Good day, and welcome to the TIA Just Preliminary Results Investor Q And A Call. Your call today will be hosted by the Agios CEO Ivan Menesas and CFO, Kathy Michaels. We're now ready to start the call. Mr. Menendez, please go ahead.
Thank you. Good morning, everyone, and welcome to the call. I'm here with Kathy. I'm gonna make a few opening remarks, and then we'll open up the line for Q And A. Okay.
I'm pleased with the overall performance we've delivered this year. Is we've demonstrated our ability to deliver consistent performance across all our key metrics and in line with our goal to deliver consistent mid single digit top line growth to invest in the business and deliver margin expansion. It was another year of strong free cash flow at GBP 2,500,000,000 with operating cash conversion above 100%. And average working capital improved by 220 basis points. This year, we returned more than £3,000,000,000 to our shareholders through dividends and buybacks.
Our CSR grew 23% and is up 17% over the last 3 years, firmly in the tough quarter relative to our peer group. So as I look at our performance, many areas I'm pleased with the progress we've made. Let me just mention a few. Johnny Walker saw broad based growth and grew 5%. India stabilized in the second half as we move past the regulatory headwinds and we continue to make really good progress on margins despite the impact of GST.
In U. S. Spirit, all key brands continue to gain category share, except vodka, And on Watsco, we saw improvement on both cattle 1 and syrup, but clearly, we have more to do. Guinness grew 5% with strong growth in Europe and Africa. And China continued to be a growth driver with, trading fund, delivering really strong growth.
And Scotch and Mainland China also grew double digit. But of course, there's lots of areas we need continue to improve performance, and I just wanted to mention a few. Africa had a weaker performance this year as a result of volatility in Kenya in the first half. With the elections and continued weakness in Ethiopia and Cameroon. While Johnny Walker did well in Scott, I'd say the rest of our Scotch portfolio, had weakness.
Molt was not strong enough, and some of our local stars, dependents, and all underperformed and we're determined to get these better as we go into next year. We continue to focused on improving our performance in U. S. Spirits. And finally, we continue to build our capability on net revenue management, which as you know, is a key value driver for the business in the future.
More broadly, I'm proud of the work we're doing promote a positive role style column society. We launched new stretching targets for 2025. And this year, we mobilize all the other employees as responsible drinking investors through our new drink positive engagement program. I want to thank our employees for their contribution to this consistent sustainable performance. We have a highly engaged workforce, very proud to be at CIO, our annual value survey showed a 1% improvement in employee engagement and a 2% improvement in the number employees to see that productivity is having a positive impact on the business.
So as we look forward, we continue to focus on the consistent execution of our strategy. We're moving much faster to spot new trends and opportunities and we're sustaining this blend of delivering growth and efficiency. But as you know, we operate across 180 countries. And as we saw this year, there's always going to be some markets where the macro conditions are challenging. So we continue to expect to deliver our medium term guidance of mid single digit organic net sales growth.
In F 2019, we expect to see negative market mix headwinds with faster growth in some markets with the lower margin. We will prioritize continued investment in the business and expect to deliver the 175 basis points organic margin expansion for the 3 years ending June 2019. And with that, why don't I open it up for questions? Thank
And our first question comes from Sanjit Ayala in Credit Suisse. Please go ahead.
Hi, Ivan. Kathy, a couple of questions for me, please. Really on the U S. In the webcast, Ivan, you said you're well set up for fiscal 'nineteen. Do you think the portfolio, is now in a shape where it's, better able to grow in line with the market?
And tied to that, can you talk a little bit about performance of the portfolio brands in the US and and and the plan for those those brands going forward. And and finally, just on, margins for for next year. You talked about 60 basis points. Given the negative market mix dynamics, how would you break that down in gross margin and add items to the P and L? Thanks.
Hi, Sanjeet. I'll take the first one and turn it over to Kathy for the second. On the U. S, if you look at, as I mentioned, if you look in every category other than vodka, we're growing share, And, we've stepped up our investment behind the brand. We've seen our reinvestment rate go up, and we will continue to do that going into fiscal 2019.
The second thing I would say is our innovation is now focused on bigger and more sustainable things. And I'm really encouraged with the shift that's happened there. Most recently, the Ketel 1 botanicals, which have just come in, and the Sarat BS Grandy, which has just come in are good examples of where we expect sustainable growth out of innovation. As we go into fiscal 2019, our investment levels are strong behind the brand. We've, I feel really good.
Within the US a couple of weeks back and going through all the brand's plans in detail, with Deirdre and the team. Feeling really good about, the quality of execution and growth. Having said all of that, as you know, this is a huge business and brands in our business move slowly. So I expect next year to do better than this year. But as I've said before, we're not predicting when we will grow at or ahead of the market, but the momentum is positive.
And, the portfolio is performing broadly much better. And then we've got some terrific momentum in Don Julio and Castamigos will come into our performance and and whiskey continues to be good, both scotch and American whiskey. Kathy.
And then if you just 3 that we had this year, right? So delivering overall 78 basis points. But we had some headwinds coming through in gross margin this year, which you would theme. So that ate into about 23 basis points. A and P grew ahead of of sales at 7%, right?
So that reinvested, 27 basis points from a margin perspective. And then you know, you saw it get strong margin results, out of other expenses, including 100 and 10 basis point improvements in overhead. So if I look at and pick apart what's underneath that, imparting gross margin, we would have had the hurricanes that came through the Virgin Islands this past year, right, So that would have caused some one off expense, which we wouldn't repeat. But we also had negative mix, and and I would mention transportation costs in the US for all that escalated. Next year, we're expecting some increase in aglava costs, but some of the costs we incurred this year would not peak.
So overall, I would expect gross margin, to give us a bit better results. And we saw this year, I'd expect us to continue to invest behind our brands as we feel are appropriate. You've heard us talk about continued upgrading in both Scotch and in the US. And I specifically point out in the U S, that that has held back our margins in the U S, and I would expect to see that again next fiscal year. We continue to push hard on our overhead costs, and I'd expect that we'll continue to see some benefits from that next year.
So hopefully that gives you a little bit more color.
That's very helpful. And just on the portfolio brands, in the U. S, can you just talk a little bit about the performance there?
It's not much change. They're still declining low to mid single digits. So, the trend hasn't shifted much. And I'm not going to comment on speculation about what we're doing on the portfolio brands. All you can know is we, rigorously and continuously look at the Diageo portfolio.
Got it. Many thanks.
Thank you.
Thank you. Next question is from Fernando Vazeda in Bank of America Merrill Lynch.
Good morning. Ivan and Cathy, I have two questions, please. One on the results and one more strategic on the numbers, if we go back to the U. S, can you comment on the growth we've seen specifically in Iraq, CAT 1 and the RTD portfolio in the 2nd half? Were there any shipment phase in there to highlight from the new launches?
And then second question, Ivan, is just clearly the best set of numbers since fiscal 2012, right? And the strategy has been very well executed to achieve that level of performance. So the question is really what's the next challenge for you and the executive committee? Is it really maintaining the consistency on growth and shareholder return or is it something else?
Sure. I'll take the second first. I mean, So our our focus is really on creating a a sustainable, consistent compounder. I mean, Diageo has I'd say this perfect blend of attractive top line growth, mid single digit, and the ability to drive margin expansion from the incredibly high returns that margins we have today. But we're focused in smartly investing in the business to sustain both of them.
And, I expect us to continue down that track. I mean, clearly, we will look at opportunities to pick up brands, which makes sense. But we're we're positioned well with our geographic footprint and our our product portfolio to really benefit I mean, one of the things I'd point to that we are, to me, that's most important to us as a management team, is that we don't get complacent and that we're really focused on all the shifts that are happening out there. Consumer shifts, technology shifts, channel shifts, regulatory shifts, and making sure we're quicker in anticipating those threats and opportunities and move faster. And so, and as I mentioned in my opening comments, we yes.
These are strong results, but there's so many parts of the business we know we can and should do better. And, so that that would be strategically how we'd look at the future. We, have a lot of work focused on the disruptive forces. That may, come at the industry and how we are well prepared to deal and indeed capitalize on them.
And then I think you asked about kind of shipment phasing and specifically around our Black kept portfolio and RTDs, you know, overall, for our business in North America, shipments roughly equal depletion. So I would say nothing material there going on. With regard to, Sarac and kettle, you know, I would point to the trend improving there in North America. Right? So to rock down 4 last year, it was down 15 and kettle down 2 last year, it was down 6.
Now the one thing I point out in terms of, overall overall phasing, is just the the tan the launch of the Pinnacle in the US. So Title 1 Potanicals was launched late in the fourth quarter. I mean, we have, I'd say, very high hopes for it. You know, it's a 73 calories and a serve with soda, infused with fine fruits and botanicals, a little bit lower ABD. And it really is playing into the lighter occasion and people's focus on natural ingredients, right, non GMO gluten free.
So we think it may hit a real sweet spot with consumers and we're really hopeful about it. But just in terms of, you know, weight innovations that fit late in the fourth quarter for us, And then with respect to RTDs, you know, if you look at our, Diageo kind of beer business, which is where our Snirnoff RTDs sit within more America, you know, that, that grew really well. And we have both smeared and smeared off seltzer that's that's doing really well in the U S. So we're feeling good about really good about that. But overall, I just go back to, from a shipments and depletions perspective, across the overall business relatively equal.
That's great. Thanks, Evan and Cathy.
Thank you.
Next question from Simon Hales in Citi.
Thank you. Morning, Kathy. Good morning, Ivan. Two or three questions, please. Can I just go back to the discussion around margin development, looking forward, particularly around marketing investments?
Clearly, seen some up waiting over the last sort of couple of years. You've committed again to continue to up weight going forward, but we've seen a significant step up already now in the U. S. I think in the Indian portfolio, should we still be expecting the same sort of step of our marketing investments next year as we saw in terms of 27 bps in 2018? And then also around that on margins, Kathy, in your presentation, you talked in quite a bit about net revenue management.
Have we actually started to see any benefits to the bottom line from the net revenue management initiatives yet or some of the top line benefits you've seen or savings you've seen been offset by the cost of putting the program into place across the globe. And then just one final one specifically on the U. S. And Buchanan, you know, clearly some sort of destocking perhaps in the second half of the year on that brand versus the good depletion rate Is that now through? And should we start to see shipments matching depletions as we move into fiscal 2019?
So so I'll start out just talking about, margins overall. So I'd say one of the things we're feeling really good about is we talked about the appointment of this tool catalyst across the business, which is a desktop tool now that sits on all of our marketeers, desktop, and it enables them to get much more specific about returns both across brands, in their markets and within brands now into different growth drivers that they can invest in. So that helps us, I would say, to feel better and better about exactly where we're targeting that A and P and best and targeting it in places that we think will drive really good returns. Now we're also very balanced in wanting to make sure that we're doing equity building for our brands. Which ultimately drives the sustained performance and sustained mid single digit top line that we're really targeting.
So I'm not going to get into the specifics of 27 basis points kind of increased reinvestment rate this year, exactly how many basis points is it going to be next year. What I would tell you is that we feel very good that we're targeting it towards the right place, and we're gonna continue to make the investments that we need. To make sure that Diageo can sustain its performance, not just into fiscal 2019, but for the long term. And then as it relates to NRM, I'd say, you know, I'd characterize what we've done today is really building the right foundation for the future. And this is one of the places that I've spoke to over the last year that we've been building our capabilities with the expectation that see more results coming through, from NRM in the years to come.
You know, I'd expect we'll start to see some of that. In next fiscal, but in the next breath, I would point to the fact that having higher growth in some of the regions where we have lower per case rate, right, you know, would be a headwind for us. But we've done a lot of work in starting to build that capability We also have a pretty sophisticated tool that we call Solaris that's already been rolled out, in both North America, and here in Europe. And we've been putting in place. I'll call it bespoke and efficient tools in the other market, concentrating on where we have to take a opportunities, but definitely building our capability and bringing new talent in to the company, by the way, from other areas where they have better experience to make sure that we're learning best practices here.
And Simon Buchanan, as you point out, depletions momentum was better in H2 than H2 on. So we have good underlying growth in Buchanan, and I would expect that to show up in sales next year. So Buchanan is a brand we expect not just in the U. S, but also in Latin America to do better next year.
Okay, thank you. Can I just clarify, I think Kathy, last time you talked about, trades and
level?
Yeah. I sorry. I'll have IR follow-up, but the statistic that you're quoting is just not resonating with me.
Okay, all right. Many thanks.
Thank you.
Next question from Chris Pritchard in Redburn.
Thanks very much. A couple of questions, please. Firstly, Ivan, I know you won't comment on the the US portfolio brands, but in terms of understanding, the benefit to the business from a potential divestment, is it a case of just removing the growth drag or by consolidating the portfolio, do you would you see a benefit to the underlying brands as well through greater focus? And then secondly, on China, In terms of the evolution of your route to market in China, there's an interesting chart with color coding on slide, 27. Could you explain what those color codes are and give us a bit more update on on what your route to market in China looks like.
And secondly, are you expanding capacity? At Seijin Funnel, do you have enough to sort of hit this very high level of growth that you're delivering at the moment?
Sure. Chris, on the first one, I think all I would say is if you look at the company over the last few years, we've taken a disciplined approach to portfolio management, look at what we did on wine on non core beer, on getting out of the hotels, and we will continue to apply that. And, I wouldn't go any further into what we're going to do with all the benefits. On China, the the group to consumer strength, of, both our Schwaging Fine business and the way we're now focused on ultra premium, and high end scotch whisky, we're in a much stronger position. And, I do see, part of Schwading Funds Momentum is a very disciplined approach to how they are building and then geographically expanding into the next year of provinces.
And we have a very good distribution network, the wholesaler alignment with running a, a true, sell out culture with great execution, supported by good marketing is what's working. On the point of capacity on Baidu, yes, we are, we the Schwading Fund company is focused on the long term projections that they've laid out publicly, and looking at solutions on how to support the capacity that's going to be needed. So that's very much part of the plan that trading fund has laid out and shared with its investors.
Okay. I mean, just specifically on the route to consumer, is it still very much Sweijin Fang, Deazhou, China, no, Henozi Diageo, or have there been changes? Intrigued by that chart on the on the slide as to what that was telling us, what was the red, what's the yellows, what's the oranges, is that where you're going direct or I'm to get a bit more color how you have evolved because your competitors have made some significant advances in terms of changing their route to the consumer.
Yeah. I I think what you're seeing, what you're seeing on that chart, Chris, is just the, Chinese white spirits. So, so we have, that route to market is separate from the Ajo China. Which is now focused on the top end of Scotch Whiskey, so a much more focused approach. And then we have more Genesee, the audio, where we have our other brands, Johnny Walker, black and, and, some of our gin brands.
And so, what I put in the presentation was purely the the root to market approach for Baidu. That is working really well for a staging plan.
Thank you. Next question from Trevor Sterling in First Investment Research.
Hi, Kathy, and Ivan. Two three questions from my side, please. One technical and 2 personal strategic. The first one, maybe Kathy, what the corporate line, corporate profit line, we saw swing from minus 11 in the first half. I think plus 35 in the second half.
Could you just give us a little bit of color about what was going on there and how we should think about that line going forward? And the other two questions, for the item, once you're talking about disruption, what do you think the potential is for cannabis to disrupt U. S. Sales, I guess, beer and spirits. And the 3rd final question is we've seen a lot of bolt on M and A and portfolio adjustment, but is there any potential still for transformational M and A for Diageo in the future?
So I'll take the first question, which is about kind of our corporate line item. So I wouldn't focus really on half over half in corporate. You know, there's a lot of I would say odds and end things that kind of run through that line. Overall, we had a little bit better experience in corporate this year, both because of lower pensions and then a little bit of favorable FX?
On cannabis, Trevor, we're tracking it very closely. As you know, it's not federally legal in the US right now. The trends to date, I'd say do not suggest any huge ships that impacts, spirits yet. However, it is it is the development which we are going to stay very closely focused on and watch the trends and are approach, Cheryl, so as we, we believe it needs to be regulated, very much like ours in the case of the U. S.
And, and, and that's some of what the industry is, is ensuring as as the sector develops. But no, no immediate disruptive threat to the business. What for us, the big thing in our favor in the U. S, which continues to be really positive is, this trend to, people's young Americans, 21 to 24 are drinking more spirits than they are before and a lot of it coming out of beer. And they're drinking better.
So the premiumization trend is really strong and healthy. And that's what gives us the confidence that the spirits industry would continue to have good growth value growth in the U. S. Commercial M and A, I mean, you know only 2 wells. The situations in the industry, many of them are in family controlled situations.
I mean, we, we watch it. We have a chessboard and won't say much more, but, what you saw us do this year with the acquisition of Casa Migos and And then, the 1st of our, Distru venture acquisitions, Belfazawa, which we're really excited about. You expect us to do more of those.
Thank you very much, Ivan.
Thanks, Travis.
Next question is from Olivier Nikoli, Morgan Stanley.
Hi, good morning, Ivan. Just a couple of questions, please. Just first of all, a follow-up on the U. S, just to make sure I understand the marketing cost say it will step up next year. So in full year 2019, should we therefore expect a further margin decline in full year 2019?
And then in the mid term, how should we think about your margin in North America? Is the cost of doing business for creating new consumer? Is going up? And actually is there much upside on your North America EBIT margin? So that's the first question.
Just a quick one on CAS Amigos. Is it fair to assume that it could add about 50 bps to your organic sales growth in the U. S? And just lastly on Europe, first of all, what are the drivers behind the weakness in Spain that you're seeing? And should we expect the UK growth rate to moderate next year?
Thank you.
Okay. So overall, just in looking at the U. S, I'd say, clearly, we're continued to be focused on making sure we're making the right investment behind marketing in the U S. For the long term. And you heard me also talk about balance equity building that we're doing.
And I'd say we're feeling very good about improving equity scores on those brands and continuing to put more A and P behind them. And you would have seen, this year, Olivier, that that constrained margins in the U. S. And so we would expect that. They would again be constrained next year as we think about that.
Importantly, I think when you then try and think about the U. S. Over the longer right? One of the wonderful things about this business is when you have brands with really strong equity, right? That enables you over time to actually take pricing and it also helps to sustain growth.
So I'd say we're very focused on making the right decisions behind A and P for sustained positive performance for Diageo over the long term. And as we build NRM capabilities and improve the equity of our brands, again, over the long term, not necessarily immediately in fiscal 2019, you know, we would hope to also get a bit more price power. And obviously, mix continues to be a big benefit in the U. S. Ivan just spoke to ongoing premiumization and the fact that young people in the U.
S. Are also continuing to drink better. And so that's a pretty favorable trend we'd expect to continue.
On the other 2 on pastamikos, you've seen the numbers in our press release. I won't give you a a shared number precisely, but I think you can figure it out. We have the brand is doing really well. We're really happy with it. And it will be accretive for share for for the US next year.
And, I mean, I know the number, but I don't wanna put it up So you can calculate it. We, because you'll come back to me next year and ask me about it. So, on on Europe, the on Nigeria, it's, whisky is the challenge. And, the category is really, really soft, and we have not been able to revitalize JNB yet. So we will do better, competent in IVRIA going forward.
But if I just step back, to me, what's really pleasing about Europe overall. I mean, in this year, Iberia was soft and then you say g, the UK GB was really strong at plus 8. To me, what, the team and John Kennedy and the team I've built in Europe is, is now a business that's delivering share gains much more reliably. We grew 50 basis points of Spirit share in, in Europe this year. If you look at absolute amount of share gains, we had 4 of the top 5 brands in Europe.
In our portfolio. We've stepped up the marketing, the route to market and sales execution resources are much better. Innovation is really firing if you look at what we've done with Gordon Pink and Tanker Estebia and half past 13. So going forward, I'd say we will have ups and downs, I'm I'm sure, in particular countries within Europe. But to me, the key in Europe is to get a sustained 3 to 4% growth year in, year out, and that's where I feel the platform is that we built now in Western Europe is really strong.
Next question from Edward Mandy in Jefferies Group.
Good morning, everyone. Three questions, please. The first is for Kathy on margins. Kathy, can you remind us where we are on the EUR 700,000,000 in terms of realization of cost savings. And just a wider question.
You've been in the business now for about 3 years. You feel that by the end of fiscal 2019, the cost piece will be more or less done or other opportunities for more work streams beyond fiscal 2019 over and above running the business and ZBB and net revenue management and the like. The second is on Shraging FANG. I think you've indicated you're increasing from 40 60%. I know you've already got management control.
What does going up to 60% give you, from an operational perspective And then the 3rd is around low alcohol. You obviously got seed lip, you're doing kettle botanicals, Guinness pure brew. Should we expect more products being launched within the whole low alcohol arena.
Okay. So I'll go ahead and started. As we think about our overall productivity program, I think the best way to think about how is that translating to the Azure's results is in the margin gains and what we've submitted in terms of our midterm guidance. So we, a year ago, after our midterm guidance from 100 basis points over the 3 year period ended fiscal 2019 to 175 basis points. If you look at what we delivered this year and what we delivered last year, right?
That's 115 basis points. Hence, I think, comment earlier with respect to 60 basis points yet to deliver in this fiscal 2019. And I would say we feel really good about seeing, our productivity efforts, both flow to the bottom line, but also from a capability building for about this. So my commentary around A and P and the catalyst tool that we use, my commentary around, our building capability and NRM, the Polaris tool that we've rolled out in some of the markets. And that enables us to move at greater speed and pace to get insights more quickly that we can translate into actions in the business.
So that's how I would think about overall performance of our productivity program. Now you, commented how do we think about it beyond fiscal 'nineteen? You know, productivity does not fall off a cliff for Diageo when we get beyond fiscal 2019, it is alive and well. And I think, I would have commented over the time that I joined the company that for me. And I think certainly for Ivan's success and the productivity program is about it being business as usual built into culture of this company every day.
You know, we would talk about that's driving efficiency and effectiveness and everything that we do. It's about simplification of the business so that we can move at greater pace. It's about making sure people have the date and information they need at their fingertips so that they have insights and they can act on those insights. So I would say we feel very good about that cultural shift in the organization and that we would absolutely expect that we will continue to get benefits beyond fiscal 2019.
On, on Baidu on trading fund, I mean, we just we see this as a very attractive category, and business. And, we have a very strong management team, a strong strategy in place, and this is really just to increase our participation. In the in the value that we see being created, with this company over over the next decade. The management team is really strong. The strategy is clear.
They have got sustained momentum I talked about route to market innovation and brand building. It doesn't really change anything else other than we want a bigger piece of the action. And so that process is underway. On the no and low alc, this is an area which We are putting more strategic focus behind. You mentioned the number of products we've introduced, including There's a new Gordon's line in in GB, which is 0.5% ABB.
We do see the consumer trends for, adult occasions with low alcohol as an important trend over the next many years. And, we're putting a lot of focus behind it from a innovation standpoint and from M and A. I mean, seedless and dalsasars is another good example, which really plays in this early evening, low alcohol location. So, I expect this to be an important part of focus for the company going forward.
Next question from Andrea Pistacchi, Deutsche Bank.
Yes, good morning. I have two questions, please. The first one on the U. S, how are you seeing the pricing environment recently? I think Brown form and in June on their call, we're making some more encouraging comments on pricing compared to what they would have said in the past couple of years.
Are you detecting any improvement. And secondly, on Africa, you highlighted Africa, of course, of having held you back this year I think on the regional call in March John O'Keefe was suggesting or expecting a recovery in 2H, which did occur, but it was, I think, quite muted at about 3%, 3%. So what really did anything turn out to be a bit worse than you would expected towards the end of the year? And how do you think about Africa going into next year?
Sure. On, on Africa, the, if you look at the whole year, we, we clearly had the number of factors in market like Kenya and the first half I talked about in Cameroon and Ethiopia have been very challenged. And, We've had good success in Nigeria, which is coming along nicely. And the whiskey category in South Africa has been more challenged. We we take, consistent medium term view here, Andrea, and I I do expect us to perform better in Africa and make year, both in beer and in spirits and in mainstream spirits.
But we'll always get hit by some degree of volatility, strategy is clear. We have an intense focus on productivity and efficiency right across the business. And, we've got strong plans. Through all of this, the Guinness brand grew 7%. Guinness is really healthy.
And our growth drivers and the effectiveness of our marketing across all the Guinness Markets in Africa has never been stronger. So if you're really good about that, mainstream spirits in Nigeria and Kenya are are continuing to do really, really well, high growth, and that margin accreted for us. So there were a number of factors and that impacted us this year, but focus and strategy is unchanged.
And then your other question was about U. S. Pricing. And I would say, the U. S.
Is obviously a very big business for us and we participate across, you know, almost all categories. So we would not, dictate the U. S. As seeing, you know, significant pricing improvement. Pricing continues to be pretty muted in the U.
S.
Would you say, thanks. Would you say that it's sort of bottoming out in high end vodka, the worst of the discounting? Would that be bottoming out, do you think?
Again, I mean, I'd I'd say we we're watching it very closely. It's, it's a market that has as you know, very good data. And we track it. And our our intention over time is to get a decent pricing rhythm back into that marketplace.
Thank
Next question is from Mitch Collett in Goldman
Sachs. Two questions, please. On growth for next year, organic net sales growth, I think you said it it should be roughly similar to to this year, but I guess if we run through the moving parts, the US should be better because you get a contribution from Casinigos I think you said you expect India to be better. You've just said Africa should be better. So I guess the parts that offset that I guess, Europe is running slightly ahead of what you said in terms of medium term growth, maybe swaying FANG a bit softer.
And perhaps LatAm, are you able to comment on what you'd expect for F 2019 for LatAm? And then related to that, perhaps you could give us some perspective on how we should think about the phasing of growth for next year, in particular, India and the U. S. Have easy comparatives for the first half. Is there anything we should know about the innovation pipeline that might skew growth between the 1st and second half next year?
Thanks.
So I think you roughly got a lot of the puts and takes. Correct as you kind of went across some of the regions on fiscal 19. I guess the only thing I'd point out as it relates to India specifically, right, GST enabled India to get more pricing this year. And generally, we would have seen across India. And so just in volume price and mix, we'd expect that to pan out a bit differently for India.
So we expect to see a little bit more volume growth in India and a bit less than pricing. We've always talked about India and in, stable times being, call it, high, high, single digit to low double digit growth. And this year, they were at 9%, right? So I think you have those puts and takes pretty well. I wouldn't attempt to get into specifics on phasing sort of by region, these one half to another half, the only other comments I would make, and I think Ivan got into this a little bit when he was talking about Africa.
Diageo is in 180 market across the globe. I mean, we do have a quite global footprint. And one of the things in that quite global footprint is that in any given year, we're going to have a couple of it that that are just off and have some kind of dislocation. What we would have seen in Africa this year was a combination of you know, political instability in Kenya in the first half, right? Africa in certain regions also suffered from really heavy rains and flooding this year, right?
That keeps people out from going to trade and and has a dampening effect on our business. FX is also pretty important to our business, given international spirits and the fact that we're such a big exporter across the globe. So, you know, I'd also say while we can't tell you exactly what countries are gonna have, you know, have, challenges next year, we certainly would expect they're not all going to be hitting on all cylinders.
Okay, understood. And then maybe just one unrelated follow-up You've listed 3 factors that negatively impacted gross margin. Are you able to quantify how material the hurricane remediation costs were in the USVI?
Between $15,520,000,000.
Thank you.
Apologies.
No. Okay. That was it. Okay. Thank you.
Hello. Do you still have more questions?
Let me ask a question. Come on.
We have Hello. Yeah. Go ahead.
Yes. We have a question from Nico Van Siegel Park in Liberum.
Hi, there. Yes. My question is just on the cost of debt going up to 3.3 and also the tax rate going up a little bit higher. I get your forward looking statements are for next year. Really wonder if you can help me out with the following years and maybe just a longer term.
So is it reasonable expect that these costs continue to rise 2020 and beyond? Thanks.
So if you look at the guidance that we've got in terms just our effective interest rate. I'd say that's all about what happens to interest rates in the future. So I'm I'm not at this point gonna try and predict interest rates beyond year, but, you know, based on what we're seeing in the forward curve for interest rates, that's in form, the guidance we gave. The other thing, just in terms of our, effective interest rates, going up, it it's also because this year, we benefited significantly from heavier use of commercial paper and some positive swap gains that we have, right? And so, you know, we'll continue to look at the market and inform that as fiscal 'nineteen evolve.
On tax rate, I'd say for several years, we have been, talking to the fact that overall for all multinationals, there's upward pressure across the globe on taxes. And so you're seeing next year that we've guided 21% to 22%. We were just a little bit below 21%, this year, excluding exceptionals. And so generally speaking, we would say, tax is a is a bit of a headwind and that we don't we don't see that changing.
Okay. But I guess as a modeling for 2020 and beyond, so that that should that should maintain that 21 to 22 over that period. Is that right?
Again, I cannot predict tax rates at this point beyond next year. I have some I say seasonably good insight to be able to predict it for next year. But overall, the environment, as it relates to tax rates from multinational putting aside the positive we got from from the US tax reform, you know, is is a bit of a headwind and you're seeing that in our guidance year and I'm not going to try and predict what it's going to be beyond that.
Thank you. Next question from Jamie Norman in Societe Generale.
Very good morning to both a couple of questions from me. Firstly, if you take a medium term look at gross margins, obviously impossible to predict many of the moving parts such as input costs. But if you look at the kind of tension between, on the one hand, premiumization, and then the other negative mix as emerging markets become more important or, the affordable product element increases. Into the medium term, what is going to be the net result between those 2? Do you think that we are going to see some gross margin growth sort of beyond F 2019?
And the second question on the U S, if I may, a very good performance overall, but very much driven by RTD. Just a comment if you could on the core spirits market where you are versus the market itself and, whether you see that closing over the next year or so Sure.
I'll take the second 1, Jamie. On the U. S. The market is growing at about 4% is how we see it. Right now, the value growth in in the spirits industry in the U.
S. And as you see in these results, we grew at 3.3 So where our growth is under the market. We expect to do better for some of the comments I made earlier on the call. But, I'm not going to predict when we're going to get to the market real quick or get ahead of it. All I would say is, what we're focused on is building a reliable, sustainable, consistent growth in the U.
S. And, the actions that Deirdre and the team have made on refocusing our innovation, upgrading investments against our brands, changes in, commercial execution, building the net revenue management capability, driving efficiency, and I'm confident we will we will see continued improvement in our top line growth happening there. In a business like this, you really don't wanna be in a hurry. These brands move slowly and to get them into sustainable growth. Takes investment and creativity, but it also takes time.
And, and for the audio to deliver it's, goals that we've laid out in terms of our medium term, guidance. We feel, the US is performing in line to deliver it and I expect it to get better, as I said.
And then just in trying to think about gross margins over the long term might make a couple of comments. So while we absolutely can get negative mix from higher growth in, in certain regions across the globe, there's also an overall trend across the globe premiumization that we're certainly participating in. So within individual markets, before we start to talk about the overall impact of Diageo, I'll call it country mix within individual market. We're very much leaning into premiumization. You would have seen some some things occur in this fiscal year, that that over time, we wouldn't expect to have the same heightened impact.
So as an example, primaries grew within our scotch portfolio at 7%, right, clearly ahead of our overall scotch growth. And so that would have caused from negative mix in scotch. We're very focused on the high end of our portfolio and making sure that we're growing strongly the high end of our portfolio And then I would point to over the longer term, we had a discussion about pricing and NRM and the more over the longer term, we can get pricing kind of moving more positively, especially, I'd say in Europe and North America where pricing has been more muted, that will also help margins overall. So I'm not going to predict what gross margins are going to be beyond, the commentary we've made on fiscal 2019, which is a little bit more near term, but I'd say one of the great benefits of Diageo is the breadth of our portfolio, both in participating and changing consumer habits and occasions, but also in just how we participate, across market and across price points. And we're very focused on trying to create, favorability within markets in terms of, the mix dynamics.
That's very helpful color. Ivan, just on the U. S, I mean, it strikes me it's very much about you and your peers kind of driving the growth. Are you seeing any incremental tailwinds from the macro, from things like casual dining, which you might expect at this stage of the cycle, or is it it's just you're just having to through your own good efforts, drive the growth?
I wouldn't call it grinding the growth, a consumer product category growing at 4% in the U. S. Is, is a very attractive sector to me.
Is it driving driving or driving driving?
Yes, sir. Yeah.
Yeah. So it's it's it's sustained. And that's what I like about, why we are confident about the US industry momentum continuing. It is very much driven by pace changes, demographic changes, and a preference of premium 3rd brands, and that continues to be strong. To your point, casual dining.
No, it still has not come back as strongly. You've not seen the on trade channels, accelerate in the U. S. Yet. Which with the GDP growth, the stock market, the unemployment levels, etcetera, we are seeing a more cautious consumer on the shift.
I mean, you're seeing the high end of bond rate very strong, but the casual dining sector in particular continues to be challenged.
Got it. Thank you very much.
Thank you. Our next question is from Chris Brechner in Redburn.
Thanks so much. Just a couple Chris, you faded out. We can't hear you.
Next question is from Simon Hales.
Thank you. I'll try a follow-up if I can. Could I just ask a little bit about the timing of the share buyback program, Ivan? I just want to clarify that if you want to, you could begin to execute that buyback immediately. And when we think about the duration, it could run through the whole of the year.
I'm just conscious that last year's buyback program was obviously completed in February. I assume that was because you saw the share price opportunistic that meant you just sort of completed earlier than perhaps might have been the case. And then just secondly, I may have missed this, but just in terms of KetelONE's performance, for the full year. Could you tell us what the base brand's performance was at I. E.
Ex Botanicals?
I will, deal with Catalan and ask Cathy on the buyback.
So, if we just talk about the buyback, I would say we could go into the market to start the buyback reasonably quickly post our results and our results, I'd say, settling and getting digested in the marketplace. And that overall, we would look to participate across the year in the market. So I would say generally speaking, we would be looking to target the program in that way.
And on Capital 1, we are very focused on the total franchise of the brand and the base brand. It's you the the main improvement I expect to see happening is as we go into next year, overall cattle, as you see in our numbers, has done better in fiscal 'eighteen than in fiscal 'seventeen. And we had a better second half than first half. It was helped by botanical. We don't there's still work to do.
Simon in terms of getting, kettle into, total trademark into sustained growth. And to me, F 'nineteen is the year that's going to prove that. We will we're upgrading our investment behind the brand and we're, I expect to see improvement continuing to F 2019. This brand still has tremendous support from bartenders, in the U. S.
It's on premise strength is really is really good. We know Botka is very, very competitive. But, I feel we feel that what we're seeing with botanicals is going to help the total trademark including the base.
Okay. Many thanks.
Thank you. And I'd like to hand the call back over to the speaker today. For any closing remarks.
Great. Well, thanks everyone for joining the call. Appreciate your interest in the company. Kathy and I will be out, next week, meeting many of you and look forward to continuing, the conversation. Thanks again.
Thank you. And this will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.