Welcome everyone to the Q And A call for Diageo interim Results. Your speakers today will be Mr. Ivan Menendez, chief executive of Diageo, and Kathy Michael's chief financial officer. I must advise you that this call is recorded today on Thursday, 25th January 2018. I would now like to hand over to your speaker today, Mr.
Ivan Menendez. Please go ahead, sir.
Hello, everyone, and Kathy and I welcome everyone to the call. I'll make a few brief opening comments and then open the line for questions. Hopefully you've had a chance to look at our results. I'm pleased with the results we've delivered to ask The strong performance reflects consistent and rigorous execution of our strategy through our 6 executional priorities. We've delivered, as you can see, 4.2 percent organic net sales growth, volume was up 1.8%, Organic margins expanded 81 basis points.
We had strong cash from our operations of £1,000,000,000 and pre exceptional EPS grew 9.4%. So we've delivered another consistent half with broad based top line growth across all regions, we increased our marketing investment by 7% and delivered operating margin expansion Our productivity program is continuing to progress the pace and the impact is showing up in our results. And we've delivered our results consistent with our medium term guidance. However, not everything is firing in all cylinders and we still have plenty of opportunity to go for to improve. This performance demonstrates the resilience of Diageo, one of strength of the company is the breadth of our portfolio combined with our truly global geographic reach.
So our financial performance expectations for the year remain unchanged. We remain confident in our ability to deliver consistent mid single digit top line growth and 175 basis points of operating margin expansion in the 3 years ending June 2019. So with that, let me now open it up for questions.
And your first question today comes from the line of Fernando Ferrero from Bank of America. Fernando? Your line is open. Do you have your cell phone mute?
Maybe try someone else operator and we can come back to Fernando.
Thank you. Your line is open.
Oh, yeah. Hi, Fernando. Can you
hear me now? Sorry.
Yes. Yes.
Good morning. Thanks for the question, Ivan. I have three questions, if I may. First one in the U. S, I mean, since you decided to up weight your marketing spend there, can you let us know how are your internal metrics showing in terms of share of voice in the industry and brand equity across the key brands in your portfolio, please?
And then second one was about pricing. In your portfolio overall. It has been quite muted, right, in recent years. But now that the currency is going against you and growth is covering in the world. How do you feel about like for like pricing ahead?
And lastly, maybe for Kathy, You mentioned on the webcast that 35 bps of margin benefits, right, that were brought forward into the 1st half which leads to an underlying margin performance of around 40, 45 basis points. Is that a reasonable assumption for the back half of the year or would you point out to anything else like increasing marketing spend in the second half? Thank you.
Okay. I'll take the first 2 Fernando and I'll ask Cathy to handle the 3rd. If you look at our overall U. S. Spirits performance, I am confident in the improving quality of underlying performance we're seeing in the except vodka.
Indeed, if you take super premium vodka route, our business is growing 5.5% in the U. S. This is also a half where we're lapping bigger innovation from last year. So the underlying business without innovation is better. To your question, we have upgraded marketing, but the nature of brand marketing and investment in the spirits businesses, it takes time.
So what do we look at? We look at the underlying brand equity measures. And, when we look at the brand health on brands like Captain Morgan, Johnny Walker, Crown Royal, Snernoff, they are all improving. And that's the leading indicator for us of of future performance. You've seen the uptake in the U.
S. We grew marketing 8% on U. S. Spirits. We intend to keep the update as we go into the second half.
But brands of this size in this market has highly competitive take time. And but we are encouraged by the quality of the marketing programs and the impact it's having on equity. And indeed, our share performance in every category other than vodka. And on vodka, we are we've got strong plans of up weight and actually more innovative plans on the brands as we, as we go forward into H2 and beyond. Your second question on pricing, you're right.
Pricing is still somewhat muted. Is that about the same level as we we got last year, a little over a point. We are seeing encouraging signs where we're recovering pricing more strongly in parts of Latin America and in Asia. I do expect over time, particularly as we deploy our net revenue management capabilities, We now have made significant investments in net revenue management across the company. We have a system called Polaris which is built all the data and analytics.
We've recruited people in. And, over time, I would expect pricing and net revenue management to be a more, positively there for us. But you can see we're still benefiting from good price and mix in these numbers. Mix continues to be a positive, but pricing will improve over time. And right now, we see it broadly in line with with probably, Kathy.
And, on March, and I guess I would start that question, but yes, reiterating what our midterm guidance has been on margin. So a 175 basis points for the 3 year period ended fiscal 2019, we delivered 37 basis points of organic margin improvement in the last fiscal year, right? So you know, just the straight math is we have 138 basis points left to deliver in the 2 fiscal years, fiscal 2018 2019. If that was even at the about 70 basis points, but we've been very clear to say it's going to be back weighted towards fiscal 2019, what we have remaining to deliver. You're correct.
We specifically, pointed to the fact that we had accelerated some employee benefits savings. And that meant we had 35 basis points of additional benefit in margin in the half. In addition to that, I would say, versus where we were at the start of the year, we have phased a little bit more A and P into the back half. So hopefully that gives you good color on half over half.
That's great. Thank you.
Your next question comes from the line of Oliver Nikoli.
Hi, good morning Ivan and Cathy. Just two questions on China and the U S. First of all, on China, you had 80% growth in white spirits. That's very impressive. Was it helped at all by potentially some early shipments ahead Chinese New Year?
And what is the underlying growth of that? I have about you to control off Shui Jing Fang in 2012. And you had a few difficult years after that. Are you back to the 2012 volume figure now? The second question is on the U.
S. Regarding Title 1, you appeared a bit more confident about this brand at the end of last year. Do you see the decline being broad based, between the on trade and the off trade or is there any specific state where you are losing share, but it would be great if you could give us, a bit more ideas on why you're confident that this point can recover. Thanks a lot.
Sure. On China, Olivia, I'd say we are underlying performance of ranging, as you've seen, these numbers is really strong. If you look at what we've done since the anti extravagance move went into China and the business went through a big correction. We have really strengthened this business the route to market, our sales and distribution system is much stronger. Our brand marketing on Schwadingfang has significantly improved and we've upgraded marketing.
Innovation is much stronger. We've got a strong leadership team and this team is really is really performing and executing very well. When I go to China, I meet our distributors in the in the Baidu business every year. And I have to say the confidence we have from the distribution system against the brand continues to be very strong. We are.
The scale of the business is is at its peak. So it's it's, it's ahead of where it was, in the pre anti extravagance period. And we're very confident about the growth in the high end of the Baidu market, which is where we participate. Brand health is really strong. It continues to build.
We've got geographic expansion opportunities. And what this number shows, 80, 75% on trading fund growth in the half is underlying performance, in the business. Now I don't expect our business to keep growing at that rate, but I certainly expect it to keep growing at strong double digit for a while. Because the categories that's healthy and the brand is resonating. And with China moving to more of a consumption economy, this business has much greater quality because it's private consumption that's driving the bulk of the growth.
On Capital 1, I would say the brand is still strong in the on trade. It has a disproportionate compared to our portfolio. It does well in the on trade And, it indeed has strong bartender, a love or endorsement still. The business is tough largely because of what's happening in super premium vodka, highly competitive, as you know, We have had the price premiums in certain states were too high, and Deirdre and the team have been correcting that, so that we get within $6.7 bucks, $6.7 of the leading, the other big competitor that's growing rapidly. As we go into the second half, we have a couple of things that it's early days, but I'd say we're encouraged by we've got, the Catalya soda campaign.
You know, there's a huge growth in vodka soda in America, particularly with women. A lot of that consumption is moving away from wine. And, we've got a targeted campaign against it. We also have, our platform of 100 percent non GMO, which is playing to trend on on KetelONE. And as we go into the second half, we have some exciting plans, which I won't discuss right now, but we believe will make a a difference to improving the trajectory on Kettle 1 going into H2 and into fiscal 2019.
Perfect. Thank you very much, Ivan. Thank
you. Your next question comes from the line of Edward Windy.
Hi, good morning, everyone. Two questions, please. First is on your transaction hedging for fiscal 2019. Kathy, are you able to give any commentary on how much hedging you have there as you think about currency for next year? And then the second question is coming back to the U.
S. I think back in July, you had expected overall performance in U. S. Spirits to continue to improve. And I think that sentence has been omitted partly because the industry itself has slowed a little bit and partly given ongoing challenges in vodka, as you think about the opportunity for Casa Migos, which is going to be included as organic in fiscal 2019, do you think you're going to be in a position to see sequential improvement in fiscal 2019 relative to 2018.
So I'll go ahead and I'll start with the question that you asked about FX. As you know, our overall kind of hedging policy as we take a, I'll call it, stair step approach. And so we're always more hedged on a near term basis than a longer term basis. And so as I look out to fiscal 2019 for, transaction benefits, which is where our hedging program flows through, Right now, I would say it's immaterial on the basis of where current spot rates are at.
And Ed, on the U. S. Performance and Casanigos and stickler, I'd say firstly, tequila is really hot. And the big gainers in ultra premium tequila right now in the U. S.
Is Don Julio and Casamigos. You can see our overall tequila business has grown 43%, excluding Casamigos, because it's not inorganic. But if you look at underlying Casamigos performance, I'm really delighted, with the momentum we're seeing. In Nielsen, it was up 70% in this half, in Natka, it's almost double And it's got a lot of runway because it still has, it's growing distribution, both in the on and off trade and entering into more outlets and wallets. So as we go into fiscal 2019, I do expect to grow the Casamigos will be accretive and add to the performance of Diageo.
But again, I think stepping back, what I would just point to again is the portfolio in total in the in the U. S. 3rd business, other than vodka, we are growing share in every category. And I'd say I expect that to be also sustained, as we go forward. So customers will add to to our growth going into fiscal 'nineteen.
Thanks, Simon. Just a follow-up on tequila. You've obviously seen the industry news that the Cardio Petroleum, a teaming up there, which certainly gives Petron a slightly bigger footprint in the U. S. Or stronger footprint in the U.
S. Do you think that's going to have any impact on your prospects, both Don Julio and Casamigos? And coming back to Casamigos, are you able to quantify what type of an impact think it might have on your North America growth from an organic perspective?
On the second one, no, I won't quantify it, obviously, we're not we wouldn't disclose what our plans are there. But on your first point, the you just have to look at the share performance of Don Julio and Casamigos. We're growing way ahead of the category and we see a lot of room for us to both in category growth and in now staking share of Ultra Premium tequila. So, I couldn't be happier to have these 2 brands in our portfolio. And all the marketing in them is very strong.
It's resonating more and more. Don Julio is really has very exciting performance coming through. Very strong in the on trade. The brand call is going up a lot and, we're growing many times faster than the category with both those brands. And I'd expect that to continue.
Your next question comes from the line of Travis Sterling.
Good morning, Ivan and Cathy. Two questions from my side, please. The first one, Ivan, you, alluded in the quarter that not everything is sparring in all cylinders despite a good first half. You talked about U. S.
Vodka. Maybe just a bit more color of where else do you think there's room for improvement? And the second question for Kathy, Kathy, you commented that the expect the corporate tax rate for this year to fall by the percentage point as a result of the U. S. Tax changes, but you'll have an extra 6 months of benefit in F 'nineteen.
So should we expect to further decline the corporate tax rate in F 2019?
Sure. I'll take the first. If you look at, firstly, areas where we've been hit Trevor by, I'd say, external factors that have made business stuff, point to East Africa, where the election uncertainty in the first half hurt our performance in Kenya hurt all consumer businesses and pleased to say that situation is stabilizing. I expect to do better there. If you look to India on the top line, because of the highway ban and the group to market changes, you see our top line growth in India was only 2 percent.
I certainly expect to do better there. If you look in Latin America, we were hit in certain markets by the hurricanes and scotch whisky Colombia had a big shift in its tax regime, which hurt, super, developed scotch Buchanan, in particular, So those are the things I would expect us to do, to do better in. On the category front, vodka is challenge in the U. S. And again, we've got the plan from Saurak.
This will take time, so I'm not calling when it will reverse. But, stepping back from it all, I'll just say what I want you to take away is what you're seeing in the last few periods over the last couple of years is the resilience and the predictability of the business has gone up. We have the capacity to take the volatility, to take the shocks in certain markets and ensure we deliver consistent resilience performance And that to me is the real whole market, the arjula we want to create.
And then with respect to tax, I'd start saying, we're not going to guide tax rate for fiscal 2019 as we stand here today. As you know, tax is pretty complex, including, you know, what's going to be our expected mix of profit kind of all across the globe. I would point to those other elements of the tax changes in the U. S. That will come into effect for Diageo into 19 relative to fiscal 2018.
So when we look at that all in the round, we just don't think it's gonna be material. Incremental in our tax rate next year. But again, we have to take everything into consideration, and we'll guide to that as we close the fiscal year out.
Trevor, the only there's one other point I alluded to earlier in terms of improvement opportunities, and it is net revenue management. If I look at how we're executing on brand marketing, on innovation, on route to consumer, we made significant improvements with we're in the middle of the journey on net revenue management. And in the next couple of years, I expect Diageo to get much better at it. So that's an area of opportunity too.
Thank you. Your next question comes from the line of Simon Hale.
Good morning, everybody, and thanks for taking the question. Just a couple of quick ones, please. Firstly, Kathy, you mentioned in your presentation, and we've talked about it a bit on the call, the marketing phasing in a shifting as a little bit into too. I wonder if you could give a bit more detail on perhaps where that is in any particular geographies we should be thinking about seeing less have a margin benefit in the second half as a result of that. And then secondly, just on back to India, Ivan, you talked in your prepared remarks about your confidence in hitting those mid to high teen margin targets.
What sort of time frame should we be thinking about now for you getting to that given the seen in that market over the last 18 months.
Okay. So I'll start out and talking about marketing phasing. So I just want to be clear. That's relative to kind of restarted at the beginning of the year, right? And we thought about what did we think our phasing was going to be.
And relative to the beginning of the year, we think phasing on A and P is a little bit, moved to the second half, right? You then have to think about year over year what's going to go on and we did start to up weight marketing in the second half of last year and in places led to the U. S. So as I look at that overall, I would say, yes, we've been thinking about margin and how it, looked half over half, We have a little phasing of A and P, but we did start upgrading A and P in the second half of last year. Now clearly, we're going to continue to be focused on the areas of focus that we've talked about from the beginning of the year.
And that's really the U. S. And scotch. But I'd also say as you look through our results, you can see that we up weight at marketing in in every one of our regions, just to a different degree.
On India, Simon, I'd say if you look at the shape of the P and L that's come through in this period, It really reflects our strategy in action. The top line was subdued because of the external shocks. Of route to market changes and the highway bands still playing through. But if you go through the P and L, we expanded gross margins 200 basis points Again, very tight productivity on cost of goods, but also better pricing that the team is now delivering. They're getting better pricing in more states.
That's coming through. If you look at overhead It's down 10% in the period. And then look at our marketing investment, it's up 20%. And overall operating margins have expanded to 100 just over 100 basis points in this period. So, to me, this really reflects the execution of our strategy in action.
We will see steady improvement in margins in India. I'd say back to our guidance, it's medium term. We're seeing in the next 3 to 5 years, we'll get to that level. But, you can see the actions we're taking are are delivering. The mix will improve as we put our focus on prestige and above.
And that will have margins as well.
Thank you. Your next question comes from the line of James Edward.
I thought, Kathy, your comment in the your prepared remarks that you're confident in our improving capability to invest in effective marketing active was very interesting the way you put it. A lot of your rivals and other categories and consumer staples are clearly struggling to do this. I suppose what I want to know is what's different either about the spirits category or about Diageo that enables you to find ways to deploy increase marketing effectively?
And so specifically, we've made a very big investment and something we call a marketing catalyst tool, which gives us better data and information to actually measure the effectiveness of our programs. And so just to give a couple of examples of how we're utilizing that. So this was the 1st year we were able to use this tool and our planning process, right? So that helped us in looking at, where did we think we could more effectively deploy our spend kind of on a regional basis and on a brand basis. And then if I dive into the details to try and bring this to life, or I'll use India as an example, So India and using this tool, looked specifically at McDowell's and their marketing spend across different states in India, and they were able to reallocate to get improved effectiveness of that spend.
On another brand, Royal Challenger, they looked at that and said, Hey, I have better information now on the effectiveness of different media channels, and they change their mix across media channels. And so those are the kinds of things on the ground that people are doing. And this is a tool that sits on every one of our marketeers' desktops now, right? So in addition to using it for planning, right, they're using it on an ongoing base to further optimize their spend during the course of the year. So we have much better data and information, and we're able to measure more accurately what our programs are doing for us to over time, basically, improve the returns of those programs.
So it's really at the Agios specific commentary in terms of a muscle that we're strongly building across the company.
So by the sound of what you're saying, this this hopefully is good for several years.
Yes. And one of the things I would point to when I talk earlier about kind of margin and that we expect stronger results in fiscal 2019 are actually programs like this and some of the things that Ivan was speaking to in terms of the muscle we're building around net revenue management and that we're investing in those areas, but I think they will deliver more us in fiscal 2019.
Your next question comes from the line of Lawrence White.
Hi, Ivan and Cathy. Thanks very much for the questions. 3 technical ones from me, if that's okay. On the FX, your expecting about 60,000,000 of profit benefit this year. And I understand that's largely from translation, and you don't want to give any guidance for next year.
If you did no currency hedging, what would that GBP 60,000,000 become? 2nd question is on the employee benefit cost savings that you've managed to get in the first half and we're expecting them in the second half. Can you let us know what they what those are? Is that sort of pensions or bonuses or company cards, whatever it is. And finally, you get about 45 percent of your profits from the U.
S. And the tax rate there has dropped from 35 to 'twenty one. Why is it only a 1% tax benefit given the math you would expect slightly higher number than that?
That's no problem. So let's start with the first question. I just want to make a clarification. So at the current FX rates that we've provided, we're expecting at the OP level, a detriment, a negative impact of GBP 16,000,000. And overall, when I look at for the year kind of the transaction positive impact, it's roughly similar in size on the positive side.
So obviously translation on being a much bigger impact. That's offsetting that. And then your, I'm sorry, your, second question, that's really broad in terms of overall, what we were doing on employee benefits and being able to accelerate that into half. So I wouldn't, I wouldn't point to, any particular item there. And then I guess the last question with respect to the U S, you know, we have a quite big, U.
S. Business. And and so like most people with a quite big U S. Business, we weren't paying, headline tax rates. Overall to start with.
And so when looking at everything that's kind of included in the change in regulation,
that it has on us.
Your next question comes from the line of Brett to pass.
Thank you. In the prepared remarks, you said that you expected more margin expansion to come through in 2019 as there's less cost to orb. It I mean, that would imply that this program or target is singular and not ongoing. So the is there a reason to believe that there isn't an opportunity post F9 team. And and maybe you can speak about your experience in some regions where you've had a longer cost control journey like in Europe.
Thanks.
Okay. And so really all I meant in that remark is that there's certain costs associated with the productivity program in saving and what we're doing in certain years. And we don't, we don't x item or call that an exceptional. We're just kind of carrying it in our overall costs. And so I'll just point to a couple of the things that we've talked about that we expect to have bigger dividends and benefits for us in fiscal 2019, the catalyst tool that helps us with marketing effectiveness similar, tools that we're building in order to help us with net revenue management.
There's a cost to implementing those things, right? And once they're implemented, then we're seeing more of the benefits in later years. And so it isn't at all to suggest that, what we're really looking to do in the company is build a culture of improved efficiency and a effectiveness as an expectation and a muscle across the company. I think we're really seeing that as we're continuing in the program. I think that's coming through in our results, you know, the cost savings on COGS being able to offset inflation and still be a little bit of gross margin improvement and especially what you're seeing come through on overhead reduction and are all other expenses really delivering strongly to give us that 81 basis points of organic improvements in the half.
But if you take
it up a level, I'd say, you know, success in productivity is that we're just looking to get more efficient and more effective every day of the week, every month of the year, every year, year in and year out and that's what you should expect from us. And I think when Ivan mentioned, Hey, we're always going for more. You know, this is a place where we're absolutely always going from
Next question? Thank you. Your next question comes from the line of Sanjeet Ojula.
Hi, a couple of questions. For me, please. Firstly, my understanding from the President's Corvid
Dutra was that there's an ex there was
an expectation to accelerate the performance in U. S. First this year versus 3.4 last year. Is that still still the message? And and if so, it implies you need to do over 4% in the second half.
So what what are the moving parts to get there? And secondly, you know, scorch has been weak. Yes. It's an, one off negative there, how confident that you you can accelerate the performance there in the second half? And then just a technical one on CapEx, your CapEx guidance is now quite a bit lower than at the start of the year.
What's, what are the moving parts there?
Sure. On the U. S. As I talked about Sanjay, the business other than vodka has good momentum, right? If you take super premium vodka route, we grew 5.5%.
Vodka is incredibly competitive. And only getting more. And so I'm not we're not going to call the pace of how we get the Botco improvement to come through. All I can say is that we are confident that we can deliver U. S.
Performance in line with our guidance and expectations overall for the company. And we will not lay out exactly when we will get to industry growth rates. What I would also say is that our confidence in the quality of marketing across the portfolio and on the vodka brands improves every month. And that's why you see the update and the investment in marketing that we're doing. On scotch, I am confident And I think the bellwether brand to look at its costumes, Johnny Walker.
It is the most global and it's the biggest brand and it really leads category. And as you see in the period, we grew Johnny Walker at 7%. And then we had a number of specific issues, Columbia, the Buchanan and all bar, we had, certain markets in Asia, like, Korea where Windsor is still tough. Single Walls will do better. And again, we had a series of specific market situations, which depressed our single malt performance.
So we're feeling good about Scott particularly feeling good about Johnny Walker. Buchanan is in route health. Molts has good potential to grow faster. And we're also investing more behind scotch. I mean, the U.
S. And scotch are our 2 priorities for up weighted investment.
And then with regard to CapEx, we did bring overall our expectation for full year spending down. It's really just the phasing of some of the bigger projects. So we have a number of projects underway in Africa, including a very large new brewery that we're in the process of beginning to build in Kenya. And so those projects are just phasing a little bit behind what our original expectation is similarly projects that we have in like America, including, barrel warehouses. And I think you're aware of this environmental brewery and barrel facility that we're building outside of Baltimore.
Just the phasing of funding on those projects are coming in a little bit slowly than we had expected when we gave that guidance at the beginning of the year.
Thank you. Your next question comes from the line of Mitch Collett.
Just staying with North America, I appreciate you don't want to, reiterate that growth will accelerate this year. But I suppose I'm just thinking a month and a half ago, Diedrich thought it would. I wondered what what had changed is Is the market getting slightly slower? And do you have any perspective on why that might be given that you're taking share in most of your categories ex vodka then there was a comment in the release about, net sales growing ahead of depletions. Can you perhaps quantify the difference between the two?
In the US. And then finally in India, I gather there are some additional states taking control of distribution. Could you comment on whether you expect that to impact your performance in India going forward or not? Thanks.
Yes. Mitch, on the U. S, the market growth rates, we medium term, long term confidence that Spirit still have a good trajectory of growth and trading up. And the most recent data, you see NAPCO's strong Nielsen a little as we went into December, we don't see anything systemic in that because the fundamentals and as we look at demographics and pace, changes that are happening in the U. S, we remain confident on the health of the U.
S. Business. Sector industry. It's grown certain years above 4%. It can drop a little below 4%.
But underlying strong. And the health of our business. And I would just point to a couple of brands where we were struggling a few years ago, which are now in much better shape. You look at Captain Morgan and you look at Bailey's which a few years ago were in tough shape, they are now in much stronger shape, with doing the same on vodka, it will take time because it's intensely competitive. And so, I expect us to improve the performance but nothing has fundamentally changed other than the intense competition in that category.
But overall, we're doing the right things. We're playing a sustained consistent game across our portfolio And the portfolio is more resilient. And as I mentioned earlier, we also have less innovation in these numbers than we had in the prior year, which I view as a good thing. Because it's really supporting the resilience of the portfolio.
And then you had asked the comment on just shipments relative to depletions, you know, we look to be transparent about this. We really manage it more over the course of the year, but it was immaterial in the half. And then you also asked about India and the impact just from changes in route to market. That impacted us in the half. India is a place where, there were a number of things that took place in the last year, and in this year.
That are causing kind of more variability because we've obviously lapped now demonetization, in India, we've seen now GFP be put in place. And then obviously in the half, we were still impacted by the Supreme Court ruling which had certain outlets located close to highways, ultimately closed down. So Those route to market changes will still have an impact, especially as we go into the next quarter. But I would say we're continuing to lap demonetization and we getting farther away from the highway band as well as the 2nd Supreme Court ruling, which made a clarification with regard to large urban centers. And so we'd expect some of those impacts to continue to improve.
Thank you. Our next question comes from the line of Matthew Webb.
Hi, yes. Two questions, please. Firstly, you mentioned that you had a higher rate of growth in maturing stock in the period to meet future. Demand for scotch and North American whiskey. I was wondering if you're willing to share your long term volume growth planning assumptions on those categories.
I think that's something you've done in the past on Scott, at least. I'm particularly interested in whether those assumptions have changed at Tori are based on the success you're having with we join Walker and primary scotch on the positive side or any concerns perhaps around the term possible effect of Brexit on the negative side. And then the second question, I was just wondering if you could go into any more detail on the pricing pressures you're facing in South Africa. Is that just in vodka or is that Scotch as well and where is that increased competition coming from? Thank you.
So I'll start just in talking about maturing stock. And so I think it's important when you look at our free cash flow Overall, we continue to make good gains in working capital. We did have a bigger investment in maturing stock in the half, But we ultimately weigh down liquid based on long term terms. And I've talked about this a little bit before in the past But as we look at scotch, which is a very large category for Diageo, we're really laying down liquid with an expectation of call it 2% to 3% sort of volume growth over the long term. And so we're very consistent in how we manage that.
We don't kind of move production around a lot, you know, half to half or year to year on the basis of kind of small changes that we might see. And we would take a similar approach as we think about North American whiskey. But I think it's important when you look at our cash flow bridge that underneath that, We continue to make really good gains in working capital, putting maturing liquids to the side. We made gains on all the lines of of working capital. And we're very focused on average working capital management and our average working capital improved 67 basis points average working capital as a percent of net sales.
So that's the place where I feel like the mussels are quite strong across the business and just producing really solid cash flow period to period.
On South Africa, the pricing pressure is really coming from beer and a bit from local spirits like Brandy, but beer has become intensely competitive in South Africa and that that does have an impact across, into the Spirit sector as well, but I'd say that's the primary shift in the competitive dynamics.
Got it. And is that primarily affecting vodka, or does that affect your scotch significantly?
Yes, more or Botkers. Man of 2018 is what most impacted by it.
Got it. Very clear. Thanks very much.
Thank you. The next question comes from the line of Alicia Faree.
Hi, good morning. Just a few questions. Quickly on Vodka, you mentioned vodka growth ex the U. S. Market is 4%.
I wonder if you can tell us a little bit about which maybe brands and or markets are driving that. And, can you remind us how much of your vodka sales are in the U. S? Secondly, on India, you noted that prestige above is growing close to 6%, which implies the, popular segment, maybe down around 4%. Clearly, some of this is the highway ban, some your own deemphasizing of the low end.
My question is how should we think about growth in that popular segment over the medium term? And over what time frame can we expect, growth to improve? And has GST changed your view of how quickly you can shift Indian consumers to the prestige and above segments?
Sure. On vodka, 40% of our Basca Businesses outside North America. So 60% is North America. If outside of North America, we grew 4% in Buska Both KetelONE and Saraka doing really nicely double digit growth. And we've also seen improvement on runoff in Asia and Latin America in the emerging markets.
So that, that would give you a flavor of what, where the growth is in vodka. On India, Our strategy is very clearly to grow in Prestige and above. The consumer dynamic is very strongly in favor of trading up. This is the area where the audio has been weaker historically. In the company we acquired.
And I'm pleased with the actions we're taking here. Brand like McDowell, number 1, Royal Challenge antiquity and signature have been renovated. We're spending more on marketing, our A and P went up 20% And that's it's our very deliberate strategy to grow prestige and above, which is about 2 thirds of our business, but over time, I expect it to become a bigger proportion. On the popular brands, in the non core states, as you know, we franchise them out. But in some key states, we have retained them where we believe the portfolio will give us an advantage in retail and trade execution they did decline more and they were impacted by the factors you referred to, the external factors.
I expect them to do a bit better, but they're not as strategic priority for us. So we would want to stabilize them and then really go grow prestige and above much faster. The GST impact, actually, I give the team a lot of credit for the actions we have taken to mitigate GST. And that has the cost actions working with our supply base the productivity numbers that have come through. So we are in a better position to mitigate GST than we thought 6 months ago And that in part is what's driving the strong margin improvement in the Indian business.
Your next question comes from the line of Andrea Pristashi.
Yes. Good morning, Ivan and Cathy. I have two questions, please. Firstly, on emerging markets, which have been gradually, but very steadily recovering, it still seems a mixed bag though. So if you leave aside China and India, which you've we've talked about a lot, what areas or main countries, emerging markets you feel, let's say, good about over the medium term next couple of years?
And conversely, where are you concerned or what do you think will still be potential a bit of a drag. The second question on the UK where you had a very strong half year. I think you mentioned the question you said there was there was help a little bit by a technical factor, some benefit as you're lapping some inventory reduction last year. So how do you think about the business in the UK on an under from an underlying point of view? What would you sort of expect for the full year?
Sure, Andrea. On the emerging markets, I'd say the nature of emerging markets is we will always have ups and downs. And we will always have certain challenges like the Columbia tax change or the Kenya elections. However, if you look On an underlying basis, if I just walk across the regions, in Latin America, we have good momentum and we're growing shares. So markets like Mexico, Brazil has come back strongly.
I don't expect that to continue. It's a bit of a bounce back effect, which you're seeing in these numbers. So that will temper into the second half. But all markets like Argentina, Peru, Chile are solid and Latin America grew 7%. Within Europe, I mean, Russia grew 13%.
Key grew 10%. These are clearly businesses that are performing better and are solid. And in Asia, Southeast Asia, that collection of countries grew 10% just outside of China and India. We still have places we need to improve, but I would I'd say as we look at the second half as well, we do have challenges in certain markets. And that's why what we've guided to at all we've talked about is we expect our full year performance to be in line with what we're doing right now.
Everything is not going to accelerate and we do have certain things where we're lapping like in Brazil where it will be where the growth rate will slow down as we go into the second half.
And I'm happy to take the second question was about U. K. And GB, which grew 7% in the past. So last year, we specifically gained inventory efficiencies and sort of the channel to big retailers, right. And so that's the technical factor that we were lapping that kind of helped encourage a bit stronger result in the half.
So I'd say as you look to the full year, we're absolutely expecting GB is going to continue to grow, just not quite at this rate, which was a bit favored by that technical factor.
Thank you. The next question comes from the line of Niko Ron Stackelberg.
Hi, there. Yes. I just wanted to follow-up on the shipments question really. Could you please tell us the percent for depletions versus your net sales, please?
No, we don't specifically disclose that. If you're relating to back to GB, I mean
Sorry, the U. S. Sorry.
It was immaterial.
Right. But you did mention it in your presentation.
We just mentioned it to be transparent. It was immaterial. And again, I'll just back up. We kind of manage it over a full year. And occasionally based on the timing that we have, innovations, it can and a half, be more material, you know, especially if we have an innovation that's coming in at large and it's towards the end of the half.
So we specifically state it so that people know that there wasn't something materially going on with shipments and depletion.
Okay. And could you, could you, going back to one of the initial questions on the call, you mentioned brand equity being strong. For a number of the key categories in the U. S. Could you just update us on scotch and how the brand equity scoring there on the back of the A and P?
Johnny Walker is building very nicely. I mean, if you look at the campaigns and investments, we're running on Johnnie Walker the Keep Walking America campaign has resonated really well. We now have a credentials campaign that's come in, which again is doing well. Johnny Walker Blue Label, the super deluxe of Johnny Walker is in double digit growth. So Buchanan is a strong brand in the U.
S. And we're investing strongly behind it also and the learnings we're getting out of Latin America. So, on Scotch, I'm feeling good on Johnny Walker, Buchanan and Walt, we need to do better, but we're really well positioned for that. Because the trend towards, expensive malt whisky is very strong, and we we we have a terrific, collection of distilleries that we can perform better at. So feeling good about Scotch.
Okay. And I just have one more question, please. As I look for FY 2018, and looking at consensus, I believe we're at around $3,800,000,000 for the operating profit pre exceptionals. How do you feel going into, the next, the next half thinking that, whether or not that's something you can beat? Or is that something that might be a bit of a stretch?
Thanks.
Yes. So we wouldn't comment because the to that level of detail with respect to consensus. I'd say overall, how we feel about the second half is that we're delivering, very consistently across the business. I've talked a lot to kind of margin and margin phasing in the first half in the second half, certainly we feel like we're going to deliver a strong year.
Thank you. Your next question comes from the line of Vincent Babin.
Yes. Hello. I have a small question about Scotch in China. You said that you have a strong double digit in mainland China, but is more than offset by decline in Taiwan. Can you give me some colors on that white Taiwan?
What is going on over there? Sure. In Taiwan, there are some commercial issues in the scotch category, which hit us in the early part of the half. I mean, there's concerns about that in the trade around counterfeit across the category, which has slowed demand a bit It is coming back through, we see improvement in November December. So I believe that's a temporary issue.
The scotch market remains important, profitable and strong in Taiwan. And on Mainland China, our scotch whisky business has done tremendously well. We've grown 3 points of market share. The high end of scotch is getting a lot of interest, both super deluxe Johnny Walker Blue and our high end malts. And we've been running, whisky academies.
We're building whiskey boutiques. It will be a long game, but we are confident that there's a high end scotch whisky business to be built in China and we're seeing the consumer interest really build over the last year. And so we're investing behind that and seeing very good growth in mainland China. Okay. Thank you very much.
Okay. The last question
Last question today comes from the line of Jamie Norman.
Yes, very good morning and thanks for taking the last question. My questions are about gin. You've had a very good first half, led by Tancery. Just wondered whether, you know, to what extent you're seeing new adopters by way of markets, is that in Europe? And what sort of legs do you think the category has further afield?
And the second question is that one of the few, flights in the argument in Europe was Spain, your old stronghold down again because of JNB, just wanted the extent to which that could be offset by, your gin book value taking off there. Thank you.
Sure. Jamie, the gin category, as you know, is very hot in Europe. It's hot in GB. It's actually strong in Spain. And it's spreading.
And performance in Europe has been a really terrific, strong double digit growth, both on Tancery and on Gordons. And we see a lot of that growth coming by way of consumers coming into the early evening, gin catech occasion where they might have been drinking wine and beer and other categories. So I think we're on to a very exciting sustained trend here. And the work we're doing on Tancre and Gordon's is very positive. In terms of trends around the rest of the world, there's a little bit of pickup we're seeing in the high end of June in pockets around the world.
You're seeing it in parts of Latin America. A little bit of pickup in the U. S, not as strong yet. But I expect the trend will spread. And I do think we will get super premium and ultra premium gin doing well, in other parts of the world.
That's why tanker a10 for us in our reserve portfolio is getting a lot of focus in terms of building it in the on trade, both Tancray and Tancray 10. Our business in Iberia actually on gin, we were up 10%. So as you point out, our challenge in Iberia was the scotch category. It stopped JNB being a huge leader. That's where we took the hit.
But, the gin business is strong in Iberia.
Thank you,
sir. We have no further questions.
Great. Well, thanks everyone for calling in. Appreciate your interest in the company and look forward to seeing some of you as Kathy and I go on the road show and, otherwise look forward to connecting again in July. Thank you very much.
Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you all for participating, and you may now disconnect.