Diageo 2012 half year results q and a transcript

Diageo PLC
F2012 Interim Results

AM Q&A Session

Philip Morrisey - Berenberg
Thank you. Paul, you note in the statement that you've taken selective price increases
in North America and I just wanted to confirm that that included the US as well as
Canada.
And if so, wanted to ask what percentage of the portfolio in the US has seen list price
increases in the period and indeed how do you see the prospects for list price increases
in the US as this calendar year progresses?
And then secondly, if I may, on margins in Asia, you've seen strong performance here
in the first half and I just wondered how sustainable you thought that 200 basis point
pace of organic margin expansion might be both in the second half of this fiscal year
but also into fiscal '13? Thank you.

Paul Walsh - CEO
Thanks Philip. Ivan, I suggest you handle the price increase in North America and
Gilbert, you can handle the margin question in Asia.

Ivan Menezes - President North America
Good morning Philip. If you look at our results, as you can see we have very strong
price mix coming through in North America, I’d say about a third of it is price. And
I'm feeling good about the strength of our brands. We are building brand equity
where investment, re-investment rates are up. And so we are able to now steadily take
price on our priority brands. One third of what you see in the first half price mix
comes through price. We'll see it continue into the second half. And clearly as we
monitor the improving strength of the marketplace and our brand equity strength
growing, we will use that to guide continued price increases going into next fiscal
year as well.

Philip Morrisey
Thank you.

1

2011/2012 Interim Results Diageo PLC

Gilbert Ghostine - President Asia Pacific
Philip, on your question on margins on Asia, our strategy in Asia is paying off. As I
promised you guys when we met last year in May I said that we will deliver in Asia
double-digit top and bottom line and ongoing operating margin improvement. And
our strategy to focus behind scotch and super deluxe is paying off, which is yielding
the operating margin improvement. We see still growth in super deluxe scotch and
we foresee operating margin to keep improving going forward.

Philip Morrisey
That's great. Thank you.

Operator
Our next question is from Ian Shackleton from Nomura. Please go ahead.

Ian Shackleton - Nomura
Yes, good morning. You've obviously had a very good performance in H1 with your
revenues up 7%. I just wondered, you have flagged a number of technical effects,
such as the buy in in France, we did have an early Chinese New Year, you've also
mentioned Spain I think. If we looked at the real underlying number how much are
those technical effects really worth in this first half?

Paul Walsh
Deirdre, do you want to take that one.

Deirdre Mahlan - CFO
Ian, the technical effects that we referred to were really talking about the first half
versus the second half performance. So there were some. As we pointed out when
we released our first quarter numbers, there were some specific technical effects that
caused the first half versus the second half to look different. I wouldn't point to any
specific technical effects across the first half performance that are overall impacting
the trend.

Paul Walsh
So really it was Q1 to Q2. So Q1, Q2, they level out. This is a pretty good
underlying trend. Now we offered our guidance six months ago. These numbers give
us great confidence in that guidance, but it's still too early to declare victory here. So
we think it is prudent to stay with the guidance that we offered.

Andrew Morgan - President Europe
I'll explain, Ian, the France and Spain effects are less than GBP5m so not material at
the Diageo level.

Ian Shackleton
Okay, thank you very much. And just if we could follow up on Nigeria where
obviously you flagged, you are flagging a bit of a slowdown. How dramatic is that?
Particularly as we go into 2012 with the political issues?

2


Paul Walsh
Let me ask Nick to answer that.

Nick Blazquez - President Africa
We saw a bit of a softening in the market in first half and we were capacity
constrained but the additional capacity we had planned came on stream at the end of
November and that's fully operational now. We had the uncertainty of the fuel
subsidy removals and that's been by and large resolved now and the market is back
seemingly operating normally. And so we were a bit uncertain at the beginning of
January, but actually we've picked up now very much. The bigger uncertainty I
suppose is Boko Haram, the terrorist uncertainty that we've seen in the north.
Hopefully that will be constrained up there.
And so I think there is a degree of increased uncertainty, but the fundamentals in
Nigeria remain the same. It's long term very attractive. We've got very strong brands,
the additional capacity has come on stream and I'm confident in that business there.

Paul Walsh
The other thing I would say about our African business, Ian, is that you look over the
last decade, yes, in any given year there was an issue with this market or that market,
but overall our performance trajectory has been pretty steady, very dependable. And I
think that speaks to the diversity of our business in sub-Sahara. So I'm confident that
we'll continue to see the growth come through in that region.

Ian Shackleton
Okay. Thank you.

Operator
We'll now take our next question from Simon Hales from Barclays Capital. Please go
ahead.

Simon Hales - Barclays Capital
Good morning everyone. Thanks for taking the question. A couple please if I can.
Firstly, Paul, I assume that your cautious outlook statement in regards to the economic
environment is largely centered on perhaps what we may or may not see in Europe.
Just building on from your comments to Ian's question, could you just talk a little bit
more about the real underlying consumer trends you've perhaps seen through Q1 into
Q2, perhaps into the early part of the new calendar year in some of your core markets,
particularly maybe GB?
And secondly just with regard to the tequila category, I wonder if you could just talk a
little bit more about what's happening in the category there, what's happening
particularly with Cuervo's performance and update us, if you can, on any further
discussions you've had with the Beckmann family on the future of your partnership
there.

3


Paul Walsh
Okay. Maybe I'll ask Ivan to talk about tequila, but let me give you a perspective on
how we're kind of seeing the world. The first thing is we're not seeing anything that
you're not seeing, but it is quite uncertain and how things play out remains to be seen.
That said, start with North America, we continue to see a steady improvement in the
economic environment. If you look at the emerging markets, now 40% of our sales,
collectively they delivered 18% growth. We're not fundamentally seeing anything
different there. We have continued to see a rising number of emerging middle class
consumers who aspire to our brands and our brand health in these markets is very,
very strong. So we expect more of the same there.
Europe is quite polarized. Yes, we see softness in Southern Europe, but our teams in
those markets have handled it very, very well and I feel in Europe, we've now got a
degree of predictability that maybe we didn't enjoy in the past few years. Once you
start to move north, Germany and France are very strong, double-digit growth. And
we can find growth opportunities in Europe, but let's not fool ourselves; it's tough.
But in aggregate, I think the fact that we've held our business flat is very creditable to
the team in Europe.
Ivan, tequila?

Ivan Menezes
The tequila trends in the US, I'd say overall the category is healthy. What you're
seeing within it is some shifts. You're seeing a shift from Gold to Silver. And in the
Cuervo numbers, which we don't break out, Cuervo Silver is doing extremely well
and growing nearly double digit. Gold is under pressure. And the second big trend I
would say is premiumization. So our higher marks in tequila are doing very well.
Don Julio is running very strongly in double-digit growth, very strong in the on-
premise. So overall what you see in our reported numbers on Jose Cuervo also
reflects a level of destocking in the distributors. The underlying trend on market share
is more favourable.
Regarding our discussions with the Beckmann family, they are ongoing. And as
you've heard from Paul before, our intention is to secure a long term participation in
the tequila category globally.

Paul Walsh
Just building on Ivan's point, if you look at our collection of high-end brands, so
Jonnie Walker Blue, Tanqueray 10, Zacapa, the Ketel One and what they delivered
for a first-half result, we have seen in aggregate 25% growth. And it's pretty broad
based; it's across many geographies. We see that trend continuing and clearly that has
a very positive impact on the leverage that we get through the P&L.

Simon Hales
That's great. Thanks guys. Can I just go back, Paul, to your general comments on the
outlook? You didn't mention Great Britain in terms of your comments in relation to
Northern Europe. What was the underlying trend really like in terms of consumer off
take? Have you noticed any real change there in recent months?

4


Paul Walsh
I see the GB market as quite polarized. I think it's polarized between the southeast
and the rest of the country. I think it's polarized between channels. But again our
high-end brands in this market are doing very, very well. It's encouraging that the rate
of pub closures has definitely slowed. I think that's positive. And whilst our sales
were off somewhat in the first half, the price mix that we saw was very positive. So
overall I would see GB continuing pretty flat.

Simon Hales
Perfect. Thank you very much.

Operator
We'll now take our next question from Andrea Pistacchi from Citigroup. Please go
ahead.

Andrea Pistacchi - Citigroup
Hi, good morning. I have a couple of questions on the US please, one going back to
Philip Morrisey's question on pricing in the US. You said that you're taking selective
price increases and you said that pricing has contributed about one third to your 5%
price mix. Just a little more granularity there. What's -- I imagine the situation is still
difficult, is it, on vodka, in rum, in tequila and those core categories? Is there any
pricing going on, on there?
The second question is on your mix, which has probably slowed slightly in the
quarter. And how I see it, there are two drivers of your mix. On the one hand, your
super premium brands growing strongly and, on the other hand, the low -- or the sharp
declines of your low-end brands. Now going forward on more difficult comps for
these premium brands, would you, do you think the current sort of level of mix is
sustainable or would you expect a bit of a slowdown?

Paul Walsh
Ivan, I'll hand over to you. I do think we've got to be very careful about going down
this rabbit's hole of first quarter, second quarter. We've tried to lay it out. Overall the
trends are pretty consistent and there has been nothing that has massively switched
between those two quarters, certainly in the US or more generally elsewhere.
But specifically for pricing, Ivan?

Ivan Menezes
Sure. On pricing I would say we are -- in the first half we've taken pricing on a
number of brands across our categories, brands like Johnnie Walker, Ketel One.
Again we take price, by brand and by market, by state. But it's pretty broad based
and, as I said, I expect that trend to continue because the brands are healthy, they have
the equity strength and I'm actually very pleased with how I'm seeing pricing come
back into these brands. And it enables us to sustain the reinvestment rate that you can
see in advertising as well.
In terms of going forward, I'm pretty confident that overall price mix we will be able
to sustain. If you look at the underlying trends in the industry right now, we're back

5


to that classic chart where the ultra premium segment of the industry in IRI is growing
10%, super premium is growing 7%, 8%, premium is growing at 4%, and the value
segment is flat or declining. I think our portfolio plays very well to those dynamics.
What I'm very pleased about is the strength we're seeing in the core brands, we talked
about it at the investor conference, on Smirnoff and Captain Morgan. Those equities
are building and you can see it in our results, the sequential improvement coming
through.
So overall I would say we would probably see the mix, the balance move slightly
more towards price. But I would expect mix to continue to be a positive factor as the
underlying consumer trends in the US are supporting that strongly. We're also seeing
a robust on-trade, which helps the business.
And, as Paul mentioned, our reserve brands, in the first half Johnnie Walker Blue was
up 35%. It's fantastic to see these top-end brands come back so strongly. And the
positioning of affordable luxury, which is what these brands represent, I think is
resonating pretty consistently now with the US consumer. And I'm also very proud of
the brand-building efforts we're putting behind these brands.
And so my overall outlook on price and mix continues to be cautiously confident that
it will sustain over the next half and into the following fiscal year.

Andrea Pistacchi
Thanks Ivan. That's helpful.

Operator
We'll now take our next question from Mitch Collett from Goldman Sachs. Please go
ahead.

Mitch Collett - Goldman Sachs
Hi there. I was wondering if you could split out the EM growth number you've given
between spirits and beer, and I guess the contribution of each to that would be useful
as well.
And then secondly, marketing's obviously gone up this half and it looks like you're
getting significant reward for that in several key brands. Could you maybe talk
broadly about where you see the marketing to sales ratio going long term? You're
back to your usual level of spend. Could we see it increase beyond here such that you
could drive further growth in the key brands? Thanks.

Paul Walsh
I don't have that split at my fingertips. We can see if we can figure it out and get it to
you. But what I would talk to directionally -- and maybe, Nick, you can speak to this
-- in Africa we are seeing very, very strong growth in our beer business, but the route
to market that we've created and the organizational strength that we have in our
market is really helping propel spirit sales. And I'll ask Nick to talk to that in a
moment. In Latin America basically our business is spirits and therefore that is
definitely driving the growth there. And I would say also in Asia, it is definitely tilted
towards spirits growth.

6


But, Nick, why don't you speak to Africa because there are some great examples in
Africa of what we're doing?

Nick Blazquez
Yes, in Africa spirits grew overall in terms of net sales by 18%, against beer at about
12%. It was a fantastic performance. And within spirits Johnnie Walker was an
absolute star, growing at 33%. The consumers in Africa are the same as consumers
around the world in terms of aspiring to our brands. We make them available through
driving distribution, through getting the right format. People will very much buy into
them and really love them.
Now what's driving that, it is our route to market. We've integrated our beer and our
spirits distribution in many of our markets. We did that in South Africa two or three
years ago and it's yielding great benefits. We continue to gain market share there in
spirits. And over the last 18 months we've done that in both in East Africa and in
West Africa. And since we've integrated beer and spirits together we've really seen an
acceleration of spirits growth across the continent. I would say Johnnie Walker is
spearheading that growth and I expect that to continue.

Mitch Collett
And it's noticeable that your, couple of the spirits brands within Africa have negative
price mix. Is that a function of country mix or is that a deliberate drive to make those
brands more affordable?

Nick Blazquez
The last part in terms of country mix, as we're seeing the countries' brands change, a
lot of that is being driven by country mix.

Paul Walsh
I think actually when you look at within country the pricing on spirits is pretty robust.
Regarding your question on A&P spend, we have to recognize that what you see is
simply the aggregate result of our strategies market by market. However, I have to
say that I like the profile of our P&L. Our brands are well invested in, but equally if
we see opportunities for growth we will keep this momentum going. We see it as
very healthy and in the long term interest of the firm. So it's a good profile of
investment. The other thing that we should never overlook, in emerging markets we
have progressively coming on stream many, many millions more of the emerging
middle-class consumers. And therefore our footprint as well as being very well
developed, we're set to see very good demographic trends come our way in these
markets.
So to your question on advertising, why wouldn't we continue with this profile? But
equally I do also make the point that our brands are very well invested in.

Mitch Collett
Thanks.

7


Operator
We'll now take our next question from Antoine Belge from HSBC. Please go ahead.

Antoine Belge - HSBC
Yes, good morning. Antoine Belge, HSBC. Three questions. First of all, sorry to
come back on Western Europe and I understand that H1 trends are more a reflection
of the underlying trend than Q2 versus Q1, but I remember that in Q1 you mentioned
that in the south of Europe you were starting to experience a more favourable basis of
comparison. And I'm wondering, it probably has been the case also in Q2 so shouldn't
we now have a more favourable base for those part of Europe which are doing less
well? And isn't this indicating that actually Q2 has been a bit weaker than Q1 on an
underlying basis?
The second question is more on maybe some qualitative comment that you could
make on Chinese New Year around what you're getting from your network in terms of
sell-out.
And finally coming back to the marketing questions, just want to make sure I
understood correctly. So the marketing reinvestment ahead of sale would be a
function on what you're achieving in terms of gross margins. I mean, should we
assume that if the gross margin continued to move nicely then there should be, let's
assume, some reinvestment in marketing?

Paul Walsh
Basically, let me take the marketing question first, if we see good ideas we have the
capacity to invest behind them. Equally if our sales growth tracks with our marketing
growth, that's also fine, given my point about being well-invested in our brands. But
if we have headroom and we see good ideas, we will back them. Andy, do you want
to add more colour to that?

Andy Fennell - Chief Marketing Officer
I think there's -- there isn't a magic number for the ratio. We need to do both, lean
into to growth ideas, as Paul said, and we've been doing that for a number of years,
and we need to use our scale to drive efficiencies from our pre-existing investments
and we'll continue to do that around the world, as you can see in this set of numbers.

Paul Walsh
Regarding Western Europe, there is an arithmetical consequence here. As we've gone
through a certain level of contraction the performance is less relevant to the total
company. Having said that, we're still seeing softness in those markets. There is no
sign that they are levelling out anytime soon, but clearly they're a smaller component
of the total and the rate of decline is also decreasing.
Gilbert, on Chinese New Year?

Gilbert Ghostine
Yes, Antoine, on Chinese New Year, anecdotally consumer demand on our brands in
China is still going very strong, especially on the super deluxe side of the business.
Johnnie Walker Blue Label in the first half had a stunning performance in China,

8


growing higher than 50%, which has been consistent. Over the last six quarters our
super deluxe scotch business in China has grown over 40%. So this trend on super
deluxe is still going strong and we are still gaining market share, which is great.

Antoine Belge
Maybe a follow up on scotch in China. Would you consider that in terms of share of
throat, so to speak, now scotch is no longer losing market share to cognac in the
region?

Gilbert Ghostine
The way, Antoine, we look at it, scotch is growing and cognac is growing. Now if
you look at scotch, total scotch is growing at 3%, but most importantly super deluxe
scotch is growing at 12%. And this is where we see the biggest opportunity for scotch
in the future and that's where we're channelling the bulk of our energy to fuel and
keep driving this trend. And this is where we are winning big time.

Antoine Belge
Thank you very much.

Operator
We'll now take our next question from Trevor Stirling from Sanford Bernstein. Please
go ahead.

Trevor Stirling - Sanford Bernstein
Good morning. One question. Sorry to give you another Q1/Q2 question, Paul, but
it's relating to China, and Asia-Pacific rather more specifically, that there was an
apparent slowdown in Asia-Pacific and I wonder maybe, Gilbert, could you just give
us a little bit of colour around that?

Paul Walsh
Gilbert?

Gilbert Ghostine
Trevor, look, there is no slowdown in Asia-Pacific. Consumer demand on our brands
is still very strong. I'm very excited about the prospects of our business in emerging
Asia. We see our business growing strongly in India, in China and in Southeast Asia.
And there is no reason why I see these trends not to continue in the second half. And
in the developed markets in Asia of Australia and Korea, yes, the first half was
challenging, but the second half will be better.

Trevor Stirling
Thank you very much, Gilbert.

Operator
We'll now take our next question from Melissa Earlam from UBS. Please go ahead.
Please go ahead. Your line is open.

9


Melissa Earlam - UBS
Hi, good morning. I've got three questions please. First of all, you mentioned organic
sales growth across your emerging markets of 18% in the half. I was wondering if
you could give us an idea of what the organic EBIT growth was for the EM region.
And secondly, you saw a pickup in scotch inventory in the half. I was wondering if
you could quantify that and give us an idea of whether this is part of a broader plan to
step up your overall scotch inventory. And given the quite big swing in net working
capital outflow in the first half I was wondering if you could give us a broad range for
what the change in working capital might be for the full year fiscal '12.

Paul Walsh
I'll ask Deirdre to handle the working capital. On the 18% organic sales growth in
emerging markets, the actual profit growth was higher. I think it was about 4 points
higher directionally. So we're getting a very good mix effect coming through on that
sales growth.
Your second question, Melissa, was what?

Andy Fennell
Scotch inventory.

Paul Walsh
Scotch inventory, yes, you're going to continue to see us build our inventories in
scotch. I've mentioned several times about the favourable demographics in the
emerging markets and the lucrative prospects for scotch. We're going to have to make
sure that we lay down liquid to serve those consumers. And that's what we have been
doing and will continue to do.
Deirdre, working capital?

Deirdre Mahlan
Hi, Melissa. I think the overall working capital in the first half, we would expect to
see about the same. If you look at the underlying growth in the business we're seeing
impacts on the growth in the receivables and importantly we continue to lay down
maturing stock given the very strong growth in our scotch business. So on a net-net
basis I would think it would be in the order of about the same.

Paul Walsh
It's very interesting coming back to this emerging market issue. We've said for some
time that once we start to get the scale, we continue to ride the demographics, but this
is going to be a critical engine of growth. You're starting to see that come through.

Melissa Earlam
Thank you.

10


Operator
Our next question comes from Jamie Isenwater from Deutsche Bank. Please go
ahead.

Jamie Isenwater - Deutsche Bank
Good morning everyone. A couple of questions from me. Firstly for Deirdre, in
terms of the restructuring charges that you've updated us on, is the lower cost for this
year a shift in timing or are there actually some savings coming through? If so, what's
driven that?
And then secondly, just on Ciroc and Mr. Diddy, there were some press reports that
he was going to launch a tequila and I presume that wasn't in conjunction with
Diageo. So I just wondered whether there were any contractual obligations around
him starting competitive products or whether it's even true. Thank you.

Paul Walsh
Okay. Deirdre and then Ivan, Ciroc.

Deirdre Mahlan
On the restructuring costs, as you know, when we announced those there were some
estimates included with respect to the movement. I do not expect that to just be a
shift. It is in fact a reduction and it just has to do with the redeployment of some
people, some lower overall cost. But the short answer is it is lower and absolute.
We're not expecting that to be a timing shift.

Ivan Menezes
On Ciroc, as you know, there's lots of speculation and stuff written about our partner
so I wouldn't believe everything you read. But what you can be assured is as we have
structured our arrangement with Mr. Combs, we've obviously talked about the long
term of how we best protect Diageo's interests. So without disclosing anything about
our contract I can assure you we feel comfortable about our future with Mr. Combs.

Jamie Isenwater
Excellent. Thank you very much.

Operator
We'll now take our next question from Alex Molloy from Credit Suisse. Please go
ahead.

Alex Molloy - Credit Suisse
Good morning. On the UK, just coming back on something you said, Paul, down in
the second quarter, but I think you said to an earlier question that you'd expect it to
continue about flat. Am I reading that wrongly or do you expect that it would
improve there in the second half?

11


Paul Walsh
We did have a weaker second quarter. We wouldn't expect the second half to follow
that trend. And overall we think in the round it will be flat.

Alex Molloy
And what will change from the Q2 to the second half?

Paul Walsh
Andrew, do you want to talk specifically about the Q2 events?

Andrew Morgan
Yes, I think, as we noted in the release, we've had a real focus on improving the
quality of the shape of the P&L in GB. And we've delivered that. So on the half
we're minus 2 at the sales line, but you've got 4 points of operating gearing there. A
lot of that has come through us having less depth and frequency of promotion on some
of our bigger brands, like Smirnoff in particular. And we'll continue to have that
focus. It's working for us. So, yes, minus 2 to flat, that's the kind of range. We're
certainly not seeing any improvement in category or industry volumes in GB anytime
soon.

Alex Molloy
Thank you.

Operator
We'll now take our next question from Ann Gurkin from Davenport. Please go ahead.

Ann Gurkin - Davenport
Hello.

Paul Walsh
Hi Ann.

Ann Gurkin
I have several questions if that's okay. One, I was wondering if I can get a further
update on the progress with integration with distributors in the US. Is that meeting
expectations? Can you give us some more detail?

Paul Walsh
Anecdotally, I met with one of our key distributors only last week. They are thrilled
with the improved structure that's in place. But, Ivan, maybe you can go into more
detail on that.

Ivan Menezes
Sure, Ann. Very early good morning to you.

12


Ann Gurkin
Hi Ivan.

Ivan Menezes
No, things are going well. We've made very substantial changes in terms of taking
our route to market to the next level – more resources, more focused on priorities like
the on-premise and multicultural. We've realigned how we go to market, connecting
marketing, trade marketing to the sales execution. Quite a substantial change and I
would say we all feel very good about the changes. You can see it in our
performance. And I think our partnership with our distributors has never been
stronger and we are really focused on stepping up the executional excellence every
day. So I think the Diageo route to market in the US is a big competitive advantage
and we intend to keep it that way.

Ann Gurkin
That is terrific. Second, maybe an update on global inventory levels at distributors. Is
there any area of risk or any area of concern?

Paul Walsh
My sense is not. We obviously, as we go through our half-year close, we look at that
pretty carefully. I don't see any issue emerging there. Deirdre?

Deirdre Mahlan
No, I don't see any issues on the distributor inventories.

Ann Gurkin
And, Deirdre, can you help me with how you're thinking about currency impacts for
the year now?

Deirdre Mahlan
We had about a GBP30m impact in the first half. We expect for the full year to
effectively net out so there'll be no impact at the operating profit line or it'll be
minimal.

Ann Gurkin
Super. And then finally, Paul, one of your key strategies has been realigning
resources globally. Where are you versus that strategy?

Paul Walsh
We're absolutely on track. If you look in our developed markets and at the corporate
level we have taken resource out, but equally we continue to invest in the emerging
markets and I think it's up about 15%. And we will continue to do that to fuel the
opportunities that I constantly reference. So we're absolutely on track.

Ann Gurkin
Super. Thank you very much.

13


Paul Walsh
Thank you.

Operator
We'll now take our next question from Simon Marshall-Lockyer from Jefferies.
Please go ahead.

Simon Marshall-Lockyer - Jefferies
Yes, thank you. Could you maybe give us a few further indications or insights into
whether there's any shift or if you're seeing any movement between the off-trade and
the on-trade in the US? Give us a bit more colour on that and how you see things
panning out.
And the second question is on Mey Icki. Could you give us some indication of how
the half went in respect to the core business, the raki business? Obviously you're
indicating sort of strong demand for the premium brands, but how did the raki
business go in underlying performance there at Mey Icki? Thank you.

Paul Walsh
Ivan, why won't you talk to the on-premise trends, which are positive, and Andrew on
Mey Icki?

Ivan Menezes
Right now the on-premise we figure in total is growing about 2%. And if you look at
total in volume on spirits, the total spirits industry is growing in the 2% to 3% range.
The thing about the US, and if you go back to the 2008 crisis we did see a drop in the
on-premise then. It is coming back nicely. Overall you need to remember the on-
premise is about 22%, 23% of the total business. So I actually see the channel mix
stay relatively resilient. You get a little bit of blips as you go through economic
cycles, but not the kind of dramatic shifts you've seen in some markets in Europe.
And you also need to remember in the US, by virtue of the three-tier system, our
profitability in the on versus off is relatively the same. It's a high-margin business in
both channels and so these impacts are on the margin. They shift a bit, but no
dramatic change. And I'm very pleased actually with the strength of the on-premise
coming back because it's a good leading indicator as well for the health of the
consumer and certainly the health of the beverage alcohol category.

Simon Marshall-Lockyer
Thank you.

Andrew Morgan
And Mey Icki very much in line with our business case and that's despite an excise tax
increase that's been applied to the category in Turkey since the acquisition. Quite
significant market share gain over the last six months would be the other highlight.
But we're very much on track is what I would say.

14


Simon Marshall-Lockyer
Thank you.

Operator
We'll now take our next question from Olivier Delahousse from Natixis. Please go
ahead.

Olivier Delahousse - Natixis
Hello everybody. Olivier from Natixis in Paris. A couple of questions. The first one
is related to the non-cash item regarding taxes. I was wondering if -- I'm guessing this
is related to brands mostly, but also to the US jurisdiction in terms of tax. I was
wondering if, Deirdre, maybe you could comment a little more on that.
And secondly, I was wondering if there were regarding duty anything, any concerns
regarding increases in other geographies, a little update on your perspective in that
respect. Thank you, guys.

Paul Walsh
I think on the duty point -- I will hand over to Deirdre regarding the non-cash tax
item. On duties we have to be alert to duties generally speaking around the world.
That said, there are certain markets in the emerging market category where we're
actually seeing duties come down because they want to eliminate illicit alcohol. So it
isn't always right to look at it through the lens of the developed world. Nevertheless,
we keep our eye on this. There is nothing horrible out there that we see lurking, but
we're going to have to be on our game constantly.
Cash tax?

Deirdre Mahlan
Yes, the write-off of the deferred tax assets was related to intangible brand assets.
You may recall that at the full year we said that we expected our tax rate, our effective
tax rate to come in line with the cash tax rate. That's effectively what's happened. As
you know, the brand IP is owned in multiple jurisdictions. And we were able to reach
favourable agreements with the tax jurisdictions so that the basis of taxation now is no
longer dependent on the amortization of those brands. And that's what caused the
write-off of the deferred tax assets, but yet an ongoing underlying reduction in our
effective rate.

Olivier Delahousse
Just a small follow up on that if I may. I guess you won't want to comment on
competitors or peers, but is this -- can you mention whether these discussions that you
have had with the tax authorities have been on a standalone basis or whether they are
likely to have been made with other groups in the industry.

Deirdre Mahlan
They were discussions that we had with the tax authorities. They were not industry
wide.

15


Olivier Delahousse
Okay. Thank you.

Operator
We'll now take our next question from Nico Lambrechts from Bank of America.

Nico Lambrechts - Bank of America
Hi there Paul and team. Thank you very much. Since it's late in the queue just two
questions. The first is could you repeat maybe the actual cost savings number which
you did in your prepared script?
And then the second question, apologies if I'm going a little bit deeper down the rabbit
hole that you mentioned, Paul, but the first quarter number 9%, I think the underlying
number was about 6% to 7%. The second quarter 5% growth, if we strip out the one-
off benefits pre-buying ahead of excise, that's probably around 4%. Could you maybe
indicate if there's in the next quarter potential technical impacts, i.e. reversals on the
pre-buying in France and LatAm, and if you think that the reported number will be
impacted negatively by these technical effects for the third quarter? Thank you very
much.

Paul Walsh
Over to Deirdre.

Deirdre Mahlan
On the benefits on restructuring we had said for the full year was around GBP40m. I
don't have the precise number in front of me for the first half. It was a little bit less
than half because they'll tend to increase through the full year, but we expect we are
on track for that.
On the second question, can you repeat the second question?

Nico Lambrechts
Just asking are there any of these technical impacts that benefitted the first quarter and
second quarter, and specifically the pre-buying in Latin America and France that will
reverse into the third quarter, i.e. the quarter into March?

Deirdre Mahlan
Yes, as Andrew suggested earlier, the impacts in France, and there was some also in
Spain, they're not material. So we don't expect it to have a material impact on the
underlying trends. And, as I said earlier, I think the shifts from the first quarter to the
second quarter, we're not expecting any of that to be impacting the full year trends or
the underlying trends in the business for the full year.

Nico Lambrechts
And is it fair to say that the underlying trends were around 6% to 7% in the first
quarter, slightly below 5% in the second quarter, and that your third quarter will face a
much tougher comp than the previous two quarters? And should that have any impact
on the quarterly numbers?

16


Deirdre Mahlan
I think I would say, as you know, we're not giving quarter-by-quarter guidance in
terms of the underlying results. I would say that the trends that we've seen in the
underlying performance of the business we believe are sustainable. Again, given the
comments that Paul and the Presidents have already made about the clear
macroeconomic impacts that would impact consumer confidence, we're confident in
the underlying performance of the brands. And the investments that we've made in
the brands are delivering the returns that we've expected. It's coming through in gross
margin and in operating margin, and right now we're not seeing anything that would
impact that.

Nico Lambrechts
Thanks very much, Deirdre.

Operator
We'll now take our last question today from Pablo Zuanic from Liberum Capital.
Please go ahead.

Pablo Zuanic - Liberum Capital
Okay. Good morning everyone. Hopefully last but not least. And I know it's late in
the queue so very quickly, number one, the US margins are so much higher than the
rest of the Company, but the US, the North American business is mostly white spirits.
It's more white spirits weighted than the rest of the world and I've always thought that
brown spirits would be more profitable. It's a larger country, more distribution costs,
third-party distribution is mandatory so I'm just thinking why are the margins so much
higher or is it that just the other divisions are quite low and there is a lot of upside?
That's one question.
The second question, in terms of at the moment if I look at your numbers in emerging
Asia in customer growth versus Latin America, they are both very similar, high teens,
almost 20% on average. When you look out more longer term, which of those two is
more sustainable? From outside one would think Asia, emerging Asia has more long-
term growth potential, but maybe I'm missing something there.
And the third one and last, when you see all the growth around craft beer in the US,
premium beer, now that new Bud Light Platinum is supposedly trying to compete
with spirits, and I hear apparently ABI trying to launch a malt beverage, a rum malt
beverage in line with Bacardi, do you see room to do something in that area or even to
reignite your RTD strategy there? That's all. Thank you.

Paul Walsh
Maybe, Ivan, you can pick up that last point. Regarding the US, what I would say,
and this is not dissimilar for many consumer products companies, the sheer scale of
that market just gives a level of efficiency that does allow higher margins. If you
think of your media reach, the fact that you can scale the organization, a variety of
things just point to it being generally a more profitable market.
Brown spirits, particularly at the high end, are seeing some resurgence and bring with
them very attractive margins. So we can see this being enhanced.

17


I wouldn't want to call the race between, say, Asia and Latin America. Both of those
markets have got huge potential. And if you look at what has been achieved in our
LatAm division, whilst Asia does tend to get a lot of the media attention, Latin
America has been strong, with very attractive growth for a number of years.
Ivan, on the craft side?

Ivan Menezes
If you look at the trends that are happening in ready-to-drink beer, the craft space, it's
quite an exciting space. Innovation does make a difference. And from Diageo's
standpoint in North America this business is still important to us. The consumer
demand, that is actually quite robust.
And as we go into the second half we actually, right now we have some new products
in the marketplace. The Smirnoff premium mixed drinks line, with products like the
Screwdriver have just gone into the market and are doing very well. And I have to
say I'm also very excited about the Parrot Bay frozen cocktail line of pouches that
we've introduced into the marketplace. Early days, but looks very, very encouraging.
This is essentially getting a high-quality frozen cocktail in a pouch for about $2 and as
you merchandize these products they're doing extremely well.
So I think the space is innovation intensive. You're going to have winners and losers
and we've seen that in our track record here. But I'm optimistic about holding our
position here and, as I said, going into the second half, you will see a fair degree of
pretty exciting innovation from Diageo in this space in North America.

Pablo Zuanic
Good. Thank you.

Paul Walsh
Let me try and bring this to a close. And first of all, thank you for your questions. As
I said in the presentation, this has been a good, well-balanced half-year performance
and I do hope that in the last 90 minutes or so have been helpful to you to understand
how that growth has been driven. I look forward to meeting a number of you over the
next few weeks, but for now thank you for your time and goodbye.

[End]

18

Diageo 2012 half year results q and a transcript

More Related Content

Viewers also liked

Similar to Diageo 2012 half year results q and a transcript

Recently uploaded

Diageo 2012 half year results q and a transcript