Q2 2020 Earnings Call - Q&A
Good day and welcome to D.D. I show interim results Investor Q and they call today's conference is being recorded.
Well today will be hosted by de Archie as CEO , Ivan and CFO Kathy.
Yes. Good question today. Please press star one we're now ready to start the call.
Then please go ahead.
Thank you hi, everyone and got PNR in London, and welcome to this morning boast results Investor calls I'm pleased to share with you another such a good consistent first half results with broad based organic growth across regions and categories.
No. We're lapping last years very strong first off and we have faced volatility in specific markets and therefore pleased that despite this outperformance is in line with our medium term gardens at 46% organic sales growth demonstrating increased resilient says the business.
Our margin expansion continues even after three strong years, despite increased cost inflation in this call.
And this was the result of <unk> continued focus on premiumization and driving everyday efficiencies.
Equally pleased with 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 American the Caribbean and travel retail.
Across guy degrees, the Keeler Canadian whiskey in Chinese White spirits, all grew double digits balancing softness and not Scotch performance.
We remain confident in the underlying performance so far Scotch portfolio as the challenge is worked quite localized to a few specific markets.
We've made significant improvements in our in P. effectiveness.
Leveraging no proprietary to got to list and strengthen the consumer insights lids marketing campaigns.
This gives us confidence to continue to grow and be a head of sales.
We're seeing tangible results from this up waste and investment.
Innovation remains a key growth drive up or else says we recruit you can do best an occasion throughout Brad.
But in spite of the sustained girls to bear in such as ongoing Regal Apple.
In the context as the market specific challenges we saw in each one and continuing to phase right. Now we expect the full year organic net sales growth to be towards the lower end up Amit didn't turn guidance of 4% to 6%.
I can see need to expect organic operating profit growth to be roughly 1.2 heads of net sales for the fully.
However, we won't be immune from any significant changes to global trade policy.
On the evolving Corona virus situation in China, we continue to monitor this very closely.
Primary concern is the welfare reform employees and ensuring they have all the available information and support 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.
So we remain focused on sustainably building up business to the disciplined execution of strategy to deliver consistent and resilient performance and with that.
Oh, we'll open up the line for your questions. So they've got the and myself. Thank you.
Thank you if he 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. It's turned off to allow your signal to reach our equipment.
In press Star one to ask a question well pause for just a moment to allow everyone an opportunity to signal for questions.
Our first question comes from Simon Health with Citi.
Oh, thank you.
In the northern money Kathy I have three questions. Please all going on one if I could just starts but you've finished so until.
Oh bring [laughter] [laughter].
Patients that's for the year I just want just done.
Right right.
With regard to ceiling.
Yeah fair to get analysis.
And you have a bad connection we can't hear you see.
Okay.
Well I need to pullback in next year, you're cutting in and out somebody I'll rejoin the queue [laughter].
Thank you. Thank you.
Thank you. Our next question comes from sung Ji, a jewel with credit Suisse.
Morning, I haven't got the I think I think Simon just trying to asked this but Oh go ahead and continue just on the on the guidance I just moving into guidance can you just walked through the moving parts of that because on one hand, you do have easy comparative into second all for the across many parts. He business. However, the guidance implies to know acceleration in.
Second home, so it'd be great to walk us through the key assumptions that and I'd also if a if you would have no. The guidance if if what do you have loved the guidance if it wasn't the corona virus outbreak in the past couple of weeks.
First I'm happy to take that so I would start with no Oh that one we discussed our full year results.
From last call. One is a key theme we had in terms of strong results that we delivered was it was a quite muted here in terms of volatility and that was part of like caused our out performance. You know if you look at what we're seeing in the first I.
I would say, we're seeing more volatility across the world and that's impacting our results and we're not expecting that situation that necessarily improve in the second half, though if you look at the places in the World where results were a little softer I would point, India and the fact that in India. A this is largely as a result of just the softening economy.
In India, and I'd say, there's a lot of uncertainty associated with Oh, when and how that's going to increase so as we looked at the second half you know we would be quite cautious about the economic situation in India, We pointed out specifically within our key back market, Peru, and Chile, I think places that have been.
In fact, it by disruptive social unrest and again that situation that continues to be difficult. Mexico is also a place where we've seen a just the overall economic environments, a weakened a bit and obviously, we have a big stops business in Mexico and that has impacted our Scotch there.
No. Its overall, so really I would say, it's just the fact that last fiscal year, we had really knew that volatility across the globe and that helped us in terms of the overall at the high end as our midterm guidance you know what what we had previously.
Last fiscal and we just expect that the world's going to continue to be a bit more about all I want to come back to you're mentioning about the corona virus, because I see what occurred and no Ivan commentary. That's the situation that you know we just had a project as we sit here at this point in time and so I you know, it's something that will just passed that.
You need to watch closely.
Got it okay, and perhaps just a quick follow up on the on the on the growth in China, you've seen in the first off of the is that really distribution led growth are you going into more provinces and still works really well.
Oh, so combination of Oh.
Greater penetration, so ready to say listen proving so if you look at the stupid <unk>, Oh switching phones, and primarily high and Scotch whisky, both up very healthy and bolsa growing double digits.
And were investing behind these brands were investing in innovation in premium innovation trades income. So we're seeing momentum in the existing distribution and we are gradually expanding distribution lists very high quality growth.
And the brands and the businesses all in really good shape and growing market share in both cases.
Got it and I appreciate 70 days, but any qualitative science of how Chinese new year ASCO.
Very ought to though I mean, obviously it came earlier so you can see enough those top results some of the sell it didn't to Chinese new year. It's a it's it's too early to call what the actual consumption has been over the last week. So we will Oh this would be tracking that.
In the weeks to come.
Got it thank you.
Our next question comes from Lawrence Wyatt with Barclays.
Hi, Ivan and Kathy Thanks, very much the questions I'm in the U.S. Oh, you you mentioned that Youre Scotch business benefited from some trade lading I had at a time impact could you said the sculptures up for bid Johnnie Walker is down five since the single most being.
As you noted could you quantify how much of that plus fool was trading and how much sort of an online grace.
And then secondly on the to vote commencement of answer all the sales velocity has worsened a bit that could you give us some detail of what's happening in those brands. If there's anything you can do to trying to improve that.
And then finally your margins have improved despite a declines in gross margin on an increase in marketing how can we be confident that the cost savings you're putting through owns gonna be affecting the business continuity.
Thanks very much.
Okay, I'll take that those two and.
Got it he will address the lost Oh, the U.S. Scott, It's a 30 basis 0.0 pre buying all blended Scotch Oh, So that's about 30 basis points to drill three oh, so off the U.S.
So small.
But to answer off.
The bucket category as you can see the U.S., it's still challenging or if I take the three brands on smirnoff.
We are stabilizing or the equity is building the business is stabilizing the quality of performance is better we are easing off.
Ah promotional intensity I'm from SK, you threw a in already <unk> initiatives et cetera, but not the spinoff is a big brand and its going to take time to do that consistently and stabilize.
On the wrong, it's still challenged and Oh I'm sorry, we've always said this is gonna be along getting to stabilize.
We are taking some actions to reduce some of the less sustainable a flavor innovations and kind of gets the base small unhealthy.
But I expect the rock to remain challenged in the U.S. it'll take us Oh, the many is to get that brand stabilized in the U.S., it's better upside clearly.
And then capital one.
Okay. One the based brand is healthy and growing and we are just lapping up incredible success. The botanical from last year, but I remain positive on the health of Gotta one.
Oh, so bostco overall, clearly challenge Guy degree, but gradually.
Health of all brands getting better.
And then I'd say look I think just relates to continuing to drive productivity overall I think we Ah shown quite good execution in terms that are current activity being driven by everyday officials say, how we take that and look to invest in key areas that growth in the company to make sure that what we're driving it.
Sample quality growth right, so kind of a virtuous circle and I think we've been a quite sustained in terms of how we do that at the IPO. So as I look at our first half results I'd say I continue to feel really good about what we're driving through every day efficiency and you see that really come through our overall overheads line you know.
It is not a little over 100 basis points or you know positive improvement, there, which really helped that off that 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.
So I say I feel very good about that as I look to the second half right. I'd also tell you look at gross margin I'm expecting right now to get a bit more productivity gains and that second half that a little bit of that softness that we're seeing and gross margin and you know overall probably.
A little less than what we saw an overhead in the first out but 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 it just has to come back on the Scotch from Ivan you mentioned 30 basis points on the blended cap screen I've understood. The tariffs run a single mode. So are you seeing no in new trading on the thing amongst them.
Yes.
I don't like what grade loading. Please [laughter], we are talking about handling the situation off are you anticipating tariffs late last year and we Didnt know, what's got degrees wouldn't get impacted or not so we at that stage, we had a plan to oh to bringing more.
Blended Scotch because there wasn't risk, which starting to lead the don't emerge. The 30 basis points is on total North America, but the the framing of blended Scotch that was a pre bought.
Because we knew what the type of situation was.
[laughter] correct clear thank you very much.
Once again, that's star one to ask a question. If you find that your question has been answered you make remove yourself from the Q by pressing star to.
Our next question comes from Simon Health at Citi.
Oh, Thank you I'm going to try again can you hear me Cathy you know.
Yeah, yeah, much better thanks for calling back inside huh.
Excellent. Thanks for taking this into the cool that's question I have three please firstly just on a MP as spending trends I pay slightly ahead of sales in the first off but not much nothing really driven by this that folks are you seeing in Asia. How do we think about to step up in I M. P spend for the second half is you're going to be broad based across more of the reaches perhaps.
But most skewed a into H. Susan H, one secondly, just carrying on for some of the comments on the U.S. performance. The previous questions I Wonder if maybe you could expand a little bit more on the performance of crown Royal and the whole very strong I Wonder if you could give us a breakdown as to how the base brand has performed versus Peach an apple.
And also smirnoff Spike Celsis, clearly doing well, where do you think youre gaining share from in the whole itself. The category all you're seeing any cannibalization or if you will spirits brands do you think the tool and then just a final one on cash flow. Cassie, obviously are the 300 million higher cash taxes like one offs in the first off you talk.
How about those one off continuing for the full year should we think about incremental further cash outflows in relation to text to maybe the French government tour in relation to the grid financing.
<unk> and situation the UK, how do we think about that for the full year.
Okay. I'll go ahead and take the first part you're in Australia second one, though I'll bring [laughter].
So what gives you any I say, we feel good about the first half and investing ahead, you know overall and aim pea that sounds about 25 basis points of margin for us I say, if you looked back at what we've done in the last couple of years, that's been reasonably consistent but as I look to the second half.
The one place I would call out in India, you asked right. So in U.S. spirits over the over the last few years, a we've increased what I'll call the and he kind of investment rate you know by rough order of magnitude 200 based to try and they're still in U.S. spirit, we how that kinda been Uh huh, we can see that in resolved I would.
We expect that that's one of the places that are in all likelihood would be further upgraded in the second half if we talk about some of the other areas, where we would have seen a an increase in S&P. Stan you know we talked about the fact that were increasing stand behind Scotch more generally you would've seen a better than Oh wait hot in Europe and then.
Asia you'd have to pick apart a little bit so I would say outside of the India business in Asia, and especially in areas up a strong growth that we were things batch in China Chinese White spirit that was would all be places that were up waiting fan. So you know we always I would say make adjustments here in real time, I mean, one of the things that Ivan.
Pointed to it we have terrific tools now right. If you went back two or three years ago, we were not as good in terms of how agile we could be some moves back to where we're kind of really seeing the returns and our catalyst tools, which we continue to invest in and you know sit on every marketeers kind of tabletop really helps us to be much more ad.
No the 'cause it stand behind where we really see that the returns coming from Ah. So that's some of the places where you see up waiting yes, I think if we look to the second half a again, we would be looking to continue to invest that and then I'll.
So crown Royal Simon.
The brand is if I started brand health. It does that an all time highs really really strong we've not had seven consecutive hubs of growth than the brand.
If you look at the breakdown of what's happening or actually Regal Apple is now use six the launch.
And it's continuing to grow double digit if you look at news America, it's up 13%.
Oh, the new loads up 10% the base business is broadly stable the base rent, but it's healthy and the main thing Crown Royal is doing which we're very encouraged by is bringing you couldn't be moves into whiskey and into crown Royal So Oh, my marketing is working well weve up way.
The Dol marketing spend against the brand in the last few years significantly.
So we feel good about gross and the momentum continues to be healthy.
Clearly flavors hub or accelerated the growth, but the flavors are bringing you can do you know the new occasions, they're not cannibalizing the base.
Oh I'm, so sorry, I mean, we are those relatively small play on FEMSA. So oh, we writing the trend with Monoprice now you can see it's in the numbers.
It's strong double digit growth on Oh, SMB business in the U.S.
It is the in my main focus is ensuring we have a healthy beer business the U.S. and so while the trends continue we will benefit but it's it's not a strategic area of full focus for us we see plenty of good growth in spirits and beer and I do business more.
I was writing the trend for though because it it couldn't be more volatile and we don't want to get overly dependent on it in terms of impact himself. So some spirit.
Oh, so far.
We are analysis and what is says it's mostly impacting beer.
Inevitably there will be some impact on spirits, but as you can see an outperformance it's not a we don't see the says are having a significant impact yet, but where we're tracking it.
And ultimately the the simplicity of a premium spurred a.
Or whether its whiskey or tequila ow bunker on the rocks with is flattish so to the with sort of trend is very strong and when you look at tequila growing up 33% to articulate this 35 in the U.S.
I mean, it's ER, there's huge trends in favor of premiums because it's that already but still in the U.S. markets and that is underpinning some of our strong performance there.
And then I'll just get back to your question, which was with respect to the higher tax payments that we would have seen in the hot and that impact and the fact that are in our guidance. We basically said, we're expecting to see that everything here I. So as you mentioned we've had over the last several years a number of different one.
Not taxane land spend in different tax jurisdictions, there's always works differently. Some of them you actually pay I had.
Some of them to pay after the fact that none of the cash flow is a year over year change number.
So I would say if you look at those one off impact so to have a they will just flow through for the full year and when we get to the end of the Cisco will be able to talk in more specificity about what we have seen in terms of one off for the year and then you know what if anything we would anticipate as we go into fiscal 21.
That's really what's going on.
Okay, that's very clear thank you.
Our next question comes from Richard with again with Kepler.
Yeah. Thanks to good morning, I have to the two questions. Please festival, specifically on the U.S. markets and your marketing spending can you discuss how your marketing effectiveness to effectiveness tools increase a the return on your marketing investments and maybe give one or two examples and and related to that should be.
So do increases a in a marketing spending ahead of net sales growth in the next few years and then the second question is it going back to productivity savings got the you mentioned you know you expect more productivity in the second half of the year a with the full year results last year. You mentioned you expect the 102 months.
Another 50 million in savings or in productivity in fiscal Plenti is that the range still valid. So do you expect to perform outside that range. Thanks.
Sure.
The first on the U.S. marketing spend if you look at the last three years I mean, we've increased our marketing spend in U.S. or by over 250 basis points significant up weight and in investment and our share of voice has gone up significantly up 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 the I'll do and we thought to our ability to direct spending.
Against effective programs and to a just quickly has is much stronger than it was a few years ago.
So as I talked about earlier, we have a significant up weight in crown Royal because we can see the returns that being really strong and it's working and delivering on our performance, but even on a brand like Ballys. We're now down to the level of sophistication, where we can pick Dave Dave in the year.
And geography, and through our digital and social spending can drive a bunch of a them very granular level. So the Oh I mean, this is clearly will continue but learning and getting better all the time, but the rig no behind which we look at every dollar spend and where it goes and how we may.
Sure returns.
As a is much stronger and the U.S. is is very capable.
And affects about the so we've upgraded on a number of brands or were constantly adjusting because not everything works and then you and then be redirect spend.
Going forward, we don't have a it up a requirement or a target, but we will keep increasing spend reinvestment levels in the U.S. It really is good but them up.
So if we see the opportunities. So good returns, we will spend more or.
At the same time are driving a lot of efficiencies and they're getting significant gains in how we buy media the efficiencies about spend which is also contributing.
Even more to be affected spend but we have enough market.
And then as it relates to productivity you know you had referenced back at our last Investor Day, We talked about the fact that we saw about 100 250 million pounds annually of kind of incremental opportunities in productivity as we look forward and that that was supportive of our overall guidance that being able to grow operating profit.
About a point that had not sales so I would say as you look at fish here and what we're currently expecting you know 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 here and we had previously stated we thought the first half on operating profit.
I was wondering in margin specifically, you know, what's gonna be a little lighter than the second half. So 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 you know margin expansion in the first half and my commentary about the second half.
As you know, we always have some phasing doing I mean in productivity I know obviously in the <unk> as I referenced earlier in the second half we are expecting to get a bit more in terms of I'll call. It Cogs productivity related savings that we're looking for in terms of just helping to offset a bit of that softness that we're seeing in gross margin.
Alright, that's me offensive on.
Our next question comes from Nikko's on Steckelberg with flip around.
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 terrorists, particularly in on on Scott's going to the U.S. I was just wondering.
Could you. Please quantify this for us and does the current operating profit guidance assume that the current tariff situation remains stable. Thanks.
Yes.
So I'm feeling that concludes our first we've assumed the garden are.
Startups situation remains stable, so they're not assuming it's getting worse or getting better than the current gardens.
In fact, we're really early in the game is what I would say as we have announced to the trade. We are focusing on the impact of darice, putting single mode sitting on Bailey. So that's been already communicated to the trade in the U.S.
ER.
Seeing the impact of them back to an actual sell out it's something we will watch very closely in the next few months, obviously, we've got ranges and scenarios that impacts and Oh, what I would say all that is factored into Oh current guidance, but so the current level up though street.
Great. Thank you and and as a follow up can I ask about crown Royal So we grew 11% in North America. It looks like Depletions were up 8% in the period. So slightly shipping ahead and I also know that if I look at NABCA through November that last 12 months. The volumes were only growing around 2.5, you're getting strong price mix.
Just as just crown. So you could have legs in terms of price mix, obviously, there's a broader premiumization trend, but you know just certainly the brand is being helped quite a lot by price mix and so how sustainable is that.
Yeah, I think overall crown ER depletion or broadly in line, the new sitting up 'cause going up.
At about 9%.
On many of friends, we do really well use in back of captures what about 45% of the market.
Our performance in leading independent channels and the on premise, which is not captured the news America ER is very strong when many brands and and so you see some of that momentum come through on crop.
Okay.
One of the things, we do see good opportunity for price and make some crowd and one of the things were doing is a really looking at the higher mobs like crown Royal ex <unk>.
Where we want to put a lot more focus a bit like we do Johnnie Walker blue. So we're looking at building the top end of the Crown Royal franchise as we go forward, putting more focus beyond that but gifting in brand building and that should improve mix as well over done.
Okay, great and if I can just ask one more question I've always wondered why do you actually get something of a path in terms of the fair market value of your 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.
So I would say, we we don't look to attempt to disclose what we say the fair market value as we would say our assets are appropriately valued in our balance sheet and we like every whiskey maker across the world I have you know a good amount of stock. So all I would say is.
Bill stock very consistently across all of our whiskey brands.
And we're happy with the stock levels that we yeah.
[laughter] Yep.
I guess, but its you know it's at cost on your on your books and there's a fair market value and I also know I'm actually maturing stocks are excluded from working capital and your and your management compensation. So you have to fight incentive to build socks, and we never really get any color on the on the gross or the IR ours of of your maturing stocks and you know more disclosure be useful I I think but.
Yeah, just stopped for acceleration thanks.
So look I was just comment that we try to create our compensation abstracts been away 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 Matt.
He is managed by I'll call. It relatively few people across the company, but specifically an area that we don't move things up and down I thought 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 fish.
Okay, and delivering strong cash flow and that's been supported by a the metric we have in our compensation programs that drive the things that people can can actually impact. Thank you for the question.
Thanks appreciate it.
Our next question comes from Trevor Stirling with Bernstein.
Hi, I'm in Tennessee, So two questions from my side, especially when you're starting to see was mostly with the consumer sentiment I mean, so 12% growth last year, 17% Firstcomp. It really seems just the boats are kicking into gear. After two years old perhaps less than I'd assume it's what you put that don't.
Two items under Swiss secondly, do we have to stocks to support that but then secondly on the Corona virus. Appreciate it sometimes they really too early to talk about the impact can you talk a little bit of what the impact of someone was back in 2003.
Yeah sure to.
Ah mold I mean, we put a I'd say a far more disciplined and focused strategy behind malls.
By a one one of the things the odd years Blessed with the wonderful 20 distilleries that produce the most beautiful single mode sudden we're kinda spoiled for choice.
Say one of the things that happened is we put real discipline and focus behind the variance and the geography, and we've got better growth drivers the brand like Singleton, though is doing really well call due in Spain is doing extremely well in the U.S. lagoon and so we we end the supply side, there's no better aligned to support.
The animals real coupled with the long term.
So I put it down to a clearance strategy in better execution against it and then look I think if you I attempted to go back to Sars you have to understand our S.J.F. business wasn't on that that point in time and ours. That's [laughter] tiny so there's just no relative compared or their fratto.
Okay could you just don't follow up I mean, you mentioned that you're passing through the price increase in single mode or your competitors scrolling as far as you can too.
No the answer to that [laughter], so I wouldn't even speculate so oh, okay. I don't know and again, what I said is I'd be communicated to the trade to the what's been doing which is why I've mentioned that debacle that's been already communicated.
Very good thank you I couldn't get.
Thank you.
Our next question comes from Alicia for E with Investec.
[laughter] Hi, good morning, I I've been in Cafe three questions. Please for me.
First volume momentum has deteriorated I appreciate India is a significant impact on that but I'm curious about what's happening with your volumes ex India and are you seeing any new trends emerge.
And then secondly, the organic operating margin fell 100 and.
60 ish basis points in India, and H. one after several years of improvement there is he's been in everything that the product portfolio.
It seems to be Cogs, driven how should we think about this near term have margins in India reached [laughter] artist Patel and then finally on a global travel retail [laughter], how should we think about the timing of recovery in this channel and we will lap Hong Kong laid our new here.
Okay, and presumably the middle east issues, well I work themselves out at some point just curious on the timing of recovery there. Thank you.
Yeah, So maybe I'll take the for the got to you do in their margin and that can come back the global travel or so on volumes or you're right to India was flat and it's almost a third of the Adrs volume. So does that impact if you take India travel retail and.
And Oh weak spots in Latin America, like Peru, and Chile, where we had a volume declines are outside of that volume would have grown the I think close to one of the office and so we all the solid volume growth coming in in most places, including the U.S., which you can see is though.
So there's no shift in trend here I mean, we are seeing consumers trading up to a more to spirits and more to premium spirits and we gained from that I mean, not reserved brands were up 11% the 20% of the business.
And so but all those conditions remain strong.
Well into it and then on on India, I would say you know over Oh, we were up here in terms of how much of the gross margin softness India business was able to offset especially in light of the difficult economic conditions that they're facing the other thing that you're seeing that's.
Causing more pressure in terms of their margin is a fair amount of inflation in specific input costs and one I would point to that has a big impact on then is based neutral theoretically so inflation based neutral spirits Saddam has been pretty significant but I'd say when I look overall it there for yourself and how much they gain.
Good margin over the past years, while they have some specific challenges this year as we look over the long term my fair expectations are unchanged for India, you know over the longer term, which as you know looking to have than I have a topline growth more high single digit low double digit and getting to a margin level of kind of mid to high.
Teams, then I think they've made terrific progress in Alaska, and a three year period, a ingest, making good gains against those long term goal.
And on global travel, we expected to remain challenging certainly through the second half and Ah, It's a little hard to predict the pace of recovery and when it comes I mean, I'll focus is really on execution and market should be defaults in particular and on that standpoint I feel.
Good about how the business is doing the sellout execution in a market trip performance.
In the measured a global reach its travel retail business, we're doing well and that's what we can control I'd say, the but with assuming things, we'll see stuff in the second off too.
[laughter].
[noise]. Our next question comes from Edward Mundy with Jefferies.
Oh, My God morning, coffee three questions. Please the first is on the buyback 1.1 billion for your 1.25, how should we think about the phasing of your 4.5 billion over three years should we think about equal phasing or is that studies Skype once you finish a 1.25 to perhaps.
Accelerate the phasing of stock buyback [noise].
The second question is around a slide 30 435 in your presentation I. Appreciate that you didn't running your business from first of July two cents last December .
And there was there are differences on shipping phasing from from one day to an next but on page 34 of your slide deck Youre shipments so see accelerates from five to 6.1.
35, omni depletion sounds funny decelerated, a little bit across most of the portfolio.
It's not really around the on trade I'm just not captured in the middle soon afterwards, there was there something else on that when I'm thinking about the stage and then the question is around Jim I think you dispose your Jim.
Hopefully grew 7% from the first off and things like research team I'm wondering what do you could clarify what the greatest office Gordon's corn Gordon's pink I'm would've been the first tough.
Okay, what I'll start with that I'll start with the first question, Yeah, Nice, though as you would've seen ER and you referenced we had complete at 1.1 billion of the three here program, which is side that up to 4.5 billion of share buybacks and capital returns in a first half.
And so 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 and if we had looked back a in the last couple of years, we had a leverage ratio that was kinda below the range. We're targeting so we target a leverage ratio up.
And a half the three times and that's an adjusted net debt.
I see that that number and so when we finished the first half we were at 2.8 times right. So you know kind of roughly in the middle age of that so as we work to Kapil Singh Kinda second half and into the next couple of years, we'll be looking to manage shareholder returns against that fact.
The leverage ratio, but right now my overall commentary was you know we feel pretty good about execution against the four and a half billion right. We made a very good down payments in the first half against that for years program.
On the U.S. depletion performance on overall U.S. spirits Depletions.
I've grown in line with the shipment in value Jones, so across a the spirit in the first off are you raised the right for into I think when you look at all group in the non measured channels.
Oh I.
Ended markets and the on premise all growth rates have been higher.
And with performing very strongly in many of those states, which are non chain states are and you put a lot of focus now in the U.S. and in fact, we put a whole <unk>.
The new organization behind it to really building our on premise presence in the U.S. strongly and I'm pleased to see.
But focus will continue to give us a good benefit somebody goes to come on June or Gordon's grew as well Gordon's base was up about three and think I think was up about one and in spite of lapping or what was the the decade, Grace's third floor and shouldn't the UK market.
[laughter], we had a phenomenal success last year, but it's still it's still growing and.
The leap on Didnt as the categories to OLED. So that's good runway ahead of it Ah, Yes GB in 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, which isn't very good real.
Hi, good thinking it's just it's just a follow up the the Captain Morgan Europe Grace has really accelerated is there anything sort of particular behind that relative to last year.
Well I'd just say we were right.
Excited about the brand we've put focus behind it it's a it's doing or if it is one of the brands were backing.
And it has as important Doug, yes, very pleased with the pull them for Europe , and the growth drivers and execution of instead of working well.
Very good thank you.
Our next question comes from Marion They shrine with Mainfirst.
Hi, good morning, everyone at <unk>.
Two questions for me. Please one on the cost Oh sure, we'll look at them going forward and in fact, it could happen in the second half.
And the second question Yeah on to price next that once every channel and if they stop that you'd be able to give us. Some granularity of what does then and then price with then more and given back now and then your management and what was mix and then through the end it should have any college to gave on the innovation pipe.
In the upcoming quarters.
So I'll start with just how we're thinking about kind of costs in the second half. So I would as I mentioned 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 to be neutral spirits is one of the areas, where we've seen higher inflation I mentioned in the past, but certainly reiterate today that gabi is another place that you know we've seen some continued to see inflation in relative weight, a high prices and the third thing I would mention as a generally.
Ah glass cost inflation has been another area of intact for us. So you know as I look to the second half I would say, we're expecting to continued to see a lot of that a similar inflationary impact with regard to overall gross margin I'd say, we're also expect.
Turning to see a bit more positive productivity facing against Cogs or you know I would say I helped to improve what we're seeing in terms of gross margin, but you know, it's always a bit of that game against what's happening in inflation, how much can we offset it in productivity and then obviously a water.
Are we seeing and price mix. So you want to take a the second question, obviously get surprised price mix, yes. So price mix says you can see was a strong here we had price of about a point to the off and the rest is the mix mixes was also help unfortunately body or India being weak [laughter].
Some of the country, the geographic mix was stronger as well, but all in all M capabilities and focus and discipline are really operating in multiple markets, but as you know we're coming from behind we've still got a lot of room to improve but with every period, we're getting better and better and in many markets, we are seeing and taking.
Well, Oh price mix in a sustained ways, that's our goal and Oh the underlying trends of in markets makes also remain very positive with Premiumization begins.
And as I said earlier reserved business, which is 20% of the business grew 11%. So that is very strong mix operating in I'll say, though on innovation I mean are focused on innovation its sustainability and consistency. So as you look at the second off we have we have a good pipeline or.
We are also as we go into a this calendar year, we're celebrating the 200th anniversary of Johnnie Walker.
And you can expect us to do some exciting things on but brand as well in the goal. So it'll be second alpha in first half of next year. So innovation pipelines are not built with the long term focus student show, we have consistency and a inhibition capability continues to.
Getting better and the focus on sustainability is also a much stronger in how redevelop and execute inhibition.
All right. Thank you.
Our next question comes from Celine Pannuti with JP Morgan.
Yes, good money most of my question have you know so I just want to tell us whether that's on your up if you could talk about the overall.
Gross environment.
Got you see your pedigree, and then well it's too in the UK, whether you've seen any who's on two other quota.
I'd say overall Europe . The as you saw the business grew 3%.
If you take a 12 month lots rolling 12 month view, we are growing share.
We have taken some price increases in certain markets in general.
And that has impacted some of the short term performance.
We do have variability across Europe , I mean, some of our markets like.
Germany, Benelux, except a growing double digits, Italy was strong spin more challenge islanders stuff flattish or the UK market I feel good about a beer business here, it's been strong.
Good news was up 6% in the UK and up one in 10 fine in London is now well again this is a higher share ever on goodness.
And so we've got ups and downs, but overall.
The performance consistency continues then be environment is good I would say, we see spirits well positioned.
And premiumization trend strong and even small categories like tequila expensive tequila growing very fast start single mode. So doing much better so oh, the Europe environment I'd say is solid.
Thank you.
Our next question comes from Andrea Pistacchi with Deutsche Bank.
Yeah. Good morning, I have three questions. Please the first one on the U.S. way scanner data Nielsen in particular have.
Proved to be not to very quick good predictor of your performance a in the U.S. says you were also highlighting that said the Nielsen data in the past couple of months show would suggest a bit of a slow down in industry level through November December have you seen.
Slowed down a tool in the business. The second question. Please on your guidance on and on China I appreciate to close the uncertainty on the situation in in China, but watch or could you give us any an idea of what a situation in China Youre factoring into your to your guidance on how how many months of.
Situation in China, you view of building into the guidance. The third question, please but back to the U.S. on the on Captain Morgan, which in the past two half. Your favorite says has been positive. So clearly clearly better performance compared to the past two or three years is this a reflection all the work you've been doing.
On the brand are you confident that you've probably turned the corner on the captain more on the Captain Morgan.
Sure I'll take the first and the third and Kathy can talk about gardens.
On the U.S. trends again, we I don't look at any particular month of Nielsen North America, I wouldn't read too much into it we don't see on when we look at the I mean, the trends over time.
I don't see is a shift in U.S.U.S. spirits market is probably growing five to five enough consent.
Throw in all channels and everything and we think that's fairly consistent.
And.
Oh.
Much in terms of the last couple of months to do some oh well NAPCO.
On Captain Morgan I'd say, it's it's a improving but we've still got a lot of work to do so up the fall from declaring victory on Captain Morgan.
The actions were taking have stabilized the brand is how I would characterize it a were going back with a lot of focus against Oh. The so the drinks the Oh MLS a 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 wasn't captain Morgan, which were focusing or we are some of it was not working so be it using that out of the base.
But there's work to do this is a big brand and the challenge category. The Rumka degree, it's still very sluggish in the U.S. and so oh, its ugly I'm happy with Ya compared to a couple of years ago, but still lots of work to do and too early to declare victory.
And then specifically as it relates to God, we were clear that it's just too early to call the impact of the Corona Iraq and so that's just the situation that we'll have to watch closely.
But your guidance assumes that of course, China will deteriorate in the in the second half since the say tone, yes.
[laughter] again, it is too early to be able to call exactly what the impact is going to be and so you know as it relates to our guidance. We can't yeah appropriately factor is something that we cannot yet really call. So it's just early days and too early to be able to.
This call how it's going to impact there you know I went back up a little bit to say.
You know China's about 4% of our business is obviously growing strongly right now, but it's just too early days to be able to understand the impact.
Perfect. Thank you yeah.
Our next question comes from on cheap as you Love with credit Suisse.
Yeah, Hi, I just had a a couple of quick follow ups. Please firstly just on mainstream for its Kevin had you speak so much about may seem Spurs recently is it still the strategic focus be solves a particularly in light told the emerging market volatility that you're seeing you know I noticed prime response was flat in the hall so nothing.
Got your assessment.
Part of the business and then just on on on the Guinness 10 around in the U.S. can you try to pinpoint what's really driving that improvement.
Sure on midstream spirits, it's still a focus and priority or you will see the performances more subdued into half in primary whiskeys was impacted also by weak bells in the UK.
We also had weakness on small enough in South Africa, It's a big brand.
So those with some of the factors that drove it but if you look at Nigeria, and Kenya were seeing really good growth and we're excited about the or potential for mainstream spirits to build and obviously into such a big market for bribery Scott's is still a big priority I mean, black and white grew 5%. It's a it's really on credit minimill.
Oh and up so absolutely very much Oh, let's focus for us to keep that business growing young but at good margins.
Oh I'm give us in the U.S. we are.
It's playing to the trends a better beer more atomic beer and the experience real side of what we put into Baltimore is working really well.
The new Oh brewery experience, we've created there so it's a bit of all of it or about to be is doing well be on crude dropped market in the U.S. is still challenged it's difficult, but we're doing really well on package than that home.
And.
Marketing is working better and what.
So I talked about earlier I really focus in the beer company is really making shobi builder quality sustainable group business, particularly around getting so and there's more exciting thing to come things to come around the brand in the next 12 months, the U.S. market as well.
Okay. Thank you.
Our next question kind of somebody goes on stock what parts of Liberum.
Hi, there or pardon for the collective side 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. You said it doesn't the statement that there'll be no direct financial impact to the audio base won't be material.
And just just can you walk me through what you why isn't the case and then secondly, whether there would be no change to the medium term guidance in the event of ER I know ft, a outcome right. Thanks.
Yes, so they simply or ability to a trade within that you doesn't change much under W. Two conditions, we would create a free or if there's some complications and borders and shipping product. We know how to handle that that means you shipped 280 countries. So it isn't.
The t. Rowe be impact within the U.
The UK government or we had a number of you are F T agreements in many countries.
Well, it's called benefited and the UK government has got the vast majority of that value covered well grandfathered Oh continued.
The post the Brexit scenario. So we don't have risk on that front and finally on the upside and it's not immediate but clearly as the UK ER develops new free trade agreements with emerging countries around the world.
We see good opportunities actually puts culture engine to benefit, but that's more medium to then immediately so no supply chain is a very indigenous supply chain, but we're not relying on shipping a lot of products from Europe and to be utility and and so we don't have the complexity of many other manufactured.
Products to deal with so those are the main reasons why we say we can to Brexit within Oh, Covent Garden, However, Brexit plays out.
Okay, I'm going to call it.
To close that thanks every much so everyone for your joining us from the fall and for your interest in the company and look forward to meeting with many of you as we got the and I go on the road show in the next two days. Thanks, a lot. Thanks, everyone.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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