Good morning, ladies and gentlemen, and welcome to Pernod Ricard's Fiscal 'eighteen Sales and Results Presentation. We are adopting a new format this morning and doing a joint press conference and analyst and investor meeting. We're hosted this morning by Alexandre Ricard and Helene de Tissot, our Chief Executive Officer and Chairman of the Board and our Finance Director in Charge of IT and Operations, obviously. Without further ado, I will hand over to you, Alexander.
Thank you very much, Giulia, and good morning to all of you. Let's dive directly into our sales and results presentation. So very strong year for Panorica with a clear sales acceleration. Organic growth of our top line was +6%, a little bit less than double what it was last year. And this is a direct consequence of our strategic implementation with, and I think it's 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%.
From 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 plus 14 basis points, while at the same time increasing behind our must win battlegrounds, we call them, but brands and markets and specific projects to drive our future growth. Currency, mainly impacted by the U. S. Dollar, as expected, with a negative €180,000,000 impact on profit from recurring operations, but also a positive €91,000,000 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 €1,000,000,000 And we now have our net debt below the €7,000,000,000 mark. And our net debt to EBITDA ratio is down 0.4 to 2.6 times. Also, we'll be proposing at our AGM in November to increase the dividend to 41 payouts versus 37% this past fiscal. So therefore, we will propose a dividend per share of €2.36 in line with our policy to gradually increase our payout to roughly 50% by fiscal year 2020.
So there you have all the figures, both organic and reported, with mature markets growing 2%, emerging markets growing 13%. So I mentioned it a few minutes ago, diversification of the sources of our growth and from a wide spectrum of markets, So 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 Rest of the World, up 9%, thanks to return to strong growth in our 2 big heavyweight emerging markets, China and India.
Modest growth in Europe, up 2% with good momentum in Eastern Germany in Eastern Europe, Germany and the U. K, but difficulties in France and Spain. And finally, Travel Retail in good growth, actually growing across all regions and this is a clear consequence as well of the new organization and leading to value market share gains. As 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 seeing are growing and 6 are improving their trends.
Very strong performance of both Mortel and Jameson growing 14%, improving trends for our Scotch portfolio, the entire portfolio growing 3% and our strategic international Scotch brands growing 5%, so Chevre's 5% but Ballantine's as well and The Glenlivet as well. Absolute up 2%, thanks to the success of the performance outside of the U. S, up 6% with the U. S. Market, vodka and margarita still extremely competitive.
Significant improvement for our Seagram Indian Whiskey brands, all three of them growing 13% versus 3% the previous year. And finally, clearly in line with our strategy, innovation is still contributing heavily to our top line growth. So here you have our full year sales results growing 6%. And you see here the FX impact of €530,000,000 for our top line. Q4 sales are up 5%, which is broadly consistent with the 9 month underlying trends.
So you see the sales, as I mentioned it earlier, growing from all regions, and 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 Ricor 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. So in the market growing 4%, we have grown 4% as well. You have here some of our Nielsen and NAPCA numbers. So in detail, Jameson's strong and double digit growth, just like previous years, enhanced as well by innovation and the continued Absolut, as I mentioned it Absolut, as I mentioned it earlier, is still in decline in a difficult category. But Lime, which was launched 18 months ago, is now the number 2 flavor just behind Citron and we know there is 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 LVS Single Distillery.
Our agave based portfolio is also performing quite dynamically with Avion, Altos and our latest acquisition in the U. S, which is Del Maguire. And from a wine portfolio portfolio point of view, it's worth mentioning the very strong development of Campobierro 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 absolute and local Canadian brands. Mexico, double digit increase for our 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 focused investment play in Brazil and continued strong dynamism in Cuba, which is driven for the 3rd 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, plus 17%, previous year was plus 2%, so it is a significant acceleration confirming the return to strong growth. Martell grew in line with China, plus 17% across the whole range, Versus, VSOP, Exo and above. And our volume market share of cognac has been maintained at roughly 44%. Return to growth of Chivas, following a 1st year of activation behind our basketball platform, with a significant increase in marketing investment to support Chivas, the key SKU and introduced Chivas 12 Extra.
Our Premium Brands portfolio is growing strongly as well, double digits, and this is following the 1st 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 middle class Chinese consumers. India, up 14%, again, we can talk about acceleration versus just plus 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 Paris Rouites with a favorable pricemix. Korea is still in decline, but trends are improving. Last year, it was double digit decline.
This year, it's minus 5%. It's driven by the difficult performance for Imperial, although we are we have been active on the innovation front behind that specific brand. But our strategic international brands are back to growth. Dynamic growth in Africa and Middle East, with our focused brands all growing, in particular, Chivas, Jameson, Ballantine's, but we could also mention more time. Australia is in slight growth, with our strategic brands as well accelerating and declining in our wines because we are focusing on value more than volume.
Difficulties in Taiwan, which is in decline, and this is clearly driven by our scotch portfolio there. In Europe, the market is up for Pernod Ricard is up 2%. We'll start with the difficult mark kits 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 and Saint Quentin and the whiskies in categories which are as well in decline, quite good performance of our growth relays with the likes of Absolute 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, simplified by some destocking and further impacted as well by the situation in Catalonia. The whisky category itself is in decline, but we launched Beefeaters Pink in last March, and we expect this to help improve our overall gin performance in the current fiscal year. Dynamic performance and our continued dynamic performance in the U.
K, which is up 6%, driven principally by Absolute, but as well by Jameson and Beefeaters, where we also launched Beefeaters Binked, 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, so 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, but also our focus, whiskey brands, Jameson and Chivas and as well Havana Club, positive pricing and an extremely successful development in Monkey 47.
Dynamic momentum as well in Ireland, driven by our focus brands, in particular our key brands in Ireland, which is Jameson, which is its home market and driving premiumization as well across the range. And 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, but also our strategic brands and good performance or should I say continued good performance in Poland. So 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, but also acceleration of our strategic local brands, driven by our Indian whiskies, but as well Olmec and Altos.
Strategic wines, a value driven strategy with very good performance, particularly of Campo Viejo. And others, which is growing with driven particularly by Monkey 47 and Lillet. So innovation delivering 2% of our total plus 6% organic top line growth and pricemix slightly above plus 2%. So Strategic and International Brands, I mentioned Jameson grew 14%, obviously, very strong performance in the U. S, including our innovation strategy, but also very strong performance in Europe, where we grew double digit, driven by the likes of Eastern Europe, but as well Ireland, Germany or Poland and continued double digit growth as well in Africa and Middle East.
So the brand is on path to become one of our global brands. Speaking about
Ladies and gentlemen, we are experiencing a momentary interruption in 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 1 side, Travel Retail on the other and clearly the U.
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. So as I was 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 brands, 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 digit, up 17% in China with back to strong growth with volume market share maintained at 44%, but also good growth outside of China. And 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 eaux de vie, which were purchased at the higher market prices during, the previous boom years of the cognac category.
Absolute 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 2 heavyweight emerging markets, China and India, but as well across Latin America and Europe. U. S. Is still in decline for the brands, approximately down 4% in a category which remains extremely competitive.
Scott Waste fees improving trends, up 5% across Chivas, Gunlibet and Ballantyne's. Chivas, I mentioned, the rebound in China, but also there's good, 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. And 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 Plant Fresh was launched just before summer to inject some newness behind the brand. Beefeaters is up 4%, good performance driven by the U. K, but 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. Moom up 1%, stronger performance in Australia, one of our key markets, but 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.
Guys went up 6% with strong performance in Japan, China, which are both in double digit growth. On our strategic local brands, like the key point here is the acceleration of our Seagram's Indian Whiskey's 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 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. And Kahlua is in a modest growth and this is mainly driven by China and Travel Retail Americas. On our Wines, we have a clearer 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. Brancot is in decline due to a very competitive environment, especially in Pacific. The separation for Jacobs Creek, but that again is driven by the implementation of a value strategy in the U. K.
Innovation and Luxury, 2 of our business accelerators. Innovation, we see continued strong momentum behind the big bets. You have here pictures of our Castmates, Extra, Blue Swift, Altos, Lillet, Double Barrel, Jacobs Creek and Monkey 47, all growing very nicely. And Luxury, Le Lucerque 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.
But maybe I think it might be worthwhile just saying that regarding sustainability and responsibility back in 2010, we had focused on a clear road map with clear objectives to achieve by 2020. And as we approach that date, we're already starting to work on our 2,030 road map. But it's worth mentioning that we have achieved or are going to overachieve on our 5 key commitments by 2020. And our 2,030 road map, which we will present later on during the fiscal year, will be quite ambitious. This is something we have at heart, in which our consumers, our employees and overall, our stakeholders are have to hurt as well.
And therefore, I'll pass on to Helene for the financials.
Thank you, Alexandre. Good morning, everybody. So let's go back to the figures with the profit from recurring operations. So looking at our P and 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 and P investments that are growing by 7% and a tight control of our structure costs.
So profit growing organically by 6.3 percent and on a reported basis minus 1.5 percent 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 2 third of our savings, targeted savings here, both from a P and L point of view and cash point of view. The amount at stake for fiscal year 2018 is €60,000,000 favorable P and L impact, mainly from cost of goods sold and A and P.
And I remind you that we are committed to reinvest half of those savings into A and P. So 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 structure cost discipline. Just a comment on the IFRS 15 impact for us that are going to be implemented from fiscal year 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. So, let's start now with the gross margin. So, growing by 6% with an improvement of our ratio of 15 basis points. And 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 fiscal year 2018, in particular agave cost and GST in India. We want to highlight that in fiscal year 2019 our gross margin is going to be impacted by increasing input costs.
Alexandre already mentioned the one on cognac will have as well inflation and commodities and again, some agave cost increase in fiscal year 'nineteen. Back to the gross margin in 'eighteen. So strong growth for Martell and Jameson contributing to positively to the gross margin, but negative mix from growth in Seagram, Indian whiskies and decline in Africa. Pricing is improving this year, as we mentioned already. If we move to the A and P expenses, so 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 projects, But as well, we have some accelerated spend to internationalize Martell to support the new Chivas platform in China. And as I mentioned, we are reinvesting half of the operational excellence savings here. So ratio broadly stable at 19%. Structure costs increasing by 5%.
Excluding other income and expenses, the growth is 4%, so translating the strong discipline we have here and while investing, targeting in a targeted way in emerging markets and growth relays. So 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 McBranies. We saw the impact on the net sales before and the negative FX impact that we mentioned already, €180,000,000 We have the detail on the following slides. So it's mainly coming from U.
S. Dollar, but as well, CNY, Indian rupee and Japanese yen. But 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 200,000,000 euros mainly due to the strengthening of the U. S. Dollar during Q4.
So if we move now to the performance by region, so starting first with the balance between emerging and mature markets. So 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 recurring operation 62%. As Alexandre mentioned, both nature of markets are contributing to growth in fiscal year 'eighteen. So now if we look at the analysis by region, we had already a view on the net sales, again, quite healthy and well balanced between 3 regions and no significant change in the profit from recurring operation in fiscal year 'eighteen. So now moving to the detailed performance by region, starting with Americas.
So we are delivering a good performance, driven by top line growth. I would not come back to the top line growth as Alexandre just commented it. So it's growing by 6%. Gross margin are growing by 5% with a deterioration of our ratio by 51 basis points and this is driven by the U. S.
Due to the increased agave costs that is impacting our performance in that region and the lower weight of absolute more than offsetting positive pricing and increasing weight of Jameson. A and P, broadly stable, growing by 5%, so reflecting continued investment to support our core priorities. Structure cost increased below that of sales with showing strong discipline there, giving a profit from recurring operational growth of plus 7% from an organic point of view, minus 7% on a reported basis due to unfavorable U. S. Dollar movements.
Let's look at Asia Rest of the World now. So growth acceleration clearly in that part of the world, driven by China, India and Travel Retail. Travel Retail supported by A and P, as you can see on that slide. So net sales growth growing by 9%, gross margin improving with gross margin increasing by 10 points by 10%, sorry, and the ratio by 42 basis points, which is driven by the acceleration of China despite the increasing weight of India. A and P increasing strongly by 13% from organic point of view, with the ratio increasing to by 67 basis points to support growth in China.
And you have here a reference to those key investments and strategic priorities in China such as Martell, Chivas 12 Extra with the NBA platform, but as well in India with innovation launches that we need to support there. Structural cost growth reflecting targeted investment 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 decreased due to this increased investment behind key priorities I just mentioned. Europe, so good performance, thanks to pricemix driving gross margin improvements.
Sales are growing by 2%, as mentioned by Alexandre. Gross margin are improving, growth of plus 3%, ratio improving by 52 basis points. And this is due to the positive pricemix we are delivering in U. K, Russia and Germany that are offsetting erosion in France due to lower weight of Annis and deflation. Tight management of A and P, growing by 2%, ratio being a bit down.
And structure costs as well in line with our strategy. So profit from recurring operation growing by 4% on an organic basis and on a reported basis, with margin improving by 53 basis points. So 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. So 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 plus 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 €75,000,000 And this is mainly due to the lower average gross debt in fiscal year 2018 versus the year before and a reduction in the cost of debt from 3.8 percent to 3.5 percent, 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 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. So we have a rate close to 25% in fiscal year 2018, which is as expected which was expected and in line with the previous year. For fiscal year 2019, we expect that rate to be 26%, so 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 basis in a context where the federal tax rate is decreasing to 21%. If we move now to the nonrecurring items. So 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.
So EUR 44,000,000 expense here with the capital gain realized on the Glenalache disposal offset by impairment charge mainly on the Brancot Estate and Vibroda. We have then €38,000,000 expenses linked to restructuring and reorganization costs, linked to numerous projects to reflect the need to adapt our organization to get efficiency. We have some positive other nonrecurring operating income that are driven by the sale of Bulk Scotch Whiskey as part of our active asset management that we share with you at the time of the communication of our first half results. And then significant non recurring tax results, which were as well already in our first half communication, mainly due to reimbursement of 3% tax on dividends in France and the impact of the U. S.
Tax reform, 55,000,000 linked to the revaluation of deferred tax asset and liabilities at new corporate income tax rate. So the group as a consequence, the group share of net profit after non recurring items is up 13%. So let's spend a few minutes now on the cash flow and the debt, Starting with the free cash flow. So continued very strong increase in free cash flow, reaching new historic high of 1 point €1,433,000,000 You have on that slide the evolution of our free cash flow over the past 4 years, which is showing this continued very strong increase, increase of 10% this year, plus €134,000,000 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. So we are having profit from recurring operation growing at 6.3% organically, but minus 1.5% on a reporting basis.
Then we have some slight overall increase in our strategic inventory build, €10,000,000 increase in fiscal year 'nineteen, which is driven by higher cash out, mainly by higher cash out to support the cognac dynamism. We had as well a positive variance of our operating working capital, €38,000,000 lower than the previous year. So positive variance despite business growth. And 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 and L. And as well, positive nonrecurring free cash flow item that are the cash translation of the element I mentioned in the P and L such as the sale of the Belk Scotch inventory and the reimbursements of the withholding tax and dividends. So looking now at the net debt. So with this free cash flow performance and post dividend and M and A, the net cash generation amounts to €800,000,000 enabling us to reduce our net debt by €900,000,000 to be accurate, €8 89,000,000 thanks to a favorable translation adjustment of €91,000,000 mainly due to the Eurodollar evolution closing rates on fiscal year 2018. So our net debt is now down to €6,900,000,000 thanks to the very significant improvements of the our net cash generation.
Then you have here the impact of this reduction of our net debt and on the ratio. The ratio is decreasing by 0.4 points, the net debt to EBITDA ratio, with now 2.6 percent in fiscal year 2018. Again, here you can see the continued deleveraging we've been achieving over the past 10 years. So in that context, as Alexandre mentioned in the introduction, we are proposing a dividend increase with a dividend of €2.36 per share. This is submitted this will be subject to the approval of our Annual General Meeting in November.
So 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 historical onethree of book net profit from recurring operation to 50% by 2020. And I hand over to Alexandre for the conclusion and outlook.
Thank you very much, Helene. So 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 and therefore, leading to a delivery of 6.3% growth organic growth of our profit from recurring operations. And last but not least, as Irene just showed, a very strong cash performance, leading in significant reduction in deleveraging. In terms of outlook, we will keep on rolling out our road map and our strategy execution with clear resource allocation behind our key battlegrounds, key brands, key markets, key projects. So 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. Ewen mentions the growing pressure we have on some of our input costs, and 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 optimal festival in China.
So this makes us share with you guidance for the current year of growth in profit from recurring operations, anywhere between plus 5% and plus 7%. Of course, these numbers are organic. Thank you.
Thank you very much, Alexandre and Helene. And 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,
Nicolas. So I will ask Catrien 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? And just last year, the U. K, on Q4, it was extremely strong, plus probably low double digit. Now how sustainable is that?
And do you see retailers building stocks? Thank you.
So on China, we did mention during the course of the year that we had increased our prices on Martell mid single digits. 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. Were the first ones to increase our prices. And going forward, we obviously don't comment on what we're going to do from a pricing point of view. So the pricing environment for KONIAN 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%. While as years go by, the market is becoming less and less important for us. So 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. We're 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 is the currency impact on the British pound, which actually is the other way around. It is actually a positive for us. And in the worst case scenario, one can say that by default, WTO is what would work. Now in terms of building stocks, we'll see as we move forward, the reality is then 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. Or in the U. K? In the U. K.
No, I don't look at quarterly numbers, just so you all are aware. I would strongly suggest that the underlying trends in specifically in the U. K. Are more in line with full year than quarterly volumes and value. Our quarterly numbers, depending on the markets, by the way, and the brands, may vary significantly from 1 quarter to another, especially when we increase prices, for instance, or when we have logistics transitions as well and so on and so forth.
So I wouldn't look at double digit. And it hasn't been 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.
Take our first question from Simon Hales from Citi.
Thank you. Good morning, everybody. Three questions, please. Firstly, could you talk a little bit about the outlook you see for gross margin development overall in fiscal 'nineteen? You've clearly flagged the higher input cost headwinds in both Eau de Vie and Agave that you're still facing.
Should we still expect with the pricing coming through to see gross margin expansion next year? And maybe in relation to that, Alex, do you expect operational leverage generally through the P and L to be better in fiscal 'nineteen than it was in fiscal 'eighteen? Secondly, 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?
And finally, just on absolute, it looks in the U. S. That the trends on absolute deteriorated in the second half versus the first half. Is that purely just the lapping of the launch of Absolute Lime in the base? And 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 absolute U. S. And then I'll leave Helene address the other questions. There is an element of lapping the Lime lunch previous year.
It was one of the most successful lunches in terms of innovation in the U. S. Market during that year of launch, so there is an element of that. The underlying trends for absolute are basically low single digit declines. According to Nielsen or Napka, you can think it's minus 3% or minus 4%.
The vodka segment does remain extremely challenging and competitive. In that environment, we are faring okay, but obviously, it's not satisfactory performance, of course. Now we're not going to overinvest just for the sake of overinvesting behind the brand. So we have the right investment strategy behind Absolute in the U. S.
It's consistent. And so we'll see what happens. I just want to mention 2 elements. Absolute today is less than 1 5th of our business in the U. S.
Absolute globally is now bigger outside of the U. S. And finally, as we mentioned it in the presentation, despite the difficult performance of Absolut in the U. S, Pernod Ricard U. S.
A. Is now performing in line with the U. S. Market.
So moving to the gross margin development question you raised. So maybe let's start with the pricemix we expect in terms of trend for fiscal year 2019. So as a reminder, we saw some improvement in fiscal year 'eighteen on our pricemix. We mentioned these figures of plus 2.3%, which is a bit better than the year before, and this improvement was due to pricing. So we expect in fiscal 'nineteen some limited improvement as well and coming from pricing.
Then as you rightly mentioned, we are expecting some growing pressure in term of COGS on input costs. We mentioned the nature of them, mainly inflation on commodities, but as well increase of cognac cost and for another year, a negative impact. So in that context of growing pressure, we will have some savings coming from our operational excellence roadmap to continue in the fiscal 'nineteen, which will help to mitigate part of this increase. So at gross margin, we expect limited improvement on an organic basis. The one I think as well the question on the operating margin.
So we will keep investing behind the right priorities in terms of A and P, tight control and structure costs. And in that context, we expect as well a moderate operating leverage in term of profit from recurring operation margin.
And just generally that question on pricing more broadly across the group rather than just on Martell?
Yes. 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 or but also promotional efficiency across the range of our brands and across markets. So you should expect to see some pricing as well to come from some of our other key strategic brands as well to different extents.
And then obviously, absolute U. S, I'm not sure you should expect any pricing.
We will now take our next question from Edouard Mondy from Jefferies.
Three questions, please. The first is on the outlook for Spain and France in 2019. Do you expect to see any improvement there? And 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% to 5%. I mean, how sustainable do you feel this level of growth is, I think, given the great diversification of growth within your business versus history and the successful implementation of your strategy to focus on the key battlegrounds? And then the third question is on FX. I see you have that you've chosen not to give an explicit FX number. Looking at the current spot rate for eurodollar relative to the average for fiscal 2018 implies a tailwind of close to €30,000,000 EBIT, assuming the sensitivity on Slide 72 holds true.
I appreciate that FX is a bit of a moving feast at the moment, but am I missing anything within this math?
Okay. So I'll address your first two questions. I'll let Helene talk to you about currencies. France and Spain, indeed, this year, we were down 4% 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, And we do expect this to inject some dynamism behind Beefeaters as a brand. That being said, it's fair to say that the year was marked by the issues in Catalonia. So 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 whisky category is struggling slightly.
But again, we do expect that this current year, we will do better in Spain. Astra France, part of the disappointing performance this fiscal year, past fiscal year, as a result of some loading at Intermarche in particular the previous year, 0.1 percent, is also impacted by some of our border sales, especially with Spain. And again, we do expect some improvement in France this current year. And this summer's Nielsen panels, especially on Henriques, actually are quite encouraging. But bear in mind that the French market is basically a stable at this market and the issues 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 road map and what we had shared with you going back to June 2015, yes, we had mentioned top line anywhere 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 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. So I think that mid single digit is still the right way to look at things going forward. And on currency, Irene?
So on currency, we are not sharing any estimate today. Well, we think it's too early. It's highly volatile. You know that we have a very little hedging, but just for you to know at the moment, based on the projection rate computation we made, it would not be material. So that's another reason not to give you an estimate today.
We will now take our next question from Trevor Stirling from Bernstein.
Three questions from my side as well. So the first one, first of all, Alexander, 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 clearly broken out of just being a U. S.-driven growth story? Second question, Helene, 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 OTV that you're purchasing over the months to come?
And the final one, returning to that question of the French pricing, Alexander, is it focused on any particular category or brand? Or is it pretty broad based?
Okay. Just it's broad based to be quite straightforward. Within the not just Spirits industry, but specifically in Spirits, it's broad based. So 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 are 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 Porter 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, 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. So brands being in being in other doesn't mean we are not investing behind them and 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 non strategic brand market combinations. So I think there, going forward, you will see us classify our House of Brands probably in a different way.
So on the pressure on cognac, so as you mentioned, we expect for fiscal year 2019 some increased costs there. And this is linked to use of eaux de vie in our cognac in fiscal year 2019 at that we have 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. And coming back to your question on the outlook in terms of harvest and pricing on eaux 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's some
Good morning. A number of companies have mentioned improving trend from a consumer point of view in the United States. I was just curious about your view on this. Yes.
Well, 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.
So this we see. And within that 4% overall trend, the underlying dynamics we see is continued premiumization, which is clearly driven by trading up. So 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. And when we see our own portfolio as well, we see that happening.
So 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 Jose Couillard, Les Coups. Could you tell us which impact you expect from both things, which are different? The what the so called Macron law between which deals with the relationship between industry and distribution? And also, which impact can you expect from the fiscal reform on consumption?
Well, on the relationship between industry and basically distribution, It's not easy. 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. But then we also know that long term deflation is negative for a country's economy and eventually, clearly as well, for employment. And that law is trying to stop this from happening.
So we do expect to see, but probably not at our level because we have a very premium oriented portfolio of brands. But we do expect to see, probably in other sectors, some improvement throughout the whole chain. But for us, I don't 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 from the room? Okay. So we'll turn to the final questions from the callers, please.
We will now take our
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? And is still a sort of a 3% to 4% structure cost growth rate per annum realistic?
Or should we expect, particularly Asia structure costs to run ahead of sales as you invest in new markets and expand sales in China? And then secondly, in the U. S, I think you're 2 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 Absolute?
Because with Absolute 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, etcetera, even if Absolut continues to lose distribution points? Is that a fair assumption?
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. And 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, but also with Absolute, which remains the number one premium imported vodka brand in the U. S. And which is still a top brand, a top coal brand in the on premise as well in the U. S. And still has scale, by the way.
And 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, but also our tequila brands or should I say agave based brands, because strong double digit performance of Altos, a good performance of Avion, but as well a very strong start for Delmaguay in our portfolio. So continued dynamism of Delmaguay. And at the same time, basically nurture anywhere between 8 to 10 brands, where we basically nurture anywhere between 8 to 10 brands that made the cut or don't to then join the overall book portfolio Pernod Ricard USA.
So 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, and today we have these foundations. But 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.
And hopefully, our M and A road map basically targeted acquisitions. Delmaguay was aiming at doing that. And before that, Avion as well and before that, Kenwood as well and so on and so forth. That's what we're working on.
So for the structure costs, just to clarify the increase in fiscal year 'eighteen. So they are increasing a little bit lower than 5%. And if you exclude the other income and expenses, it's even a bit lower than that. So moving forward, we want to invest behind key priorities, and this is true as well for our structure costs, not only for A and P. But we believe that we're going to continue to have a tight control of the structure costs globally, and then they should not grow faster than the top line.
Just to be clear, the investment is focused in Asia. And just on the other income and expenses, is that a positive that's getting smaller or a cost that's been getting bigger? Just I appreciate it is largely unforecastable, but just to give us an idea because it did add a point to your structure costs this year.
So positive, getting smaller.
And should we assume it sort
of
basis at flat soon?
As you said, it's quite difficult to predict. But this year, it's positive, getting smaller.
Okay. Thank you.
You're welcome.
We'll take our final two questions, please.
The next question comes from Sanjit Ajala from Credit Suisse.
Three questions from me also, please. Firstly, can you just comment on the balance sheet priorities given net debt EBITDA down at 2.6x, it's the lowest in over a decade, with particular reference to M and 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? And thirdly, on tequila, it's the 3rd consecutive year of significant increases in agave. Are you reflecting that in pricing on your tequila portfolio now? Or 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 3 year period starting this year, which led us to increase that ratio as we speak, subject to shareholder improvement from EUR 37,000,000 to EUR 41,000,000,000, so that's one thing. In terms of M and 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 And just bear in mind, we're not going to do or 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. And there's no pressure from that point of view. So we'll keep on rolling out our strategic roadmap from an M and A point of view, what you've seen us do over the last 4 or 5 years. You'll keep seeing us doing it and by the way, let's be clear, what we've done acquiring premium fast growing brands or high potential brands and disposing of lower and growth brands or even declining brands, we are seeing the impact on our financial performance.
And 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 this will 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 Altus, which they did.
So today, I think Altos is a couple of dollars more expensive, but it's really worth it.
GST. So GST was implemented 1 July 2017 in India on dry goods with a rate between 12% 18%. G and S, 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 this wet goods, it's still uncertain. So we'll carefully monitor that in the next few months.
Got it. And then 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've been building there? Should we see some significant benefits in fiscal 2019 or is it more to come in subsequent years?
No. We've put in place that specific revenue generation road map almost 2 years ago, I think 18 months ago, which includes building clear specific capabilities across a big, large number of markets. These capabilities have now been in place for some time in some markets, more recently in others. And 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. And we're also hired because it's nice to have somebody centrally driving in the agenda, but you also need local capabilities to then execute that agenda. And so we also hired a large number of people in market across the U. S. To drive that.
Now promotional efficiency, let's be clear, is something which will be consistent over time, which would be ongoing. It's part of our overall 2020 road map and will go beyond. And 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. And so there's a big challenge, or should I say, in our case, opportunity to really have access to real time dynamic data to help us and need improve from that point of view. And 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 and during our Capital Market Day, we had you visit Tencent.
Sharing data allows us to become much more efficient in terms of as well in terms of trying, I don't know, up to 1,000 different promotion combinations within a 20 minute time frame and figure out which one will be the most efficient. So, 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 and 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.
We
will now take our next question from Jamie Normand from Societe Generale.
Yes. Good morning, everybody. Thank you very much for taking my question, which is on gin and your growth in beefeater 4% solid, not spectacular. And you mentioned partly that's down to the impact of Spain. To my knowledge, that's where the Renaissance started.
So just be interested in your thoughts on why that is, what is the problem in Spain and what sort of runway you see for the Beefeaters brand globally? You've mentioned the line extension, but also with the help of Monkey 47 at the super premium end. Thank you.
Well, as you did mention, I'm not impressed by the performance of Origin portfolio, although the performance is solid. Beefeaters Spain is the largest premium spirit brand in the market, which has which had surpassed the 1,000,000 case milestone in that market. And as you become huge and you start seeing other smaller brands coming in, well, obviously, start to need to reinvent yourself. So 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 3, 4 months view, so still some more to come. But 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, so we have our Beefeater brand, we have Beefeater 24, we have Beefeater Pink and we have higher expressions of Beefeater. It is, of course, a Monkey 47, which has had a tremendous, very bottle size.
As you know, outside the U. S, we have 5 bottle size. As you know, outside the U. S, we have 500 ml size, which is not possible to have in the U. S.
But 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. So 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.
So that brings our call
to you. Julia, I cannot 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. But you see, we have we had quite an extensive portfolio of brands in a category which is undergoing, especially at the high end, a good dynamism.
Thank you, Alexandre. Thank you, Helene. Thank you, ladies and gentlemen.