Good day. Welcome to the Diageo interim results investor Q&A call. Today's conference is being recorded. Your call today will be hosted by Diageo CEO, Ivan, and CFO, Kathy. To ask a question today, please press star one. We are now ready to start the call. Ivan, please go ahead.
Thank you. Hi, everyone. Kathy and I are in London, and welcome to this morning's post-results investor call. I'm pleased to share with you another set of good, consistent first half results with broad-based organic growth across regions and categories. As you know, we're lapping last year's very strong first half, and we have faced volatility in specific markets. I'm therefore pleased that despite this, our performance is in line with our medium-term guidance of 4%-6% organic sales growth, demonstrating our increased resilience as a business. Our margin expansion continues even after three strong years, despite increased raw inflation in this half, and this is a result of our continued focus on premiumization and driving everyday efficiencies.
I'm particularly pleased with the strong growth in the U.S., our largest market, as well as good growth in Africa and Asia Pacific, which more than offset challenges in India, Latin America and Caribbean and travel retail. Across categories, tequila, Canadian whisky, and Chinese white spirits all grew double digits, balancing softness in our Scotch performance. We remain confident in the underlying performance of our Scotch portfolio, as the challenges were quite localized to a few specific markets. We made significant improvements in our A&P effectiveness through leveraging our proprietary tools, Catalyst, and our strengthened consumer insight led marketing campaigns. This gives us the confidence to continue to grow A&P ahead of sales. We're seeing tangible results from this upweight in investment.
Innovation remains a key growth driver for us as we recruit new consumers and occasions to our brands, as evidenced by the sustained growth of variants such as Crown Royal Regal Apple. In the context of the market-specific challenges we saw in H1 and continue to face, I now expect full-year organic net sales growth to be towards the lower end of our medium-term guidance of 4%-6%. I continue to expect organic operating profit growth to be roughly one point ahead of net sales for the full year. We won't be immune from any significant changes to global trade policy. On the evolving coronavirus situation in China, we continue to monitor this very closely. Our primary concern is the welfare of our employees and ensuring they have all the available information and support as the situation evolves. There will be an impact on performance.
However, it's too early to be able to quantify this at this point in time. We remain focused on sustainably building our business through the disciplined execution of strategy to deliver consistent and resilient performance. With that, we'll open up the line for your questions to Kathy and myself. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Simon Hales with Citi.
Thank you. Morning, Ivan. Morning, Kathy. I have three questions, please. Ivan, I wonder if I could just start where you finished and your expectations for the year. I just wonder what drivers of what's now in the guidance
Simon, you're coming in and out, so.
Simon, you have a bad connection, and we can't hear you clearly.
Okay. I might need to call back in then because you're cutting in and out on me. I'll rejoin the queue.
Thank you.
Thank you.
Thank you. Our next question comes from Sanjeet Aujla with Credit Suisse.
Morning, Ivan, Kathy. I think Simon was trying to ask this, but I'll go ahead and continue. Just on the guidance, the lowering of the guidance, can you just walk through the moving parts of that? On the one hand, you do have easier comparatives in the second half of the year across many parts of your business. However, the guidance implies no acceleration in the second half. It'd be great to walk us through the key assumptions there, and also, would you have lowered the guidance if it wasn't for the coronavirus outbreak in the past couple of weeks?
Sure. I'm happy to take that. I would start with, you'll recall that when we discussed our full year results from last fiscal, one of the key themes we had in terms of the strong results that we delivered, was it was a quite muted year in terms of volatility, and that was part of what caused our outperformance. If you look at what we're seeing in the first half, I would say we're seeing more volatility across the world, and that's impacting our results, and we're not expecting that situation to necessarily improve in the second half. If you look at the places in the world where results were a little softer, I would point to India and the fact that in India, this is largely as a result of just the softening economy in India.
I'd say there's a lot of uncertainty associated with when and how that's going to improve. As we look to the second half, we would be quite cautious about the economic situation in India. We pointed out specifically within our PEBAC market, Peru and Chile as being places that have been impacted by disruptive social unrest.
Again, that's a situation that continues to be difficult. Mexico is also a place where we've seen just the overall economic environment weaken a bit, and obviously we have a big Scotch business in Mexico, and that has impacted our Scotch business overall. Really, I would say it's just the fact that last fiscal year, we had really muted volatility across the globe, and that helped us in terms of the overall at the high end of our mid-term guidance, what we had reduced last fiscal. We just expect that the world's going to continue to be a bit more volatile. I want to come back to your mentioning about the coronavirus, because as you would have heard in Ivan's commentary, that's a situation that we just can't predict as we sit here at this point in time.
It's something that we'll just have to continue to watch closely.
Got it. Okay. Perhaps just a quick follow-up on the growth in China you've seen in the first half of the year. Is that really distribution-led growth? Are you going into more provinces still, or what's really important?
It's a combination of greater penetration, so rate of sale improving. If you look at the two big businesses, Shui Jing Fang and primarily high-end Scotch whisky, both are very healthy, and both are growing double digits. We're investing behind these brands. We're investing in innovation and premium innovation in Shui Jing Fang. We're seeing momentum in the existing distribution, and we are gradually expanding distribution. It's very high-quality growth. The brands and the businesses are in really good shape and growing market share in both cases.
Got it. I appreciate it's early days, but any qualitative signs of how Chinese New Year has gone?
Very hard to tell. Obviously, it came early, so you can see in our first half results some of the sell-in into Chinese New Year. It is too early to call what the actual consumption has been over the last week. We will obviously be tracking that in the weeks to come.
Got it. Thank you.
Our next question comes from Laurence Whyatt with Barclays.
Hi, Ivan and Kathy. Thanks very much for the questions. In the U.S., you mentioned that your Scotch business benefited from some trade loading ahead of the tariff impact. You said that Scotch is up 4%, but Johnnie Walker's down 5%, so that's the single malts that are being presumably loaded. Could you quantify how much of that up four was trade loading, and how much is sort of an underlying growth? Secondly, on the two vodka brands, Smirnoff and Cîroc, sales velocity has worsened a bit there. Could you give us some detail of what's happening in those brands, and if there's anything you can do to try and improve that? Finally, your margins have improved despite declines in gross margin and an increase in marketing.
How can we be confident that the cost savings you're putting through aren't going to be affecting the business continuity? Thanks very much.
Okay. I'll take the first two. Kathy will address the last. On the U.S. Scotch, it's 30 basis points of pre-buying of blended Scotch. That's 30 basis points of the real rate of the U.S. business. It's small. On vodka and Cîroc, the vodka category, as you can see in the U.S., is still challenging. If you take the three brands on Smirnoff, we are stabilizing. The equity is building. The business is stabilizing. The quality of performance is better. We are easing off promotional intensity on some SKUs through our NRM initiative, et cetera. Smirnoff is a big brand, and it's going to take time to do that consistently and stabilize. On Cîroc, it's still challenged. On Cîroc, we've always said this is going to be a long game to stabilize.
We are taking some actions to reduce some of the less sustainable flavor innovations and trying to get the base more healthy. I expect Cîroc to remain challenged in the U.S. It'll take us over many years to get that brand stabilized in the U.S. It's better outside, clearly. Then Ketel One, core Ketel One, the base brand is healthy and growing, and we are just tapping incredible success of Botanicals from last year. I remain positive on the health of Ketel One. Vodka overall, clearly challenged category, but gradually, health of our brands getting better.
I'd say, look, as it just relates to continuing to drive productivity overall, I think we've shown quite good execution in terms of our productivity being driven by everyday efficiency, how we take that and look to invest in key areas of growth in the company to make sure that what we're driving is sustainable quality growth, right. Kind of a virtuous circle, and I think we've been quite sustained in terms of how we do that at Diageo.
As I look at our first half results, I'd say I continue to feel really good about what we're driving through everyday efficiency, and you see that really come through our overall overhead lines, getting us a little over 100 basis points of positive improvement there, which really helped us to offset both the gross margin softness that you saw and continuing to invest ahead in marketing, right, which we've been doing very consistently, and I expect we'll continue to do as we look forward in the second half. I'd say I feel very good about that. As I look to the second half, I have to tell you, as we look at gross margin, I'm expecting right now to get a bit more productivity gains in the second half that can help a little bit of that softness that we're seeing in gross margins.
Overall, probably a little less than what we saw in overhead in the first half. Again, I think we've got a strong engine of driving productivity on an everyday efficiency, sustainable basis, and we continue to feel great about that.
Thank you. Just to come back on the Scotch from Ivan. You mentioned 30 basis points on the blended category, I'd understood that the tariffs were on a single malt. Are you seeing no trade loading on single malt, then?
Yeah.
Well, first thing, I don't like the word trade loading, please. We are talking about handling the situation of we were anticipating tariffs later last year, and we didn't know what categories would get impacted or not. At that stage, we had a plan to bring in more blended Scotch because there was a risk, which thankfully did not emerge. 30 basis points is on total North America. That's the framing of blended Scotch that was pre-bought, because till we knew what the tariff situation was.
That's very clear. Thank you very much.
Just again, hit star one to ask a question. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. Our next question comes from Simon Hales from Citi.
Thank you. I'm going to try again. Can you hear me, Kathy and Ivan?
We can, yes. Much better. Thanks for calling back in, Simon.
Excellent. Thanks for taking the call. Good question. I have three, please. Firstly, just on A&P spend trends. A&P slightly ahead of sales in the first half, but not much, and I think really driven by the trends you are seeing in Asia. How do we think about the pickup in A&P spend for the second half? Is it going to be broad-based across more of the regions, perhaps a bit more skewed into H2 than H1? Secondly, just carrying on from some of the comments on your U.S. performance from the previous questions. I wonder, Ivan, maybe you could expand a little bit more on the performance of Crown Royal in the half, very strong. I wonder if you could give us a breakdown as to how the base brand has performed versus peach and apple. Also, Smirnoff Seltzer sales is clearly doing well.
Where do you think you're gaining share from in the heart itself? To what degree are you seeing any cannibalization of your spirits brands, do you think, at all? Just the final one on cash flow, Kathy, obviously you had a GBP 300 million higher cash tax one-offs in the first half. You've talked about those one-offs continuing through the full year. Should we think about incremental, further cash outflows in relation to tax to maybe the French government or in relation to the group financing exemption situation in the U.K.? How do we think about that for the full year?
Okay. I'll go ahead and take the first question.
Yeah.
I'll take the second one. I'll bring the third one back to me.
Go ahead.
If you look at A&P, I'd say we feel good about the first half and investing ahead overall in A&P. That consumed about 25 basis points of margin for us. I'd say if you looked back at what we've done in the last couple of years, that's been reasonably consistent. As I look to the second half, the one place I would call out is in the U.S., so in U.S. spirits over the last few years, we've increased what I'll call the A&P kind of investment rate, by rough order of magnitude, 200 basis points or so in U.S. spirits. We held that kind of in the half. You can see that in the results. I would expect that that's one of the places that, in all likelihood, would be further up-weighted in the second half.
If we talk about some of the other areas where we would've seen an increase in A&P spend, we've talked about the fact that we're increasing spend behind Scotch more generally. You would've seen a bit of an up-weight in Europe. Asia, you'd have to pick apart a little bit. I would say outside of the India business in Asia, and especially in areas of strong growth that we would've seen Scotch in China, Chinese white spirits, those would all be places that we're up-weighting spend. We always, I would say, make adjustments here in real-time. One of the things that Ivan pointed to is we have terrific tools now. If you went back two or three years ago, we were not as good in terms of how agile we could be to move spend to where we're kind of really seeing the returns.
Our Catalyst tools, which we continue to invest in and sit on every marketer's tabletop, really helps us to be much more agile to put the spend behind where we really see the returns coming from. That's some of the places where you'd see upweight. Yes, I think as we look to the second half, again, we would be looking to continue to invest ahead. Then I'll turn to you.
On Crown Royal, Simon, if I start with brand health, it is at an all-time high, really strong. We've now had seven consecutive halves of growth on the brand. If you look at the breakdown of what's happening, actually Regal Apple's now year six of launch, and it's continuing to grow double digits. If you look at Nielsen, that is up 13%. Vanilla is up 10%. The base business is broadly stable, the base brand, but it's healthy. The main thing Crown Royal is doing, which we're very encouraged by, is it's bringing new consumers into whiskey and into Crown Royal. Our marketing is working well. We've up-weighted our marketing spend against the brand in the last few years significantly. We feel good about Crown and the momentum continues to be healthy.
Clearly, flavors have accelerated the growth, but the flavors are bringing new consumers and new occasions. They're not cannibalizing the business. On seltzer, I mean, we are a relatively small player in seltzer. We are riding the trend with Smirnoff right now. You can see from the numbers, it's strong, double-digit growth on our F&B business in the U.S. My main focus is ensuring we have a healthy beer business in the U.S., and so while the trends continue, we will benefit, but it's not a strategic area of focus for us. We see plenty of good growth in spirits and beer, and I view this more as riding the trend for now, because it could be more volatile, and we don't want to get overly dependent on it. In terms of impact of seltzers on spirits, so far, our analysis and what is said, it's mostly impacting beer.
Inevitably, there'll be some impact on spirits, but as you can see in our performance, we don't see this as having a significant impact yet. We're tracking it. Ultimately, the simplicity of a premium spirits, whether it's whiskey or tequila or vodka on the rocks with a splash of soda, the with soda trend is very strong. When you look at tequila growing at 33%, our tequila business, 35% in the U.S., I mean, there's huge trends in favor of premium spirits that are at work still in the U.S. market, and that is underpinning some of our strong performance there.
Then I'll just get back to your question, which was with respect to the higher tax payments that we would've seen in the half, and that impact and the fact that, in our guidance, we basically said we're expecting to see that flow through to the year. As you mentioned, we've had, over the last several years, a number of different one-off tax payments. In different tax jurisdictions, this always works differently. Some of them you actually pay ahead, some of them you pay after the fact, and then the cash flow is a year-over-year change number. I would say as we look at those one-off impacts for the half, they will just flow through for the full year.
When we get to the end of the fiscal, we'll be able to talk in more specificity about what we have seen in terms of one-offs for the year. If, what, if anything, we would anticipate as we go into fiscal 2021. That's really what's going on.
Okay. That's very clear. Thank you all.
Our next question comes from Richard Withagen, Kepler .
Yeah, thanks. Good morning. I have two questions, please. First of all, specifically on the U.S. market and your marketing spend. Can you discuss how your marketing effectiveness tools increase the return on your marketing investments and maybe give one or two examples? Related to that, should we expect further increases in marketing spending ahead of net sales growth in the next few years? The second question is, going back to productivity savings. Kathy, you mentioned, you expect more productivity in the second half of the year. With full-year results, last year, you mentioned you expect GBP 100 million-GBP 150 million in savings or in productivity in fiscal 2020. Is that range still valid, or do you expect to perform outside of that range? Thanks.
I'll take the first. On U.S. marketing spend, if you look at the last three years, I mean, we have increased our marketing spend in U.S. spirits by over 250 basis points. Significant upweight in investment. Our share of voice has gone up significantly. I'm really pleased with the quality of marketing and innovation coming out of the team in North America. It is some of the best we see across Diageo. With our tools, our ability to direct spending against effective programs and to adjust quickly is much stronger than it was a few years ago. As I talked about earlier, we have a significant upweight in Crown Royal, because we can see the returns there have been really strong, and it's working and delivering on our performance.
Even on a brand like Baileys, we're now down to the level of sophistication where we can pick days in the year and geographies, and through our digital and social spending, can drive a purchase at a very granular level. I mean, this is clearly, we'll continue. We're learning and getting better all the time. The rigor now behind which we look at every dollar spent and where it goes and how we measure returns is much stronger, and the U.S. is very capable, and effective at this. We've upweighted on a number of brands. We're constantly adjusting because not everything works, we redirect spend, going forward. We don't have a requirement or a target that we will keep increasing spend reinvestment levels in the U.S. It really is bottom up. If we see the opportunities for good returns, we will spend more.
At the same time, we're driving a lot of efficiencies, and we're getting significant gain from how we buy media and the efficiencies of our spend, which has also been contributing even more to the effective spend that we have in the market.
As it relates to productivity, you had referenced that at our last investor day, we talked about the fact that we saw about GBP 100 million-GBP 150 million annually of kind of incremental opportunities in productivity as we look forward, and that that was supportive of our overall guidance of being able to grow operating profit about a point ahead of net sales. I would say as you look at this year and what we're currently expecting, we're continuing to look at that and say we believe we can grow operating profit about a point ahead of net sales for the full year. We had previously stated we thought the first half on operating profit growth delivery and margins specifically, was going to be a little lighter than the second half.
I'd say we feel, again, very good about our execution of everyday efficiency and seeing those benefits continue to come through the business. They clearly support it, margin expansion in the first half. My commentary about the second half is, we always have some phasing going on in productivity and, obviously in this, as I referenced earlier, in the second half, we are expecting to get a bit more in terms of what I'll call the cost productivity related savings, that we're looking for in terms of just helping to optimize some of that profit that we're seeing in gross margin.
All right. That's clear. Thanks a lot.
Our next question comes from Nico von Stackelberg with Liberum.
Hi, good morning, everyone. I just wanted to ask, because I know there are parts of the guidance that are certainly quite volatile and hard to forecast, but one part that you should have a pretty good feel for is the impact of tariffs, particularly on Scotch going to the U.S. I was just wondering, can you please quantify this for us? Does the current operating profit guidance assume that the current tariff situation remains stable? Thanks.
Yes. To answer your second part first, we've assumed the current tariff situation remains stable. We're not assuming it's getting worse or getting better in the current guidance. The impact, we're really early in the game is what I would say. We have announced to the trade, we are passing on the impact of tariffs on single malt and on Baileys. That's been already communicated to the trade in the U.S. Seeing the impact of that on actual sell-out is something we will watch very closely in the next few months. Obviously, we've got ranges and scenarios of impacts. What I would say, all that is factored into our current guidance, that the current level of tariffs stay.
Great. Thank you. As a follow-up, can I ask about Crown Royal? It grew 11% in North America. It looks like depletions were up 8% in the period, so it's really shipping ahead. I also note that if I look at NABCA through November, the last 12 months, those volumes are only growing around 2.5%. You're getting strong price mix. Does Crown still have legs in terms of price mix? Obviously, there's a broader premiumization trend, but certainly the brand is being helped quite a lot by price mix. How sustainable is that?
Yeah, actually, although on Crown our depletions are broadly in line, the Nielsen market is growing at about 9%. On many of our brands, we do really well. Nielsen market captures, whatever, 45% of the market. Our performance in the independent channels and the on-premise, which is not captured in Nielsen market, is very strong on many brands. So you see some of that momentum come through on Crown. We do see good opportunity for price and mix on Crown, and one of the things we're doing is really looking at the higher marks like Crown Royal XR, where we want to put a lot more focus, a bit like we do with Johnnie Walker Blue.
We're looking at building the top end of the Crown Royal franchise as we go forward, putting more focus behind that for gifting and brand building, and that should improve mix as well over time.
Okay, great. If I can just ask one more question. I've always wondered why Diageo gets something of a pass in terms of the fair market value of your maturing inventories. Could you maybe for the full year, provide some sort of color around the fair market value of your maturing stocks? It seems like it'd be useful for the valuation equation. Thanks.
I would say we don't look to attempt to disclose what we would say the fair market value is. We would say our assets are appropriately valued in our balance sheet, and we, like every whiskey maker across the world, have a good amount of stock. All I would say is we build stock very consistently across all of our whiskey brands, and we're happy with the stock levels that we have.
Yeah. I guess, it's the cost on your books, and there's the fair market value. I also note maturing stocks are excluded from working capital in your management compensation. You have a slight incentive to build stocks, and we never really get any color on the growth or the IRRs of your maturing stocks. More disclosure would be useful, I think, but, yeah, just thought for consideration. Thanks.
Look, I would just comment that we try to create our compensation metrics in a way that the people across the organization can have an impact. As it relates to growing maturing stock. We just look to do that consistently to support our brands, and that is managed by a, I'll call it, relatively few people across the company, but it's specifically an area that we don't move things up and down, but we actually just look to grow our stocks consistent with the categories that they support. I think we have done a great job in terms of actually everyday efficiency and delivering strong cash flow, and that's been supported by the metrics we have and our compensation programs that drive the things that people can actually impact. Thank you for the question.
Yep. Thanks. Appreciate it.
Our next question comes from Trevor Stirling with Bernstein.
Hi. Hi Ivan, Kathy, two questions from my side. The first one returns the theme of malts and more the performance moment. We saw 12% growth last year, 17% first half. It really seems like the malts are kicking into gear after a few years of less than ideal performance. What do you put that down to, Ivan? I suppose secondly, do we have the stocks to support that? Secondly, on the coronavirus, I appreciate it's entirely way too early to talk about the impact. Can you talk a little bit about the impact of SARS back in 2003?
Yeah, sure, Trevor. On malts, we've put a, I'd say, a far more disciplined and focused strategy behind malts. One of the things Diageo is blessed with is these wonderful 28 distilleries that produce the most beautiful single malts, we're kind of spoiled for choice. I'd say one of the things that's happened is we put real discipline and focus behind the variants and the geographies, we've got better growth drivers. A brand like The Singleton now is doing really well. Cardhu in Spain is doing extremely well. In the U.S., Lagavulin. The supply side is now better aligned to support sustainable growth over the long term. I put it down to a clearer strategy and better execution against it.
Look, I think if you attempted to go back to SARS, you have to understand, our SJF business wasn't on at that point in time, and our Scotch business was tiny, so there's just no relative comparator there for us.
Okay. Could I just ask one follow-up, Ivan? You mentioned that you're passing through the price increase in single malts. Are your competitors following as far as you can tell?
I don't know the answer to that. I wouldn't even speculate. I don't know. Again, what I said is that we've communicated to the trade, to the off-take team, which is why I mentioned it on the call, because it's been already communicated.
Very good. Thank you, Ivan, Kathy.
Thank you.
Our next question comes from Alicia Forry with Investec.
Hi. Good morning, Ivan and Kathy. Three questions, please, from me. First, volume momentum has deteriorated. I appreciate India has a significant impact on this, but I'm curious about what's happening with your volumes ex-India, and are you seeing any new trends emerge? Secondly, the organic operating margin fell 160 basis points in India in H1 after several years of improvement there as you've been improving the product portfolio. It seems to be COGS driven. How should we think about this near term? Have margins in India reached a sort of plateau? Finally, on global travel retail, how should we think about the timing of recovery in this channel? We will lap Hong Kong later in the year, and presumably the Middle East issues will work themselves out at some point. Just curious on the timing of recovery there. Thank you.
Maybe I'll take the first, Kathy, you do India margin, and I can come back to global travel.
Great.
On volumes, you're right, India was flat, and it's almost a third of Diageo's volume, so it does have an impact. If you take India, travel, retail, and our weak spots in Latin America, like Peru and Chile, where we had volume declines. Outside of that, our volume would have grown, I think close to 1.5%. There's solid volume growth coming in most places, including the U.S., which you can see. There's no shift in trend here. We are seeing consumers are trading up to more to spirits and more to premium spirits, and we gain from that. Our reserve brands were up 11%. That's 20% of the business. All those conditions remain strong.
On India, I would say, overall, we were pleased in terms of how much of the gross margin softness the India business was able to offset, especially in light of the difficult economic conditions that they're facing. The other thing that they're seeing that's just causing more pressure in terms of their margins is a fair amount of inflation in specific input costs, and one I would point to that has a big impact on them is base neutral spirits. Inflation in base neutral spirits for them has been pretty significant.
I'd say when I look overall at their results and how much they've gained in margin over the past years, while they have some specific challenges this year, as we look over the long term, their expectations are unchanged for India. Over the longer term, which is looking to have them have a top-line growth, more high single digits, low double digits, and getting to a margin level of mid to high teens. I think they've made terrific progress in the last two-year period, in just making good gains against those long-term goals.
On global travel, we expect it to remain challenging, certainly through the second half. It's a little hard to predict the pace of recovery and when it comes. Our focus is really on execution and market share in the airports in particular. On that standpoint, I feel good about how the business is doing. The sell-out execution and our market share performance in the measured global travel retail business, we're doing well. That's what we can control at Diageo. We're assuming things will stay tough in the second half too.
Our next question comes from Edward Mundy with Jefferies.
Hi, Morning, Ivan. Morning, Kathy. Two questions, please. The first on the buyback, where you're GBP 1.1 billion through your GBP 1.25 billion. How should we think about the phasing of your GBP 4.5 billion over three years? Should we think about equal phasing, or is there some gap once you finish your GBP 1.25 billion to perhaps accelerate the phasing of that buyback? The second question is around slide 34 and 35 in your presentation. I appreciate that you don't run your business from 1st of July to 31st December. There are differences on shipment phasing from one peak to the next. On page 34 of the slide deck, your shipments have obviously accelerated from 5% to 6.1%. On 35, your depletions have certainly decelerated a little bit across most of the portfolio.
Is that really around the on-trade that's not captured in the [reports], or is there something else that we're not thinking about at this stage? The third question is around gin. I think you proposed that your gin portfolio grew 7% in the first half and vodka grew 13%. I was wondering whether you could clarify what the growth of Gordon's Core and Gordon's Pink would have been in the first half.
Okay. I'll start with the first question.
Yeah.
As you would have seen, and you referenced, we had completed GBP 1.1 billion of the three-year program, which is I said up to GBP 4.5 billion of share buybacks and capital returns in the first half. The way that we always talk about this is we're looking to manage capital returns to shareholders against the backdrop of our leverage ratio, right? If we had looked back in the last couple of years, we had a leverage ratio that was kind of below the range we're targeting. We target a leverage ratio of 2.5x- 3x , and that's an adjusted net debt to EBITDA number. When we finished the first half, we were at 2.8 x, right? Kind of roughly in the middle-ish of that range.
As we look to both the second half and into the next couple of years, we'll be looking to manage shareholder returns against that backdrop of the leverage ratio. Right now, my overall commentary was, we feel pretty good about execution against our GBP 4.5 billion, right? We made a very good down payment in the first half against that three-year program.
On the U.S. depletions performance, our overall U.S. spirits depletions have grown in line with shipments in value terms, so across this period in the first half. You raised the right point. I think when you look at our growth in the non-measured channels of the independent markets and the on-premise, our growth rates have been higher. We're performing very strongly in many of those states, which are non-chain states. We put a lot of focus now in the U.S., and in fact, we put a whole new organization behind it to really building our on-premise presence in the U.S. strongly. I'm pleased to see that focus will continue to give us good benefits in the years to come. On gin, Gordon's grew as well. Gordon's base was up about 3%, and Pink, I think, was up about 1%.
In spite of having what was the decade's greatest spirits launch in the U.K. market, we had a phenomenal success last year, but it's still growing. Belief on gin is the category still has good runway ahead of it. Yes, G.B. and Spain took off the earliest, so those growth rates will slow down, but the rest of Europe and then other markets like South Africa, Brazil, except Australia, we're seeing very good growth.
Okay, thank you. Just a follow-up. The Captain Morgan Europe growth has really accelerated. Is there anything particular behind that relative to last year?
Well, I'd just say we're excited about the brand. We put focus behind it. It is one of the brands we're backing. It has, as you point out, yeah, very pleased with the performance in Europe. The growth drivers and execution against it are working well.
Very good. Thank you.
Our next question comes from Marion Boucheron with MainFirst.
Hi, good morning, everyone. Two questions from me, please. One, on the costs, how should we look at them going forward, and the impact it's got on the second half? The second question would be on the price mix that was very strong in the first half. Would you be able to give us some granularity of price, what's been more driven by external management than what was mixed? Then third, I don't know if you have any colors to give on the innovation pipeline in the upcoming quarters.
I'll start with just how we're thinking about costs in the second half. I would mention that we obviously had softness in gross margin in the first half, and part of that is coming from just the level of inflation that we're seeing relative to our ability to offset it through productivity. I had mentioned in India specifically, kind of base neutral spirits is one of the areas where we've seen higher inflation. I've mentioned in the past, and would certainly reiterate today, that agave is another place that we've continued to see inflation and relatively high prices. The third thing I would mention is, generally, glass cost inflation has been another area of impact for us. As I look to the second half, I would say we're expecting to continue to see a lot of the similar inflationary impacts.
With regard to overall gross margin, I'd say we're also expecting to see a bit more positive productivity phasing against COGS to, I would say, help to improve what we're seeing in terms of gross margin. It's always a bit of a game against what's happening in inflation, how much can we offset it in productivity, and then obviously, what are we seeing in price mix. Do you want to take the second question, obviously, which is price mix?
Price mix. Price mix, as you can see, was strong here. We had price of about a point and a half, and the rest is mix. Mix was also helped, unfortunately, by India being weak. Some of the country, the geographic mix was strong there as well. Our NRM capabilities and focus and discipline are really operating in all our markets. As you know, we are coming from behind, and we've still got a lot of room to improve, but with every period, we're getting better and better. In many markets, we are seeing and taking more price mix in a sustained way. That's our goal. The underlying trends of in-market mix also remain very positive, with premiumization being strong. As I said earlier, our reserve business, which is 20% of the business, grew 11%.
That is very strong mix operating in our favor. On innovation, our focus on innovation is sustainability and consistency. As we look at the second half, we have a good pipeline. We are also, as we go into this calendar year, we are celebrating the 200th anniversary of Johnnie Walker, and you can expect us to do some exciting things on that brand as well in the course of the second half and first half of next year. Innovation pipelines are now built with a long-term focus to ensure we have consistency, and our innovation capability continues to get better, and the focus on sustainability is also much stronger in how we develop and execute innovation.
All right. Thank you.
The next question comes from Celine Pannuti with JP Morgan.
Yes, good morning. Most of my questions have been answered. I just wanted to follow up on Europe, if you could talk about the overall growth environment that you see in your categories, and then also in the U.K., whether you've seen any slowdown through the quarter.
I'd say overall Europe, as you saw, the business grew 3%. If you take a 12-month last rolling 12-month view, we are growing share. We have taken some price increases in certain markets and channels, that has impacted some of the short-term performance. We do have variability across Europe. Some of our markets, like Germany, Benelux, et cetera, are growing double digits. Italy was strong. Spain is more challenged. Ireland is tough, flattish. The U.K. market, I feel good about. Our beer business here has been strong. Guinness was up 6% in the U.K., one in 10 pints in London is now a Guinness. This is our highest share ever on Guinness. We've got ups and downs, overall, the performance consistency continues, the environment is good, I would say. We see spirits well positioned, premiumization trends strong.
Even small categories like tequila, expensive tequila, are growing very fast. Our single malts are doing much better. The Europe environment, I'd say, is solid.
Thank you.
Our next question comes from Andrea Pistacchi with Deutsche Bank.
Good morning. I have three questions, please. The first one on the U.S., where scanner data, Nielsen in particular, have proved to be not a very good predictor of your performance in the U.S., as you were also highlighting.
That said, the Nielsen data in the past couple of months show would suggest a bit of a slowdown at industry level through November, December. Have you seen a slowdown at all in the business? The second question, please, on your guidance and on China. I appreciate, of course, the uncertainty on the situation in China. Can you give us an idea of what situation in China you are factoring into your guidance on how many months of difficult situation in China you are building into the guidance? The third question, please, back to the U.S. on Captain Morgan, which in the past two half-year appearances has been positive. A clearly different performance compared to the past two or three years. Is this a reflection of the work you've been doing on the brand? Are you confident that you've turned the corner on Captain Morgan?
I'll take the first and the third. Kathy will talk about the guidance. On the U.S. trends, again, I don't look at any particular month of Nielsen or Nielsen and read too much into it. When we look at the MAT trends over time, I don't see a shift in U.S. The U.S. spirits market is probably growing 5% - 5.5% if you throw in all channels and everything. We think that's fairly consistent. We don't see much in terms of the last couple of months of Nielsen on that count. On Captain Morgan, I'd say it's improving, but we've still got a lot of work to do. I'm far from declaring victory on Captain Morgan. The actions we're taking have stabilized the brand, is how I would characterize it.
We're going back with a lot of focus against the serve, the drinks, the MLS, the football sponsorship, which is just kicking in terms of its full impact. The marketing is much more focused. We're getting smarter about some of the innovation that was on Captain Morgan, which we're focusing. Some of it was not working, so we're easing that out of the base. That says what to do. This is a big brand in a challenged category. The rum category is still very sluggish in the U.S. I'm happy where it is compared to a couple of years ago, but still, lots of work to do and too early to declare victory.
Specifically, as it relates to guidance, we were clear that it's just too early to call the impact of the coronavirus. That's just a situation that we'll have to watch closely.
Your guidance assumes that, of course, China will deteriorate in the second half, versus H1 , yes?
It is too early to be able to call exactly what the impact is going to be. As it relates to our guidance, we can't yet appropriately factor in something that we can't yet really call. It's just early days and too early to be able to call how it's going to impact. I would back up a little bit to say, China's about 4% of our business. It's obviously growing strongly right now. It's just too early days to be able to understand the impact.
Perfect. No, thank you.
Our next question comes from Sanjeet Aujla with Credit Suisse.
Yeah. Hi. I just had a couple of quick follow-ups, please. Firstly, just on mainstream spirits, we haven't heard you speak so much about mainstream spirits recently. Is it still a strategic focus for yourselves, particularly in light of the emerging market volatility that you're seeing? I noticed primary Scotch was flat in the half. Love to get your assessment on that part of the business. Just on the Guinness turnaround in the U.S., can you try and pinpoint what's really driving that improvement?
On mainstream spirits, it's still a focus and priority. You will see the performance was more subdued in the half, and primary whiskeys was impacted also by weak sales in the U.K. We also had weakness on Smirnoff in South Africa. It's a big brand. Those were some of the factors that drove it. If you look at Nigeria and Kenya, we're seeing really good growth, and we're excited about the potential for mainstream spirits to build. Obviously, India is such a big market for us. Primary Scotch is still a big priority. Black & White grew 5%. It's really on trend in many markets. Absolutely very much a focus for us to keep that business growing and at good margins.
On Guinness in the U.S., it's playing to the trends of better beer, more iconic beer, and the experiential side of what we've put in Baltimore is working really well, the new brewery experience we've created there. It's a bit of all of it. Bottled beer is doing well. The on-trade draft market in the U.S. is still challenged. It's difficult, we are doing really well on packaging at home. The marketing's working better, and as Ivan talked about earlier, our focus in the beer company is really making sure we build a quality, sustainable growth business, particularly around Guinness. There's more exciting things to come around the brand in the next 12 months in the U.S. market as well.
Okay. Thank you.
Our next question comes from Nico von Stackelberg with Liberum.
Hi there. Pardon for the collective sigh around the city on this, but there was no question around Brexit, and I was just wondering, could you just give us a quick update on Brexit, even in the event of a no free trade agreement outcome? It says in the statement that there'll be no direct financial impact to Diageo. I guess it won't be material. Just can you walk me through why is that the case? Secondly, there will be no change to the medium-term guidance in the event of a no FTA outcome, right? Thanks.
Yes. Very simply, ability to trade within the EU doesn't change much. Under WTO conditions, we will trade tariff free. If there's some complications in borders and shipping product, we know how to handle that. We ship to 180 countries, so it's immaterial, the impact within the EU. The U.K. government, we had a number of EU FTA agreements in many countries, where Scotch benefited, and the U.K. government has got the vast majority of that value covered or grandfathered or continued in the post-Brexit scenario. We don't have risk on that front. Finally, on the upside, and it's not immediate, clearly, as the U.K. develops new free trade agreements with emerging countries around the world, we see good opportunities, actually, for Scotch and gin to benefit. That's more medium-term than immediate.
Our supply chain is a very indigenous supply chain, that we are not relying on shipping a lot of products from Europe into the UK. We don't have the complexity of many other manufactured products to deal with. Those are the main reasons why we say we can take Brexit within our current guidance, however Brexit plays out. I'm going to call it to a close there. Thanks very much, everyone, for your joining us on the call and for your interest in the company, and look forward to meeting with many of you as Kathy and I go on the road show in the next few days. Thanks a lot.
Thanks, everyone.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.