, which is driven by the acceleration of China despite the increasing weight of India. A&P increasing strongly by 13% from an organic point of view with the ratio increasing by 67 basis points to support growth in China. You have here a reference to those key investments and strategic priorities in China such as Martell, Chivas Extra with the NBA platform, but as well in India with innovation launches that we need to support there. Structural cost growth reflecting targeted investments in growth relays.
All in all, our profit from recurring operation is improving from an organic point of view by 7%, is stable on a reported basis, and the margin are decreased due to this increased investment behind key priorities I just mentioned. Europe, good performance, thanks to price mix driving gross margin improvements. Sales are growing by 2%, as mentioned by Alexandre. Gross margins are improving growth of +3%, ratio improving by 52 basis points. This is due to the positive price mix we are delivering in U.K., Russia, and Germany that are offsetting erosion in France due to lower weight of Anise and deflation. Tight management of A&P growing by 2%, ratio being a bit down. Structural costs as well in line with our strategy.
Profit from recurring operation is growing by 4% on an organic basis and on a reported basis with margin improving by 53 basis points. If we move now to the net profit, let's start with the group share of net profit from a recurring operation, which is increasing by 2% and so is the EPS. We are delivering on a reported basis a decline of 1.5% due to the negative FX impact I mentioned before, but able to deliver this +2% on a reported basis improvement of the group share of net profit due to the significant reduction in financial expense from recurring operation.
You can see on that slide the amount at stake is EUR 75 million, and this is mainly due to the lower average gross debt in fiscal year 2018, that is the year before, and a reduction in the cost of debt from 3.8% to 3.5%, mainly linked to the repayment of bonds in fiscal year 2017. The expected cost of debt for fiscal year 2019 is 3.9%, and this is mainly due to another year of good cash generation that we expect for fiscal year 2018 that will enable us to reimburse short-term, cheaper debt and as well a U.S. dollar interest rate increase that will have a negative effect on the floating U.S. dollar debt. Just as a reminder, 16% of our total U.S. dollar debt is with floating rate. A comment on the income tax on recurring operations.
We have a rate close to 25% in fiscal year 2018, which was expected and in line with the previous year. For fiscal year 2019, we expect that rate to be 26%, slightly above, and which is mainly due to geographical mix. And as well, very limited impact coming from the U.S.A. tax reform. We already shared with you with some burdening taxable bases in a context where the federal tax rate is decreasing to 21%. If we move now to the non-recurring items. We have the positive evolution here compared to last year, which is due to the following elements, starting with the capital gain losses and impairments. A EUR 44 million expense here with the capital gain realized on the Glenallachie disposal offset by impairment charge, mainly on the Brancott Estate and Wyborowa.
We have EUR 38 million expenses linked to a restructuring and reorganization cost, linked to a numerous project to reflect the need to adapt our organization to get efficiency. We have some positive other non-recurring operating income that are driven by the sale of the bulk Scotch whisky as part of our active asset management that we share with you at the time of the communication of our first half results. Significant non-recurring tax results, which were as well already in our first half communication, mainly due to a reimbursement of 3% tax on dividends in France and the impact of the U.S. tax reform, EUR 55 million linked to the revaluation of deferred tax assets and liabilities at new corporate income tax rate. As a consequence, the group share of net profit after non-recurring items is up 13%.
Let's spend a few minutes now on the cash flow and the debt, starting with the free cash flow. A continued very strong increase in free cash flow, reaching new historic high of EUR 1.1 billion 433 million. You have on that slide the evolution of our free cash flow over the past four years, which is showing this continued very strong increase. Increase of 10% this year, plus EUR 134 million. If we look at the detailed performance enabling us to deliver this free cash flow, I suggest to move directly to the following slides to comment that detail. We are having profit from recurring operation growing at 6.3% organically, but -1.5% on a reporting basis.
We have some slight overall increase in our strategic inventory build, a EUR 10 million increase in fiscal year 2019, which is driven by a higher cash out, mainly by higher cash out to support the cognac dynamism. We have as well a positive variance of our operating working capital, EUR 38 million lower than the previous year. Positive variance despite business growth. You have as well here the impact of the operational excellence program I mentioned before. Moving to CapEx, the ratio is almost stable at 4%. Financial expense are decreasing, and this is thanks to the lower average gross debt and reduction in cost of debt I was referring to when I was commenting the P&L.
As well, positive non-recurring free cash flow item that are the cash translation of the element I mentioned in the P&L, such as the sale of the bulk Scotch inventory and the reimbursement of the withholding tax and dividends. Looking now at the net debt. With this free cash flow performance and post-dividend and M&A, the net cash generation amounts to EUR 800 million, enabling us to reduce our net debt by EUR 900 million, to be accurate, EUR 889 million, thanks to a favorable translation adjustment of EUR 91 million, mainly due to the euro-dollar evolution closing rates on fiscal year 2018. Our net debt is now down to EUR 6.9 billion, thanks to the very significant improvements of our net cash generation. You have here the impact of this reduction of our net debt and on the ratio.
The ratio is decreasing by 0.4 point, the net debt to EBITDA ratio, with now 2.6 in fiscal year 2018. Again, here you can see the continued deleveraging we've been achieving over the past 10 years. In that context, as Alexandre mentioned in the introduction, we are proposing a dividend increase with a dividend of EUR 2.36 per share. This will be subject to the approval of our annual general meeting in November. This represents an increase of 17% versus fiscal year 2017, with a payout ratio of 41%, reflecting our new policy we shared with you back in April of gradually increasing the cash distribution from the historic one-third of group net profit from recurring operation to 50% by 2020.
I hand over to Alexandre for the conclusion and the outlook.
Thank you very much, Hélène. If we summarize a very strong year, demonstrating a clear acceleration in the business with broad-based diversified growth across all regions and key brands. Acceleration in sales including a return to strong growth in China and India. The U.S. is now growing broadly in line with the market. We'll continue to focus the investment to support our future growth and good progress as well on the implementation of our operational excellence roadmap, including return, as you've seen, to positive pricing. Therefore, leading to a delivery of 6.3% growth, organic growth of our profit from recurring operations. Last but not least, Hélène just showed a very strong cash performance leading in significant reduction in deleveraging.
In terms of outlook, we will keep on rolling out our roadmap and our strategy execution with clear resource allocation behind our key battlegrounds, key brands, key markets, key projects. For this current new year, in an uncertain geopolitical and monetary environment, we expect to continue to grow our broad-based sales, to continue to improve as well our pricing. Hélène mentioned the growing pressure we have on some of our input costs, we'd like to just let you know that we expect to have a very strong Q1. Number 1, driven by quite a low base of comparison for India in the previous year and an earlier mid-autumn festival in China. This makes us share with you guidance for the current year of growth in profit from recurring operations anywhere between +5% and +7%. Of course, these numbers are organic. Thank you.
Thank you very much, Alexandre and Hélène. We'll now turn to your questions, which you may ask in French or in English. We will start with some questions from the room, if there are any. Olivier?
Bonjour, Alexandre, Helene. Olivier Nicolai with Morgan Stanley. I will ask it in English, but on China, first of all, could you comment on the pricing environment on cognac and what was the price increase in Martell that you've seen in 2018? Question on Korea as well. How big it is in terms of your group sales, and could you perhaps comment on the situation there and whether or not there is a serious risk for you to lose your license? Just lastly, on the U.K., on Q4 was extremely strong, plus probably low double digit. How sustainable is that and do you see retailers building stocks? Thank you.
On China, we did mention during the course of the year that we had increased our prices on Martell mid-single digit. We had also said that the impact from a price point of view would be quite marginal for the fiscal year 2018, and we'd see it come through for fiscal year 2019. We were the first ones to increase our prices. Going forward, we obviously don't comment on what we're going to do from a pricing point of view. The pricing environment for cognac generally in China is positive. For Korea, where we declined 5%, just as a reminder, I think the previous year market was down for us double digit. I think it was close to 15%. Well, as years go by, the market is becoming less and less important for us.
We don't disclose exactly how much Korea represents, but it's not a big number. It's a low single-digit number of our global business. For the U.K., basically we have limited visibility and guidance on the conditions of a Brexit, where we'll be obviously happy to know what they are so we can adapt. There's on one side, obviously the U.K., which is also low single digit in terms of our global business. There's the currency impact on the British pound, which actually is the other way around. It's actually a positive for us. In the worst case scenario, one can say that by default, WTO is what would work. In terms of building stocks, we'll see as we move forward.
The reality is we'll look at that's more logistics details in terms of trucks, in terms of warehousing, and in terms of bureaucracy and administrative papers in a worst case scenario. That's what we can say on Brexit.
Just on, sorry, on Q4, I'm curious it grew quite low double digits. What was the system level?
Where? In the U.K.?
In the U.K.
I don't look at quarterly numbers, just so you all are aware. I would strongly suggest that the underlying trends specifically in the U.K. are more in line with full year Then quarterly volumes and value. Our quarterly numbers, depending on the markets, by the way, and the brands, may vary significantly from one quarter to another, especially when we increase prices, for instance, or when we have logistics transitions as well, and so on and so forth. I wouldn't look at double digit and there's no loading or anything in the U.K. in Q4. It's just phasing from Q3 to Q4.
Thank you. Do we have another question from the room? In which case, we'll turn to our callers, please.
I'll take our first question from Simon Hales from Citi. Please go ahead.
Thank you. Morning, everybody. Three questions, please. Firstly, could you talk a little bit about the outlook you see for gross margin development overall in fiscal 2019? You've clearly flagged the higher input cost headwinds in both ODV and agave that you're still facing. Should we still expect with the pricing coming through to see gross margin expansion next year? Maybe in relation to that, Alex, do you expect operational leverage generally, through the P&L, to be better in fiscal 2019 than it was in fiscal 2018? Just on pricing specifically, you're obviously more confident about the pricing outlook. Is that primarily driven by the movements you've made on Martell, or do you see the ability to take pricing across a broader range of your brands and geographies in 2019?
Finally, just on Absolut, it looks in the U.S. that the trends on Absolut deteriorated in the second half versus the first half. Is that purely just the lapping of the launch of Absolut Lime in the base? Has there been any real sign of underlying improvement in the base brand given the launch of the Nothing to Hide campaign last year?
Okay. I'll start with Absolut U.S., then I'll leave Hélène to address the other questions. There is an element of lapping the Lime launch previous year. It was one of the most successful launches in terms of innovation in the U.S. market during that year of launch, there is an element of that. The underlying trends for Absolut are basically low single-digit declines. According to Nielsen or NABCA, you can think it's -3% or -4%. The vodka segment does remain extremely challenging and competitive. In that environment, we are fairing okay, but obviously it's not a satisfactory performance, of course. We're not going to overinvest just for the sake of overinvesting behind the brand. We have the right investment strategy behind Absolut in the U.S. It's consistent. We'll see what happens. I just want to mention two elements.
Absolut today is less than one fifth of our business in the U.S. Absolut globally is now bigger outside of the U.S. Finally, as we mentioned it in the presentation, despite the difficult performance of Absolut in the U.S., Pernod Ricard USA is now performing in line with the U.S. market.
Moving to the gross margin development question you raised. Maybe let's start with the price mix we expect in term of trend for FY 2019. As a reminder, we saw some improvement in FY 2018 on our price mix. We mentioned these figures of +2.3%, which is a bit better than the year before, and this improvement was due to pricing. We expect, in FY 2019, some limited improvement as well, and coming from pricing. As you rightly mentioned, we are expecting some growing pressure in term of COGS on the input cost. We mentioned the nature of them, mainly inflation on commodities, but as well increase of cognac cost and, for another year, an agave negative impact.
In that context of growing pressure, we will have some savings coming from our Operational Excellence Roadmap to continue in FY 2019, which will help to mitigate part of this increase. At gross margin, we expect limited improvement on an organic basis. The last thing as well, the question on the operating margin. We will keep investing behind the right priorities in term of A&P, tight control on structure cost. In that context, we expect as well a moderate operating leverage in term of profit from recurring operation margin.
Just generally that question on pricing more broadly across the group rather than just on Martell.
Well, obviously a big part, given the size of Martell, will be coming from Martell, but not only. Let's be very clear. We have put in place, I think we shared this with you a year ago or 18 months ago, a clear strategy called our Revenue Growth Roadmap specifically targeting, not just top-line pricing but also promotional efficiency across the range of our brands and across markets. You should expect to see some pricing as well to come from some of our other key strategic brands as well, to different extents. Then obviously Absolut U.S., I'm not sure you should expect any pricing.
Great. Alex, thank you. Thanks, Hélène.
We will now take our next question from Edward Mundy, from Jefferies. Please go ahead.
Morning, Alexandre. Morning, Hélène. Two questions, please. The first is on the outlooks for Spain and France in 2019. Do you expect to see any improvement there? If not, is there an opportunity to potentially optimize the cost base? The second is on your top-line growth. You're growing at 6%, nicely ahead of your 4%-5%. How sustainable do you feel this level of growth is, given the greater diversification of growth within your business versus history, and the successful implementation of your strategy to focus on the key battlegrounds? The third question is on FX. I see you've chosen not to give an explicit FX number. Looking at the current spot rate for euro-dollar, relative to the average for fiscal 2018, it implies a tailwind of close to EUR 30 million EBIT, assuming the sensitivity on slide 72 holds true.
I appreciate that FX is a bit of a moving feast at the moment, am I missing anything within this math?
I'll address your first two questions. I'll let Hélène talk to you about currencies. France and Spain, indeed, this year we were down 4% and 5% in both markets. We do expect some improvement in this new fiscal year. In Spain, as I mentioned, we launched towards the latest part of the fiscal year, Beefeater Pink. We do expect this to inject some dynamism behind Beefeater as a brand. That being said, it's fair to say that the year was marked by the issues in Catalonia. Tourism in Catalonia, which was down. Clearly, this impacted part of the performance, not just for Pernod Ricard Spain, but for the overall market. The whiskey category is struggling slightly. We do expect that this current year we will do better in Spain.
As for France, part of the disappointing performance this past fiscal year is a result of some loading at Intermarché in particular, the previous year, point one. It is also impacted by some of our border sales, especially with Spain. We do expect some improvement in France this current year. This summer's Nielsen panels, especially on Ricard actually, are quite encouraging. Bear in mind that the French market is basically a stable, at best market, and the key issue we have in France is basically pricing with 85% of the market, which is the off-trade market. Going to our medium-term roadmap and what we had shared with you going back to June 2015. We had mentioned top line anywhere between 4% or 5%. I think we could re-qualify this and talk about mid-single digit top-line growth.
I think that this mid-single-digit top-line growth, which basically relies on anywhere between high-single, low-double-digit growth in markets like China, and low-double-digit growth in a market like India. Nothing has really changed. Some years we might be in double-digit growth for China, others maybe a high-single-digit growth. It depends on the volatility. Which is okay. The underlying trends in, for instance, these two markets, from a consumer dynamics point of view, have always been there, as we mentioned it, including during the difficult years, and are clearly there as we speak. I think that mid-single-digit is still the right way to look at things going forward. On currency, Hélène?
On currency, we are not sharing any estimate today. We think it's too early. It's highly volatile. You know that we have a very little hedging.
Just for you to know at the moment, based on the projection rate computation we made, it will not be material. That's another reason not to give you an estimate today.
Great. Thank you.
We will now take our next question from Trevor Stirling from Bernstein. Please go ahead.
Good morning, Alexandre and Hélène. Three questions from my side as well. The first one, perhaps for Alexandre. Given the broad-based success of Olmeca Altos, do you think you're considering maybe to make it a strategic international brand? Because it's really broken out of just being a U.S.-driven growth story. Second question. Hélène, you talked about the pressure on cognac that's coming through next year based on the purchases from several years ago. Could you comment a little bit on this year's cognac harvest and the outlook for the eau de vie that you're purchasing over the months to come? The final one, returns question.
Pricing, Alexandre, is it focused on any particular category or brand, or is it pretty broad-based?
Okay. It's broad-based, to be quite straightforward. Within not just spirits industry, but specifically in spirits, it's broad-based. It's more of a portfolio pricing pressure approach, which is a direct consequence of the price wars which all of the key off-trade accounts have been going through for quite some time now. Regarding Altos, actually, I'll even broaden your question. It's fair to say, as I was going through the presentation, that we have some strategic local brands, we have some big bets, and we even have this chunk of stuff called Other, within which we have brands like Lillet, or within which we have brands like Monkey 47. I think it's probably the right time for Christian Porta and his team to go through and revisit the way we classify our brands more generally.
Which ones will be the lucky ones to end up in strategic and all this kind of stuff. I don't want to disclose anything, because first of all, we don't know yet, and second, we're going to go through the whole process. That being said, this classification, from a presentation point of view, is based on communications. Internally, let's be very clear, we have a very focused investment strategy behind the brands we believe are going to grow our performance both today, and investing behind the brands we believe will be our growth relays, both medium term and long term. Brands being in Other doesn't mean we are not investing behind them.
Some brands, and more specifically, because we have a much more clinical approach to that, some strategic brand market combinations we might be slightly under-investing because we believe there's much more opportunity for other strategic brand market combinations. I think there, going forward, you will see us classify our house of brands probably in a different way.
On the pressure on cognac, as you mentioned, we expect for fiscal year 2019 some increased cost there, and this is linked to use of eau de vie in our cognac in fiscal year 2019. That we had purchased a few years ago at a higher market price. We do not expect this to happen again, meaning that we hope and we believe that we're going to have normal increase after, from fiscal year 2020 onwards. Coming back to your question on the outlook in term of harvest and pricing on eau de vie in the coming months, I think it's too early to make any comment on that.
Thank you. We will take some questions from the room now. I believe there are some questions.
Yes. Good morning. Virginie. A number of companies have mentioned improving trade from a consumer point of view in the U.S. I was just curious about your view on this.
We believe the U.S. market to be in a healthy growth situation. Our estimate is that the market is growing at around 4%, which for a mature market of the size of the U.S., is quite strong growth. This we see, and within that 4% overall trend, the underlying dynamics we see is continued premiumization, which is clearly driven by trading up. Basically we see American consumers trading up from, I'd say, standard and premium segments into more premium segments and super premium segments and so on. When you look at the Nielsen panels, it's quite obvious. When we see our own portfolio as well, we see that happening. The situation in the U.S. is, I would say, quite positive with the market at or around 4%.
Thank you. We have a question here in front, please.
Thank you. Marie-Josée Cougard, Les Echos. Could you tell us which impact you expect from both things which are different? What the so-called Macron law, which deals with the relationship between industry and distribution, and also which impact can you expect from the fiscal reform on consumption?
On the relationship between industry and basically distribution, it's not easy. We all know that price wars might be interesting or appealing short term in terms of offer consumers as they see prices decline. We also know that long-term deflation is negative for a country's economy and eventually, clearly as well, for employment. That law is trying to stop this from happening. We do expect to see, but probably not at our level, because we have a very premium-oriented portfolio of brands. We do expect to see, probably in other sectors, some improvement throughout the whole chain. For us, I cannot foresee at this stage any impact. In terms of the fiscal reform, it's difficult to comment other than to say, right now, the French spirits market is barely stable, and we expect it to continue being so for the next foreseeable future.
Thank you. Some final questions in the room? No. Okay, we'll turn to the final questions from the callers, please.
We will now take our next question from Chris Pitcher from Redburn. Please go ahead.
Thank you very much. A couple of questions. Firstly, on the structure costs. It's being distorted by this other income expenses line. Could you give us a bit more color on that? Is still a sort of a 3%-4% structure cost growth rate per annum realistic, or should we expect particularly Asia structure cost to run ahead of sales as you invest in new markets and expand sales in China? Secondly, in the U.S., I think you're two years into the new structure there. It obviously seems to be paying off with the market share gains stabilizing. Can I just understand where distribution is now for Jameson and Absolut?
With Absolut declining, it feels like Jameson now has given you the scale you need in that market to help grow your other brands like Glenlivet and Martell, et cetera, even if Absolut continues to lose distribution points. Is that a fair assumption? Thanks very much.
Well, I'll start with the U.S. Yes, it's fair to say that our new structure or our new organization in the U.S., which took a lot of hard work in the U.S. by our team to get in place, is starting to deliver. I do think that the fact that we're now growing broadly in line with the market is a good piece of new news. In terms of scale, in terms of our specific scale in the U.S., we don't have any scale issues in the U.S. We're big enough in terms of scale to have impact, of course, with brands like Jameson, which is clearly now our biggest brand.
Also with Absolut, which remains the number one premium imported vodka brand in the U.S., and which is still a top brand, a top call brand in the on-premise as well in the U.S. and still has scale, by the way. At the same time, we are investing behind what we call our medium growth relays, specifically Martell, which is clearly starting to weigh in our performance in the U.S., across the country. Also our tequila brands, or should I say agave-based brands, because a strong double-digit performance of Altos, a good performance of Avión, as well, a very strong start for Del Maguey in our portfolio. Continued dynamism of Del Maguey.
At the same time, investing for the longer term in the U.S., which is part of our new organization, what we call NBV, New Brand Ventures, where we basically nurture anywhere between 8 to 10 brands that make the cut or don't to then join the overall book portfolio of Pernod Ricard USA. I think, the new organization, the clarity of the strategy with the key focus brands as we speak, with the medium-term growth relays where we're investing and are starting to be sizable, and the long-term seeding brands, is something we had never had in the past. Today we have these foundations. We don't have any scale issues in the U.S. What we do have, just to conclude on the U.S. piece, is underexposure. The U.S. is a huge and strong market, and we're slightly underexposed to the U.S. It's not a scale issue.
It's just that the U.S. is part of our global mix. We're slightly underexposed there, hopefully our M&A roadmap basically targeted acquisitions. Del Maguey was aiming at doing that, and before that, Avión as well, and before that, Kenwood as well, and so on and so forth. That's what we're working on.
For the structure cost, just to clarify the increase in fiscal year 2018. They are increasing a little bit lower than 5%. If you exclude the other income and expenses, it's even a bit lower than that. Moving forward, we want to invest behind key priorities. This is true as well for our structure cost, not only for A&P. We believe that we're going to continue to have a tight control of the structure cost globally, and then they should not grow faster than the top line.
Just to be clear, the investment is focused in Asia. Just on the other income and expenses, is that a positive that's getting smaller or a cost that's been getting bigger? I appreciate it is largely unforecastable, but just to give us an idea, because it did add a point to your structure cost this year.
It's a positive getting smaller.
Should we achieve it sort of bases at flat?
As you said, it's quite difficult to predict, this year it's a positive getting smaller.
You're welcome.
We'll take our final two questions, please.
The next question comes from Sanjeet Aujla from Credit Suisse. Please go ahead.
Hi, three questions from me also, please. Firstly, can you just comment on the balance sheet priorities, given net debt EBITDA down at 2.6 times, it's the lowest in over a decade, with particular reference to M&A ambitions. Do you think you're at a stage where perhaps you can do bigger deals? Secondly, can you just talk a little bit about GST outlook in India? I think you highlighted perhaps the scope of some incremental headwinds there. Any update? Thirdly, on tequila, it's the third consecutive year of significant increases in agave. Are you reflecting that in pricing on your tequila portfolio now? Should we expect that? Thank you.
I'll start with our balance sheet priorities. Last time we had our financial communications, we shared with you the fact that we were on the road to progressively increase our payout ratio from 37%, roughly a big third, to roughly 50% over a three-year period starting this year. Which led us to increase that ratio as we speak, subject to shareholder approval from 37 to 41. That's one thing. In terms of M&A ambitions, clearly, and we also mentioned it, we will continue to have an active management of our portfolio of brands, i.e., basically meaning we will continue to screen for good targeted acquisition opportunities, while at the same time dispose of what we believe are non-strategic brands in our portfolio. You'll see this keep on going. We do have financial flexibility to do including sizable deals, but the reality is, that's what we're focusing on right now.
Just bear in mind, we're not going to overpay what we believe is a strategic fit for us. We will put whatever prices we deem appropriate based on our strategy. There's no pressure from that point of view. We'll keep on rolling out our strategic roadmap from an M&A point of view. What you've seen us do over the last four or five years, you'll keep seeing us doing it. By the way, let's be clear. What we've done acquiring premium, fast-growing brands or high-potential brands and disposing of lower end growth brands or even declining brands, we are seeing the impact on our financial performance. On tequila, before we go to GST. Yes, we still have a full year of increased agave costs, which will impact our tequila margins this new current year.
We obviously don't believe these kind of input costs will keep on growing. They will, at worst, stabilize and a little bit of, if everything goes as planned, we should start seeing them decline as market adapts, supply, demand always adapts. Paul Duffy, during the Americas call last fiscal, at some point, I don't know when it was, a few months back. He did point out the fact that they were increasing prices on our tequila and especially on Altos, which they did. Today, I think Altos is a couple of USD more expensive. It's really worth it.
GST. GST was implemented the 1st of July 2017 in India, on dry goods, with a rate between 12% and 18%. GNS, grain neutral spirits, and malt were excluded. There is an uncertainty here on whether or not the perimeter of this GST could evolve and include these wet goods. It is still uncertain, we will carefully monitor that in the next few months.
Got it. Just a quick follow-up if I could. Just on the promotional efficiency piece. Can you just talk a little bit about the capabilities you have been building there? Should we see some significant benefits in fiscal 2019 or is it more to come in subsequent years?
We have put in place that specific Revenue Growth Roadmap almost two years ago, 18 months ago. Which includes building clear specific capabilities across a large number of markets. These capabilities have now been in place for some time in some markets, more recently in others. If I take, for instance, the U.S. market, which is our largest market. We have somebody in place in New York, in our headquarter who was hired specifically to drive that agenda. We also hired, because it is nice to have somebody centrally driving the agenda, but you also need local capabilities to then execute that agenda. We also hired a large number of people in market across the U.S. to drive that. Promotional efficiency, let us be clear, is something which will be consistent over time, which will be ongoing.
It is part of our overall 2020 roadmap, and we will go beyond. The more, by the way, data becomes reliable, the more data is shared in real time, which also includes having stronger partnership with some of our key accounts, the more efficient we will be in terms of promotional efficiency. There is a big challenge, or should I say, in our case, opportunity to really have access to real-time dynamic data to help us improve from that point of view. If you look at digital, which is one of our key business accelerators, and if you look at what we are capable of doing in the case of some partnerships with some big digital companies. During our capital market day, we had you visit Tencent.
Sharing data allows us to become much more efficient, as well as in terms of trying up to 1,000 different promotion combinations within a 20-minute timeframe, and figure out which one will be the most efficient. I do think it is something which is very exciting for us to do, and we'll keep on building our capabilities, improving our capabilities. This is an ongoing, very long-term, actually forever, I think with the capabilities we have now, IT and human, or should I say human and IT. There's a lot we can do on that front.
Many thanks.
We will now take our next question from Jamie Norman from Société Générale. Please go ahead.
Yes, good morning, everybody. Thank you very much for taking my question, which is on gin. Your growth in Beefeater, 4% solid, not spectacular. You mentioned partly that's down to the impact of Spain. To my knowledge, that's where the renaissance started. Just be interested in your thoughts on why that is. What is the problem in Spain? What sort of runway you see for the Beefeater brand globally? You've mentioned the line extension. Also with the help of Monkey 47 at the super premium end. Thank you.
As you did mention, I'm not impressed by the performance of our gin portfolio. Although the performance is solid. Beefeater Spain is the largest premium spirit brand in the market, which had surpassed the million case milestone in that market. As you become huge, and you start seeing other smaller brands coming in, obviously, you start to need to reinvent yourself. That's specific to Spain. We did launch Beefeater Pink in Spain, but as well in other markets, including the U.K., where we were very nicely and positively impressed by the performance. This is just a three, four months view. Still some more to come. More generally speaking, our gin story is not just Beefeater and to some extent, Monkey 47. Our gin story is Beefeater, is innovation behind Beefeater as a brand in terms of premiumization as well.
We have our Beefeater brand, we have Beefeater 24, we have Beefeater Pink, and we have higher expressions of Beefeater. It is, of course, Monkey 47, which has had a tremendous, very successful year across all markets, including the U.S., with the introduction of the one liter bottle size. As you know, outside the U.S., we have 500 ml size, which is not possible to have in the U.S. Don't forget as well, we have a nice little jewel as well called Plymouth Gin, which is part, by the way, of our New Brand Ventures division in the U.S., and which we are investing behind. We have a portfolio approach.
We announced, I think it was basically just about a year ago, the creation of the gin hub, which will therefore see how it can really, really maximize the potential using the breadth of the portfolio of gin we have.
Thank you.
Thank you very much. That brings our call to-
Excuse me, Julia. I cannot not mention Seagram's Gin, which is still growing quite nicely in the Spanish market at a premium positioning as well. Very impactful. Obviously, it's a different positioning in the U.S. You see, we had quite an extensive portfolio of brands in a category which is undergoing, especially at the high end, good dynamism.
Thank you, Alexandre. Thank you, Hélène. Thank you, ladies and gentlemen.
All right.