Today, welcome to the Diageo's preliminary results investor Q&A call. Your call today will be hosted by Diageo's CEO, Ivan Menezes, and CFO, Kathryn Mikells. To ask a question today, please press star one on your telephone keypad. We're now ready to start the call. Mr. Menezes, please go ahead.
Thank you. Good morning, everyone, welcome to the call. I'm here with Kathy. I'm going to make a few opening remarks, then we'll open up the line for Q&A. I'm pleased with the overall performance we've delivered this year. We've demonstrated our ability to deliver consistent performance across all our key metrics, 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 2.5 billion, with operating cash conversion above 100%, and average working capital improved by 220 basis points. This year, we returned more than GBP 3 billion to our shareholders through dividends and buybacks. Our CSR grew 23%, is up 17% over the last three years, firmly in the top quarter relative to our peer group.
As I look at our performance, there are many areas I'm pleased with the progress we've made. Let me just mention a few. Johnnie Walker saw broad-based growth and grew 5%. India stabilized in the second half as we moved past the regulatory headwinds, we continued to make really good progress on margins despite the impact of GST. In U.S. Spirits, all key brands continued to gain category share except vodka. On vodka, we saw improvement on both Ketel One and Cîroc, but clearly we have more to do. Guinness grew 5% with strong growth in Europe and Africa, China continued to be a growth driver with Shui Jing Fang delivering really strong growth. Scotch in Mainland China also grew double digits. Of course, there's lots of areas we need to continue to improve performance, 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, continued weakness in Ethiopia and Cameroon. While Johnnie Walker did well in Scotch, I'd say the rest of our Scotch portfolio had weakness. Malt was not strong enough, some of our local stars, Buchanan's and Old Parr, underperformed, we're determined to get these better as we go into next year. We continued to focus on improving our performance in U.S. Spirits. Finally, we continued 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 to promote a positive role for alcohol in society.
We launched new stretching targets for 2025. This year we've mobilized all Diageo employees as responsible drinking ambassadors 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 Diageo. Our annual value survey showed a 1% improvement in employee engagement and a 2% improvement in the number of employees who see that productivity is having a positive impact on the business. 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. 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.
We continue to expect to deliver our medium-term guidance of mid-single digit organic net sales growth. In FY 2019, we expect to see negative market mix headwinds with faster growth in some markets with a lower margin. We will prioritize continued investment in the business and expect to deliver the 175 basis points of organic margin expansion for the three years ending June 2019. With that, why don't I open it up for questions?
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. Our first question comes from Sanjeet Aujla in Credit Suisse. Please go ahead.
Hi, Ivan, Kathy. A couple of questions from me, please. Really on the U.S. In the webcast, Ivan, you said you're well set up for FY 2019. Do you think the portfolio is now in a shape where it's better able to grow in line with the market? Tied to that, can you talk a little bit about the performance of the portfolio brands in the U.S., and the plan for those brands going forward? Finally, just on margins for next year. You talked about 60 basis points. Given the negative market mix dynamics, how would you break that down between gross margin and other items in the P&L? Thanks.
Hi, Sanjeet. I'll take the first one and turn it over to Kathy for the second. On the U.S., as I've mentioned, if you look in every category other than vodka, we're growing share, and we've stepped up our investment behind the brands. 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 One Botanical, which have just come in, and the Cîroc VS Brandy, 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 brands. I feel really good.
I was in the U.S. a couple of weeks back and going through all the brand plans and details 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. I expect next year to do better than this year. As I've said before, we're not predicting when we will grow at or ahead of the market. The momentum is positive, and the portfolio is performing broadly much better. We've got some terrific momentum in Don Julio, and Casamigos will come into our performance, and whiskey continues to be good, both Scotch and American whiskey. Kathy?
If you just agree that we had this year, right? Delivering overall 78 basis points. We had some headwinds coming through in gross margin this year, which you would've seen. That ate into about 23 basis points. A&P grew ahead of sales at 7%, right? That reinvested 27 basis points from a margin perspective. You saw us get strong margin results out of other expenses, including 110 basis point improvements in overhead. If I look at and pick apart what's underneath that, in parting gross margin, we would've had the hurricanes that came through the Virgin Islands this past year, right? That would've caused some one-off expense, which we wouldn't repeat. We also had negative mix, and I would mention transportation costs in the U.S. were escalated.
Next year, we're expecting some increase in agave cost, some of the costs we incurred this year would not repeat. Overall, I would expect gross margin to give us a bit better result than 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 upweighting in both Scotch and in the U.S. 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, I'd expect that we'll continue to see some benefit from that next year. Hopefully that gives you a little bit more color.
That's very helpful. Just on the portfolio brands, in the U.S.-
Yes.
Ivan, 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. The trend hasn't shifted much. 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. Question is from Fernando Ferreira in Bank of America Merrill Lynch.
Morning, Ivan and Kathy. 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 Cîroc, Ketel One, and the RTD portfolio in the second half? Were there any shipment phasing there to highlight from the new launches? Second question, Ivan. This is clearly the best set of numbers since fiscal 2012, right? The strategy has been very well executed to achieve that level of performance. 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. Our focus is really on creating a sustainable, consistent compounder. 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 and margins we have today. We're focused in smartly investing in the business to sustain both of them. I expect us to continue down that track. Clearly, we will look at opportunities to pick up brands which make sense. We're positioned well with our geographic footprint and our product portfolio to really benefit. One of the things I'd point to that, to me, that's most important to us as a management team is that we don't get complacent. That we're really focused on all the shifts that are happening out there.
Making sure we're quicker in anticipating those threats and opportunities, and move faster. As I mentioned in my opening comments, yes, these are strong results, but there's so many parts of the business we know we can and should do better. That would be strategically how we 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.
I think you asked about kind of shipment phasing and specifically around our vodka portfolio and RTDs. Overall.
Yeah
For our business in North America, shipments roughly equal depletions. I would say, nothing material there going on. With regard to Cîroc and Ketel, I would point to the trend improving there in North America, right? Cîroc down four, last year it was down 15, and Ketel down two, last year it was down six. The one thing I'd point out in terms of overall phasing, is just the launch of Ketel One Botanical in the U.S. Ketel One Botanical was launched late in the fourth quarter. We have, I'd say, very high hopes for it. It's 73 calories in a serve with soda, infused with fine fruits and botanicals, a little bit lower ABV. It really is playing into the lighter occasion and people's focus on natural ingredients, right? Non-GMO, gluten-free.
We think it may hit a real sweet spot with consumers, and we're really hopeful about it. Just in terms of late innovations, that hit late in the fourth quarter for us. With respect to RTDs, if you look at our Diageo kind of beer business, which is where our Smirnoff RTDs sit within North America, that grew really well. We have both Smirnoff Ice Smash and Smirnoff Spiked Sparkling Seltzer that's doing really well in the U.S., we're feeling really good about that. Overall, I just go back to, from a shipments and depletions perspective, across the overall business, are relatively equal.
That's great. Thanks, Ivan and Kathy.
Thank you.
Next question from Simon Hales in Citi.
Thank you. Morning, Kathy. 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, we've seen some upweighting over the last sort of couple of years. You've committed again to continue to upweight 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-up on marketing investments next year as we saw in terms of the 27 basis points in 2018? Then also around that, on margins, Kathy, in your presentation, you talked quite a bit about net revenue management. Have we actually started to see any benefits to the bottom line from the net revenue management initiative yet?
Have some of the top-line benefits you've seen or savings you've seen been offset by the costs of putting the program into place across the globe? Then just one final one, specifically on the U.S. and Buchanan's. 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? Thank you.
I'll start out just talking about margins overall. I'd say one of the things we're feeling really good about is we talked about the deployment of this tool, Catalyst, across the business, which is a desktop tool now that sits on all of our marketeers' desktops, and it enables them to get much more specific about returns, both across brands in their markets and within brands now in the different growth drivers that they can invest in. That helps us, I would say, to feel better and better about exactly where we're targeting that A&P investment and targeting it in places that we think will drive really good returns. 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.
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 going to 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. As it relates to NRM, I'd say, I'd characterize what we've done today as really building the right foundation for the future. 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 we'll see more results coming through from NRM in the years to come.
I'd expect we'll start to see some of that in next fiscal, 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 rates would be a headwind for us. We've done a lot of work in starting to build that capability. We also have a pretty sophisticated tool that we call Polaris that's already been rolled out in both North America and here in Europe. We've been putting in place, I'll call it bespoke and efficient tools in the other markets, concentrating on where we have the biggest opportunities. 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.
Simon, Buchanan's, as you point out, depletions momentum was better in H2 than H1. We have good underlying growth in Buchanan's, I would expect that to show up in sales next year. Buchanan's 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
Still just T level?
Yeah. Sorry, I'll have IR follow up. The statistic that you're quoting is just not resonating with me.
Okay. All right, many thanks.
Thank you.
Next question from Chris Pitcher in Redburn.
Thanks very much. A couple of questions, please. Firstly, Ivan, I know you won't comment on the U.S. 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, would you see a benefit to the underlying brands as well through greater focus? 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 what your route to market in China looks like? Secondly, are you expanding capacity at Shui Jing Fang, or do you have enough to sort of hit this very high level of growth that you're delivering at the moment? Thanks.
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. I wouldn't go any further into what we're going to do or the benefits. On China, the route to consumer strength of both our Shui Jing Fang 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 a part of Shui Jing Fang's momentum is a very disciplined approach to how they are building and then geographically expanding into the next tier of provinces. We have a very good distribution network.
The wholesaler alignment with running a true sellout culture with great execution, supported by good marketing is what's working. On the point on capacity on Baijiu, yes, the Shui Jing Fang 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. That's very much part of the plan that Shui Jing Fang has laid out and shared with its investors.
Just specifically on the route to consumer, is it still very much Shui Jing Fang, Diageo China, Moët Hennessy Diageo, or have there been changes? I was just intrigued by that chart on the slide as to what that was telling us. What was the reds, what was the yellows, what was the oranges? Is that where you're going direct, or I'm just trying to get a bit more kind of how you have evolved because your competitors have made some significant advances in terms of changing their route to consumer.
Yeah. I think what you're seeing on that chart, Chris, is just Shui Jing Fang, Chinese white spirits. We have that route to market is separate from Diageo China, which is now focused on the top end of Scotch whisky, so a much more focused approach. We have Moët Hennessy Diageo, where we have our other brands, Johnnie Walker Black and some of our gin brands. What I put in the presentation was purely the route to market approach for Baijiu that is working really well for Shui Jing Fang.
Okay. Thanks very much.
Sure.
Thank you. Next question from Trevor Stirling in Bernstein Research.
Hi, Kathy and Ivan. Three questions on my side, please. One technical and two perhaps more strategic. The first one maybe Kathy, on the corporate line, corporate profit line, we saw a swing from GBP -11 in the first half to I think GBP +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? The other two questions, Ivan, one is, you were talking about disruption. What do you think the potential is for cannabis to disrupt U.S. sales, I guess beer and spirits? The third final question is, we've seen a lot of bolt-on M&A and portfolio adjustment, but is there any potential still for transformational M&A for Diageo in the future?
I'll take the first question, which is about kind of our corporate line item. I wouldn't focus really on half over half in corporate. There's a lot of, I would say, odds and ending 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 are tracking it very closely. As you know, it is not federally legal in the U.S. right now. The trends to date, I would say do not suggest any huge shift that impacts spirits yet. However, it is a development which we are going to stay very closely focused on and watch the trends. Our approach here also is we believe it needs to be regulated, very much like alcohol in the case of the U.S., and that is some of what the industry is ensuring as the sector develops. No immediate disruptive threats to the business. For us, the big thing in our favor in the U.S., which continues to be really positive, is this trend to young Americans, 21-24, are drinking more spirits than they are before, and a lot of it is coming out of beer, and they are drinking better.
The premiumization trend is really strong and healthy, and that is what gives us the confidence that the spirits industry will continue to have good value growth in the U.S. On transformational M&A, you know only too well, the situations in the industry, many of them are in family-controlled situations. We watch it. We have a chessboard, I will not say much more, but what you saw us do this year with the acquisition of Casamigos and then the first of our distilled venture acquisitions, Belsazar Vermouth, which we are really excited about. You can expect us to do more of those.
Thank you very much, Ivan.
Thanks, Trevor.
Next question from Olivier Nicolai, Morgan Stanley.
Hi, good morning, Ivan, Kathy. Just a couple of questions, please. First of all, a follow-up on the U.S., just to make sure I understand. Marketing costs, you said will step up next year, so in full year 2019. Should we therefore expect a further margin decline in full year 2019? Then in the midterm, how should we think about your margin in North America? Is the cost of doing business, recruiting new consumer is going up, and actually is there much upside on your North America EBIT margin? That's the first question. Just a quick one on Casamigos. Is it fair to assume that it could add about 50 basis points to your organic sales growth in the U.S.? Just lastly, on Europe, first of all, what are the drivers behind the weakness in Spain that you're seeing?
Should we expect the U.K. growth rate to moderate next year? Thank you.
Okay. 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. You heard me also talk about in that 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&P behind them. You would've 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, when you try and think about the U.S. over the longer term, one of the wonderful things about this business is when you have brands with really strong equity, that enables you over time to actually take pricing, and it also helps to sustain growth. We're very focused on making the right decisions behind A&P for sustained positive performance for Diageo over the long term. As we build NRM capabilities and improve the equity of our brands, again, over the long term, not necessarily immediately in FY 2019, we would hope to also get a bit more pricing power. Mix continues to be a big benefit in the U.S.
Ivan just spoke to ongoing premiumization, the fact that young people in the U.S. are also continuing to drink better, that's a pretty favorable trend we'd expect to continue.
On the other two, on Casamigos, you've seen the numbers in our press release. I won't give you a shared number precisely, but I think you can figure it out. The brand is doing really well. We're really happy with it. It will be accretive for share for the U.S. next year. I know the number, but I don't want to put it out. You can calculate it. Because you'll come back to me next year and ask me about it. On Europe, on Iberia, whiskey is the challenge. The category is really, really soft, we have not been able to revitalize J&B yet. We will do better, I'm confident in Iberia going forward.
If I just step back, to me, what's really pleasing about Europe overall, in this year, Iberia was soft, then you say the U.K., GB was really strong at +8. To me, what the team, and John Kennedy and the team have built in Europe is now a business that's delivering shared gains much more reliably. We grew 50 basis points of spirit share in Europe this year. If you look at absolute amount of shared gains, we had four of the top five brands in Europe in our portfolio. We've stepped up the marketing. The go-to market and sales execution resources are much better. Innovation is really firing. If you look at what we've done with Gordon's Pink and Tanqueray Sevilla, and Hop House 13. Going forward, I'd say we will have ups and downs, I'm sure, in particular countries within Europe.
To me, the key in Europe is to get a sustained 3%-4% growth year in, year out, and that's where I feel the platform that we built now in Western Europe is really strong.
Thank you very much. Bye-bye.
Next question from Ed Mundy in Jefferies Group.
Morning, everyone. Three questions, please. The first is for Kathy on margins. Kathy, can you remind us where we are on this GBP 700 million in terms of realization of cost savings? And just a wider question, you've been in the business now for about three years. Do you feel that by the end of fiscal 2019, the cost piece will be more or less done? Or are there opportunities for more work streams beyond fiscal 2019, over and above running the business in ZBB and net revenue management and the like? The second is on Shui Jing 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 third is around low alcohol. You've obviously got Seedlip. You're doing Ketel One Botanical, Guinness Pure Brew.
Should we expect more products being launched within the whole low alcohol arena?
I'll go ahead and get started. As we think about our overall productivity program, I think the best way to think about how is that translating to Diageo's results is in the margin gains and what we've submitted in terms of our midterm guidance. We, a year ago, upped our midterm guidance from 100 basis points over the three-year period and into fiscal 2019 to 175 basis points. If you look at what we delivered this year and what we delivered last year, that's 115 basis points, hence the, I think, comment earlier with respect to 60 basis points yet to deliver in this fiscal 2019. I would say we feel really good about seeing our productivity efforts both flow to the bottom line, but also from a capability building perspective.
My commentary around A&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. That enables us to move at greater speed and pace to get insights more quickly that we can translate into actions in the business. That's how I would think about overall performance of our productivity program. Now, you commented, how do we think about it beyond fiscal 2019? Productivity does not fall off a cliff for Diageo when we get beyond fiscal 2019. It is alive and well, I think I would have commented over the time that I've joined the company that for me, and I think certainly for Ivan's success on the productivity program, is about it being business as usual, built into the culture of this company every day.
We would talk about that's driving efficiency and effectiveness in 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 data and information they need at their fingertips so that they have insights, and they can act on those insights. 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.
Baijiu, on Shui Jing Fang, we see this as a very attractive category, and business. We have a very strong management team, a strong strategy in place, and this is really just to increase our participation in the value that we see being created with this company over the next decade. The management team is really strong. The strategy is clear. They have got sustained momentum through, 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. That process is underway. On 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 G.B., which is 0.5% ABV.
We do see the consumer trends for adult occasions with low alcohol as an important trend over the next many years, we're putting a lot of focus behind it from an innovation standpoint and from an M&A. Seedlip and Belsazar is another good example, which really plays in this early evening, low alcohol occasion. I expect this to be an important part of focus for the company going forward.
Okay, thank you.
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-Forman, in June on their call, were making some more encouraging comments on pricing compared to what they would've said in the past couple of years. Are you detecting any improvement? 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'Keeffe was suggesting or expecting a recovery in 2H, which did occur, but it was, I think, quite muted at about 3%. What really, did anything turn out to be a bit worse than you would've expected towards the end of the year, and how do you think about Africa going into next year? Thanks.
Sure. On Africa, if you look at the whole year, we clearly had a number of factors in markets like Kenya in the first half I talked about, and Cameroon and Ethiopia have been very challenged. We've had good success in Nigeria, which is coming along nicely. The whiskey category in South Africa has been more challenged. We take the consistent medium-term view here, Andrea, and I do expect us to perform better in Africa next year, both in beer and in spirits, and in mainstream spirits. We'll always get hit by some degree of volatility. Our strategy is clear. We have an intense focus on productivity and efficiency right across the business. 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. I feel really good about that. Mainstream spirits in Nigeria and Kenya are continuing to do really well, high growth. That's margin accreted for us. There were a number of factors, and that impacted us this year, but our focus and strategy is unchanged.
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 almost all categories. We would not depict the U.S. as seeing significant pricing improvement. Pricing continues to be pretty muted in the U.S.
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'd say we're watching it very closely. It's a market that has very good data, and we track it, and our intention over time is to get a decent pricing rhythm back into that marketplace.
Thank you.
A reminder, to ask a question, please press star one. Next question is from Mitch Collett in Goldman Sachs.
Hi there. Two questions, please. On growth for next year, organic net sales growth. I think you said it should be roughly similar to this year. I guess if we run through the moving parts, the U.S. should be better because you get a contribution from Casamigos. I think you said you expect India to be better, and you just said Africa should be better. 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 Shui Jing Fang a bit softer. Perhaps LatAm, are you able to comment on what you would expect for FY 2019 for LatAm? 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 comparisons for the first half. Is there anything we should know about the innovation pipeline that might skew growth between the first and second half next year? Thanks.
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 2019. I guess the only thing I'd point out as it relates to India specifically, GST enabled India to get more pricing this year than generally we would have seen across India. Just in volume price and mix, we'd expect that to pan out a bit differently for India. We expect to see a little bit more volume growth in India and a bit less in pricing. We've always talked about India in stable times being, call it, high single digits to low double-digit growth, and this year they were at 9%. I think you have those puts and takes pretty well. I wouldn't attempt to get into specifics on phasing by regions, one half to another half.
The only other comments I would make, I think Ivan got into this a little bit when he was talking about Africa. Diageo's in 180 markets across the globe. We do have a quite global footprint. One of the things in that quite global footprint is that in any given year, we're going to have a couple of markets that are just off and have some kind of dislocation. What we would've seen in Africa this year was a combination of political instability in Kenya in the first half. Africa in certain regions also suffered from really heavy rains and flooding this year. That keeps people out from going to trade 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.
I'd also say, while we can't tell you exactly what countries are going to have challenges next year, we certainly would expect they're not all going to be hitting on all cylinders.
Understood. Maybe just one unrelated follow-up. You listed three factors that negatively impacted gross margin. Are you able to quantify how material the hurricane remediation costs were in the USVI?
Between GBP 15 million and GBP 20 million.
Okay. Thank you.
Next question.
Mitch, I have a question about Europe.
Apologies.
No.
Okay. That was it. Okay. Thank you.
We do have more questions.
Let me ask a question. Come on.
We have
Hello? Yeah, go ahead.
Yes. We have a question from Nico van Zyl in Liberum.
Hi there. Yes, my question's 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. Just really wondering if you can help me out with the following years and maybe just the longer term. Is it reasonable to expect that these costs continue to rise 2020 and beyond? Thanks.
If you look at the guidance that we've got in terms of just our effective interest rate, I'd say that's all about what happens to interest rates in the future. I'm not at this point going to try and predict interest rates beyond next year. Based on what we're seeing in the forward curve for interest rates, that's informed the guidance we gave. The other thing, just in terms of our effective interest rates going up, it's also because this year we benefited significantly from heavier use of commercial paper and some positive swap gains that we have, right? We'll continue to look at the markets and inform that as fiscal 2019 evolves. 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.
You're seeing next year that we've guided 21%-22%. We were just a little bit below 21% this year, excluding exceptionals. Generally speaking, we would say tax is a bit of a headwind and that we don't see that changing.
Okay. I guess as I'm modeling for 2020 and beyond, that should maintain that 21%-22% over that period. Is that right?
I cannot predict tax rates at this point beyond next year. I have some, I'd say, reasonably good insight to be able to predict it for next year. Overall, the environment, as it relates to tax rates for multinationals, putting aside the positive we got from U.S. tax reform, is a bit of a headwind, and you're seeing that in our guidance next year, and I'm not going to try and predict what it's going to be beyond that.
I appreciate that. Thank you so much.
Thank you. Next question from Jamie Norman in SocGen.
Very good morning to you 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. 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 products element increases. Into the medium term, what is going to be the net result between those two? Do you think that we are going to see some gross margin growth beyond FY 2019? 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 one, Jamie. On U.S. spirits, the market is growing at about 4%, is how we see it right now, the value growth in the spirits industry in the U.S. As you see in these results, we grew at 3.3%. Our growth is under the market. We expect to do better for some of the comments I made earlier on the call. I'm not going to predict when we're going to get to the market, we'll create 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. The actions that Deirdre and the team have made on refocusing our innovation, upweighting investments against our brands, changes in commercial execution, building the net revenue management capability, driving efficiency.
I'm confident we will see continued improvement in top-line growth happening there. In a business like this, you really don't want to be in a hurry. These brands move slowly, and to get them into sustainable growth takes investment and creativity, but it also takes time. For Diageo to deliver its goals that we've laid out in terms of our medium-term guidance, we feel the U.S. is performing in line to deliver it, and I expect it to get better, as I said.
Just in trying to think about gross margins over the long term, I'd make a couple of comments. While we absolutely can get negative mix from higher growth in certain regions across the globe, there's also an overall trend across the globe of premiumization that we're certainly participating in. Within individual markets, before we start to talk about the overall impact of Diageo, I'll call it country mix within individual markets, we're very much leaning into premiumization. You would have seen some things occur in this fiscal year that over time, we wouldn't expect to have the same heightened impact. As an example, primaries grew within our Scotch portfolio at 7%, right? Clearly ahead of our overall Scotch growth, that would have caused from negative mix and 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. I would point to, over the longer term, we had a discussion about pricing and NRM, 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. 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. I'd say one of the great benefits of Diageo is the breadth of our portfolio, both in participating in changing consumer habits and occasions, but also in just how we participate across markets and across price points.
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., 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 it's just you're just having to, through your own good efforts, drive the growth?
I wouldn't call it driving the growth. A consumer product category growing at 4% in the U.S. is a very attractive sector to be in.
I said driving, not grind. Driving. Yeah.
It's sustained, and that's what I like about why we are confident about the U.S. industry momentum continuing. It is very much driven by taste changes, demographic changes, and a preference of premium spirits brands. That continues to be strong. To your point of 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, et cetera, we are seeing a more cautious consumer on the shift. You're seeing the high end of on-trade very strong.
The casual dining sector in particular continues to be challenged.
Got it. Thank you very much.
Sure.
Thank you. Next question from Chris Pitcher in Redburn.
Thanks very much. Just a couple of
Chris, you faded out.
Apologies.
We can't hear you.
Next question from Simon Hales.
Oh, 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. 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 it earlier than perhaps might have been the case. Secondly, I may have missed this, but just in terms of Ketel One's performance for the full year, could you tell us what the base brand's performance was, i.e., ex-botanicals?
I will deal with Ketel One and ask Kathy on the buyback.
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. Overall, we would look to participate across the year in the market. I would say generally speaking, we would be looking to target the program in that way.
On Ketel One, we are very focused on the total franchise of the brand and the base brand. The main improvement I expect to see happening is as we go into next year. Overall, Ketel, as you see in our numbers, has done better in fiscal 2018 than in fiscal 2017. We had a better second half than first half, which was helped by botanical. There's still work to do, Simon, in terms of getting Ketel into total trademark, into sustained growth. To me, FY 2019 is the year that's going to prove that. We're upweighting our investment behind the brand, and I expect to see improvement continuing to FY 2019. This brand still has tremendous support from bartenders in the U.S. Its on-premise strength is really good.
We know vodka is very, very competitive, but we feel that what we're seeing with botanicals is going to help the total trademark, including the base.
Okay. Many thanks.
Thank you. 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. This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.