Brand Diageo - Internal Template

28 January 2016
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• Good morning everyone. Welcome to our interim results webcast.
• At the fiscal 15 results presentation and at our investor conference, I had talked about our clear goal
to become a reliable compounder of growth
• We lead in an industry that is financially attractive and growing.
• We have the portfolio and geographic balance to drive growth.
• The organisational changes over the last two years have built a culture of disciplined execution.
• Diageo is now a stronger company, better equipped to deliver on our growth opportunity.
• We now have the platform to achieve our performance ambition to become a reliable compounder
of growth.
• And most importantly, we now have momentum.
• Our performance in the half demonstrates that momentum.
• When we talked about our expectations for fiscal 16 we highlighted volume growth as being key to
delivering better top line growth.
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• And in the half on an organic basis volume was up 1% and our net sales growth improved.
Depletions were ahead of shipments again reflecting our sell out focus across markets.
• Improved net sales growth is despite the decline in net sales in North America where as we expected
net sales were down 2% although depletions were up nearly 3%. As you know we made a number of
changes to the way we manage innovation launches in the US and we also launched our big
innovations in the US later in the half. The main impact was on Cîroc given the timing changes and
better shipment flow which reduced Diageo net sales growth by about 1ppt; North America net sales
by 3 pps and reduced growth in our reserve brands by 7 pps.
• We gained share in key battlegrounds especially Western Europe, sustaining our leadership positions
and bringing our brands to an increasing number of consumers.
• Exchange and geopolitics continue to impact the emerging markets but with the discipline we now
bring to all areas of the business we are managing this volatility and in the half drove 5% growth in
the emerging markets.
• Our focus has been enhanced through our disposal of non core assets in the last 12 months and we
continue to drive productivity and cash conversion.
• All in all a solid set of results that Kathy Mikells will now go through in more detail.
• Kathy, welcome to your first Diageo results webcast
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• Thank you Ivan and good morning everyone
• You’ve heard Ivan talk about the level of change which Diageo has implemented in the last two years.
We have moved our focus to sell out enabling us to get closer to our customers and improve our
insights on consumer demand, we have strengthened our route to consumer with better coverage
and physical availability of our brands and we’ve enhanced accountability by standardising metrics
and moving to a market focused organization, all with the aim of improving our execution and
thereby our performance.
• Our first half results demonstrate that improved performance trajectory, especially in the key metric
of volume growth.
• We have also achieved positive price/mix despite a weaker price environment resulting in organic
net sales up 1.8%.
• Organic operating margin was up, mainly driven by marketing spend efficiencies, better pacing of
spend against innovations in the US, and a shift towards proven growth drivers to improve our
returns on marketing spend.
• Exceptional items in the half netted to a pre tax profit of £107 million. This includes an exceptional
non-operating gain of £457million from the sale of beer operations in Jamaica and Malaysia, a loss of
£123 million from the sale of our wine assets in the US and Great Britain as well as an operating
charge of £104 million for impairment of the Ypióca brand. This was mainly triggered by a change in
duty legislation in Brazil which will lower our profitability
• Free cash flow improved by £140 million reflecting our focus on cash conversion.
• Eps pre exceptionals was down largely driven by the impact of foreign exchange and the disposals of
non core assets.
• And we have increased the interim dividend by 5% in line with our strategy to rebuild cover.
• Let me now go through the details of my first set of results at Diageo.
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• Reported net sales were down 5% with FX the biggest driver of that decrease.
• Despite an appreciation of the US dollar against the pound in the last few months, the devaluation of
nearly all emerging markets currencies and the euro against the pound continued to have a negative
FX impact on net sales which was worth 5 percentage points of growth.
• About £60 million of the foreign exchange impact results from our decision to change the
consolidation rate of the Venezuelan Bolivar to one which recognised local inflation.
• Since the second half of fiscal 2015 we have used the Simadi rate to consolidate our operations in
Venezuela which is about 200 bolivars to the dollar. However as the economy has weakened, access
to dollars has become more difficult so we have moved to an exchange rate which better reflects the
level of inflation in Venezuela. This change reduced the hyper inflation charge that is reflected in
other finance charges.
• Venezuela is now a significantly smaller business, amounting to about £4 million of net sales in the
half.
• Acquisitions and disposals netted to £109 million. This is mostly driven by the sale of Gleneagles and
Bushmills in the second half of last year, the sale of non core beer assets in Africa, Jamaica and
Malaysia which completed in the first half and the sale of our US and UK wine operations which were
disposed of in January.
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• Volume growth was 1%. Diageo has delivered a consistent improvement in volume performance
from the first half last year through to the most recent six months.
• In North America volume was down 2%, consistent with our expectations, as we move towards a
replenishment model in innovation and our Cîroc innovation was launched later in this half.
• In Europe we had volume growth across all key categories with the exception of vodka which was
driven by declines in Germany and Austria. In Turkey volume grew and in Russia volume declined as
the economy slowed but we priced more aggressively enabling strong net sales growth there.
• In Africa volume was up 7% driven by growth in beer. Beer volume grew 23% as Senator more than
doubled in size following the duty roll back earlier in the year. Volume of RTD declined as Orijin in
Nigeria lapped the national roll out last year with scotch volume decline in South Africa and Angola
given the weaker economies there.
• In Latin America volume was up 4% with all markets delivering volume growth. Mexico was the
biggest contributor as it benefitted from the repatriation of Smirnoff distribution rights as well as the
good performance of Johnnie Walker Red Label with volume up 14%, supported by the new “Walk
With Joy” campaign.
• Our volume growth underpinned improved momentum in our top line, with net sales up 1.8%
against a flat performance in the previous two halves.
• Now let’s look at the net sales performance in more detail.
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• Net sales trends have improved in both developed and emerging markets.
• Net sales in developed markets were broadly flat as the net sales decline in North America was offset
by growth in Europe and Australia.
• We delivered good growth in emerging markets, which were up 4%. These markets remain volatile
and the trading environment remains difficult in markets like Russia, Brazil, Nigeria and China, but
there are also many markets that are performing well. Colombia and Mexico for example both grew
strong double digit and are gaining share, East Africa up 13% benefitted from the duty remission on
Senator, and USL was up 6% despite some trading challenges.
• We know we will have ups and downs in emerging market countries. It is part of their journey to
become developed economies. We are getting better at managing this volatility and will continue to
focus on that as it is integral to producing more consistent trading results.
• Let’s look at our geographic results in a bit more detail
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• With the exception of North America, all regions contributed to net sales growth despite weakness
in some specific markets.
• In Europe, Russia and Turkey net sales were up 3%. Russia delivered net sales growth despite volume
decline. Europe was the biggest contributor as momentum continued and the brands gained 20bps
of share of overall spirits in Western Europe.
• Africa net sales were up 3%. All markets contributed to growth with the exception of Nigeria where
net sales declined 9% largely driven by Orijin, as it lapped last year’s national roll out and faced
increased competition in the category. Elsewhere the Africa top line performance was particularly
good. In East Africa net sales grew 13%, with Senator more than doubling in size following the duty
roll back and in Africa Regional Markets net sales grew in Ghana and Cameroon following the launch
of Orijin.
• In Latin America and Caribbean net sales were up 9%, with all markets contributing to growth.
Performance was particularly strong in Mexico and Colombia both growing strong double digit on
the back of strong growth in scotch. In a challenging trading environment Brazil net sales were also
up 12%, although the market benefitted from buy in prior to the tax increase in December. This
phasing of shipments accounted for approximately 80% of Brazil’s sales growth which will reverse in
the second half.
• Finally in West LAC net sales were up 3% in domestic markets while the performance in the export
channel was weaker than we expected with depletions down 20% in the half.
• In Asia Pacific net sales were up 2%. This is the first time United Spirits has contributed to organic
growth for the region, with net sales up 6% and positive mix.
• Elsewhere growth in Australia, Taiwan, Japan and Shui Jing Fang broadly offset weakness in the
Middle East and in international spirits in mainland China.
• North America net sales declined 2% in line with the volume decline.
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• Looking now at performance in the United States in more detail.
• Net sales in US Spirits declined 3% largely driven by the changes that we have made in managing
innovation launches and lower depletions on Cîroc as the new flavour, Apple, was launched late in
the half, while the launch of Cîroc Pineapple last year occurred earlier in the half.
• So while overall shipments of US Spirits were down 3%, depletions were up 3%.
• With the exception of Cîroc, underlying trends in US Spirits improved.
• Smirnoff, our largest brand by volume, is up 4% and Crown Royal, our largest brand by value is up
8%. Bulleit, growing strong double digits, continues to gain share in the fast growing North American
Whiskey category
• In a declining rum category both Captain Morgan and Zacapa are outperforming the category and are
both in growth.
• In scotch Johnnie Walker was back in growth driven by its super deluxe variants and Buchanan’s, now
the second largest scotch in the US, continued to drive good growth.
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• As this slide shows, Diageo’s global giants delivered a strong performance in the period which given
the global perspective of these brands demonstrates their resilience even in challenging markets.
• Guinness’ performance demonstrates this point with the brand growing in Africa and in the tougher
beer markets of Great Britain and Ireland, where innovations from The Brewers Project, Guinness
Hop House 13 and Guinness Golden Ale, contributed to improve performance including share gains.
• All of our global giants spirits also grew in the half as our markets gained better execution against
proven growth drivers from sampling to on trade activation to greater participation in cultural and
music festivals. And our new campaigns ‘Walk with Joy’ for Johnnie Walker and Smirnoff’s
‘Exclusively for Everybody’ are resonating with customers and will build brand equity.
• The net sales growth of our local stars is equally robust across a range of brands from Shui Jing Fang
to Raki to Crown Royal and Buchanan’s
• The decline in reserve brands is due to the decline in Cîroc which we have already covered, as other
reserve brands showed solid growth.
• We had a strong performance in other spirits although growth in our IMFL brands was held back by
performance in some states in India, however we have already taken the steps to improve this
trajectory in the second half.
• Beer net sales, excluding Guinness, were up 5%, fuelled by Senator in Kenya and Malta in Nigeria.
• Ready to drink was weak given the decline in Orijin in Nigeria as we lapped distribution gains last
year and saw increased competition.
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• Turning to category performance.
• Scotch was up 1% with growth from Latin American and Caribbean, where net sales were up 9%, and
Europe, Russia and Turkey where growth was 6%. The scotch category faces challenges in Korea from
changing consumption trends and in China with increased competition and a weaker economy. In
addition, economic and political challenges in the Middle East has reduced consumer demand. Given
our global leadership presence in scotch, these changes have impacted our performance. However,
despite these challenges we grew share especially in Asia, in LAC and in global travel.
• The emerging markets continue to be affected by currency volatility, particularly in Latin America and
Russia. We are building our secondary scotch business in these markets to capture consumers that
either can no longer afford premium scotch brands or want to enter the category at a lower price
point. As a result brands such as Black and White and White Horse performed well with net sales up
19%.
• Cîroc in the US in the half was the driver of the decline in vodka sales, while Smirnoff improved with
net sales up 1% in developed markets and 4% in emerging markets.
• North American Whiskey saw double digit growth fuelled by Bulleit growing over 25% and Crown
Royal at 8%.
• I also want to mention the good performance of Baileys and Shui Jing Fang [Sway Jing Fang].
• Baileys net sales were up 6%. Sampling and improved visibility in outlets have been a proven growth
driver for the brand, particularly in Great Britain where net sales were up 14%.
• Shui Jing Fang continued its positive momentum with net sales up 68%, albeit from a low base.
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• Turning to profits.
• On an organic basis operating profit increased 2.4% resulting in a 16 basis points improvement in
margin.
• Reported operating profit was negatively impacted by foreign exchange and from the sale of non
core assets resulting in a 6.6% decline.
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• Looking at margin,
• Foreign exchange reduced reported margin by 66 basis points. Acquisitions and disposals had a small
negative impact and organic growth drove a 16 basis points improvement.
• Looking further at the organic growth performance, gross margin was down 23 basis points largely
driven by market mix with growth in India and net sales decline in US Spirits. Marketing spend had a
positive impact largely driven by £40 million of procurement efficiencies and the reduction of spend
tied to the number and timing of innovations in the US.
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• While Marketing spend on an organic basis declined 5%, when we examine the detail of what’s
driving it we see a bit of a different picture.
• We have been improving the efficiency of our marketing spend for a couple of years and now we are
definitely building a capability here. In the half, procurement efficiencies amounted to £38 million
with every region contributing to savings. For example, we renegotiated media costs in North
America, Europe, Brazil, Mexico and Australia. We are driving efficiencies at how we spend money on
point of sale material and we have become more stringent and demanding when reviewing
production cost and agency fees.
• In addition, in the US Spirits business we had reduced spend on innovations. We had fewer
innovations in the first half with several launching later in the fourth quarter*, primarily Cîroc apple.
• In China we decided to reduce spend on expensive promotion in the modern on trade due to low
returns and effectiveness.
• After adjusting for these three factors, marketing spend increased 3.3% year on year, ahead of our
net sales growth.
• All our spend needs to be return driven and we need to be agile in concentrating spend on our
biggest opportunities.
• We have continued to invest ahead of net sales in proven growth drivers like North American
Whiskey and gin and behind Captain Morgan in the US. Marketing spend on Johnnie Walker outside
China was up 2%, ahead of net sales, as we supported the launch of the new Keep Walking campaign
“Walk With Joy”.
* Fourth quarter in the webcast refers to Diageo’s second quarter
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• Turning to the remaining margin drivers.
• Higher overheads in the half had a negative impact on margin. There was a negative market mix
impact to overhead of 30 basis points given the net sales decline in the US. Additionally an increase
in the bonus accrual year on year of £33 million reduced margin by roughly 50 basis points.
• Finally, other income and expenses had a positive impact of 42 basis points almost entirely driven by
the gain on sale of our shares in UBL.
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• Average net debt decreased by about £1 billion largely as the result of proceeds from disposals.
• Significantly reduced net debt and modestly lower rates have yielded over £30 million of savings in
net interest expense.
• Key drivers of the lower interest rate were the reduction of debt in United Spirits as well as the
maturity of higher yield Diageo bonds.
• I expect the effective full year interest rate to increase slightly to about 3.5%.
• Other finance charges decreased £32 million, largely driven by a lower hyperinflation charge for
Venezuela as a result of the change that we made to the consolidation rate.
• In the second half I expect finance charges will be at a similar level.
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• Eps was down 4% and the biggest driver of the decline was the impact of adverse FX on operating
profit. The disposal of non core assets also negatively impacted eps.
• Lower net finance charges as I have just described had a positive impact on eps.
• Tax in the half had a small negative impact as the move to a higher tax rate of 19%, against the rate
of 18.3% last year, was offset by the lower operating profit.
• 19% is our current forecast for the full year tax rate.
• The increase in non controlling interests was largely driven by the increased profit in United Spirits.
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• Free cash flow in the half increased 140 million.
• Working capital movement caused a 45 million pound higher use of cash, mainly driven by a
reduction in creditors due to the settlement of the Korean customs litigation in the second half last
year
• Maturing stock had a positive impact on working capital as we laid down less stock compared to H1
last year to better align production with depletions.
• Despite many markets improving their creditor positions, overall creditors were lower compared to
the previous period largely driven by the payment in respect of the Korean customs litigation. We
also lapped a period last year when many contracts and credit terms were re-negotiated. Overall
operating working capital was therefore broadly flat compared to last year.
• Net capex in the half was lower than last year and for the full year I expect net capex to be around
£550 million.
• Lower tax payments were driven by timing. For the full year I expect tax payments to be higher than
last year. Net interest payments were reduced as we reduced higher interest debt in USL and a
Diageo bond matured.
• Other operating activities included the proceeds from the sale of shares in UBL offset by the
provision made against a loan guarantee.
• The interim dividend is 22.6 pence per share, up 5% from the previous year. We expect to maintain a
mid single digit increase until we rebuild dividend cover back to between 1.8 and 2.2 times relative
to eps.
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• As I look at the second half I expect the positive momentum we saw in this first half to continue.
• In the second half we will see shipment growth in North America as we lap a 3% net sales decline in
the second half of last year.
• Depletion growth in US Spirits is currently 2.7% and we expect it to improve a bit in the second half
as our brand performance is improving given the actions taken on Smirnoff, with the ‘Sourced’
innovation infused with real fruit juices due to ship in the third quarter, and on Captain Morgan with
upweighted on premise activation especially around the shot occasion.
• Top line performance in Europe will broadly continue in line with the first half. Russia will benefit
from weaker comps in the second half last year although Turkey will likely slow as we pass through
the duty increase which was approved in January.
• Trends in Africa will continue to be broadly the same as weakness in Nigeria and Angola continue to
be offset by growth in other markets.
• Net sales growth will come down a bit in the second half in Latin American and Caribbean mainly
driven by the buy in we saw in Brazil in the first half and further currency related weakness in the
export channels.
• Performance in Asia Pacific is expected to improve in the second half largely driven by stronger net
sales growth in United Spirits as it will benefit from the renovation of McDowell’s. Performance in
South East Asia will be stronger although this will be somewhat offset by continued weakness in
global travel and in the Middle East.
• Given these puts and takes I expect to see an overall improved top line performance in the second
half led by shipment growth in US spirits. Margin will come in roughly flat in the second half as
marketing will not decline despite efficiencies and other income will be lower. As a result, we don’t
expect much margin expansion for the full year, consistent with our guidance back in July.
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• Before I hand back to Ivan I wanted to spend a few minutes on my early views of Diageo and how I
am setting my priorities.
• While I am not yet 90 days in the role, I have set a number of priorities within the business.
• As you would expect they are somewhat interlinked and all grounded in driving sustainable improved
performance.
• Driving the productivity targets we have identified will be key to achieving and sustaining our long
term financial goals, in part by freeing up more investment for growth. I have two roles to play here.
Drive the company wide work and deliver productivity for the finance function. The finance group
has a big role to play. In addition to enabling savings in the finance function, corporate and in market
leaders will be supporting all of this work across the company ensuring we have detailed plans,
metrics and measurements to track our progress from trade spend down to T & E and everything in
between.
• As we seek to reinvest savings to drive growth, we will need to be ruthless at targeting investment to
the highest return opportunities and absent that, taking them to the bottom line.
• The environment will remain volatile and we will need to continue to proactively have plans in place
to manage that volatility to enable better results.
• In order to be agile in the market place and best direct our investment, we have to have a good
forward look around the corner using both past trends and leading indicators so that we make the
best informed business decisions, so I will continue to drive further improvements in forecasting.
This is about quicker identification of issues and opportunities and faster response
• As part of this we will look to improve how we model the business impacts from external changes
like GDP and FX movements considering the impact they have on pricing and potentially our local
business models.
• You have heard Ivan talk about disciplined execution and you have seen us reduce marketing spend
in this half, while driving volume growth and gaining ground on our key brands. Our overall results
are evidence that the many changes we have made in the business are working and momentum is
building. There is more work to do to ensure our positive trajectory continues and that work is in full
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motion. And with that I will give it back over to Ivan
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• Kathy has taken you through the outlook so what I want to do now is talk you through the actions we
have taken and the decisions we have made about where we focus in order to deliver that outlook
and build for the future.
• As you have heard me say before, our way of working in Diageo is through disciplined execution
against our 6 priorities.
• And I am going to use that framework again in this presentation to talk about delivering our
performance ambition.
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• So lets start with our focus on premium core and our biggest category scotch. 74% of scotch net
sales are premium core scotch brands which include JW Black & Red, Buchanan’s, JεB, Windsor, Bell’s
and primary scotches.
• Our scotch portfolio is back in growth despite the continued volatility we face in this global category
where currency weakness impacts local pricing in many emerging markets.
• In fact net sales trends improved across all regions except Africa and it was only in very troubled
areas such as Angola and the Middle East where we saw any significant slowdown.
• Within scotch, our reserve scotch net sales were up 9% while our premium core scotch nets sales
declined 2%. However, the trend is improving
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• While it was Johnnie Walker which drove this improvement we continued to benefit from the
strength of our scotch malts and Buchanan’s.
• Buchanan’s continues to challenge for the position of the world’s number two blended scotch whisky
behind Johnnie Walker. Quite a partnership.
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• The execution skills we have built in reserve continue to drive growth in the Johnnie Walker reserve
portfolio. It was again up double digit.
• But in this half we have delivered 5% growth in the premium core Johnnie Walker in Europe, Russia
& Turkey region. This was driven by double digit net sales growth in a number of countries.
• In Latin America net sales of these brands was also strong, up 9% with double digit growth in Mexico
and Colombia.
• As the spirits industry’s most global brand Johnnie Walker faces challenging environments especially
in China, in the Middle East and in Angola and the slowdown in these markets has impacted net sales
growth.
• However given the range of our scotch portfolio we can manage the impact the volatility has on
consumer demand:
• For example in China, where the deluxe scotch category continues to be challenged we have shifted
our focus to Super Deluxe scotch and are gaining share.
• In Russia we grew net sales 28% through judicious price increases and driving reserve.
• In Korea we have launched a low ABV Windsor Ice to participate in the growing trend for lower ABV
spirits
• And in LAC we are leveraging our primary scotches with consumers looking for affordable scotch.
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• We are also focused on the next decades of growth for Johnnie Walker. In the half we launched the
next evolution of the extremely successful ‘Keep Walking’ campaign. It is still early days, after all the
Keep Walking campaign was influencing consumer choice for 17 years, but the campaign is already
building equity.
• Our marketing is now structured around programmes which recruit and re- recruit consumers.
Supporting great campaigns such as Keep Walking with activations which keep our brands front of
mind with consumers. We call this the saliency affect.
• For Johnnie Walker our Mentor program has always been the most effective tool to build saliency
and recruit new consumers into Johnnie Walker and remind returning consumers how great this
brand is.
• We continue to mentor through traditional events where consumers come to us but we are now
adding mentoring where we go to consumers.
• Here you see an example of a Johnnie Walker trunk in a US Costco store:
• Events are centered around a portable trunk that serves as a “trunk of curiosities” and fully explains
the Johnnie Walker story from start to finish including tasting six different marques.
• In the half we executed 600 events in the US reaching 41,000 consumers. 25% of people who
interacted with our trunk purchased a bottle of Johnnie Walker. We are scaling up our Mentoring
activity exponentially.
• Globally, we are aiming to immerse over 1 million consumers face to face by the end of this fiscal.
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• We are also building a signature serve for premium core Johnnie Walker with Johnnie and Ginger.
• This is an example from Mexico of how we recruit consumers through Johnnie and Ginger in the
casual get together occasion.
• By deploying Johnnie and Ginger sampling experiences in the on-trade, Johnnie Walker brings to life
its relevance to this occasion and shows versatility through offering multiple drink options for both
Red & Black Label.
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• Let’s talk about Smirnoff next.
• Smirnoff grew net sales 2% in the half.
• Net sales in North America the biggest Smirnoff market were up 4% with Smirnoff Red up 5%. Yes
we were cycling some soft comps from the half last year and depletions do lag the category. So I am
not here to tell you that we have this brand where we want it to be in the US. However Smirnoff is
stronger than it was last year.
• And we will continue to focus on three platforms to deliver that improvement.
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• First, re-recruiting vodka drinkers. In October, we launched a new platform of the ‘Exclusively for
Everyone’ campaign featuring two of the stars of HBO’s Emmy Award-winning hit show ‘Silicon
Valley’.
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• We grabbed people’s attention in the first week of launch with a big digital, social and PR splash,
supported with strong TV presence. In the second half, there will be significant up-weight in our
digital and social media behind this execution.
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•
•
•
•
Second, increased reach and recruitment through Smirnoff’s electronic dance music platform.
In the half, we sponsored 10 festivals - one million attendees and 250k Smirnoff drinks sold.
In the second half we will sponsor another 21 festivals.
In the fourth quarter this year we will launch Smirnoff Ice Electric a new RTD offering. With $10
million invested in this activation it will drive positive momentum for the whole trademark.
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• Third, we are expanding into new experiences and occasions for Smirnoff consumers.
• Shots for example is a key millennial moment and something Smirnoff had previously never played
in. 12 months ago we launched Smirnoff Sours in the USA, in the half we are extending the Sours line
by launching Berry lemon.
• In February, we are launching Smirnoff Sourced. We expect this to have big consumer appeal.
Smirnoff infused with real fruit juice, gluten free and no high fructose corn syrup. It leverages all the
growing trends in food and beverage which have not yet been available in spirits at a mass scale.
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• Captain Morgan is back in growth with North America net sales growing 1% as we stepped up
recruitment using proven growth drivers, priced the brand for recruitment and launched Cannon
Blast to feed the core brand.
• In addition the brand continued to grow double digit in Europe with our strong execution against
proven growth drivers
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• Our goal with Captain Morgan is to establish it as an ‘Icon of Fun’ and we will do this by ‘GOING FULL
CAPTAIN’.
• The Captain wants you to take yourself less seriously.
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• In the half we activated against three growth drivers
• Bringing the fun back through on-premise promotions ‘The Keys to Adventure’. This is Diageo’s
longest running and most proven growth driver. We will execute 4000 of these in a year, connecting
1.2 million consumers with the brand.
• A bespoke Captain Morgan glass - ‘The Tankard’. We have over 10 Million Tankards in circulation
across Captain Morgan markets already. We will elevate the role of the Tankard to be the
manifestation of fun times with the crew in the drinking occasion.
• Given Captain Morgan is a highly responsive brand we have built an integrated digital and traditional
media programme which supports the on premise activations.
• Bailey’s had one of the best halves for some time.
• Net sales grew 6% with solid growth in its two biggest markets, North America & Europe.
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• This was a result of focusing on proven growth drivers
• We put the delicious liquid at the centre of the messaging. It is after all the “most loved in the spirits
category”. We showcased signature serves such as the Flat White Martini and Baileys in Hot Coffee.
• Our execution against Liquid on Lips in Europe led to 2 million sampling occasions.
• And we improved trade visibility and displays through partnership with Keurig Coffee in the US and
the Chocolat Luxe gold pack in Europe.
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• Moving now to Guinness which has returned to growth with net sales up 9% with improving
momentum in Great Britain and Ireland and double digit growth in Africa
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• In Europe our activation against the rugby world cup has helped to create the strong start to the year.
• A recent yougov poll of consumers ranked Guinness as the number one brand associated with the
rugby world cup ahead of any of the official sponsors.
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• The Brewers Project has driven growth in both GB and Ireland with continued strong performance
from Hop House 13 lager in Ireland and Golden Ale in GB.
• Hop House 13 has achieved 3% share of the draught lager market in Ireland.
• In the half we reversed it and launched Hop House 13 in GB and Golden Ale in Ireland.
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• In Africa we activated against football. Guinness is the official broadcast sponsor of the English
Premier League which is shown on cable TV in bars and therefore gives us access to the single
biggest male drinking occasion in Sub Saharan Africa.
• Let me move now to the mainstream spirits opportunity
• At the Diageo Capital Markets Day we shared with you why mainstream spirits is a significant growth
opportunity for Diageo and why Diageo is uniquely well positioned to take advantage of the
opportunity.
• In the half, we have delivered on that opportunity. In Mexico and Brazil our primary scotches have
performed strongly. Black & White net sales were up 87% in Mexico and White Horse grew 30% in
Brazil. In Kenya, mainstream spirits nets sales were up 17%
• In Nigeria we are putting in place a mainstream spirits route to consumer as Guinness Nigeria will
become the exclusive distributor of Diageo’s international premium spirits and McDowell’s No. 1.
This will allow Diageo and USL to access Guinness Nigeria’s strong route to consumer platform.
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• In India the focus we have on the prestige and above price points has been the key driver of growth.
• Momentum is also building here with net sales of these brands growing 14% in our second quarter
to the end of December driven by the success we are seeing behind the relaunch of Royal Challenge.
• The relaunch of McDowell’s No. 1 has just started and should see the impact in the second half.
• As this morning’s USL results show focus on prestige and above is driving top line and operating
margin improvement.
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• Moving now to reserve brands, we have already covered the impact of Cîroc on our reserve brands
performance. However as this slide shows our other reserve brands performed strongly. Improving
trends in reserve Johnnie Walker and continued growth of scotch malts, Bulleit and Don Julio.
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• Diageo has an outstanding line up of reserve brands and we continue to grow share in part driven by
our in bar activations.
• Our reserve brands were therefore the big winners in the World’s 50 best bars 2016 annual report
• In their respective categories, Bulleit, Tanqueray No. TEN, Don Julio and Ketel One were voted as the
#1 brand in both the Best Selling and the Most Trending spirits awards.
• Johnnie Walker was the best selling scotch and Zacapa the #1 trending rum in the world.
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• Innovation is a priority because it allows us to access new consumers and occasions.
• In this half the launch of Captain Morgan Cannon Blast in the US has given us access to the vibrant
shot occasion.
• The launch has been heavily focused on building from the on-premise out by executing over 1500
bar samplings, 22 Captain’s Tour events and sampling over 2200 gatekeepers to garner bartender
advocacy.
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• We shared the Whiskey Union project at the Diageo Capital Markets day. But in addition to our own
innovations of vibrant new whiskeys we have also invested in a couple of new world whiskeys
through our Distill Ventures vehicle.
• Stauning is a Danish whiskey created in 2005 by nine friends who started making whiskey as a hobby
but have now built a strong growing business.
• Their attention to detail and commitment to controlling all stages of production from malting
through to maturation has resulted in a portfolio of outstanding whiskeys that have received
widespread critical acclaim.
• Their Danish Single Malt and Rye whiskey is the winner of multiple awards including “Best European
Single Malt” and that might be what they are sharing with Prince Henrik of Denmark.
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• Starwood is an equally innovative Australian whiskey produced in Melbourne. Starwood uses
Australian red wine casks to mature the whiskey. This allows its taste profile and brand positioning
to target bourbon drinkers.
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• Route to consumer is at the core our changes in focus over the last two and a half years. It is the
platform which delivers our enhanced sell out focus.
• Over the last few years we have spoken a lot about the way we have built our route to consumer in
developing markets. But our big improvements have also been in developed markets.
• So today I am going to talk about our journey in Spain. A challenging market and one where growth
has been difficult to find given the economy.
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• During that economic crisis we cut costs as sales declined. Part of that was to reduce our on premise
coverage to 5 sales people covering 250 outlets. The remaining outlets were serviced by our
wholesalers. A mistake and a great example of the reasons why cost cutting is not the answer –
productivity is.
• In fiscal 14, we changed tack
• We increased our on premise direct coverage and increased activation behind our brands.
• This improved visibility, increased our presence on menus and we trained more bartenders to be
advocates for the brands
• Our sales force increased, call efficiency improved and we are now covering nearly 10,000 outlets in
nearly 50 cities.
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• Through the half we have trained 3500 bartenders through our Diageo Bar Academy programme
which supports advocacy and quality serves of our brands. We also activated menus in nearly 3000
bars.
• We expect these changes to drive an improvement in the on-premise business similar to the results
we have seen in Western Europe where our 35% increase in sales force since the beginning of fiscal
15 has resulted in share gains of 30 bps.
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• Moving now to Productivity
• Our Global Efficiency Program launched in 2014 is expected to deliver £59 million savings in F16 and
in the first half we delivered £29 million. Half of which we reinvested in growing our top line.
• Some of that is behind our productivity work.
• We have now completed our ‘outside in’ assessment – 6 work streams across 5 markets which has
confirmed our £500 million productivity opportunity.
• Initial fiscal 17 productivity targets for the net revenue management, marketing effectiveness,
marketing efficiency and the product supply work streams have been identified.
• We will then build those targets into the market’s fiscal 17 plans as well as laying out our medium
term productivity goals.
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• Before we end let me summarize. In the last two years Diageo has changed to become a stronger,
more competitive business.
• Better positioned to deliver on the growth opportunity which I have shared with you before. This is
an attractive sector and we have the assets, scale and global reach we need.
• We have embedded a culture of disciplined execution, intensified our focus on sell out and
disposed of non core assets.
• As expected our results in this half demonstrate the positive impact this change has had on
performance.
• We have delivered volume growth, gained share in key battlegrounds, driven cost productivity and
continued to generate strong cash flow.
• While trading conditions remain challenging in some markets, Diageo’s brands, capabilities in
marketing and innovation and our route to consumer have proved resilient delivering improved top
line performance.
• Today we reiterate our expectation to deliver volume growth and better top line performance in
fiscal 16 with muted margin expansion and strong cash conversion.
• This will set us up to deliver better momentum in fiscal 17 with productivity gains supporting margin
expansion and investment in growth.
• We remain confident of achieving our objective of mid-single digit top line growth and 100 bps of
operating margin improvement in the three years ending fiscal 19.
• My confidence that Diageo will deliver stronger, sustained performance is supported by the results
we have achieved in this first half.
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