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Diageo plc  (NYSE:DEO)
Q2 2020 Earnings Call
Jan. 30, 2020, 4:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Diageo Interim Results Investor Q&A Call. [Operator Instructions] Your call today will be hosted by Diageo's CEO, Ivan, and CFO, Kathy. [Operator Instructions] We are now ready to start the call. Ivan, please go ahead.

Ivan Menezes -- Chief Executive

Thank you. Hi everyone. Kathy and I are in London, and welcome to this morning's post-results investor call. I'm pleased to share with you another set of good consistent first half results with broad-based organic growth across regions and categories. As you know, we are lapping last year's very strong first half and we have faced volatility in specific markets, and therefore, pleased that despite this, our performance is in line with our medium-term guidance of 4% to 6% organic sales growth, demonstrating our increased resilience as a business. Our margin expansion continues even after three strong years, despite increased COGS inflation in this half. And this is a result of our continued focus on premiumization and driving everyday efficiencies.

I'm particularly pleased with the strong growth in the US, our largest market, as well as good growth in Africa and Asia-Pacific, which more than offset challenges in India, Latin America and the Caribbean, and Travel Retail. Across categories, tequila, Canadian whiskey and Chinese white spirits, all grew double-digit, balancing softness in our scotch performance. We remain confident in the underlying performance of our scotch portfolio as the challenges were quite localized to a few specific markets. We made significant improvements in our A&P effectiveness through leveraging our proprietary tool, Catalyst, and our strengthened consumer insight-led marketing campaigns. This gives us the confidence to continue to grow A&P ahead of sales. We're seeing tangible results from this up-weight in investment. Innovation remains a key growth driver for us, as we recruit new consumers and occasions to our brands, as evidenced by the sustained growth of variants such as Crown Royal Regal Apple.

In the context of the market-specific challenges we saw in H1 and continue to face, I now expect the full year organic net sales growth to be toward the lower end of our medium-term guidance of 4% to 6%. I continue to expect organic operating profit growth to be roughly 1 point ahead of net sales for the full year. However, we won't be immune from any significant changes to global trade policy.

On the evolving coronavirus situation in China, we continue to monitor this very closely. Our primary concern is the welfare of our employees and ensuring they have all the available information and support as the situation evolves. There will be an impact on performance. However, it's too early to be able to quantify this at this point in time.

So we remain focused on sustainably building our business through the disciplined execution of strategy to deliver consistent and resilient performance. And with that, we'll open up the line for your questions to Kathy and myself. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Simon Hales with Citi.

Simon Hales -- Citigroup -- Analyst

Thank you. Good morning, Ivan. Good morning, Kathy. I have three questions, please. Ivan, I wonder if I could just start where you finished on your [Technical Issues].

Kathryn Mikells -- Chief Financial Officer

Simon?

Ivan Menezes -- Chief Executive

Simon, you're fading in and out.

Kathryn Mikells -- Chief Financial Officer

Simon, you have bad connection. We can't hear you clearly.

Simon Hales -- Citigroup -- Analyst

Okay. I might need to call back in there. You're cutting in and out. I'll rejoin the queue.

Kathryn Mikells -- Chief Financial Officer

Thank you.

Ivan Menezes -- Chief Executive

Thank you.

Operator

Thank you. Our next question comes from Sanjeet Aujla with Credit Suisse.

Sanjeet Aujla -- Credit Suisse -- Analyst

Morning, Ivan, Kathy. I think Simon was trying to ask this, but I'll go ahead and continue. Just on the guidance -- the lowering of the guidance, can you just walk through the moving parts of that? Because on the one hand, you do have easier comparatives in the second half of the year across many parts of your business. However, the guidance implies no acceleration in the second half. So it'd be great to walk us through the key assumptions there. And also if you would have lowered the guidance, if -- would you've lowered the guidance if it wasn't for the coronavirus outbreak in the past couple of weeks?

Kathryn Mikells -- Chief Financial Officer

Sure. I'm happy to take that. So I would start with, you'll recall that when we discussed our full year results from last fiscal, one of the key themes we had in terms of the strong results that we delivered was, it was a quite muted year in terms of volatility, and that was part of what caused our outperformance. If you look at what we're seeing in the first half, I would say, we're seeing more volatility across the world, and that's impacting our results. And we're not expecting that situation to necessarily improve in the second half. So if you look at the places in the world where results were a little softer, I would point to India and the fact that in India, this is largely as a result of just the softening economy in India. And I'd say there's a lot of uncertainty associated with when and how that's going to improve.

So as we look to the second half, we would be quite cautious about the economic situation in India. We pointed out, specifically within our PEBAC market, Peru and Chile as being places that have been impacted by disruptive social unrest, and again, that's a situation that continues to be difficult. Mexico is also a place where we've seen just the overall economic environments weaken a bit, and obviously, we have a big Scotch business in Mexico, and that has impacted our Scotch business overall. So really, I would say, it's just the fact that last fiscal year, we had really muted volatility across the globe and that helped us in terms of the overall -- at the high end of our mid-term guidance what we had produced last fiscal. And we just expect that the world is going to continue to be a bit more volatile. I want to come back to your mentioning about the coronavirus because as you would've heard in Ivan's commentary, that's a situation that we just can't predict as we sit here at this point in time. And so, it's something that we'll just have to continue to watch closely.

Sanjeet Aujla -- Credit Suisse -- Analyst

Got it. Okay. And perhaps just a quick follow-up on the growth in China you've seen in the first half of the year. Is that really distribution-led growth? Are you going into more provinces still? Or what's really supporting?

Ivan Menezes -- Chief Executive

It's a combination of greater penetration, so rate of sale improving. So if you look at the two businesses, Shui Jing Fang and primarily high-end Scotch whisky, both are very healthy and both are growing double-digit. And we're investing behind these brands. We're investing in innovation -- in premium innovation in Shui Jing Fang. So we're seeing momentum in existing distribution and we are gradually expanding distribution. It's very high-quality growth. And the brands and the businesses are in really good shape and growing market share in both cases.

Sanjeet Aujla -- Credit Suisse -- Analyst

Got it. And I appreciate its early days, but any qualitative signs of how Chinese New Year has gone?

Ivan Menezes -- Chief Executive

Very hard to tell. Obviously, it came early, so you can see in our first half results some of the sell-in in to Chinese New Year. It's too early to call what the actual consumption has been over the last week. So we will obviously be tracking that in the weeks to come.

Sanjeet Aujla -- Credit Suisse -- Analyst

Got it. Thank you.

Operator

Our next question comes from Laurence Whyatt with Barclays.

Laurence Whyatt -- Barclays -- Analyst

Hi, Ivan and Kathy. Thanks very much for the questions. In the US, you mentioned that your Scotch business benefited first from some trade loading ahead of the tariff impact. Because you said the Scotch is up 4% but Johnnie Walker is down 5%, so single malts are being presumably loaded. Could you quantify how much of that plus 4% was trade loading and how much sort of an underlying growth? And then secondly, on the two vodka brands, Smirnoff and Ciroc, sales velocity has worsened a bit there. Could you give us some detail on what's happening in those brands and if there's anything you can do to try and improve that? And then finally, your margins have improved despite declines in gross margin and an increase in marketing. How can we be confident that the cost savings you're putting through aren't going to be affecting the business continuity? Thanks very much.

Ivan Menezes -- Chief Executive

Okay. I'll take the first two and Kathy will address the last. On the US Scotch, it's 30 basis points of pre-buying of blended Scotch. So that's 30 basis points for the growth rate of the US business, so it's small. On vodka and Ciroc, the vodka category, as you can see, in the US is still challenging. If I take the three brands, on Smirnoff, we are stabilizing. The equity is building. The business is stabilizing. The quality of performance is better. We are easing off promotional intensity on some SKUs through our NRM initiatives, etc. But Smirnoff is a big brand and it's going to take time to do that consistently and stabilize. On Ciroc, it's still challenged. And on Ciroc, we've always said this is going to be a long game to stabilize. We are taking some actions to reduce some of the less sustainable flavor innovations and trying to get the base more healthy. But I expect Ciroc to remain challenged in the US. It will take us over many years to get that brand stabilized in the US. It's better outside, clearly. And then Ketel One, core Ketel One, the base brand is healthy and growing, and we are just lapping incredible success of Botanicals from last year, but I remain positive on the health of Ketel One. So vodka overall, a clearly challenged category, but gradually health of our brand is getting better.

Kathryn Mikells -- Chief Financial Officer

And then I'd say, look, as it just relates to continuing to drive productivity overall, I think we've shown quite good execution in terms of our productivity being driven by everyday efficiency, how we take that and look to invest in key areas of growth in the company to make sure that what we're driving is sustainable quality growth. So, it's kind of a virtuous circle, and I think we've been quite sustained in terms of how we do that at Diageo. If I look at our first half results, I'd say, I continue to feel really good about what we're driving through everyday efficiency and you see that really come through our overall overhead line, getting us a little over 100 basis points of positive improvement there, which really helped us to offset both the gross margin softness that you saw and continuing to invest ahead in marketing, 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'd say I feel very good about that.

As I look to the second half, I'd also tell you, as we look at gross margin, I'm expecting right now to get a bit more productivity gains in the second half that can help a little bit of that softness that we're seeing in gross margins and overall, probably, a little less than what we saw in overhead in the first half. 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.

Laurence Whyatt -- Barclays -- Analyst

Thank you. Just to come back on the scotch from Ivan, you mentioned 30 basis points on the blended category. And as I understood it, the tariffs were on a single malt. So you are seeing no trade loading on the single malt then?

Ivan Menezes -- Chief Executive

I don't like the word trade loading, please. We are talking about handling the situation of -- we were anticipating tariffs late in last year and we didn't know what categories would get impacted or not. So we -- at that stage, we had a plan to bring in more blended scotch because there was a risk, which thankfully did not emerge. The 30 basis points is on total North America. That's the framing of blended scotch that was pre-bought because -- until we knew what the tariff situation was.

Laurence Whyatt -- Barclays -- Analyst

That's very clear. Thank you very much.

Operator

[Operator Instructions] Our next question comes from Simon Hales with Citi.

Simon Hales -- Citigroup -- Analyst

Thank you. I'm going to try again. Can you hear me, Kathy and Ivan?

Kathryn Mikells -- Chief Financial Officer

We can, yeah, it's much better. Thanks for calling back in, Simon.

Simon Hales -- Citigroup -- Analyst

Excellent, thanks for taking the call -- the question. I have three, please. Firstly, just on A&P spend trends, A&P is slightly ahead of sales in the first half but not much and I think really driven by the step-ups you're seeing in Asia. How do we think about the step-up in A&P spend for the second half? Is it going to be broad-based across more of the regions, perhaps a bit more skewed into H2 than H1?

Secondly, just carrying on from some of the comments on your US performance, the previous questions, I wonder, Ivan, maybe you could expand a little bit more on the performance of Crown Royal. In the half, very strong. I wonder if you could give us a breakdown as to how the base brand has performed versus peach and apple. And also Smirnoff Spiked Seltzer is clearly doing well. Where do you think you're gaining share from in the hard seltzer category? Are you seeing any cannibalization of your spirits brands you think at all?

And then just a final one on cash flow, Kathy. Obviously, GBP300 million higher cash tax one-offs in the first half. You talk about those one-offs continuing for the full year. Should we think about incremental further cash outflows in relation to tax to move [Phonetic] the French government or in relation to the group financing exemption situation in the UK? How do we think about that for the full year?

Kathryn Mikells -- Chief Financial Officer

Okay, I'll go ahead and take the first question, also the second one. I'll bring the third one back to me.

Ivan Menezes -- Chief Executive

Yeah, go ahead.

Kathryn Mikells -- Chief Financial Officer

So look, as you look at A&P, I'd say, we feel good about the first half and investing ahead overall in A&P. That consumed about 25 basis points of margin for us. I'd say, if you looked back at what we've done in the last couple of years, that's been reasonably consistent. But as I look to the second half, the one place I would call out is in the US, so in US spirits, over the last few years, we've increased what I'll call the A&P kind of investment rate by rough order of magnitude 200 basis points or so in US spirits. We held that kind of in the half. You can see that in the results. I would expect that that's one of the places that, in all likelihood, would be further up-weighted in the second half.

If we talk about some of the other areas where we would've seen an increase in A&P spend, we've talked about the fact that we're increasing spend behind scotch more generally. You would've seen a bit of an up-weight in Europe. And then, Asia, you have to pick apart a little bit. So I would say outside of the India business in Asia, and especially in areas of strong growth that we would've seen, scotch in China, Chinese white spirits, those would all be places that were up-weighting spend. So we always, I would say, make adjustments here in real time. One of the things that Ivan pointed to is we have terrific tools now. If you went back two or three years ago, we were not as good in terms of how agile we could be to move spends to where we're kind of really seeing the returns. And our Catalyst tools, which we continue to invest in and sit on every marketeer's kind of table top, really helps us to be much more agile to put the spend behind where we really see the returns coming from. So That's some of the places where you see up-weight. And yes, I think if we look to the second half, again, we would be looking to continue to invest ahead. And then I'll turn it to you.

Ivan Menezes -- Chief Executive

So, on Crown Royal, Simon, the brand is -- if I start with brand health, it is at an all-time high, really, really strong. We've now had seven consecutive halves of growth in the brand. If you look at the breakdown of what's happening, actually Regal Apple is now year sixth of launch and is continuing to grow double-digit. If you look at Nielsen/NABCA, it's up 13%, Vanilla is up 10%. The base business is broadly stable, the base brand, but it's healthy. And the main thing Crown Royal is doing which we are very encouraged by is it's bringing new consumers into whisky and into Crown Royal. And our marketing is working well, we've up-weighted our marketing spend against the brand in the last few years significantly. So we feel good about Crown and the momentum continues to be healthy. Clearly, flavors have accelerated the growth, but the flavors are bringing new consumers and new occasions. They're not cannibalizing the base.

On seltzer, I mean, we are a relatively small player in seltzer. So we are riding the trend with Smirnoff right now. You can see it in the numbers. It's strong double-digit growth on our F&B business in the US. It is -- our main -- my main focus is ensuring we have a healthy beer business in the US. And so, while the trends continue, we will benefit. But it's not a strategic area for focus for us. We see plenty of good growth in spirits and beer, and I view this more as riding the trend for now, because it could be more volatile and we don't want to get overly dependent on it.

In terms of impact of seltzer from spirits, so far, we -- our analysis and what it says, it's mostly impacting beer. Inevitably there'll be some impact on spirits, but as you can see in our performance, it's not -- we don't see this as having a significant impact yet, but we're tracking it. And ultimately, the simplicity of a premium spirit, whether it's whisky or tequila or vodka on the rocks with a splash of soda, the with soda trend is very strong. And when you look at tequila growing at 33%, our tequila business, 35% in the US, it's -- there's huge trends in favor of premium spirits that are still in the US markets, and that is underpinning some of our strong performance there.

Kathryn Mikells -- Chief Financial Officer

And then I'll just get back to your question, which was with respect for the higher tax payments that we would've seen in the half and that impact and the fact that in our guidance, we basically said we're expecting to see that flow-through through the year. So as you mentioned, we've had over the last several years, a number of different one-off tax payments. And in different tax jurisdictions, this always works differently. Some of them you actually pay ahead. Some of them you pay after the fact and then the cash flow is a year-over-year change number. So I would say, as we look at those one-off impacts for the half, they will just flow through for the full-year. And when we get to the end of the fiscal, we'll be able to talk in more specificity about what we have seen in terms of one-offs for the year and then, what, if anything, we would anticipate as we go into fiscal 2021. But that's really what's going on.

Simon Hales -- Citigroup -- Analyst

Okay, that's very clear, thank you all.

Operator

Our next question comes from Richard Withagen with Kepler.

Richard Withagen -- Kepler Cheuvreux -- Analyst

Yeah thanks. Good morning. I have two questions, please. First of all, specifically, on the US market and your marketing spending, can you discuss how your marketing effectiveness tools increase the return on your marketing investments and maybe give one or two examples? And related to that, should we expect further increases in marketing spending ahead of net sales growth in the next few years? And then the second question is, going back to productivity savings, Kathy, you mentioned, you expect more productivity in the second half of the year. With the full year results last year, you mentioned you expect GBP100 million to GBP150 million in savings or in productivity in fiscal '20. Is that range still valid? Or do you expect to perform outside of that range? Thanks.

Ivan Menezes -- Chief Executive

Sure, I'll take the first. On US marketing spend, if you look at the last three years, we have increased our marketing spend in US spirits by over 250 basis points, significant up-weight in investment, and our share of voice has gone up significantly. I'm really pleased with the quality of marketing and innovation coming out of the team in North America. It is some of the best we see across Diageo. And with our tools, our ability to direct spending against effective programs and to adjust quickly is much stronger than it was a few years ago. So as I talked about earlier, we have a significant uplift in Crown Royal because we can see the returns there being really strong and it's working and delivering on our performance. But even on a brand like Baileys, we're now down to the level of sophistication where we can pick days in the year and geographies, and through our digital and social spending, can drive a purchase at a very granular level. So, this is clearly -- will continue. We're learning and getting better all the time. But the rigor now behind which we look at every dollar spend and where it goes and how we measure returns is much stronger. And the US is very capable and effective at this.

So we've up-weighted on a number of brands. We're constantly adjusting because not everything works and then we redirect spend going forward. We don't have a requirement or a target that we will keep increasing spend reinvestment levels in the US. It really is built bottom-up. So if we see the opportunities for good returns, we will spend more. At the same time, we're driving a lot of efficiencies and we're getting significant gains in how we buy media and the efficiencies of our spend, which is also contributing even more to the effective spend that we have in that market.

Kathryn Mikells -- Chief Financial Officer

And then as it relates to productivity, you had referenced that at our last Investor Day, we talked about the fact that we saw about GBP100 million to GBP150 million annually of kind of incremental opportunities in productivity as we look forward, and that was supportive of our overall guidance of being able to grow operating profit about 1 point ahead of net sales. So as you look at this year and what we're currently expecting, we're continuing to look at that and say we believe we can grow operating profit about 1 point ahead of net sales for the full year. And we had previously stated we thought the first half on operating profit growth, delivery and margins specifically, was going to be a little lighter than the second half. 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, margin expansion in the first half. And my commentary about the second half is, we always have some phasing going on in productivity, and obviously, as I referenced earlier, in the second half, we're expecting to get a bit more in terms of our product cost 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.

Richard Withagen -- Kepler Cheuvreux -- Analyst

All right, that's clear. Thanks a lot.

Operator

Our next question comes from Nico von Stackelberg with Liberum.

Nico von Stackelberg -- Liberum Capital Limited -- Analyst

Hi. Good morning, everyone. I just wanted to ask -- because I know there are parts of the guidance that are certainly quite volatile and hard to forecast, but one part that you should have a pretty good feel for is the impact of tariffs, particularly on Scotch going to the US. 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.

Ivan Menezes -- Chief Executive

Yeah. To answer your second part first, we've assumed the current tariff situation remains stable. So we're not assuming it getting worse or getting better in the current guidance. The impact, we're really early in the game is what I would say. As we have announced to the trade, we are passing on the impact of tariffs on single malts and on Baileys. So that's been already communicated to the trade in the US. Seeing the impact of that on actual sell-out is something we will watch very closely in the next few months. Obviously, we've got ranges and scenarios that impact, and what I would say, all that is factored into our current guidance that the current level of tariffs will stay.

Nico von Stackelberg -- Liberum Capital Limited -- Analyst

Great. Thank you. And as a follow-up, can I ask about Crown Royal? So it grew 11% in North America. It looks like depletions were up 8% in the period. So, slightly shipping ahead. And I also note that if I look at NABCA through November, the last 12 months, the volumes are only growing around 2.5, so you're getting strong price/mix. Does Crown still have legs in terms of price/mix? Obviously, there's a broader premiumization trend but, certainly, the brand is being helped quite a lot by price/mix, and so how sustainable is that?

Ivan Menezes -- Chief Executive

Yeah, I'll say overall Crown, our depletions are broadly in line. The Nielsen/NABCA is growing at about 9%. On many of our brands, we do really well. Nielsen/NABCA captures, whatever, 45% of the market. Our performance in the independent channels and the on-premise, which is not captured in Nielsen/NABCA is very strong on many brands and so you see some of that momentum come through on Crown. One of the things -- we do see good opportunity for price and mix on Crown. And one of the things we are doing is really looking at the higher marks, like Crown Royal Extra XR, where we want to put a lot more focus, a bit like we do with Johnnie Walker Blue. So we are looking at building the top end of the Crown Royal franchise as we go forward [Indecipherable] behind that for gifting and brand building, and that should improve mix as well over time.

Nico von Stackelberg -- Liberum Capital Limited -- Analyst

Okay, great. And if I can just ask one more question. I've always wondered why Diageo gets something of a pass in terms of the fair market value of your maturing inventories. Could you maybe for the full year provide some sort of color around the fair market value of your maturing stocks? It seems like it'd be useful for the valuation equation. Thanks.

Kathryn Mikells -- Chief Financial Officer

So I would say we don't look to attempt to disclose what we would say the fair market value is. We would say our assets are appropriately valued in our balance sheet. And we, like every whiskey maker across the world, have a good amount of stock. So all I would say is, we build stocks very consistently across all of our whiskey brands, and we're happy with the stock levels that we have.

Nico von Stackelberg -- Liberum Capital Limited -- Analyst

Yeah, I guess, but it's at cost on your books and there is a fair market value. And I also know -- actually maturing stocks are excluded from working capital in your management compensation. So you have a slight incentive to build stocks. And we never really get any color on the growth or the IRRs of your maturing stocks, and more disclosure would be useful, I think. But, yeah, just a thought for consideration. Thanks.

Kathryn Mikells -- Chief Financial Officer

So look, I would just comment that we try to create our compensation metrics in a way that the people across the organization can have an impact. As it relates to growing maturing stocks, we just look to do that consistently to support our brand, and that is managed by, I'll call it, relatively few people across the company. But it's specifically an area that we don't move things up and down, but we actually just look to grow our stocks consistent with the categories that they support. I think we've done a great job in terms of actually everyday efficiency and delivering strong cash flow and that's been supported by the metrics we have in our compensation programs that drive the things that people can actually impact. But thank you for the question.

Nico von Stackelberg -- Liberum Capital Limited -- Analyst

Yeah, thanks. Appreciate it.

Operator

Our next question comes from Trevor Stirling with Bernstein.

Trevor Stirling -- Sanford C. Bernstein -- Analyst

Hi, Ivan and Kathy. There's two questions from my side. The first one, just returning to the theme of malts, more the performance at the moment, we saw 12% growth last year, 17% first half. It really seems that the malts are kicking into gear after a few years of perhaps less-than-ideal performance. What you put that down to, Ivan? And I suppose secondly, do we have the stocks to support that? But then secondly, on the coronavirus, I appreciate it's entirely way too early to talk about the impact. Can you talk a little bit about the impact of SARS back in 2003?

Ivan Menezes -- Chief Executive

Yeah, sure Trevor. On malts, we've put, I'd say, a far more disciplined and focused strategy behind malts by -- one of the things Diageo is blessed with is this wonderful 28 distilleries that produce the most beautiful single malts and we're kind of spoiled for choice. I'd say one of the things that's happened is, we put real discipline and focus behind the variants and the geographies and we've got better growth drivers. A brand like Singleton now is doing really well. Cardhu in Spain is doing extremely well; in the US, Lagavulin. And so we -- and the supply side is now better aligned to support sustainable growth over the long-term. So I'd put it down to clear strategy and better execution against it.

Kathryn Mikells -- Chief Financial Officer

And then, look, I think if you attempted to go back to SARS, you have to understand our SJF business wasn't owned at that point in time, and our scotch business was tiny. So there's just no relative comparator there for us.

Trevor Stirling -- Sanford C. Bernstein -- Analyst

Okay. Could I just ask one follow-up, Ivan? You mentioned that you are passing through the price increase in single malts. Are your competitors following, as far as you can tell?

Ivan Menezes -- Chief Executive

I don't know the answer to that. I wouldn't even speculate. So, I don't know.

Trevor Stirling -- Sanford C. Bernstein -- Analyst

Okay.

Ivan Menezes -- Chief Executive

And again, what I said is, that we've communicated to the trade, to the -- what we're doing, which is why I've mentioned it on the call because that's been already communicated.

Trevor Stirling -- Sanford C. Bernstein -- Analyst

Very good. Thank you, Ivan and Kathy.

Kathryn Mikells -- Chief Financial Officer

Thank you.

Ivan Menezes -- Chief Executive

Thank you.

Operator

Our next question comes from Alicia Forry with Investec.

Alicia Forry -- Investec -- Analyst

Hi. Good morning, Ivan and Kathy. Three questions, please, from me. First, volume momentum has deteriorated. I appreciate India is the significant impact on this. But I'm curious about what's happening with your volumes ex-India. And are you seeing any new trends emerge? And then, secondly, the organic operating margin fell 160-ish basis points in India in H1 after several years of improvement there, as you've been improving the product portfolio. It seems to be COGS-driven. How should we think about this near-term? Have margins in India reached a sort of plateau? And then, finally, on global travel retail, how should we think about the timing of recovery in this channel? We will lap Hong Kong later in the year, and presumably, the Middle East issues will work themselves out at some point. So, just curious on the timing of recovery there. Thank you.

Ivan Menezes -- Chief Executive

Yeah, so maybe I'll take the first. Kathy, you do India margin, and I can come back to global travel.

Kathryn Mikells -- Chief Financial Officer

Great.

Ivan Menezes -- Chief Executive

So on volumes, you're right, India was flat, and it's almost a third of Diageo's volume, so does have a impact. If you take India, travel retail and our weak spots in Latin America like Peru and Chile, where we had volume declines, outside of that, our volume would have grown I think close to 1.5%. So we are -- there's solid volume growth coming in most places, including the US, which you can see is -- so I'd -- there's no shift in trend here. We are seeing consumers are trading up to-- more to spirits and more to premium spirits, and we gain from that. Our reserve brands were up 11%. That's 20% of the business. And so all those conditions remain strong. India?

Kathryn Mikells -- Chief Financial Officer

And then on India. I'd say, overall, we were pleased in terms of how much of the gross margin softness the India business was able to offset, especially in light of the difficult economic conditions that they're facing. The other thing that we're seeing that's just causing more pressure in terms of the margin is a fair amount of inflation in specific input costs. And one I would point to that has a big impact on them is base neutral spirits. And so inflation in base neutral spirits for them has been pretty significant. But I'd say, when I look overall at their results and how much they've gained in margin over the past years, while they have some specific challenges this year, as we look over the long term, I'd say, our expectations are unchanged for India over the longer term, which is looking to have them -- have a top line growth more high-single digits, low-double digits and getting to a margin level of kind of mid-to-high teens. And I think they've made terrific progress in the last kind of three-year period in just making good gains against those long-term goals.

Ivan Menezes -- Chief Executive

And on global travel, we expect it to remain challenging, certainly through the second half. And it's a little hard to predict the pace of recovery and when it comes. Our focus is really on execution and market share in the airports, in particular. And on that standpoint, I feel good about how the business is doing, the sell-out execution and our market share performance in the measured global travel retail business, we are doing well. And that's what we can control, I'd say. But we are assuming things will stay tough in the second half too.

Operator

Our next question comes from Edward Mundy with Jefferies.

Edward Mundy -- Jefferies -- Analyst

Morning, Ivan. Morning, Kathy. Three questions, please. The first is on the buyback where you're GBP1.1 billion through your GBP1.25 billion. How should we think about the phasing of your GBP4.5 billion over three years? Should we think about equal phasing? Or is there some scope once you've finished your GBP1.25 billion to perhaps accelerate the phasing of that buyback? The second question is around Slides 34 and 35 in your presentation. I appreciate that you don't run your business from 1st of July to 31st December and there's-- there are differences on shipment phasing from one day to the next. But on Page 34 of your slide deck, your shipments has obviously accelerated from 5 to 6.1 [Phonetic]. But on 35, your depletions have slightly decelerated a little bit across most of the portfolio. Is that really around the on-trade that's not captured in the Nielsen and NABCA? Or is there something else that we're not thinking about at this stage? And then the third question is around gin. I think you disclosed that your gin portfolio grew 7% in the first half and Tanqueray grew 13%. I was wondering whether you could clarify what the growth of both Gordon's Core and Gordon's Pink would have been in the first half.

Kathryn Mikells -- Chief Financial Officer

Okay. Well, I'll start with the first question. As you would have seen and you referenced, we had completed GBP1.1 billion of the three-year program, which is sized at up to GBP4.5 billion of share buybacks and capital return in the 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. And if we had looked back in the last couple of years, we had a leverage ratio that was kind of below the range we're targeting. We target a leverage ratio of 2.5 times to 3 times, and that's an adjusted net debt to EBITDA number. And so when we finished the first half, we were at 2.8 times, so kind of roughly in the middle-ish of that range. So as we look to both the kind of second half and into the next couple of years, we'll be looking to manage shareholder returns against that backdrop of the leverage ratio. But right now, my overall commentary was, we feel pretty good about execution against the GBP4.5 billion. We made a very good down payments in the first half against that three-year program.

Ivan Menezes -- Chief Executive

On the US depletion performance, our overall US spirits depletions have growth in line with shipment in value terms, so across this period in the first half. You raised the right point. I think when you look at our growth in the non-measured channels of the independent markets and the on-premise, our growth rates have been higher, and we are performing very strongly in many of those states, which are non-chain states. And we put a lot of focus now on the US. In fact, we put a whole new organization behind it to really building our on-premise presence in the US strongly. And I'm pleased to see that focus will continue to give us good benefits in the years to come.

On gin, Gordon's grew as well. Gordon's base was up about 3% and Pink, I think, was up about 1%, and in spite of lapping what was the decade's greatest spirits launch in the UK market, we had a phenomenal success last year, but it's still growing. And our belief on gin is the category still has good runway ahead of it. Yes, GB and Spain took off the earliest. But those growth rates will slow down. But the rest of Europe and then other markets like South Africa, Brazil, [Indecipherable] Australia, we are seeing very good growth.

Edward Mundy -- Jefferies -- Analyst

Very good, thank you. And then just as a follow-up, the Captain Morgan Europe growth has really accelerated. Is there anything sort of particularly behind that relative to last year?

Ivan Menezes -- Chief Executive

I would just say we are excited about the brand. We've put focus behind it. It's doing -- it is one of the brands we're backing. And it has -- as you point out, yeah very pleased with the performance in Europe. And the growth drivers and execution against it are working well.

Edward Mundy -- Jefferies -- Analyst

Very good, thank you.

Operator

Our next question comes from Marion Boucheron with MainFirst.

Marion Boucheron -- MainFirst -- Analyst

Hi, good morning, everyone. Two question for me, please. One, on the COGS, how shall we look at them going forward and impact it could have on the second half? And the second question would be on the price/mix that was very strong in the first half. Would you be able to give us some granularity of what has been -- I mean price, what's been more driven by net revenue management and what was mix? And then third, I don't know if you have any colors to give on the innovation pipeline in the upcoming quarters.

Kathryn Mikells -- Chief Financial Officer

So I'll start with just how we're thinking about kind of COGS in the second half. So I would've mentioned that we obviously have softness in gross margin in the first half. And part of that is coming from just the level of inflation that we're seeing relative to our ability to offset it through productivity. I had mentioned, in India specifically, kind of base neutral spirits is one of the areas where we've seen higher inflation. I've mentioned in the past and will certainly reiterate today that Agave is another place that we've continued to see inflation and relatively high prices. And then the third thing I would mention is, generally, glass cost inflation has been another area of impact for us. So as I look to the second half, I would say, we're expecting to continue to see a lot of the similar inflationary impact. With regard to overall gross margin, I'd say, we're also expecting to see a bit more positive productivity phasing against COGS. I would say, I hope to improve what we're seeing in terms of gross margin. But it's always a bit of a game against what's happening in inflation, how much can we offset in productivity, and then obviously, what are we seeing in price/mix. So you want to take the second question, obviously, get to [Phonetic] price/mix?

Ivan Menezes -- Chief Executive

So price/mix, as you can see, was strong here. We had price of about 0.5 and the rest is mix. Mix was also helped unfortunately by India being weak, some of the country -- the geographic mix is stronger as well. But our NRM capabilities and focus and disciple are really operating in all our markets. As you know, we are coming from behind. We've still got a lot of room to improve. But with every period, we are getting better and better. And in many markets, we're seeing and taking more price/mix in a sustained way. That's our goal. And the underlying trends of in-market mix also remain very positive with premiumization being strong. And as I said earlier, our reserve business, which is 20% of the business, grew 11%, so that is very strong mix operating in our favor.

On innovation, our focus on innovation is sustainability and consistency. So as we look at the second half, we have a good pipeline. We are also -- as we go into this calendar year, we are celebrating the 200th anniversary of Johnnie Walker, and you can expect us to do some exciting things on that brand as well in the course of -- it will be second half and the first half of next year. So innovation pipelines are now built with the long-term focus to ensure we have consistency and our innovation capability continues to get better, and the focus on sustainability is also much stronger in how we develop and execute innovation.

Marion Boucheron -- MainFirst -- Analyst

All right, thank you.

Operator

Our next question comes from Celine Pannuti with J.P. Morgan.

Celine Pannuti -- J.P. Morgan -- Analyst

Yes, good morning. Most of my question had been answered. I just wanted to follow-up on Europe. If you could talk about the overall growth environment that you see in your categories, and then also in the UK, whether you've seen any slowdown throughout the quarter?

Ivan Menezes -- Chief Executive

I'd say overall, Europe, as we saw, the business grew 3%. If you take a 12-month -- last rolling 12 months' view, we are growing share. We have taken some price increases in certain markets and channels, and that has impacted some of the short-term performance. We do have variability across Europe. Some of our markets like Germany, Benelux, etc., are growing double-digit. Italy was strong. Spain is more challenged. Ireland is tough, flattish. The UK market, I feel good about. Our beer business here has been strong. Guinness was up 6% in the UK. And one in 10 pints in London is now a Guinness. This is our highest share ever on Guinness. And so, we've got ups and downs. But overall, the performance consistency continues. And the environment is good, I would say. We see spirits well-positioned and premiumization trends strong, and even small categories like tequila, expensive tequila are growing very fast. Our single malts are doing much better. So the Europe environment, I'd say, is solid.

Celine Pannuti -- J.P. Morgan -- Analyst

Thank you.

Operator

Our next question comes from Andrea Pistacchi with Deutsche Bank.

Andrea Pistacchi -- Deutsche Bank -- Analyst

Yeah, good morning, I have three questions please. The first one on the US, where scanner data, Nielsen in particular, have proved to be not a very good predictor of your performance in the US, as you were also highlighting. That said, the Nielsen data in the past couple of months show or would suggest a bit of a slowdown in -- at the industry level through November, December. Have you seen a slowdown at all in the business? The second question, please, on your guidance and on China. I appreciate, of course, the uncertainty on the situation in China. But what -- could you give us an idea of what situation in China you are factoring into your guidance, on how many months of difficult situation in China you are building into the guidance? The third question, please, back to the US on Captain Morgan, which in the last 2.5 period has been positive, so a clearly better performance compared to the past two or three years. Is this a reflection of the work you've been doing on the brand that you're confident that you've probably turned the corner on Captain Morgan?

Ivan Menezes -- Chief Executive

Sure, I'll take the first and the third, and Kathy, you can talk about the guidance. On the US trends, again, I don't look at any particular month of Nielsen or NABCA and read too much into it. We don't see -- we look at the MAT trends over time, I don't see a shift in US. The US spirits market is probably growing 5% to 5.5%, if you throw in all channels and everything in, and we think that's fairly consistent. And so we don't read much in terms of the last couple of months of Nielsen or NABCA.

On Captain Morgan, I'd say it's improving, but we've still got a lot of work to do. So we're far from declaring victory on Captain Morgan. The actions we're taking have stabilized the brand, is how I would characterize it. We're going back with a lot of focus against the serve, the drinks, the MLS, the football sponsorship, which is just kicking in, in terms of its full impact. The marketing is much more focused. We're getting smarter about some of the innovation that was on Captain Morgan, which we're focusing -- some of it was not working, so we're easing that out of the base. But there's work to do. This is a big brand in a challenged category. The rum category is still very sluggish in the US. And so it's -- I'm pleased -- I'm happy we're here as compared to a couple of years ago, but still lots of work to do and too early to declare victory.

Kathryn Mikells -- Chief Financial Officer

And then specifically as it relates to the guidance, we were clear that it's just too early to call the impact of the coronavirus. And so that's just a situation that we'll have to watch closely.

Andrea Pistacchi -- Deutsche Bank -- Analyst

But your guidance assumes that, of course, China will deteriorate in the second half versus H1, yes?

Kathryn Mikells -- Chief Financial Officer

Again, it's too early to be able to call exactly what the impact is going to be. And as it relates to our guidance, we can't yet appropriately factor in something that we can't yet really call. So it's just early days and too early to be able to call how it's going to impact the business. I would back up little bit to say China is about 4% of our business. It's obviously growing strongly right now. But it's just too early days to be able to understand the impact.

Andrea Pistacchi -- Deutsche Bank -- Analyst

Perfect, thank you, yeah.

Operator

Our next question comes from Sanjeet Aujla with Credit Suisse.

Sanjeet Aujla -- Credit Suisse -- Analyst

Yeah, hi. I just had a couple of quick follow-ups please. Firstly, just on mainstream spirits, we haven't heard you speak so much about mainstream spirits recently. Is it still a strategic focus for yourselves, particularly in light of the emerging market volatility that you're seeing? I noticed primary scotch was flat in the half, so love to get your assessment on that part of the business. And then just on the Guinness turnaround in the US, can you try and pinpoint what's really driving that improvement?

Ivan Menezes -- Chief Executive

Sure, on mainstream spirits it's still a focus and priority. You will see, the performance was more subdued in the half, and primary whiskeys was impacted also by a weak Bell's in the UK. We also had weakness on Smirnoff in South Africa. It's a big brand. So those were some of the factors that drove it. But if you look at Nigeria and Kenya, we're seeing really good growth and we're excited about the potential for mainstream spirits to build, and obviously, India is such a big market for us. Primary scotch is still a big priority. Black & White grew 5%. It's really on trend in many markets, and so absolutely very much a focus for us to keep that business growing and at good margins.

On Guinness, in the US, we are -- it's playing to the trends of better beer, more iconic beer. And the experiential side of what we've put into Baltimore is working really well, the new brewery experience we've created there. So it's a bit of all of it. Bottle beer is doing well. The on-trade draft market in the US is still challenged. It's difficult. But we are doing really well on packaged and at-home. And the marketing is working better. And as I talked about earlier, really, our focus in the beer company is really making sure we build a quality, sustainable growth business, particularly around Guinness. And there's more exciting things to come around the brand in the next 12 months in the US market as well.

Sanjeet Aujla -- Credit Suisse -- Analyst

Thank you.

Operator

Our next question comes from Nico Von Stackelberg from Liberum.

Nico von Stackelberg -- Liberum Capital Limited -- Analyst

Hi there. Pardon for the collective sigh around the city on this, but there was no question around Brexit. And I was just wondering, could you just give us a quick update on Brexit, even in the event of a no free trade agreement outcome? You said in the statement that there will be no direct financial impact to Diageo. Basically, it won't be material. And just can you walk me through why is that the case? And secondly, there would be no change to the medium-term guidance in the event of a no FTA outcome, right? Thanks.

Ivan Menezes -- Chief Executive

Yes, very simply, our ability to trade within the EU doesn't change much. Under WTO conditions, we will trade tariff free. If there's some complications in borders and shipping products, we know how to handle that. We ship to 180 countries. So it's immaterial, the impact within the EU. The UK government -- we had a number of EU FTA agreements in many countries where scotch benefited, and the UK government has got the vast majority of that value covered or grandfathered or continued in the post-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 develops new free trade agreements with emerging countries around the world, we see good opportunities actually for scotch and gin to benefit, but that's more medium term than immediate. And our supply chain is a very indigenous supply chain that we are not relying on shipping a lot of products from Europe into the UK. 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 take Brexit within our current guidance, however Brexit plays out.

Okay, I'm going to call it to a close there. Thanks very much everyone for your -- joining us on the call and for your interest in the company and look forward to meeting with many of you as we -- Kathy and I go on the road show in the next few days. Thanks a lot.

Kathryn Mikells -- Chief Financial Officer

Thanks everyone.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Ivan Menezes -- Chief Executive

Simon Hales -- Citigroup -- Analyst

Kathryn Mikells -- Chief Financial Officer

Sanjeet Aujla -- Credit Suisse -- Analyst

Laurence Whyatt -- Barclays -- Analyst

Richard Withagen -- Kepler Cheuvreux -- Analyst

Nico von Stackelberg -- Liberum Capital Limited -- Analyst

Trevor Stirling -- Sanford C. Bernstein -- Analyst

Alicia Forry -- Investec -- Analyst

Edward Mundy -- Jefferies -- Analyst

Marion Boucheron -- MainFirst -- Analyst

Celine Pannuti -- J.P. Morgan -- Analyst

Andrea Pistacchi -- Deutsche Bank -- Analyst

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