Diageo PLC (DEO) 2018 Q4 法說會逐字稿

Good day, and welcome to the Diageo Preliminary Results Investor Q&A Call. Your call today will be hosted by Diageo's CEO, Ivan Menezes; and CFO, Kathy Mikells. (Operator Instructions) We're now ready to start the call. Mr. Menezes, please go ahead.

Thank you. Good morning, everyone, and welcome to the call. I'm here with Kathy. I'm going to make a few opening remarks, and then we'll open up the line for Q&A.

I'm pleased with the overall performance we've delivered this year. We demonstrated our ability to deliver consistent performance across all our key metrics, and in line with our goal to deliver consistent mid-single-digit top line growth to invest in the business and deliver margin expansion. It was another year of strong free cash flow at GBP 2.5 billion with operating cash conversion above 100%, and average working capital improved by 220 basis points. This year, we returned more than GBP 3 billion to our shareholders through dividends and buybacks. Our CSR grew 23% and is up 17% over the last 3 years, firmly in the top quartile relative to our peer group.

So as I look at our performance, many areas I'm pleased with the progress we've made. Let me just mention a few. Johnnie Walker saw broad-based growth and grew 5%. India stabilized in the second half as we moved past regulatory headwinds, and we continued to make really good progress on margins despite the impact of GST. In U.S. first, all key brands continued to gain category share except vodka. And on vodka, we saw improvement both on Ketel One and Cîroc, but clearly we have more to do. Guinness grew 5% with strong growth in Europe and Africa. And China continued to be a growth driver with Shui Jing Fang delivering really strong growth. And scotch in Mainland China also grew double digit.

But of course, there's lot of areas we need to continue to improve performance, and I just wanted to mention a few. Africa had a weaker performance this year as a result of volatility in Kenya in the first half with the elections and continued weakness in Ethiopia and Cameroon. While Johnnie Walker did well in scotch, I'd say the rest of our scotch portfolio had weakness. Malt was not strong enough and some of our local stars, Buchanan's and Old Parr, underperformed and we're determined to get these better as we go into next year. We continue to focus on improving our performance in U.S. spirits. And finally, we continue to build our capability on net revenue management which, as you know, is a key value driver for the business in the future.

More broadly, I'm proud of the work we are doing to promote a positive role for alcohol in society. We launched new stretching targets for 2025. And this year, we mobilized all Diageo employees as responsible drinking ambassadors through our new Drink Positive engagement program.

I want to thank our employees for their contribution to this consistent, sustainable performance. We have a highly engaged workforce, very proud to be at Diageo. Our annual Values Survey showed a 1% improvement in employee engagement and a 2% improvement in the number of employees to see that productivity is having a positive impact on the business.

So as we look forward, we continue to focus on the consistent execution of our strategy. We're moving much faster to spot new trends and opportunities, and we're sustaining this blend of delivering growth and efficiency.

But as you know, we operate across 180 countries. And as we saw this year, there's always going to be some markets where the macro conditions are challenging, though we continue to expect to deliver our medium-term guidance of mid-single-digit organic net sales growth.

In F '19, we expect to see negative market mix headwinds with faster growth in some markets with a lower margin. We will prioritize continued investment in the business and expect to deliver the 175 basis points of organic margin expansion for the 3 years ending June 2019.

And with that, why don't I open it up for questions?

(Operator Instructions) And our first question comes from Sanjeet Aujla in Crédit Suisse.

Couple of questions from me, please, really, on the U.S. In the webcast, Ivan, you said you're well set up for fiscal '19. Do you think the portfolio is now in a shape where it's better able to grow in line with the market? And tied to that, can you talk a little bit about the performance of the portfolio brands in the U.S. and the plans for those brands going forward? And finally, just on margins for the next year, you talked about 60 basis points. Given the negative market mix dynamics, how would you break that down between gross margin and other items in the P&Ls?

Sanjeet, I'll take the first one and turn it over to Kathy for the second. On the U.S., if you look at -- as I mentioned, if you look in every category other than vodka, we're growing share, and we've stepped up our investment behind the brands. You've seen our reinvestment rate go up, and we will continue to do that going into fiscal '19. The second thing I would say is our innovation is now focused on bigger and more sustainable things. And I'm really encouraged with the shift that's happened there, most recently the Ketel One Botanicals, which have just gone in, and the Cîroc VS brandy, which has just gone in, are good examples of where we expect sustainable growth out of innovation. As we go into fiscal '19, our investment levels are strong behind the brands. We've -- I feel really good. I was in the U.S. a couple of weeks back and going through all the brands' plans and details with Deirdre and the team, feeling really good about the quality of execution and growth. Having said all of that, as you know, this is a huge business and brands in our business move slowly. So I expect next year to do better than this year. But as I've said before, we are not predicting when we will grow at or ahead of the market. But the momentum is positive and the portfolio is performing broadly much better. And then we've got some terrific momentum in Don Julio and Casamigos will come into our performance. And whiskey continues to be good, both scotch and American whiskey. Kathy?

And then if you just (inaudible) that we had this year, right, so delivering overall 78 basis points. So we had some headwinds coming through in gross margin this year, which you would have seen. So that ate into about 23 basis points. A&P grew ahead of sales at 7%, right, so that reinvested 27 basis points from a margin perspective. And then, you saw us get strong margin results out of other expenses, including 110 basis point improvements in overhead. So if I look at and pick apart what's underneath that, in part in gross margin, we would have had the hurricanes that came through the Virgin Islands this past year, right? So that would have caused some one-off expense, which we wouldn't repeat. But we also had negative mix, and I would mention transportation costs in the U.S. (inaudible) escalated. Next year, we're expecting some increase in agave cost, but some of the cost we incurred this year would not repeat. So overall, I would expect gross margin to give us a bit better result than we saw this year. I'd expect us to continue to invest behind our brands as we feel are appropriate. You heard us talk about continued upweighting in both scotch and in the U.S. And I specifically point out in the U.S. that, that has held back our margins in the U.S. and I would expect to see that again next fiscal year. We continue to push hard on our overhead costs, and I'd expect that we'll continue to see some benefit from that next year. So hopefully, that gives you a little bit more color.

That's very helpful. And just on the portfolio brands in the U.S., I mean, can you talk a little bit about the performance there?

Yes, it's not much changed. They're still declining low to mid-single digits. So the trend hasn't shifted much. And I'm not going to comment on speculation about what we're doing on the portfolio brands. All you can know is we rigorously and continuously look at the Diageo portfolio.

Next question is from Fernando Ferreira in Bank of America Merrill Lynch.

I have 2 questions, please, one on the results and one more strategic. On the numbers, if we go back to the U.S., can you comment on the growth we're seeing specifically in Cîroc, Ketel One and the RTD portfolio in the second half? Were there any shipment phase in there to highlight from the new launches? And then, second question, Ivan, this is clearly the best set of numbers since fiscal '12, right, and the strategy has been very well executed to achieve that level of performance. So the question is really, what's the next challenge for you and the Executive Committee? Is it really maintaining the consistency on growth and shareholder return? Or is it something else?

Sure. I'll take the second first. I mean, our focus is really on creating a sustainable, consistent compounder. I mean, Diageo has, I'd say, this perfect blend of attractive top line growth, mid-single digit, and the ability to drive margin expansion from incredibly high returns and margins we have today. But we're focused in smartly investing in the business to sustain both of them, and I expect us to continue down that track. I mean, clearly, we will look at opportunities to pick up brands which make sense. But we're positioned well with our geographic footprint and our product portfolio to really benefit. I mean, one of the things I'd point to that we are -- to me that's most important to us as a management team, is that we don't get complacent and that we're really focused on all the shifts that are happening out there, consumer shifts, technology shifts, channel shifts, regulatory shifts, and making sure we're quicker in anticipating those threats and opportunities and move faster. And so -- and as I mentioned in my opening comments, yes, these are strong results, but there's so many parts of the business we know we can and should do better. And so that would be strategically how we look at the future. We have a lot of work focused on the disruptive forces that may come at the industry and how we are well prepared to deal, indeed capitalize on them.

And then I think you asked about kind of shipment phasing and specifically around our lack of portfolio on RTDs. Overall, for our business in North America, shipments roughly equal depletions. So I would say nothing material there going on. With regard to Cîroc and Ketel, I would point to the trends improving there in North America, right? So Cîroc down 4% last year, it was down 15%; and Ketel down 2% last year, it was down 6%. Now the one thing I'd point out in terms of overall phasing is just the -- the launch of Botanicals in the U.S. So Ketel One Botanicals was launched late in the fourth quarter. I mean, we have, I'd say, very high hopes for it. It's 73 calories and is served with soda, infused with fine fruits; and Botanicals, a little bit lower ABV. And it really is playing into the lighter occasion and people's focus on natural ingredients like non-GMO, gluten-free. So we think it may hit a real sweet spot with consumers and we're really hopeful about it. But just in terms of late innovations that hit late in the fourth quarter for us. And then with respect to RTDs, if you look at our Diageo kind of beer business, which is where our Smirnoff RTDs sit within North America, that grew really well. And we have both Smirnoff Smash and Smirnoff Seltzer that's doing really well in the U.S. So we're feeling good about -- really good about that. But overall, I just go back to from a shipments and depletions perspective across the overall business, relatively equal.

Next question from Simon Hales in Citi.

Two or 3 questions, please. Can I just go back to the discussion around margin development looking forward, particularly around marketing investments? Clearly, we've seen some upweighting over the last sort of couple of years. You've committed again to continue to upweight going forward. But we've seen a significant step-up already now in the U.S., I think, in the Indian portfolio. Should we still be expecting the same sort of step-up on marketing investments next year as we saw in terms of the 27 bps in 2018? And then also around that on margins, Kathy, in your presentation, you talked quite a bit about net revenue management. Have we actually started to see any benefits to the bottom line from the net revenue management initiatives yet? Or have some of the top line benefits that you've seen or savings you've seen being offset by the costs of putting the program into place across the globe? And then just one final one specifically on the U.S. and Buchanan's. Clearly, some sort of destocking perhaps in the second half of the year on that brand versus a good depletion rate. Is that now through? And should we start to see shipments matching depletions as we move into fiscal '19?

So I'll start out just talking about margins overall. So I'd say one of the things we're feeling really good about is we talked about the deployments of this tool catalyst across the business, which is a desktop tool now that sits on all of our marketeers' desktops. And it enables them to get much more specific about returns, both across brands in their markets and within brands now and the different growth drivers that they can invest in. So that helps us, I would say, to feel better and better about exactly where we're targeting that A&P investment and targeting it in places that we think will drive really good returns. Now we're also very balanced in wanting to make sure that we're doing equity building for our brands, which ultimately drives the sustained performance and sustained mid-single-digit top line that we're really targeting. So I'm not going to get into the specifics of 27 basis points kind of increased reinvestment rate this year, exactly how many basis points is it going to be next year. What I would tell you is that we feel very good, that we're targeting it towards the right place. And we're going to continue to make the investments that we need to make sure that Diageo can sustain its performance, not just into fiscal '19, but for the long term. And then as it relates to NRM, I'd say I'd characterize what we've done today as really building the right foundation for the future. And this is one of the places that I've spoken to over the last year, that we've been building our capabilities with the expectation that we'll see more results coming through from NRM in the years to come. I'd expect we'll start to see some of that in next fiscal. But in the next breath, I would point to the fact that having higher growth in some of the regions where we have lower per case rates, right, would be a headwind for us. But we've done a lot of work in starting to build that capability. We also have a pretty sophisticated tool that we call Polaris that's already been rolled out in both North America and here in Europe. And we've been putting in place, I'll call it, bespoke and efficient tools in the other markets, concentrating on where we have the biggest opportunities. But definitely building our capability and bringing new talent in to the company, by the way, from other areas where they have better experience to make sure that we're learning best practice this year.

And Simon, Buchanan's, as you point out, depletions momentum was better in H2 than H1. So we have good underlying growth in Buchanan's, and I would expect that to show up in sales next year. So Buchanan's is a brand we expect not just in the U.S., but also in Latin America, to do better next year.

Okay. Can I just clarify? I think, Kathy, last time you talked about trade (inaudible) level?

Yes. I -- sorry, I'll have IR follow up, but with the statistics that you're quoting is just not resonating with me.

The next question from Chris Pitcher in Redburn.

Couple of questions please. Firstly, Ivan, I know you won't comment on the U.S. portfolio brands, but in terms of understanding, the benefit to the business from a potential divestment, is it a case of just removing the growth drag? Or by consolidating the portfolio, do you -- would you see a benefit to the underlying brands as well through greater focus? And then secondly, on China, in terms of the evolution of your route to market in China, there is an interesting chart with color coding on Slide 27. Could you explain what those color codes are? And give us a bit more update on what your route to market in China looks like. And secondly, are you expanding capacity at Shui Jing Fang, do you have enough to sort of hit this a very high level of growth that you're delivering at the moment?

Sure. Chris, on the first one, I think all I would say is, if you look at the company over the last few years, we've taken a disciplined approach to portfolio management. Look at what we did on wine, on noncore beer, on getting out of the hotel. And we will continue to apply that. And I wouldn't go any further into what we're going to do or the benefits. On China, the route to consumer strength of both our Shui Jing Fang business and the way we're now focused on ultra-premium and high-end scotch whiskey, we're in a much stronger position, and I do see a part of Shui Jing Fang's momentum is a very disciplined approach to how they are building and then geographically expanding into the next tier of provinces. And we have a very good distribution network of the wholesaler alignment with running a true sellout culture with great execution, supported by good marketing is what's working. On the point on capacity on baijiu yes, we are -- the Shui Jing Fang company is focused on the long-term projections that they've laid out publicly, and looking at solutions and how to support the capacity that's going to be needed. So that's very much part of the plan that Shui Jing Fang has laid out and shared with its investors.

I mean, just specifically on the route to consumer, is it still very much Shui Jing Fang, Diageo China, Moët Hennessy, Diageo or have there been changes? I was just intrigued by that chart on the slide as to what that was telling us. What was the reds? What was the yellows? What was the oranges? Is that where you're going direct? Or -- I'm just trying to get a bit more color how you have evolved because your competitors have made some significant advances in terms of changing their route to consumer.

Yes, I think what you're seeing on that chart, Chris, is just Shui Jing Fang, Chinese white spirits. So we have -- that route to market is separate from Diageo China, which is now focused on the top end of scotch whiskey, for a much more focused approach. And then we have Moët Hennessy Diageo where we have our other brands, Johnnie Walker, Black and some of our Gin brands. So what I put in the presentation was purely the route to market approach for baijiu, that is working really well for Shui Jing Fang.

The next question is from Trevor Stirling in Bernstein Investment Research.

Kathy and Ivan. Three questions from my side, please, 1 technical and 2 perhaps more strategic. The first one maybe, Kathy, at the corporate line, the corporate profit line, we saw swing from minus 11% in the first half to I think plus 35% in the second half, could you just give us a little bit of color about what was going on there? How we should we think about that line going forward? And the other 2 questions, Ivan, once you're talking about disruption, what do you think the potential is for cannabis to disrupt U.S. sales? I guess beer and spirits? And the third and final question is, we've seeing a lot of bolt-on M&A and portfolio adjustment, but is there any potential still for transformational M&A for Diageo in the future?

So I'll take the first question, which is about kind of our corporate line item. So I wouldn't focus really on half-over-half in corporate. There is a lot of, I would say, odds and end things that kind of run through that line. Overall, we had a little bit better experience in corporate this year both because of lower pensions and then a little bit of unfavorable FX.

On cannabis, Trevor, we're tracking it very closely. As you know, it's not federally legal in the U.S. right now. The trends to date, I'd say, do not suggest any huge shift that impacts spirits yet. However, it is a development which we are going to stay very closely focused on, and watch the trends. And our approach also is, we believe it needs to be regulated very much like alcohol in the case of the U.S. and that some of what the industry is ensuring as the sector develops. But no immediate disruptive threats to the business. What -- for us, the big thing in our favor in the U.S., which continues to be really positive is this trend to people -- young Americans, 21 to 24 are drinking more spirits than they are before. And a lot of it coming out of beer, and they're drinking better. So the premiumization trend is really strong and healthy. And that's what gives us the confidence that the spirits industry will continue to have good growth, value growth in the U.S. On transformational M&A, I mean, you know only too well. The situations in the industry, many of them are in family-controlled situations. I mean, we watch it, we have a chessboard, and I won't say much more, but what you saw us do this year with the acquisition of Casamigos and then the first of our Distill Venture acquisitions, Belsazar vermouth, which we are really excited about, you can expect us to do more of those.

Next question is from Olivier Nicolai in Morgan Stanley.

Ivan, Kathy, just a couple of questions, please. Just, first of all, a follow up on the U.S., just to make sure I understand. Marketing cost you said will step-up next year, so in full year '19. Should we, therefore, expect a seasonal marginal decline in the full year '19? And then in the midterm, how should we think about your margin in North America? Is it cost of doing business, recruiting new consumer is going up? And actually is there a much upside on your North America EBIT margin? So that's the first question. Just a quick one on Casamigos, is it fair to assume that it could add about 50 bps to your organic sales growth in the U.S.? And just lastly on Europe. First of all, what are the drivers behind the weakness in Spain that you're seeing? And should we expect the U.K. growth rate to moderate next year?

Okay. So overall, just in looking at the U.S., I'd say, clearly, we're continued to be focused on making sure we're making the right investment behind marketing in the U.S. for the long term. And you heard me also talk about in that balance, equity building that we're doing, and I'd say, we're feeling very good about improving equity scores on those brands and continuing to put more A&P behind them. And you would've seen this year, Olivier, that, that constrained margins in the U.S., and so we would expect that it would again be constrained next year as we think about that. Importantly, I think, when you then try and think about the U.S. over the longer term, right? One of the wonderful things about this business is when you have brands with really strong equity, right? That enables you, over time, to actually take pricing and it also helps to sustain growth. So I'd say, we're very focused on making the right decisions behind A&P for sustained positive performance for Diageo over the long term. And as we build on our own capabilities and improve the equity of our brand, again, over the long term, not necessarily immediately in fiscal '19, we would hope to also get a bit more pricing power. And obviously, mix continues to be a big benefit in the U.S., Ivan just spoke to ongoing premiumization, and the fact that young people in the U.S. are also continuing to drink better. And so that's a pretty favorable trend we'd expect to continue.

On the other 2, on Casamigos, you've seen the numbers in our press release, I won't give you a shared number precisely, but I think you can figure it out. We have -- the brand is doing really well, we're really happy with it. And it will be accretive for share for the U.S. next year. And I mean, I know the number but I don't want to put it out, so you can calculate it. The -- because you'll come back to me next year and ask me about it. So on Europe, the -- on Iberia it's -- whiskey is the challenge. And the category is really, really soft, and we have not been able to revitalize J&B yet. So we will do better, I'm confident in Iberia going forward. But if I just step back -- to me, what's really pleasing about Europe overall, I mean in this year, Iberia was soft. And then the see the U.K., GB was really strong at plus 8%. To me, what the team, and John Kennedy and the team have built in Europe is now a business that's delivering shared gains much more reliably. We grew 50 basis points of spirit share in Europe this year. If you look at absolute amount of share gains, we had 4 of the top 5 brands in Europe in our portfolio. We've stepped up the marketing, the route to market and sales execution, resources are much better, innovation is really firing. If you look at what we've done with Gordon's Pink and Tanqueray Sevilla and Hop House 13. So going forward, I'd say, we will have ups and downs, and I'm sure, in particular countries within Europe. But to me, the key in Europe is to get a sustained 3% to 4% growth year in, year out. And that's where, I feel, the platform is that we built now, and Western Europe is really strong.

Next question is from Edward Mundy in Jefferies Group.

Three questions, please. The first is for Kathy on margins. Kathy, could you remind us where we are on the GBP 700 million in terms of realization of cost savings? And just a wider question, you've been in the business now for about 3 years. Do you feel that by the end of fiscal '19, the cost piece will be more or less done? Or are there opportunities for more work streams beyond fiscal '19 over and above running the business on ZBB and [net review] management and the like? The second is on Shui Jing Fang, I think you've indicated you're increasing from 40% to 60%. I know you've already got management control, what does going up to 60% give you from an operational perspective? And then the third is around low alcohol. You've obviously got Seedlip, you're doing Ketel Botanicals, Guinness, Pure Brew, should we expect more products being launched within the whole low-alcohol arena?

Okay. So I'll go ahead and get started. As we think about our overall productivity program, I think the best way to think about how is that translating to Diageo's results is in the margin gains and what we've committed in terms of our midterm guidance. So, we -- a year ago, up to our midterm guidance from 100 basis points over the 3-year period, ended fiscal '19 to 175 basis points. If you look at what we delivered this year, and what we delivered last year, right? That's 115 basis points. Hence, I think comment earlier with respect to 60 basis points yet to deliver in this fiscal '19. And I would say, we feel really good about seeing our productivity efforts, both flow to the bottom line, but also from a capability building perspective. So my commentary around A&P and the catalyst tool we use; my commentary around our building capability and NRM; the Polaris tool that we've rolled out in some of the markets -- and that enables us to move at greater speed and pace to get insights more quickly that we can translate into actions in the business. So that's how I would think about overall performance of our productivity program. Now you commented how do we think about it beyond fiscal '19? Productivity does not fall off a cliff for Diageo when we get beyond fiscal '19, it is alive and well. And I think, I would have commented, over the time that I joined the company that, for me, and I think, certainly for Ivan, success and the productivity program is about it being business as usual built into the culture of this company every day. We would talk about, that's driving efficiency and effectiveness in everything that we do. It's about simplification of the business. So that we can move at greater pace. It's about making sure people have the data and information they need at their fingertips so that they have insights, and they can act on those insights. So I would say, we feel very good about that cultural shift in the organization and that we would absolutely expect that we will continue to get benefits beyond fiscal '19.

On baijiu -- on Shui Jing Fang, I mean, we just -- we see this as a very attractive category and business. And we have a very strong management team, a strong strategy in place. And this is really just to increase our participation in the value that we see being created with this company over the next decades. The management team is really strong, the strategy is clear. They have got sustained momentum through -- I talked about, route to market, innovation and brand building. It doesn't really change anything else other than we want a bigger piece of the action. And so that process is underway. On low-alc, this is an area, which we are putting more strategic focus behind. You mentioned the number of products we've introduced, including there is a new Gordon's line in GB, which is 0.5% ABV. We do see that consumer trends for adult occasions with lower alcohol as an important trend over the next many years, and we're putting a lot of focus behind it from innovation standpoint, and from M&A, I mean, Seedlip and Belsazar is another good example, which really plays in this early evening lower alcohol occasions. So I expect this to be an important part of focus for the company going forward.

Next question is from Andrea Pistacchi, Deutsche Bank.

Yes. I have 2 questions, please. The first one on the U.S. How are you seeing the pricing environment recently? I think, Brown-Forman, in June, on their call were making some more encouraging comments on pricing compared to what they would've said in the past couple of years. Are you detecting any improvement? And secondly, on Africa, you highlighted Africa, of course, having held you back this year. I think on the regional call in March, John O'Keeffe, he was suggesting or expecting a recovery in 2H, which did occur, but it was I think, quite muted, it's about 3%. So what really -- did anything turn out to be a bit worse than you would've expected towards the end of the year? And how do you think about Africa going into next year?

Sure. On Africa, the -- if you look at the whole year, we clearly had a number of factors in markets, like Kenya in the first half, I talked about, and Cameroon and Ethiopia have been very challenged. And we've had good success in Nigeria, which is coming along nicely. And the whiskey category in South Africa has been more challenged. We take consistent medium term view here, Andrea, and I do expect us to perform better in Africa next year both in beer and in spirits, and in mainstream spirits. But we'll always get hit by some degree of volatility. Our strategy is clear, we have an intense focus on productivity and efficiency right across the business. And we've got strong plans. Through all of this, the Guinness brand grew 7%. Guinness is really healthy. And our growth drivers and the effectiveness of our marketing across all the Guinness markets in Africa has never been stronger. So I feel really good about that. Mainstream spirits in Nigeria and Kenya are continuing to do really, really well, high growth. And that's margin accretive for us. So there were a number of factors that impacted us this year, but our focus and strategy is unchanged.

And then your other question was about U.S. pricing, and I would say, the U.S. is obviously a very big business for us and we participate across almost all categories. So we would not depict the U.S. as seeing significant pricing improvement. Pricing continues to be pretty muted in the U.S.

Would you say that it's sort of bottoming out in high end vodka, the worst of the discounting, would that be bottoming out do you think?

Again, I mean, I'd say we're watching it very closely. It's a market that has, as you know, very good data. And we will track it. And our intention over time is to get a decent pricing rhythm back into that marketplace.

(Operator Instructions) The next question is from Mitch Collett in Goldman Sachs.

Two questions, please. On growth for next year -- organic net sales growth, I think you said it should be roughly similar to this year. But I guess, if we run through to the moving parts, the U.S. should be better because you get a contribution from Casamigos. I think you said, you expect India to be better, and you just said Africa should be better. So I guess the parts that offset that, I guess, Europe is running slightly ahead of what you've said in terms of medium-term growth, maybe Shui Jing Fang a bit softer. And perhaps, LatAm, are you able to comment on what you'd expect for FY '19 for LatAm. And then related to that, perhaps you could give us some perspective on how we should think about the phasing of growth for next year, in particular India and the U.S. have easy comparatives for the first half. And is there anything we should know about the innovation pipeline that might skew growth between the first and second half of next year?

So, I think, you roughly got a lot of the puts and takes correct as you kind of went across some of the regions on fiscal '19. I guess, the only thing I'd point out as it relates to India, specifically, right? GST enabled India to get more pricing this year than generally we would have seen across India, and so just been volume, price and mix, we'd expect that to pan out a bit differently for India. So we'd expect to see a little bit more volume growth in India and a bit less in pricing. We've always talked about India in stable times being, call it, high single-digits to low double-digit growth, and this year there were at 9%, right? So I think, you have those puts and takes pretty well. I wouldn't attempt to get into specifics on phasing, sort of, by regions, one half to another half. And the only other comment I would make, and I think Ivan got into this a little bit when he was talking about Africa. Diageo is in 180 markets across the globe. I mean, we do have a quite a global footprint. And one of the things in that quite global footprint is that in any given year, we're going to have a couple of markets that are just off and have some kind of dislocation. What we would've seen in Africa this year was a combination of political instability in Kenya in the first half, right? Africa in certain regions also suffered from really heavy rains and flooding this year, right? That keeps people out from going to trade, and has a dampening effect on our business. FX is also pretty important to our business given international spirits and the fact that we're such a big exporter across the globe. So I'd also say, while we can't tell you exactly what countries are going to have challenges next year, we certainly would expect they're not all going to be hitting on all cylinders.

Understood. And then maybe just one unrelated follow-up. You listed 3 factors that negatively impacted gross margin, are you able to quantify how material the hurricane remediation costs were in the USVI?

Between GBP 15 million and GBP 20 million.

Mitch, your other question was Europe?

No.

Okay. That was it. Okay. Thank you.

We have a question from Nico Von Stackelberg in Liberum.

Yes, my question's just on the cost of debt going up to 3.3%, and also the tax rate going up a little bit higher. I get your forward-looking statements are for next year. Really wondering if you can help me out with the following years and maybe just longer term. So is it reasonable to expect that these costs continue to rise 2020 and beyond?

So if you look at the guidance that we've got in terms of just our effective interest rate, I'd say, that's all about what happens to interest rates in the future, so I'm not, at this point, going to try and predict interest rate beyond next year, but based on what we're seeing in the forward curve for interest rates, that's informed the guidance we gave. The other thing, just in terms of our effective interest rates going up, it's also because this year we benefited significantly from heavier use of commercial paper and some positive swappings that we have, right? And so we'll continue to look at the markets and inform that as fiscal '19 evolves. On tax rate, I'd say, for several years, we've been talking to the fact that, overall, for all multinationals, there is upward pressure across the globe on taxes. And so you're seeing, next year, that we've guided 21% to 22%. We were just a little bit below 21% this year excluding exceptionals. And so generally speaking, we would say, tax is a bit of a headwind and that we don't see that changing.

Okay. But I guess, as a modeling for 2020 and beyond, so that should maintain that 21% to 22% over that period. Is that right?

Again, I cannot predict tax rates at this point beyond next year. I have some, I'd say, reasonably good insight to be able to predict it for next year. But overall, the environment, as it relates to tax rates, the multinationals putting aside the positive we got from U.S. tax reform, is a bit of a headwind, and you're seeing that in our guidance next year. And I'm not going to try and predict what it's going to be beyond that.

Next question is from Jamie Norman in Société Générale.

Couple of questions for me. Firstly, if you take a medium-term look at gross margins, obviously, impossible to predict many of the moving parts, such as input cost. But if you look at the kind of tension between, on one hand, premiumization and then other, negative mix as emerging markets become more important or the affordable products element increases. Into the medium term, what is going to be the net result between the those 2? Do you think that we are going to see some gross margin growth sort of beyond F '19? And the second question on the U.S., if I may, a very good performance overall, but very much driven by RTD. Just a comment, if you could, on the core spirits market, where you are versus the market itself? And whether you see that closing over the next year or so?

Sure. I'll take the second one, Jamie. On U.S. spirits, the market is growing at about 4%, is how we see it. Right now, the value growth in the spirits industry is in the U.S. And as you see, in these results, we grew at 3.3%. So our growth is under the market. We expect to do better, so some of the comments I made earlier on the call. But I'm not going to predict when we're going to get to the market [real quick] or get ahead of it. All I would say is what we're focused on is building kind of reliable, sustainable, consistent growth in the U.S. And the actions that Deirdre and the team have made on refocusing our innovation, upweighting investments against our brands, changes in commercial execution, building the net revenue management capability, driving efficiency. I'm confident we will see continued improvement in our top line growth happening there. In a business like this, you really don't want to be in a hurry. These brands move slowly, and to get them into sustainable growth, takes investment and creativity, but it also takes time. And for Diageo to deliver its goals that we've laid out in terms of our medium-term guidance, we feel the U.S. is performing in line to deliver it, and I expect it to get better, as I said.

And then just in trying to think about [gross] margins over the long term, I'd make a couple of comments. So while we absolutely can get negative mix from higher growth in certain regions across the globe, there is also an overall trend across the globe of premiumization that we're certainly participating in. So within individual markets, before we start to talk about the overall impact of Diageo, I'll call it, country mix, within individual markets, we're very much leaning into premiumization. You would have seen some things occur in this fiscal year, that over time, we wouldn't expect to have the same heightened impact. So as an example, primaries grew within our Scotch portfolio, at 7%, right? Clearly ahead of our overall scotch growth. And so that would have caused some negative mix in scotch. We're very focused on the high end of our portfolio, and making sure that we're growing strongly in the high end of our portfolio. And then I would point to, over the longer term, we had a discussion about pricing and NRM, and the more, over the longer term, we can get pricing kind of moving more positively, especially, I'd say, in Europe and North America where pricing has been more muted. You know that will also help margins overall. So I'm not going to predict what gross margins are going to be beyond the commentary we've made on fiscal '19, which is a little bit more near term, but I'd say, one of the great benefits of Diageo is the breadth of our portfolio both in participating and changing consumer habits and occasions, but also in just how we participate across markets and across price points. And we're very focused on trying to create favorability within markets in terms of the mix dynamics.

That's very helpful color. Ivan, just on the U.S., I mean, it strikes me that it's very much about you and your peers kind of driving the growth. Are you seeing any incremental tailwinds from the macro from things like casual dining, which you might expect at this stage of the cycle? Or is it -- it's just -- you're just having to (inaudible) good efforts drive the growth?

I wouldn't call it grinding the growth. Consumer product category growing at 4% in the U.S. is a very attractive sector to me.

I said driving, driving -- not grinding, driving. Yes.

Yes. So it's sustained, and that's what I like about why we are confident about the U.S. industry momentum continuing. It is very much driven by face changes, demographic changes, and a preference of premium spirits brands. And that continues to be strong. To your point of casual dining. No, it still has not come back as strongly. You've not seen the on-trade channel accelerate in the U.S. yet, which with the GDP growth, the stock market, the unemployment levels, et cetera, we are seeing a more cautious consumer on the shift. I mean, you're seeing the high end of on-trade very strong, but the casual dining sector, in particular, continues to be challenged.

Our next question is from Chris Pitcher in Redburn.

Just a couple of...

Chris, you faded out. Do you -- we can't hear you.

Next question is from Simon Hales.

I'll try to follow this if I can. Could I just ask a little bit about the timing of the share buyback program, Ivan? Somewhat just to clarify that if you want to, you could begin to execute that buyback immediately. And when we think about the duration, it could run through the whole of the year. I'm just conscious, the last year's buyback program was obviously completed in February, I assume that was because you saw the share price opportunistic, that meant you just sort of completed earlier than perhaps might have been the case. And then just secondly, I may have missed this. But just in terms of Ketel One's performance for the full year, could you tell us what the base brand's performance was, i.e. ex-botanicals?

I will deal with Ketel One, and ask Kathy on the buyback.

Yes, so if we just talk about the buyback, I would say, we could go into the market to start the buyback reasonably quickly post our results -- and our results, I'd say, settling in, getting digested in the marketplace. And that overall we would look to participate across the year in the market. So I would say, generally speaking, we would be looking to target the program in that way.

And on Ketel One, we are very focused on the total franchise of the brand and the base brand. The main improvement I expect to see happening is as we go into next year. Overall, Ketel, as you've seen in our numbers has done better in fiscal '18 than in fiscal '17. And we had a better second half than first half. It was helped by botanicals. We don't -- there is still work to do, Simon, in terms of getting Ketel into total trademark, into sustained growth, and to me, F '19 is the year that's going to prove that. We will -- we're upgrading our investment behind the brand, and we are -- I expect to see improvement continue into F '19. This brand still has tremendous support from bartenders in the U.S., its on-premise strength is really good. We know vodka is very, very competitive, but I feel, we feel, that what we're seeing with botanicals is going to help the total trademark including the base.

And I'd like to hand the call back over to the speaker today for any closing remarks.

Great. Well, thanks everyone for joining the call. Appreciate your interest in the company. Kathy and I will be out next week meeting many of you and look forward to continuing the conversation. So thanks again.

Thank you. And this will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.