Diageo plc

Good morning and welcome to Diageo's 20 Preliminary Results Investor Q&A call. Your call today will be hosted by Diageo's CEO, Ivan Menezes, and CEO, Cathy Nichols. The question today, please signal by pressing star 1 on your phone keypad. If you're using a speakerphone, please make sure your mission is turned off to allow your signal to reach us. We're now ready to start the call. Mr. Menezes, please go ahead.

Thank you. Good morning, everyone, and welcome to our preliminary results call. I hope you and your families have been staying well through this time. Fiscal 20 was a year of two distinct halves. In the first half, we delivered good, consistent performance with broad-based organic growth across regions, categories, and we had margin expansion. Our second half performance, however, was significantly impacted by the global outbreak of COVID-19, with the peak of the impact occurring in Q4. We adapted quickly and acted decisively to protect our people and our business. We supported our customers, trade partners, and communities. We stayed connected to our consumers and rapidly responded to their changing needs. We reduced expenditure, conserved cash, and raised additional liquidity. The strong foundation we built over the last six years has increased our resilience and agility and smart investment has given us the technology tools to be effective in this environment. Our insights have enabled us to stay close to consumers, and we've continuously refocused our marketing investment to capture opportunities and strengthen brand equity. The US, our largest and most profitable market, has been most resilient. Our trade demand was strong during lockdown, and our tequila and Canadian whiskey brands continue to perform particularly well through the year. Depletions were ahead of shipments, which resulted in a reduction in distributor inventories. In our other regions, we had a much higher on-trade exposure, which meant the impact on our business was more severe. For example, in Europe, around 50% of our sales are normally on-trade, and Africa is a strongly on-trade-oriented region. As these two regions are our largest bear markets, the decline in our beer business was significant during COVID-19. In aggregate, around three quarters of Guinness sales are on trade in the larger Guinness markets in Europe and Africa. The impact of COVID-19 was also disproportionately high for our Scotch category due to its greater exposure to emerging markets and travel retail. Together, they account for over two thirds of our Scotch net sales prior to COVID-19. So across all our markets, we move rapidly to adapt to the reduction in consumer demand caused by COVID-19 in keeping with our disciplined sellout culture. Our decision to take back around 500,000 Guinness kegs from customers demonstrates our commitment to quality. We've also been very disciplined in our working capital management. While the on-trade is gradually reopening in many of our markets, we expect volatility to continue. Given the significant uncertainty around the pace and shape of recovery, we're not providing specific revenue and profit guidance for fiscal 21. We expect organic net revenue in the first half of fiscal 21 to be significantly impacted. However, within Q4 of fiscal 20, we saw sequential improvements. We expect that to continue into fiscal 21 with sequential improvement in the first and second quarter as the on-trade continues to reopen and consumer demand begins to recover. Today, we announced that we're recommending a final dividend in line with fiscal 19, bringing the full-year dividend growth to 2%. This reflects our long-term confidence in the resilience of our business and the robust fundamentals of our industry. As we manage through this period, we're determined to emerge stronger. We are rapidly responding to changing consumer opportunities, investing with agility in marketing and innovation, partnering with our customers to win across all channels, driving efficiencies in cost and cash management, and continuing to do business in the right way from grain to glass. And with that, Cathy and I are ready to take your questions. Let's open the line for questions.

Thank you, sir. We have our first question from Sanjita Aulia from Credit Suisse. Please go ahead.

Good morning, guys, and Kathy. A couple of questions. First, look at the new data for the US and also the new data for Europe. It seems like the manager is underperforming the category within the off-prem channel. Can you just talk a bit about your competitiveness in the off-cade, in particular post-COVID? And then in emerging markets, are you seeing any signs of consumers down trading from the spirit category to the illicit or even to beer. Thank you.

Sure. Hi, Sandeep. Your question on U.S. share performance in the uptrade. If you look at our performance across the portfolio, we've got, I'd say, share-gaining brands and share-losing brands. Clearly, Tequila, our North American whiskey brands are doing very well vodka and rum are tougher. What I would point to is firstly, Nielsen and Apka represent about 45% of the market. As I indicated, our depletions ran ahead of our shipments. However, we're slightly behind the market. If you go back the past 18 months, the U.S. had got to be in line with the market. We've We're slightly behind right now when you look at our depletion growth relative to the industry growth. And we are very focused in our actions to make sure we improve that going into fiscal 21. I have to say overall, the strength of our U.S. performance, I'm very pleased with. And you will see our price mix is higher than the industry. And one of the actions we have taken is not to chase share. but to really keep the quality of shared growth strong. So our price mix is running well ahead of the industry price mix if you look at the last recent few months. On the emerging markets, I'd say you've got a couple of impacts. One is imported products like scotch, particularly when you have currency devaluations and economic slowdown, you do have a natural impact of some down trading that takes place from there. And this is not new. We've faced it over cycles, over many, many decades. So you would see some of our primary Scotch brands like Black and White and VAT69, et cetera, picking up and the top end of deluxe and super deluxe Scotch slowing down. I would say overall spirits continues to be healthy and are the breadth of our portfolio I'll give up the ability they are mainstream spirit play in Africa we p.m. the real opportunity or actually spirits to gain share from the air through the spirit so what its market specific the trend within scotch in emerging markets particularly that currently that up and economy have I'll have taken a downward trend I'll we will be from short-term down trading coach will be But overall, spirits is healthy. And I'd say the actions we've taken to broaden our portfolio position us better to maintain our positions and indeed grow shares as we go through 21.

Thank you, Ivan. And just following up on Europe, any comments on share trends in Europe, particularly in the post-COVID environment in the offshore channel?

Yeah, so just the context on Europe. One is we are heavily skewed to the on-premise in Europe, right, because of our beer business. You know, Guinness is significantly on-premise skewed. If you look at our performance in the most recent months, the at-home performances or the off-trade performance on beer is improving. Guinness is actually gaining share in the off-trade. And as the entree comes back, and I'm just using the data point of the last few weeks in the UK, we are also seeing Guinness perform relatively better within the beer category. So I'm feeling very good about Guinness. On spirits, we are underperforming the market slightly, but we feel confident going into the first half of fiscal 21. We've got strong programs, good innovations, and fully expect to do better in our spirits performance going into F21. We have some specific commercial issues in markets like Germany, where because of price increases, we have taken some short-term hits. I do believe the Europe team, you'll see sequential improvement in our share performance as we go into fiscal 21.

Okay, that's very helpful. Thanks, Ivan.

Thank you. Our next question, Simon Hales of Citi. Please go ahead, sir.

Thank you. Morning, Guy, and morning, Cathy. Just two or three from me as well, please. Can I just go back to your outlook comments, just so I understand the messaging into the first half of next year, clearly. I appreciate you're going to see some sequential improvement in the volume picture from Q4 into Q1 and Q2. But with regards to the margin development in the first half of the year, you also say you expect to see a sequential improvement from the H2 level. Is that improvement relative to the sequential decline we saw in H2 on organic margins? around sort of 600, 700 basis points? Or is it in terms of the absolute margin level in the second half, a pickup from that level? And then secondly, on stock levels, I think, Cathy, in the presentation, you talked about stock days in trade being up in a number of markets due to the reduced demand. I wanted you to expand a little bit on that. And I wonder, should we expect to see some further destocking in the first half, not only in travel retail, but perhaps around Scotch whisky in emerging markets. And then just a final quick one, if I can. Back at the Capital Markets Day last year, you talked about a further 100, 150 million of efficiency savings to come by the end of F22. Is there any opportunity for you to accelerate some of those savings a little bit more quickly into the current fiscal year, please?

Shall I take stock levels? You can take one and three. Okay. So on the stock levels, we feel really good about where we close the year. Clearly, the big variable on stock levels is forward demand, forward consumer demand. And we're tracking that very closely. And our sell-out culture and the data we have now has us moving very rapidly. We indicated global travel. It's really hard to call the recovery on global travel. And so... That could be an area, we think, which is going to be much slower and coming back. So we will not sell into that channel until we start seeing end demand pick up. In the rest of the emerging markets, I feel good about where we are on our stock levels. And we will continue to monitor it real time and adjust very quickly. So I'm not expecting destocking in other emerging markets in a big way happening. unless, of course, end consumer demand really drops off, which we're not anticipating. So we're in good shape on the stock levels.

And then I'll go ahead and address, first of all, a question about our outlook comments. So you've clearly said, as it relates to top line, that we're expecting to see sequential improvement in the first and the second quarter, in the first half, relative to what we saw in the fourth quarter in fiscal 2020. As it relates to overall margin improvement, I do expect that absolute margin in the first half to be better than what we saw in the second half of fiscal 20. Obviously, I also commented that we continue to expect to see some pressure on a year-over-year basis. And then you had asked about overall cost savings. What I'd say is clearly we've looked to continue to push hard on everyday efficiency. And during this COVID period, I'd say we especially scrubbed harder at what I would call discretionary spending. So we've tried to take the approach of I'll call it blank sheet of paper on discretionary funding and really only do the spending that we think is critical to the business. So overall efficiencies I would characterize as actually running on the higher side, if not ahead, of what I talked about on Capital Markets Day. Now, the flip side of that is we've unfortunately seen the volume decline and that causing negative gearing in the P&L. And I would just remind you that, you know, roughly 15% of our business is a beer business in a place like Africa. 60% of our Africa business is a beer business. And so that business has, I'll call it, higher fixed costs within COGS. And so when volumes decline, we would see a bit more pressure in terms of negative leverage across the PML.

That's great. That's very clear. Thank you so much.

Thank you very much. Our next speaker is Olivier Nicolai from Goldman Sachs. Please go ahead. Your line is open.

Hi, good morning, Ivan, Cathy. Just a couple of questions, please, on e-commerce. You mentioned in the presentation that you've seen some relaxation of regulation allowing you to do more e-commerce. In the U.S. specifically, what is the current business model that you're using and how do you see things evolving as we come out of this crisis? And just lastly, can you remind us what's the percentage of sales in e-commerce for the group, please? Thank you.

Hi, Olivier. The percentage of sales, firstly, is small. It's low single digit. But what I'd point to is if you look at our Q4 e-commerce sales relative to q3 it doubled so there's some accelerated growth but we have far less penetrated than other consumer product categories mostly because of the regulatory environment now some of those things are changing in markets and we are seeing more access to e-commerce channels in latin america africa in addition to europe and china on your point of the u.s the u.s system is still operating within the requirements of the three-tiered system. So you have a platform like Drizzly where the business is running 4X, four times what they expected in the last few months. Now what Drizzly does is it takes its order from the consumer but picks up the product at a retail shop, a liquor store, and then delivers it. You also have retailers within state who are able to take e-commerce orders and deliver within the state to customers, and that business is growing rapidly. But it is from the liquor store to your home within the state. So we don't have national big players like Amazon, et cetera, in the alcohol category. It is very focused on liquor retailers, and a few platforms like Drizzly. And that business is growing. You also have a pickup at the store is growing where people can place their orders electronically and drive by and have the product delivered at the store so they don't have to enter the store. And you've seen in states like New Jersey, I mean, that has increased a lot. So the convenience and delivery to the home has picked up in the U.S., but still very much within the framework of the CPS.

And then the one other thing I would think is just cocktails to go. Yeah. It's also been enabled in the U.S., which allows people to, you know, especially when they're ordering from a restaurant, to not just pick up great food, but to pick up great cocktails as well.

Thank you very much.

Thank you. Our next question comes from Trevor Sterling of Bernstein. Please, your line is open, sir.

Good morning, Ivan and Kathy. Just on my side, please. First one, Ivan, maybe could you give us a little more color in the U.S.? Shipments are running a little behind depletions. How far behind depletions were they? And is that now stabilizing? And the share trends you mentioned earlier, is that slightly worse share performance coming from lower share gains from the Casamigos of this world, or is it higher share losses from Smirnoff and Captain Morgan? And I guess final question, can you just comment a little bit on the Indian run rate performance now we're through the lockdowns? What's the state of demand in India at the moment?

Sure, I'll take the US questions and Cathy can handle India. So what we're seeing in the US performance I would say broadly it's an industry, Trevor, that we think it's a little hard in the last couple of months, but our estimate is growing around 4%, in value. I'm talking U.S. spirits. You saw our shipments were 2 and a bit, and I'd say our depletions are somewhere in between. So we are still slightly behind the market, and the main... Areas where we are losing spirit share is in Vodka, Captain Morgan, and a bit in Johnny Walker. Johnny Walker is also linked to the lapping of White Walker from the year before. That's broadly where we are. We have very focused plans that Debra and the team have on improving this picture as we go into fiscal 21. he still has some very good momentum on Custom Eagles and Don Julio and Crown Royal, you know, the share gainers. So that's how I would characterize the reps.

And then if you just talk about India, as everyone is aware, they had a six-week complete lockdown in terms of the alcoholic beverage industry in its entirety, you know, production. as well as overall sales. And so coming out of that, we continue to see good sequential improvement there, you know, kind of May to June and then especially into July. So July really much stronger. So I would say we feel pretty good and confident about that continued sequential improvement in India now that the whole kind of countrywide lockdown is over.

Thank you very much, Kathy and Ivan. Thank you. Thank you.

Thank you very much. Our next question comes from Edward Mundy of Jefferies. Please go ahead.

Morning. Good morning, Cathy. Three ones for me. The first one is capital returns for fiscal 21. I think, Cathy, you mentioned in the pre-release that H121 net debt regard is going to be impacted given the way the numbers are falling. As the board thinks around dividends, are there any financial metrics that will help you provide a steer around capital returns, for instance, if you hit four times net debt with EBITDA? The second is on innovation, which has been an important driver of Diageo's growth over the last couple of years, which has been really good innovation. How does COVID-19 impact your ability to launch innovation? And then the last one, Ivan, is on sustainability. You've got this paper-based water bottle. It's really interesting. I see you're launching a new 2030 social environment for strategy and targets. Without giving away too much, could you talk about what the main changes will be following your 2015-2020 targets?

Well, I'll go ahead and take the first question. So you would have seen our leverage ratio increase to 3.3 times, and we have said that we target to maintain that ratio between two and a half to three times. We made the decision, our board made the decision, and we announced today, although this needs to get approved at our AGM, that we're maintaining our final dividend flat. And we earlier announced in April that we've paused our share repurchase program as a result of that leverage increase that you've seen, and we've further said that program continues to remain paused in fiscal 21. As you think about the impact of COVID-19, clearly it's had its peak impact in this fourth quarter, and we said we expect to see sequential improvement in the first quarter and the second quarter. But when we get to interoms and report at that period of time, we'll be reporting a leverage ratio off of our 12-month trailing EBITDA, right? So that's going to take into consideration a 12-month period of time that will have been fully impacted by COVID. As a result, I expect our leverage ratio is going to peak at that point in time, you know, and then we would see improvement as we go into the second half of fiscal 21 and into fiscal 22. I'd kind of take a step back from that, Ed, and I'd say if you look at the total financial picture for Diageo, I mean, we do have real financial strength. We're an A-rated company. We've taken actions to further bolster what was already a strong liquidity position. We've got 5.3 billion pounds of standby credit facilities. We ended the year with $3.3 billion in cash. So I think we're in a quite good position to continue to make balanced decisions, I would say, with regard to shareholder returns, but ensuring that we really support the ongoing investment in the business for the long term.

And, Ed, on innovation, I'd say this is one of the areas we very quickly kind of reassessed our pipeline and our approach. Simply, what we are leaning in more to is big recruit and re-recruit innovation on big brands. I'll give you an example. In the UK, in the last few months, the line extensions on Gordon, Sicilian Lemon, and Mediterranean Orange, we've had three of them. Literally, in the last three months, we've gained, I think, eight points of market share in the UK with those launches. They're doing very well. There's a Captain Morgan line extension going into the U.S. or has gone into the U.S. So we're going back to big brands with innovation. Brands that need seeding and building and particularly on-trade support, we are delaying because this is not a time to be building, let's say, Roe and Co. Irish whiskey in the U.S. when the on-trade is down. So we're slowing those down. And then we're looking at new opportunities. And as an example, the whole space of ready-to-serve cocktails and premix we see as very attractive. And so we're doubling down on being much more ambitious on our goals there. So Diageo has had a strong track record of innovation. We're not backing off. We're reshaping it to the times. And I feel confident going into fiscal 21. We had some pretty exciting things in the pipeline which should help our performance. On sustainability, as we point out, yes, the Johnny Walker bottle got a lot of excitement around it, the paper bottle on Johnny Walker. Also, our bullet distillery, the new one, is carbon neutral, which is really a big first as well. You will see, we're just coming to the end of our period in 2020, where we had set our goals five years ago, and you'll see the results with our annual report. We've done very well. I'm really proud of our performance on carbon and water. Going forward and the 2030 goals, it's going to be in three areas. One is sustainability, so carbon, water, recyclability, packaging, the standard metrics there. The second area is inclusion and diversity. And the third is on positive drinking. And on all three, we are setting, I'd say, pretty ambitious goals. needs in this area we want to continue to lead and later in the second half we'll be releasing our 2030 objectives but I can assure you they are going to be ambitious and they are very core to our strategy so we're putting the resources and effort behind it thank you and just to come back to the first question there's no sort of

hard-leverage target that could precede you from paying a dividend? I mean, you look at a number of things, including the run rate, your liquidity, just to be clear, there's no hard-leverage target that would put you off paying a dividend at any time?

No, and in fact, Ed, I would have said if you went back into Diageo's past history, At about the time that we acquired the USL business in India, we also would have exceeded our leverage targets at that time. So we really take a holistic view, and a big part of that is just getting more data and information on the pace, you know, and the overall... slope of the improvements and positive trajectory that we'll be seeing in the business as the on-trade starts to open up. So that's something we'll obviously be keeping in mind. And we said that the capital return decision, you know, will continue to be under review throughout fiscal 21.

Thank you.

Thank you very much. Our next question comes from Pina Erd-Morgan Stanley. Please go ahead.

Thank you. Good morning. I have a quick follow-up to Simon and Trevor's question on the U.S. With depletions running ahead of shipments, should we expect some catch-up in H1? And do you see wholesalers stocking up ahead of potential tariff risk? Another quick one on the U.S. Did demand for your product benefit at all from the government stimulus plans year to date? And do you see down trading as a risk at all going forward? Or would you see continuation of solid demand in the U.S.? And finally, a quick one on India. How's your long-term view on the gross potential of this market change? What was the key driver behind the impairment charge you've taken? Thank you.

Okay, I'll handle the U.S. and then turn to Cathy on India, Pinar. Yeah, so on U.S. spirits, firstly, I would not, this depreciation being ahead of shipments is on the margin, so this is not a big deal. So I wouldn't factor it. The key factor that's going to be important is could Zuma offtake in the second half? And that's what we're very focused on because the We are encouraged by the trends we continue to see in the U.S., and you can see it in the overall industry trends in Nielsen and NAPCA remain strong. To your point on demand and how much of it is supported by stimulus, I mean, there's no question there is an impact that consumers have the spending power right now, and while they are stuck at home, we are seeing... both in food and drink and entertaining generally, that there is a willingness to spend. I would point to previous economic recessions, you know, and the global financial crisis to me is the best set of data to look at where there was a severe impact. And what we saw was a very short period of slowdown and downtrading that happened. It was literally two or three quarters. And right now, we're not seeing down trading. In fact, if you look at U.S. spirit industry data, the higher price points are the ones that are growing the fastest. But could we see some? I'd say we could see it moderate, but I don't expect it to be a sustained trend because the main source of growth on spirits in the U.S. is still spirits growing faster than beer and wine. And younger Americans in the 21 plus are consuming much more spirits. And in the time of lockdown, where cocktails at home have only gone up. And so I see the long-term trends here in terms of premium spirits brands continuing. We could have some short-term impact as if consumer spending gets severely hit. But History would say that's not a... I don't see it as a sustained or structural trend. It could be short-term for a little while.

And then I'd say specifically with regard to India, we continue to have a lot of confidence in the long-term opportunity that we have in India. More recently, we would have seen in the first half GDP starting to flow in India. So even ahead of the pandemic impact. They were starting to see the economy slow a bit. So that softened our results in the first half. India was up about 2% in the first half. You know, that is lighter, you know, than what we think the potential of the market and our business is in India. And then, as we've already mentioned, in the second half, literally the entire Al-Fab industry was closed down for six weeks. So there are impacts from COVID in the second half are very significant and much more material than you would have been at the total the agile level we obviously had to take that into consideration and you've seen that impairment that we've taken but it doesn't change our view on India at all for the long term you know the long-term trend there in terms of population growth over time per capita income growth enabling more people to afford our brands both our international spirit brands as well as our prestige and above brands. And really importantly, the people in India just love whiskey. And that really bodes positively for the long term for our business. So I would say, you know, over the long term, we continue to be really bullish that that's a business that's going to be good for the Asian, good for its shareholders. Thank you.

Thank you. Our next caller, our next question is from Chris Fitcher. Please go ahead.

Thank you very much. A couple of questions and a clarification, please. Firstly, on China, it looks like you had a very dramatic stock reduction in the final quarter there. Could you give us confidence that you've now cleared out the excess Chinese New Year stock and that you should start to see the recovery early in the new half? And can you give us a feel for what you sense your Baizhu market share is doing? Secondly, on the US, you mentioned your price mix was running ahead of the industry. It does look like it faded a bit in the second half, despite what I would expect would be a period with reduced promotion. We've been here in the past before where you've priced and mixed ahead of the industry and driven good margin expansion, but market share has suffered. How should we think about your relative price position? Are you comfortable with the price gaps on some brands or going into a softer economic backdrop? Should we expect increased promo in the new financial year? And then just finally, a clarification. I think you said you wouldn't ship to global travel retail until you saw a recovery. I assume you must be selling something into global travel retail, or are you literally not shipping anything at the moment?

Thank you. I'll take two and three, Chris. Hi, Chris. Global travel, yeah, it's a fickle. I don't know. Very little, because really, I mean, there's a dramatic reduction in passenger numbers. So we're ready to respond quickly as it picks up, but right now we're not doing virtually very little business. One of the things I feel really good about is the NRM capabilities that we have built in the team, and they've been at it for the last 18 months. And the second thing I would say, we are hyper-local in our focus in the U.S. We now have data down to the zip code, to the store level, and so the analytics and data we are putting behind execution, behind pricing, and the management of mix has moved significantly in the last couple of years. And we've got to get the right balance of share, price, mix, margin, and the I feel very good about our capability and focus here within our team and working with our distributors to get it right. We have eased off some lower ROI programs that we used to do in the past, and we are leaning in more to ensuring our execution at the point of sale in terms of visibility and display and the launch of innovation and the pace at which we are measuring our execution at stores now with our Edge 365 capabilities, all of that is significantly ahead. So our focus going forward is to get that right balance of price, mix, and share. And I'd say that managing it at a very micro and very sophisticated level now, and I feel good about going into 21, seeing improvement in our share performance, as I talked about earlier.

And then specifically as it relates to China and overall stock reduction, so our Shui Jing Feng business has reported publicly, and so you would see that in, I'll call it, our third quarter and fourth quarter, their first quarter and second quarter, top line was down as we looked to reduce stock and trade. So for our third quarter, the top line was down 22%, more like 90% in their second quarter, our fourth quarter. And that was all about reducing stock and trade so that they could basically kind of end what our second half was. in good stead in terms of the stocks that remained in stock and trade. So they made commentary on their call about ending the half with stock levels closer to kind of 2018, 2019 levels. So I think they're feeling very good about where they end at stock and trade today. And I would have said the same thing overall for our scotch business, and that we're beginning to see especially the deluxe part of our scotch business now pick up in China. And overall, the scotch business in Taiwan, which is reported in our greater China market, actually was very resilient during this period of time. And then finally, I think you asked a question about or buys you kind of market share. One thing I would say is if you look across the industry in this most recent period of time, the price point sort of at the 600 R&D level and below has not performed as well as some of the higher price points. And our business participates in the price point at the 300 to 600 R&D level. You know, that's in part because banquets and especially, I'd say, business occasions have not yet picked up to the same degree as other occasions. But as you said, how our business is performing kind of ahead of this period of time, we were gaining very strong share. And so I would say we're very confident that we'll get back to that space pretty quickly.

Thank you very much.

Thank you. Our next question comes from Olivia at UBS. Please go ahead.

Hey, hello. It's Nick here. Thanks, Cathy, Ivan, for the question. Well, it's two, actually. One, the first is an extension of Pinar's question on the U.S. And I guess if we look back to the financial crisis, I guess the U.S. market held up fairly well volume-wise. I think it was like 2%, 2.5%. If we look at NABCA, And would that be kind of a sensible run rate to assume going forward?

I would say, based on current conditions and what we see, the US spirits market showing kind of modest volume growth and little better value growth will continue. Yeah. And as I said, the biggest The source of that volume is coming out of beer and wine. It's going faster than that, so the occasions are shifting. We remain confident about the long-term consistent trend of growth in the U.S. birds market. As I said earlier, if you have a quarter or two, if the economy really gets tough and spending gets constrained heavily. You could see some slowdown and some down trading, but we don't see that sustaining. And yeah, so I'd say that's the reasonable assumption, that we continue with no single-digit volume growth.

Okay, thank you. And then one final one from you. It's obviously of the Squatch portfolio. And you called out obviously Lagavupa and the mall doing very well. And I guess, obviously, the blends, obviously, comping the launch of White Walker last year. How are you thinking about, like, malts versus blends over the next 12 months?

Are you talking about the U.S. or overall?

Yes, sorry, U.S., yeah.

Yeah, so I'd say we... We have a big focus clearly on our malts business as well as on Johnny Walker and Buchanan's and the blends business. In the early stages of the COVID lockdown consumer habits, American whiskey has done better than Scotch. And in part because Scotch is more about, the malts are more about discernment. I mean, we also skewed to the on trade in many of these brands. So, but we've got to focus on really getting John Walker coming back. In the last few weeks, the share performance is a little better. And so we've got big plans on the brand. And single malt, I mean, continues to be positive. And we expect that to continue as well.

Okay. Thanks so much.

Thank you. Our next question comes from Alicia Foreo of Investec. Please go ahead, ma'am.

Hi. Good morning, Ivan and Kathy. Three questions from me, please. The first one on the U.S. You mentioned distributor destocking in the U.S., but we've also heard from many consumer companies in alcohol and in other categories that U.S. retailers are also destocking. So I was wondering if you can give us your assessment of the U S landscape over the near term. Um, and then secondly, uh, beer trends at the end of the H two period, some peers have reported significant improvement, uh, around June. Have you seen a similar development? And then finally, uh, on excise, you mentioned excise in India. Are there any other key markets where there is a risk of excise or other unfavorable regulatory developments over the near term? Thank you.

Thank you. I'll take the U.S. and excise, and Kathy will take the beer question. I'd say broadly for the U.S., distributor and retailer stock levels are normal, are where they should be. So I don't see... If your question is, are there going to be big changes going forward in stock levels in the trade on the spirit side, I'd say no. They're pretty stable. On excise, we've not seen... India had a few states that just jacked up the excise when they opened up, and many of them have reversed the duty increases. Generally, I'd say so far we have not seen significant changes. One of the things I'd say that's very much in the message we are getting across to governments is the hospitality industry is so critical to the recovery of the economy. One in ten jobs in the world and in most countries sit in the hospitality industry. It's mostly young people. And this is not a time to be penalizing the hospitality industry. And I think that message is landing there's far more appreciation for what bars and restaurants and pubs mean to the economy and to society now uh probably than pre-covered and uh we in the industry and working with bars and restaurants and hotels are really getting that message through to government

And then as it relates to beer, I would say, you know, you have to look at the specifics of our beer footprint because Europe and Africa is the largest kind of overwhelming majority, you know, kind of two-thirds of the overall beer business are in those two large regions. And so what we see is the improvements in our beer business as the on-trade opens up because both of those regions are also heavily weighted to the on-trade. So we mentioned Europe. You know, we're about 60% weighted to the on-trade, but our beer business would be even more heavily weighted than that, you know, given how popular Guinness is in Europe specifically. And then similarly in our Africa business, you know, you've got countries like Kenya where Senator Kegg is a, you know, very strong part of that business, and it would be, you know, over 90% kind of weighted into the on-trade. And so very much tied to the on-trade opening up. I'd say when you dissect this on a market-by-market basis, you know, the impact of COVID and the closing of the on-trade was very different market-by-market, and it kind of came to Africa and Latin America later, right, then it landed in Europe. And so as we've seen the on-trade start to open, we see that improvement coming through our beer business. But it's very market-specific. And we would certainly expect now that the entree is opening up more broadly across markets that we would see that sequential improvement in beer, as we talked about, you know, for the overall company. Thank you.

Thank you. Our next question comes from Nico von Steckelberg from Liberium, California.

Hi, good morning, everyone. Can I just summarize here? It sounds like you're saying that you do expect modest recessionary environment and maybe some down trading for a bit of time, but the recovery of the on trade should certainly overwhelm any temporary impact from recession-linked down trading. My second question is on just the growth rates. Could you provide me with your growth rates for Q4, how you finished Q4 and the start of Q1? I hate being so short-term, but it would be interesting to hear. And then finally, I'm not sure if that could be the answer, but I'd be curious to hear if you have any comment on consensus for FY21 so you can see what we can see. But do you think it's achievable? And, yeah, what's your thoughts on consensus? Thanks.

And so clearly what we're saying as we talk about sequential improvement to our top line in the first quarter and the second quarter of this fiscal half, we are saying that while we are expecting some impact from both the recession overall impacting different markets differently and some level of down trading, that we think volumes coming back are going to overcome those other impacts, hence the sequential improvement we expect to see coming from the fourth quarter. As it relates to kind of overall what did our fourth quarter look like, top line overall for the half was down 23%, and for the fourth quarter it was closer to 40%. And then specifically as it relates to the first quarter, we're not giving out monthly numbers for the quarter. I would just go back and again tell you we've clearly already seen an improvement, you know, in terms of July relative to June. And we'd expect overall the first quarter to sequentially be better than what we saw in the fourth quarter.

And on consensus?

We're not giving specific guidance, so I'm not going to comment on consensus.

Thank you.

Thank you. Our next question comes from Mikhail Shanberg from Landmark Family Investment Office. Please go ahead, sir.

Yeah, good morning. I have two questions, basically. You know, one was on the U.S. market. You know, clearly the hard seltzer market there is booming and taking significant share from traditional markets. I understand we don't really consider that as a focus opportunity. I was just wondering why, you know, any specific reasons why we've not looked at the hard sales market in the U.S. and I'm there. And the second one was, you know, follow up to some earlier questions, are China market share or China share in a total, you know, revenues is say less than 5%. Do you think this grows over a period of time and anything specific which we still have to do where China really becomes a more significant part of overall business pie. Thank you.

Sure, I'll take this. In the U.S., we haven't talked about it much on the call, our Viaggio beer company, which sells Guinness and beers and F&Bs and selfers, we have a line of selfers, is doing really well. It's among the fastest growing beer companies in the U.S. right now. And we have a small position in Salsa, but we have deliberately decided not to make a big investment into that category because, quite frankly, we have better places to invest in the U.S. when we look across our total portfolio of beer and spirits. But we're clearly benefiting from the trend right now, and you see it in our beer business performance or the beer company performance in the U.S. We have taken the seltzers into Europe. They're in the UK and in Ireland right now, the Smirnoff lineup. So we are participating in that sector, but not making it a big strategic priority yet for investment. China is, we remain, to answer your question, yes, I expect China to keep becoming a bigger part of the agile. And our two main businesses there, Baiju has a very good runway ahead of it and we fully expect that to be a business that gets back on a steady trajectory of growth and we're very encouraged by the early signs on scotch whiskey and we are building the top end of scotch whiskey when i say early signs the last few years where the interest in scotch at the top end super deluxe and moles is really building very nicely and even in this very challenging period, our Scotch whisky business in mainland China grew. And in fact, if you look at e-commerce, Scotch whisky outperforms other forms of international spirits on e-commerce platforms as well. So long term, I'd say China should be a very attractive growth engine for the company. Thank you. Okay, this is the last question.

Thank you very much. Our last question comes from Richard Whitigan from Kepler. Please go ahead.

Yes, good morning all. Thanks for the question. I have two, please. First of all, in the prepared remarks, you talk about leveraging bolts.com and thebar.com. Can you give some more details what initiatives you take in this area and how that benefits your brand portfolios? And then the second question I have is you mentioned radar, your tool to project market demand. Can you talk about what kind of underlying data go into radar and if the sensitivities to this underlying data in the various regions are very different?

Sure. Firstly, I'd say digital commerce more broadly. The posture the company is taking is we want to be a leader here in the shaping of digital commerce in beverage alcohol and so we have a number of initiatives including working with the big platforms working with retailers and uh as you point out we have some direct to consumer platforms like malls.com and bar.com i'd say they're still small we're very much in in experimenting mode in markets in europe and brazil etc and they're doing it for learning and we were clearly learn and scale up from there. But if I look at what we're doing in Europe and China and even in the U.S. through the 3G system, we're really building our digital commerce capabilities and moving very rapidly in that area. We're investing behind it because we do believe it's going to grow faster than the overall market. And one of the things I'm encouraged by is actually our market share in e-commerce channels, for the most part, tends to be higher than in physical channels. And it is an environment where well-known brands that are well-supported do well.

And then the second question was about radar intelligence. This is, I'll call it, another module that we're adding on to our catalyst tool. So sometimes we'll talk about our edge tools, which is about everyday execution at the outlet level in markets, and that we're able to get a lot of data and information about what's happening around a particular outlet. So what are consumers doing? are drinking in terms of bars in the neighborhood, what are the demographics of the neighborhoods, and what would that tend to lead us to believe are the best types of Diageo brands, you know, to really have at that outlet, and what are programs that we can run that will be a win-win both for Diageo and the outlet owner. So it's all about trying to get, I'll call it, hyper-local. information and really trying to make sure we're on the ground getting those focal insights. And so what this next module within Catalyst does is something similar, and it's looking to grab external information, you know, not just about the macroeconomic situation in a place like the U.S., but about the specific economic situation in you know, at a zip code level or within a region, within a state, so that we understand what's happening both at a very micro and local level, again, so we can determine what are the best programs for us to run so that we have high confidence that our marketing dollars are really going to get a high return. So it's all about having more and more local information so that we can make local decisions. You know, clearly we run some national advertising campaigns, but this is about really being able to, on the ground, do different things locally. That's great for our brands and overall great for the business.

All right, very clear. Thank you, Cathy.

Thanks, Stephen. You're welcome. Well, why don't I draw to a close here. Again, a big thank you to everyone for your interest in the company. I hope you and your family stay well and safe, and Kathy and I look forward to connecting with many of you in the next few days. Thank you.

Thank you, everyone. This concludes today's conference. Thank you for your participation. You may disconnect.