Ivan M. Menezes - Chief Executive Officer and Executive Director
Deirdre A. Mahlan - Chief Financial Officer and Executive Director
Diageo (DEO) F2Q 2014 Earnings Call January 30, 2014 3:00 AM ET
Ivan M. Menezes
Good morning, everyone, and thank you for your time today. Deirdre and I are now going to give you our takeaways from the results we released this morning.
This half has seen a weaker set of results at the top line than we would have expected at the start of the year. But it's also a set of results which, on many levels, demonstrates what a strong business this is. It demonstrates our geographic reach. The weakness we have seen in some markets in Asia and Latin America and in Nigeria has resulted in a decline in volume in the half, but we have delivered net sales growth given our strong performance in the U.S., our improving performance in Western Europe, strong growth of our reserve brands and growth in South Africa, in Brazil, India and Russia. When you look at our performance in the more challenging markets, it also reflects the strength of our brands and our category depth. For example, in China, while baijiu has been very weak, we have delivered strong growth and share gains in super and ultra premium scotch, and Baileys continues to grow, opening up a whole new consumer opportunity for us. In Nigeria, our brand range will enable us to respond in the second half to changing consumer trends. In the West LAC and Southeast Asia, our scale and brand strength means that we have the flexibility to manage stock levels and respond quickly when market conditions improve. And markets will improve as the long-term structural growth drivers in the emerging markets are unchanged. As Deirdre and I will show you, the last 6 months have presented a number of challenges, but we have met those challenges and have continued to strengthen this business with investment behind the 6 performance drivers. These are our must-dos, and they are the focus as we drive to achieve our performance ambition to create one of the best performing, most trusted and respected consumer products companies in the world. We are now able to build an even more agile, accountable and effective organization. And over the next few months, we will develop detailed plans to delayer the organization and deliver further operating efficiency.
Let me now hand over to Deirdre to talk you through the performance in more detail.
Deirdre A. Mahlan
Thank you, Ivan, and good morning. While this has been a challenging half, we have, again, delivered efficient growth. We've focused our cost and maintained our investment in brands and route to consumer but with a weaker top line than we had envisaged at the beginning of the year. Top line weakness came from slower growth in the emerging markets and the continued uneven economic recovery in the developed markets, which has impacted some price points. Actions we have taken to reduce inventory levels and maintain our price positioning in an aggressive price environment in some markets also contributed to volume and net sales weakness. Emerging market volume was down 3% and net sales up 1%, reflecting the challenges we have had to manage in China, Southeast Asia, Nigeria and West LAC. In North America, our strongest business, given our scale, route to consumer and leading brands, the recovery is not yet benefiting all consumers, and growth has been uneven across price tiers. U.S. spirits, for example, delivered another good set of results, with strong growth from our super and ultra premium brands and new innovation launches but a weaker performance at value and standard price points. In Western Europe, the macro environment remains difficult in Southern Europe and in Ireland, but there are positive leading indicators elsewhere in the region. And even in Southern Europe, trends have improved. Even in this challenging trading environment, we delivered positive price/mix, from selective price increases and strong growth in reserve, overhead savings and margin improvement while continuing to invest for the future. I think these results demonstrate that while we are not immune to an economic slowdown in emerging markets, our geographic diversity and leading position in North America, together with the breadth and depth of our brand portfolio, can mitigate the impact of challenges in individual markets. They also demonstrate our commitment to active resource allocation and cost management to deliver efficient growth despite competitive and macroeconomic challenges.
I'll now take you through the results in more detail. Let me start with net sales. The termination of the distribution agreement with Jose Cuervo and a negative foreign exchange impact, mainly the South African rand, Brazilian real and the Australian dollar, reduced reported net sales, which was down 70 basis points. Weakness in value and standard spirit brands and in beer led to an organic decline in volume. However, the stronger performance of our higher-priced brands, especially our reserve brands, and the impact of the decline in beer volume, drove positive mix, which, together with selective price increases, drove price/mix up 4 percentage points. In looking out at our performance in Venezuela, the consolidation rate used for reporting purposes is VEF 9 to the U.S. dollar, which is driven by accounting standards. However, to ensure the discussion of our underlying performance in the first half is not materially distorted by market dislocation and exchange rates, we used a rate of VEF 19 to the dollar for organic calculation, which is a more conservative rate than the consolidation rate. The foreign exchange difference between using an exchange rate of VEF 9 and VEF 19 is GBP 83 million and is shown separately on the chart. The rate of VEF 19 was arrived at by using the consolidation rate adjusted by the inflation rate. Using the same method, we estimate that the year-end consolidation rate would be VEF 26 to the dollar, and this is the rate we have used in our foreign exchange guidance.
Let me take you through the volume and net sales movements in more detail. First, looking at the movements by category. Beer volume declined 12%. The weak economy and high inflation in Nigeria means that consumers have continued to trade down from premium and mainstream brands into value beer, and our volume decreased 17%. In Ireland, the beer category is weak, and volume declined by 8%. Volume of Senator in Kenya also declined as duty was levied on the brand for the first time, but this led to a mix improvement, which, together with price increases in North America, Kenya and Ireland, drove 9 percentage points of price/mix. Reduced inventory levels in Latin America, particularly in West LAC, and the challenging conditions in China and Southeast Asia, were the main drivers of the weak volume performance of scotch. Stronger growth of our scotch reserve brands drove 6 percentage points of mix. Volume in vodka was impacted by a decline of Smirnoff and the U.S. as we maintained our price position in a very competitive category. And with stronger growth of Cîroc and Ketel One, we delivered 6 percentage points of mix. Rum volume grew 9%, driven by Captain Morgan's growth in Germany and Austria, Great Britain and Russia and Eastern Europe. In December, the sell-in of Captain Morgan White began in North America, ahead of a planned launch early in the second half. Continued strong performance by Don Julio drove the growth of tequila. Ready to drink delivered 12% volume growth, driven mainly by Smirnoff Ice Double Black & Guarana in South Africa. However, it did lead to negative mix given the price points.
Now I will move on to drivers by region. Overall, North America's performance, with volume down 2% and net sales up 5%, reflects consumer trends, with higher-priced tiers performing better and value brands declining. Our reserve brands grew volume 16% and net sales 26%. Cîroc delivered strong volume growth with the recently launched Cîroc Amaretto. Bulleit also performed well and grew 60%, which was fueled by Bulleit Bourbon and the continued growth of Bulleit Rye, which we launched in 2011. Johnnie Walker continued to grow strongly in North America, especially in the U.S., driving very strong mix. Captain Morgan grew low single-digit, and Crown Royal shipments were impacted by the comparison against last year's launch of Crown Royal Maple Finished. The success of Smirnoff Light Sorbet line and new launches in the Confectionery line had a positive impact, but they didn't fully offset the decline of the Smirnoff core. Standard and value brands saw a greater impact from the tax increases and government shutdown, which negatively impacted consumer confidence.
In Western Europe, volume performance reflects the continued weakness in Southern Europe, mainly the decline of J&B in Iberia and the decline of beer in Ireland, partially offset by growth in rum and reserve. The rum category, which now accounts for almost 10% of volume in Western Europe, grew 10%, led by Captain Morgan. Reserve brands performed well again, with volume up 12%. Baileys declined across a number of markets following price increases. In the coming months, our new advertising should improve brand equity and support these price increases. We've seen great performance from Baileys Chocolat Luxe, which was launched this year and contributed to positive price/mix.
A volume decline of 4% in Africa, Eastern Europe and Turkey was driven by the decline in beer in Nigeria, which I have already described, and the introduction of duty on Senator Keg. In Kenya, the 2013 budget halved the excise tax remission previously enjoyed by Senator Keg, and this duty increase was passed on to the consumer, which led to significant volume reduction. Our other beer brands in Kenya have performed well, and sales, excluding Senator, were up 23%. In fact, excluding these specific weaknesses on Senator and in Nigeria, we delivered double-digit net sales growth in beer in Africa. In Africa, the spirits category continues to grow, delivering 4% volume growth, primarily driven by Johnnie Walker and by Jebel gin, which we launched in East Africa this year. Ready to drink has delivered a great performance, and volume nearly doubled compared to last year. Volume in Eastern Europe and Turkey was flat. Captain Morgan and our scotch brands, Johnnie Walker, Bell's and White Horse, grew volume, but that was offset by a decline of 6% in raki following excise duty increases. Positive price/mix was driven by the decline of Smirnov.
Moving now to Latin America, where volume was down just over 200,000 cases. This was driven by the destock in West LAC, which was partially offset by a 6% volume growth in Brazil. Of course, the biggest impact of the destock was on scotch volumes, which were also negatively impacted by a 30% reduction of scotch volumes in Venezuela. In Venezuela, the volume decline in scotch was partially offset by growth in Cacique, Smirnoff ready to drink and continued growth of Gordon's. Pricing drove net sales growth. Ypióca grew strongly following completion of the acquisition and a full relaunch of the brand. Mexico also delivered a 3% increase in volume, the key contributors being Captain Morgan, Baileys and Black & White, and rum performed strongly throughout the region.
The 4% volume decline we saw in Asia Pacific was primarily due to a 15% decline in volume in Southeast Asia. The decline was driven by Thailand, where our brands were impacted by a significant tax increase, which drove retail prices up by 15% to 20%. In addition, there was destocking in some markets in Southeast Asia as currency volatility and uncertainty about the economic outlook have weakened trade confidence. 65% of our sales in Southeast Asia are in scotch. In China, Johnnie Walker Black and Red Label shipments declined, although depletions were up slightly for Black and Double Black. Our super and ultra premium Johnnie Walker brands continued to deliver double-digit growth and gain share. Scotch volume was up strongly in India and in Middle East duty free, which partially offset the decline in Southeast Asia and China. Growth of vodka was driven by India. And rum grew in a number of markets, with growth driven mainly by 9% growth in Australia. Although net sales were significantly impacted by our Shui Jing Fang business, volumes were not due to higher bulk baijiu sales, but this drove negative price/mix.
Moving now to price/mix. Net sales grew 2%, driven by 4 percentage points of positive price/mix. Reserve brands, which grew volume 13% and net sales 19%, accounted for about 1/3 of our overall price/mix. Beer delivered around another 1/3 of the price/mix, driven by the positive mix impact of the decline in Senator Keg and price increases in Kenya. Price and mix on Guinness in North America and price increases in Ireland also drove price/mix. Net sales of Shui Jing Fang declined over 60% on flat volume of baijiu given higher bulk sales driving negative price/mix.
Overall, there is little difference in our growth between the 2 quarters despite some volatility in individual markets. When we reported our first quarter, we were using an exchange rate for Venezuela of VEF 9 to the dollar. We have restated our organic performance for the first quarter using the exchange rate we have used for the half of VEF 19 to the dollar. In North America, we were lapping the launch of Crown Royal Maple Finished in last year, and this is reflected in our second quarter performance. In Western Europe, as you can see, the underlying trends were unchanged. In Africa, Eastern Europe and Turkey, the phasing of shipments in Russia and Eastern Europe drove faster growth in the second quarter, offset by further weakness in Africa. In Latin America, Colombia was lapping a strong first quarter in fiscal '12. So performance was weak in the first quarter. Venezuela benefited from price increases in the second quarter, and trends in West LAC were broadly unchanged between the quarters. In Asia Pacific, despite an improved performance in India, the slowdown in the second quarter is driven by the weakness in Southeast Asia and China.
In this half, organic growth in our marketing investment was 3% focused on reserve and new activities from our premium core brands. In North America, we invested behind Johnnie Walker's super and ultra premium variants, Cîroc and Guinness, which was back in growth, supported by the new marketing campaign. Media spend increased on Crown Royal and Captain Morgan, and investment in reserve grew 10%, driven by Don Julio and the launch of Cîroc Amaretto. In Western Europe, we reduced marketing investment broadly in line with net sales and focused on strategic brands. We have also improved marketing efficiency and increased media spend. Switching focus from small-scale activities towards scalable activations makes our programs more effective and saves us money. The increase in marketing spend in Africa, Eastern Europe and Turkey was mainly driven by investment in Africa behind Tusker in Kenya, the relaunch of Guinness in Nigeria and the increased investment on scotch in Nigeria and South Africa. The overall investment in Russia and Eastern Europe and Turkey was broadly flat. In Latin America, we increased investments on Ypióca, relaunching the brand with a new media campaign and new packaging, and on scotch in Venezuela, Mexico and West LAC. In Asia Pacific, marketing spend was reduced although it grew as a percent of net sales. We reduced spend in Korea and Southeast Asia, particularly on scotch, and increased spend behind Baileys in China and Vietnam, where it's growing strongly, and on Bulleit and Bundaberg in Australia. We continued to support Chinese white spirits brands as we are extending our portfolio and have launched a new premium baijiu at a lower price point than Shui Jing Fang.
On to margin now. In a difficult trading environment, we were quick to react to manage our cost base and deliver efficient growth. Gross margin improved 34 basis points, reflecting positive price/mix from the strong growth of reserve brands. In the first 6 months, we have invested slightly ahead of our net sales growth, and marketing spend had a negative impact of 14 basis points. Margin benefited from savings in overhead mainly coming from North America and Asia Pacific.
We delivered free cash flow of GBP 326 million in the half, a decrease of about GBP 400 million from a year ago. The biggest driver is related to the increase in working capital, which is primarily driven by lower creditors as marketing spend was phased to the first quarter, where marketing spend was up 11%. Dividend income is lower due to the earlier receipt of dividends from Moët Hennessy last year. Higher tax payments are principally the result of increased taxable profit and the timing of tax audit payments. Net interest payments were broadly in line with last year. In July, we also made a one-off contribution of GBP 85 million to the Irish pension fund, partially offset by a lower pension contribution in the U.S. Looking to the full year free cash flow, I do not expect to see the negative year-on-year movement we have seen in the first half. For the full year, we will have lower pension contributions, but higher CapEx and adverse FX movements will have a negative impact. I do expect to make the cash contributions we have agreed in respect of the recent thalidomide-related settlement in Australia. However, the first half timing difference on working capital and dividend income will reverse.
Now moving to the income statement. Reported operating profit was up 3%, the result of negative foreign exchange of GBP 54 million, GBP 35 million lower profits year-on-year relating to disposables, lower costs relating to acquisitions and organic growth of 3% together with the GBP 83 million add-back in respect of the adjustment between organic growth and consolidation rates for the Venezuelan bolivar. Associate income was up GBP 41 million, driven by growth in income from Moët Hennessy and the inclusion of United Spirits.
Average net debt increased by GBP 1 billion, principally as a result of the acquisition of the stake in United Spirits and the one-off contributions to the U.K. and Irish pension funds. The effective interest rate is lower than last year as we benefited from lower interest rates on the debt we have raised and also higher commercial paper balances. This has reduced the interest charge in the period. The effective interest rate for the full year is expected to be below 4%. The positive impact on post-employment charges is mainly driven by the reduction of the pension deficit as a result of the pension contributions that we have made. We have a higher hyperinflation adjustment for our operations in Venezuela as a result of higher local net assets.
Now moving down the P&L. The tax rate before exceptional items increased to 19.4% because of the higher level of profit in Venezuela and the fact that the hyperinflation charge of GBP 27 million is not an allowable expense for tax purposes. Excluding the group's Venezuelan operation, the tax rate before exceptional items remained at about 18%. Noncontrolling interests are broadly flat year-on-year, and EPS grew 4%.
Now let me pull this all together and talk about what we think the first half tells us about the trends for the full year. As I said in my introduction, this top line growth has been disappointing, but our cost focus has delivered our margin targets. Currency weakness has caused trading uncertainty and adversely affected our reported results. For the full year, we estimate a negative impact on operating profit of about GBP 280 million from foreign exchange.
In North America, growth of U.S. spirits in the first half benefited from great innovation launches, including Cîroc Amaretto, Johnnie Walker Platinum and gold bullion reserve and Captain Morgan White, which we shipped in the first half ahead of its launch early in the third quarter. Net sales growth in wine in the first half also benefited from innovation. We don't have plans in the second half for such significant innovations. And therefore, we expect our second half performance for U.S. spirits and wine will moderate somewhat. Performance in Guinness U.S.A. and in Canada is expected to improve, although net sales in Guinness U.S.A. is likely to continue to be negative. Bulk sales accounted for 80 basis points of top line growth in the half as last year bulk sales were mainly in the second half. We do not believe there will be any marked change in consumer trends. And therefore, the rate of net sales growth in the second half reflects the timing of innovation launches and comparison against a very strong third quarter last year. We expect that the improving trend will continue in Western Europe but that the second half will still decline on last year. In Africa, Eastern Europe and Turkey, while we expect the performance in South Africa to slow, we do expect to improve our performance in Nigeria. In Latin America and Caribbean, we anticipate that destocking in West LAC will not be an impact in the second half but that given currency restrictions, scotch shipments in Venezuela will slow. In Brazil, we expect that performance will continue to improve. In Asia, we expect to deliver modest growth in the second half, driven by the comparison against the weak second half in Korea and duty free last year and a strong pipeline of innovation in Australia.
Overall, therefore, I think our top line performance will improve in the full year. And given our continued cost focus, we remain committed to achieving our operating margin targets. The review which we have announced to delayer the organization and deliver further operating efficiencies will lead to an exceptional charge, which I expect will be around GBP 200 million to GBP 250 million. There will be some impact on cash flow this year, but I expect that the significant cash expenditure in respect to the restructuring will be in fiscal '15. I don't expect any savings will be realized in fiscal '14. Our view of the long-term growth of this industry and that of Diageo as the leader of the industry is unchanged. This is a strong business, and we have invested in our brands and our routes to market again this half. We are investing to achieve our ambition to create one of the best consumer products companies, as Ivan will now describe.
Ivan M. Menezes
Thank you, Deirdre. I want to talk to you now about our regional performance in the half. It's a mixed picture given some of the challenges which arose, but as I said in my introduction, Diageo's strengths enable us to manage challenges and deliver on opportunities. I also want to talk about how we have begun that step-up in executional focus on our must-dos, which I outlined at our Capital Markets Day back in November. I'm also going to explain how the changes we are looking to make in our global, regional and market structures will improve that executional focus and deliver further cost savings.
Let me start with the regions. North America is a great market for Diageo, not just the biggest and the most profitable, but also a strong route to market, a market-leading position and a great team. We are one of the few consumer goods companies that has delivered sustained performance on top line growth and margin expansion. The performance is all the more impressive when you remember that the economic recovery in the U.S. has been uneven. Consumers at lower income levels have been affected by uncertainty, and this is reflected in their spending patterns. As a result, volume for standard brands has been most impacted, and price sensitivity and these segments is increasing. Smirnoff has certainly been impacted by this, losing share as competitors continue to discount prices. Innovation is helping to mitigate some of this. But to regain share and increase our pricing strength, we are working on a new communications platform that will enhance the brand's credentials with consumers. In contrast, premium and above brands are leading category growth, and our reserve brands are well placed to benefit from this trend. Johnnie Walker Platinum and Johnnie Walker Blue are great examples of this. And together, they delivered GBP 25 million of additional net sales in the half, as are Bulleit and Don Julio, which together drove about 1/3 of our sales growth. The role that innovation continues to play in U.S. spirits sets us apart from the competition. Cîroc Amaretto, Johnnie Walker Platinum and the shipping of the new Captain Morgan White, which goes on sale in Q3, drove significant growth in the half. We continue to build our route to consumer, and our distributors have added 90 people to our dedicated sales resources in Missouri. This is a strong business that continues to deliver.
In Western Europe, our strategy of investing behind our premium core brands and reserve and innovating at scale is a slow build, but we are on the right trajectory. Net sales continue to decline in Southern Europe and Ireland, but this has slowed to mid-single digits mainly as stock levels are stabilizing. Great Britain and France grew, and Germany, Austria and the Benelux again performed very well. We will remain cautious about the medium term, but we do see a number of areas where we can grow our brands. While our marketing reinvestment levels are broadly flat, Western Europe is now applying the learning from North America to drive further efficiency in marketing spend and increasing the amount we spend on media. Western Europe has had a strong half in terms of its innovation performance, growing 50% versus last year. We had multi-country launches, such as Baileys Chocolat Luxe. Smirnoff Gold was launched in Great Britain in the first half and will be rolled out across the region in the second half. The luxury market in Western Europe is growing, and momentum in our reserve business has continued with double-digit net sales growth. Cîroc has performed tremendously, more than doubling in size, boosted by the launch of new Red Berry in Great Britain. The successful Zacapa Rooms have been rolled out, and Zacapa sales are up 28%. In malts, Talisker has grown 27%, fueled by the launch of Talisker Storm and the powerful campaign of the Atlantic Challenge, which I hope you've seen. And while the Spanish market is weak overall, gin is growing. And we're capturing this growth with Tanqueray, which has gained share.
The beer market in Nigeria was a significant challenge in the half. The beer category is soft, and consumers are moving to value beer. On reflection, we did not respond to this quickly enough. We lost share, and the price increase we took in October was not the right thing to do in this environment. We were late with a value beer offering in the market, but Dubic is now growing strongly. In H2, we will adjust our pricing, and we have innovation launches and a Guinness relaunch. And our route to consumer work will double our outlet coverage in Lagos and expand across the country. In East Africa, despite the impact of Senator, beer net sales still grew as this is a strong beer market in which we have seen considerable success. And as I've said before, the opportunity for spirits in Africa is huge. We have increased our investment in the category again this half. In East Africa, spirits net sales grew 24%, with Jebel gin a large contributor to this. In Nigeria, Johnnie Walker grew 39%. And in Africa, reserve grew 45%. In South Africa, innovation is performing particularly well, and we're gaining share across spirits. Russia and Eastern Europe is also growing, led by Bell's, which was up 45%, and Bushmills, which was up over 20%. This is an attractive region to invest in. Diageo is strong, and we will continue to build our brands, innovate to meet consumer needs and expand our route to consumer.
In Latin America and the Caribbean, we've managed the challenges of pricing in Venezuela and inventory levels in West LAC. We have also built on our route to consumer and continue to diversify our portfolio to set ourselves up well for future growth. In Venezuela, we managed pricing to ensure we kept pace with inflation. While scotch volumes are down, we've gained share. We have continued to focus on our portfolio of domestic brands, and we've delivered strong growth on Cacique. In Brazil, we are performing well, restructuring our route to consumer, reducing stock levels and gaining share. Our Ypióca business is now fully integrated, and we have relaunched the brand with new packaging and a new marketing campaign, driving net sales growth of over 30%. In Mexico, the market is softer. And in West LAC, we have held firm on price, which has led to some destocking. Our super and ultra premium brands continue to grow, and we gained share in scotch, rum and Baileys. Across the region, innovation is driving growth. In scotch, we've focused on super premium, with brands such as Johnnie Walker Gold Reserve and Johnnie Walker Platinum, and on premium-priced brands with Johnnie Walker Double Black and Buchanan's Master. Outside of scotch, Cîroc and Ketel One vodka are growing strongly and helping to build our presence across categories.
The first half performance in Asia was impacted by China and destock in Southeast Asia. In China, the government's anti-extravagance measures and their impact, I think, are well understood. We've managed our stock levels in Shui Jing Fang and, in some cases, taken stock back and written it off. We have launched innovation at more affordable price points, and we've maintained the marketing spend behind the brand. I think the current Chinese New Year is unlikely to see a rebound, but we have taken all the steps to rebase the business for growth in calendar 2015. Stock levels are an issue in the international spirits sector in China, and we have managed our stock levels carefully on Johnnie Walker Black and Double Black. So shipments declined, while depletions are up slightly. Our strong performance in super and ultra premium scotch continues, as does our strong growth in Baileys, with both up over 30% in the half. This demonstrates that category breadth is a strength even in challenging markets. I've spoken about a number of actions we have taken this half, which we believe strengthen our business for the future, such as managing our stock levels. Let me now talk about the impact of one we took last year. Last year, in Korea, we saw very weak sales as we held price against the market trends. This half, our share has not only rebounded to previous levels, but we've made share gains on that base given our consistent approach to the price position of Windsor and our successful innovation. Diageo has the ability to take these decisions, absorb the short-term impact and build for the long term. And before I move to the must-dos, a word on India. We worked quickly to put the sales promotion agreement in place, which has contributed to the very strong growth in India in the first half. This shouldn't be extrapolated on a straight line for the future. India is a sophisticated market, and the route to consumer is very strong. However, it is an emerging market, and experience has proven that there will be challenges and volatility. But it is a great start.
In November, I shared with you our 6 executional must-dos. It's early days yet, but let me share how we're tracking. As you can imagine, we are further along in some areas than others. Premium core is 60% of our business. These are profitable, high return brands. We have to ensure that they all have proven growth drivers behind them, marketing campaigns, innovation and a strong route to consumer. If you look at the performance in the half, it is still mixed. As you may remember, my benchmark for success in premium core is building brand equity, grow share and take price. Captain Morgan would be an obvious success story in the half, and Johnnie Walker remains an iconic brands with depletions growing even though destocking has impacted its sales this half. Tanqueray would meet my benchmark in many of its markets. We were right to hold our price position on Smirnoff in the U.S., but we do need to build up the brand equity if we are going to hold the volume in a very price-competitive category. And Baileys has been strong in North America, China, Latin America and Caribbean but weaker in Western Europe. It's true that the challenges we have faced in specific markets have impacted our premium core brands more than our reserve brands, but we also need to deliver a more consistent performance. And this is a high area of focus for us.
Our reserve brands have truly delivered in the first half. As we walked through each region, I highlighted how these incredible brands were driving growth both in emerging and developed markets. Not only are we seeing strong volume growth, but these brands are creating significant value for Diageo, delivering around 1/3 of our total price/mix. This isn't just about internal metrics. When we look at the latest Drinks International report on the world's 50 best bars, Diageo has 3 brands in the list of top-selling brands, including the #1 and 2 brands, and we have 4 in the list of the 10 top trending brands. This is a testament to our reserve organization and the impact of our World Class bartender program. We have increased our activations, signature drinks, drink menu presence and improved brand visibility. In the first half, a television program featuring the World Class contest was aired across many countries, not only increasing awareness of the program across the industry, but also promoting a premium cocktail culture. In the half, we expanded our dedicated reserve sales model to 10 new cities in Africa, Turkey and Canada. We will continue to extend this model to new markets, as well as expanding our reserve coverage in cities where we're already present, such as London, Sao Paulo and Bangkok. This will lead to increased distribution and availability of our reserve brands in more than 10,000 on and off premise accounts. The Johnnie Walker Houses are another example of where we've taken a proven growth driver to the next level. They have evolved beyond being an experience for a select group of individuals to being a direct sales route to the luxury consumer. Launch of new scotch whisky collections, such as the Epic Dates collection and bespoke [ph] blends, have generated incremental sales. As well as opening a third Johnnie Walker House in Seoul, we have extended what we have learned from them to create other brand opportunities, such as the Zacapa Rooms and the Voyager program, which we invested behind strongly in the first half.
I have highlighted in this slide just 2 of the successes we have had in innovation in the half to give you a flavor: Smirnoff Gold is a spectacular liquid, unique to the category. Initial success in Great Britain is driven by the visual disruption that the product brings, which is particularly impactful for the on-trade. Cîroc Amaretto builds on the brand's leadership in the flavored vodka segment. And within 13 weeks of distribution, it was the #6 brand in the industry. Our focus on execution and innovation is to create fewer but bigger, more scalable ideas, and we're starting to see this. In the half, just 4 innovations accounted for over 50% of the net sales growth from innovation.
We are also making good progress on our route to consumer. We are not rolled out in every market yet, but we have had some quick wins. The launch of our route to consumer work covers approximately GBP 4 billion of our net sales, including Western Europe. Several of these markets are now in implementation phase. We are in the diagnostic stage in the Wave 2 countries accounting for about a further GBP 1 billion of net sales. I have already mentioned our route to consumer enhancements in the U.S. and our sales promotion arrangement with USL. Let me share some other wins we've had in the half: We have added feet on the street in Spain to cover an additional 2,000 outlets. And in Russia, we almost doubled the national sales force to just under 200 people and tripled our outlet coverage in Russia. We have increased the coverage of our exclusive third-party sales team in South Africa by 25%. This required only one additional head as it was achieved through better, data-driven planning of sales force schedules and routes. As you can see, we've been busy on route to consumer, and I have greater confidence that this work will deliver net sales improvement. And as I will come onto, it's going to deliver significant cost efficiencies for us in logistics and supply.
We have maintained our focus on cost in the half and, as Deirdre showed you, delivered efficient growth. Savings in the procurement of promotional items have been reinvested in media spend. We've made substantial savings on travel costs, reducing the number of flights by over 50% in the half. And together with other procurement savings, this has contributed to our margin improvement. In the half, we ran a leadership program for 250 leaders in Diageo. Our aim was to align behaviors behind our performance ambition. It is a major time commitment from the leaders and from their line managers, and it has a huge impact on the behaviors we're seeing in the business. But the biggest change we will make this year to deliver these 2 must-dos is the change we announced today to delayer the organization and capture further operating efficiencies. So let me move on to that now.
Our performance ambition is that Diageo will be one of the best-performing, most trusted and respected consumer product companies in the world. As I said at our Investor Conference, achieving that requires a step-up in our focus on the executional must-dos and the change in culture and behavior. As I've just shown, we have already begun to make progress on the must-dos. But in the last 6 months, it has become clear that the organization is not yet structured in the best way to deliver our performance ambition. The world is not homogenous. We need a more decentralized business while retaining the benefits of scale and attracting top talent. This delayering follows on from the changes we made in 2011, which simplified the organization by removing regional hubs structures, such as our international layer. It made our 21 markets fully accountable for delivering the business performance in their markets and put our resources and decision-making closer to customers and consumers. As I tell my colleagues regularly, in Diageo, everyone sells or helps to sell. Since 2011, we have upgraded talent. The leadership of market general managers and their direct teams, especially in marketing and finance, is now in a much stronger place. We have also moved accountability for our supply operations in-market to the local managing directors. And to deliver the step-up in our focus on the executional must-dos and really change our culture and behavior, we need to take the next step. The principle behind that next step is to ensure all my colleagues across Diageo can act like owners and that they can be bold in execution.
There are 4 main areas where we're proposing to make changes. In shared services and IS, we believe we can improve our service levels to the markets and reduce cost with better procurement. And this will deliver about 1/4 of the total cost savings we expect to achieve. We currently spend about GBP 600 million on logistics. From the route to consumer work we have already completed in a number of markets, which account for about GBP 100 million of this total, we have identified savings of about 12%. The savings come from reducing stock levels and some very simple things, such as optimizing pallet and truck loads. We will reconfigure our above-market teams, working in regions and global functions to support the markets and manage vital global activities that benefit us all. We know there are opportunities to simplify and streamline our approach. We look very hard at our current discretionary activity and ensure we are focused only on those things which demonstrably add value. And finally, at the market level, we will review our structures to ensure we are competitive and organized to deliver efficient growth. This is a continuous process, and about GBP 50 million of the annual savings we've identified will be used each year to fund further change.
My final slide is our performance ambition because while this has been a tougher half, especially in terms of top line growth, I have seen a lot of things in the way the markets have responded to these challenges, which have shown me that Diageo is firmly on the way to achieving our ambition. We are sustaining our performance in North America, and we're improving in Western Europe. Our reserve organization has now been established as one of the premier luxury goods businesses. In scotch, we continue to build share. We continue to lead the industry in innovation, and our new marketing campaigns on Guinness and Baileys are building the brands' equity. We have the strength, both financially and with our scale, to take tough decisions. We've continued to invest behind proven growth drivers in marketing and in route to consumer. And we can do more to delayer the organization to ensure we have the agility, I believe we need to deliver on this performance promise and to deliver further operational efficiency.
Thank you for your time. I look forward to taking your questions at 9:30 on our conference call when Deirdre and I will be joined by our exec colleagues.
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