Diageo plc

Good morning and welcome to Diageo's 2022 Interim Results Q&A call. Your call today will be hosted by Ivan, Diageo CEO, and Lavania, Diageo CFO. This conference is being recorded. To ask a question today, please press star 1 on your telephone keypad. We are now ready to start the call. Ivan, please go ahead.

Hello, everyone, and thank you for joining our interim results call for fiscal 22. I hope you've had a chance to read our press release and watch our presentation webcast on theadjo.com. I'm very pleased with our results for the first half of fiscal 22. It builds on our strong momentum in fiscal 21 and demonstrates world-class brand building, supply chain excellence, and agile culture. Organic net sales were up 20%. All five regions delivered double-digit growth and exceeded net sales in the first half of fiscal 19. Growth was broad-based across categories, and I was particularly pleased with the strong growth in scotch, up 27%. The continued outperformance in tequila, up 56%, and the recovery in beer, up 22%. We also delivered a significant improvement in operating margin, up 131 basis points, while increasing our marketing spend ahead of net sales growth. And we achieved this while managing higher cost inflation and ongoing disruption from global supply chain constraints. Our advantage portfolio combined with effective marketing, excellent commercial execution, and successful innovation enabled us to gain or hold off-trade share in the majority of our markets. And we also gained share in the on-trade as it continued to recover. We are investing in long-term growth, including production capacity, digital capabilities, and our society 2030 goals. And we're delivering consistent returns for shareholders, increasing our interim dividend by 5%, and accelerating the timeline for completion of our return of capital program to 2023. While we expect continued volatility in the near term, I'm optimistic about the growth prospects for our industry and for Diageo. We believe we are well positioned for resilience in the off-trade and further recovery in the on-trade. We expect to continue benefiting from the rapid premiumization of the spirits category and its share gains within total beverage alcohol. And our premium differentiated brand Guinness is well positioned for key growth trends in beer. I am confident in our strategy and our ability to execute strongly through the remainder of fiscal 22 and beyond. I'll now hand the call back to the operator to open the phone line for your questions. Lavanya and I are both in our London Park Royal head office as we take this call.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will now take our first question from Pinar Nguyen from Morgan Stanley. Please go ahead.

Hi, good morning. I have two questions, please. The first one is, to what extent have supply constraints impacted volumes, especially in North America? And do you see any signs of improvement in the supply chain situation? And the second one is, do you see any possibility that consumers might spend less on premium spirits as the cost of living goes up? And I guess in that context, can Diageo continue to raise prices with a limited impact on volumes? Thank you.

Hi, Pinar. I'll take the second on... premiumization trends and asked Lavanya to address your first question on supply constraints. So I would say the premiumization trends, as you know, have been very long-dated and steady in the U.S. and in other parts of the world. People drinking better has been a trend that has really sustained through lots of cycles, economic cycles and disruptions. The second point I'd make is if you look at the U.S. market, the average American household that buys spirits, this is about half the household, they spend about a dollar a day on spirits purchased at home. So when you're faced with an economic crunch, our product is an infrequent purchase, right? People typically buy spirits six, seven times a year. They buy a few bottles of a category. So if you're drinking Ketel One vodka, you're buying a few bottles a year. And it's only a few dollars of a premium to a low-priced vodka. And so we do believe, actually, that sustainability is good. The other thing I would say is if you look at the demographics, Young adults, America again, 21 to 31, 35, over-index in buying premium spirits. The multicultural population over-indexes in buying premium spirits. And you see these demographic trends also very positive for the premiumization in spirits. So, I mean, we're not immune from overall consumer confidence and spending power, but I would say within... within those shifts, we still see higher-priced brands growing faster, and that tailwind should continue for the audio.

I'll take the first part of your question, Pinar. On supply constraints impacting volumes in North America, yes, we are seeing issues that are impacting our business in North America, but having said that, Now, our U.S. business in North America grew 3% volume in half one. So I kind of look back at pre-COVID levels, volume growth from this business was somewhere between 1% and 2% at the top end. And so, yes, we are seeing issues. They're spotty. But having said that, I think the organization is doing a fantastic job of navigating them and being able to grow volume faster than we have historically grown on the business. Let me talk a little bit about where we're seeing constraints. Two areas, one is on certain parts of our portfolio we're seeing constraints in terms of age liquid. That's true on Crown Royal and that's true on Tequila liquid constraints. And then on Bullitt we have a very specific issue around glass, and that really is impacting just the bullet bottle, which is the very bespoke bottle. And, you know, we're working with our strategic bottle supplier on that brand to resolve those issues.

Great. Thank you.

Next question. We want to take our next question from Sanjit Adler from Credit Suisse. Please go ahead.

Morning, Ivan Lavania. A couple of questions from me, please. Just following up again on the supply chain dynamics in North America, can you give us a bit of a timeframe as to when you expect those constraints to be resolved or certainly moderating from what we've seen in H1? And then secondly, as you think about the pricing outlook, particularly in Europe, can you give us a sense of what sort of magnitude of pricing you feel you're in a position to take in the region? I think we've seen a lot come through in emerging markets already, but I'm particularly interested in how you think about Europe. And then my final question, just on China, if there's any color you can give us on the current sellout trends through Chinese New Year or into Chinese New Year, particularly against the heightened lockdowns that we've seen in recent weeks. Thank you.

Yeah, why don't I take China and pricing and to cover supply chain. On China, we see the environment is solid. I mean, you see in our numbers, both Baijiu and Scotch Whiskey continues good momentum. We're feeling, I mean, you do have the impact of COVID lockdowns in various parts of the country that does impact business. I'd say going into Chinese New Year, it's solid, but not exuberant. And in particular, I'd say for our Baiju business, the large-scale banqueting occasions are going to be less and large-scale gifting is going to be a bit less. But we remain confident on continued strong growth in China on both Scotch whiskey and Baiju. And we're gaining share and we're feeling very good about the momentum there. And certainly for the longer term, we feel confident. very positive about the growth prospects of China. On pricing in Europe, I'd say if you look at what we've been doing in Europe, we've been investing behind the brand strongly. We're gaining market share. Actually, we've gained in five out of six markets, we're gaining significant share. And our spirits business is performing very well. As we've talked before, we've got multiple levers to manage the inflationary impacts. Volume growth helps us, and there's very good volume growth in Europe. Mix is positive. And we will be taking some price. So the combination of productivity and pricing will offset inflation. But we're very surgical in how we apply our price increases. But you will see more pricing coming into Europe because of the inflationary pressures.

Sanjeev, I'll take your question on supply constraints in North America. As I mentioned to Pinar, we got to look at this in the context of the overall performance of the business, which has been absolutely fantastic in delivering volume growth in North America as well. Really, our organization has been able to achieve very strong results because of the proactive approach that we have taken to this area and because of the strategic relationships that we have with key suppliers. You know, in North America, as an example, the procurement organization has been able to bring in new suppliers to the market, and this has allowed us to increase our glass capacity by almost 25%. Now, on bullets specifically, We think, you know, the teams are actively working on it, and we think it's going to be a matter of months before, you know, to be able to resolve it. It's not going to be a long-term issue by any means. On the age liquid constraints that we have, look, we have a number of tools in our arsenal that help us to work around that. The first thing is demand shaping. You know, we're able to move our A&P spend to parts of the portfolio where we do not have similar constraints. You know, kind of look at our results on Scotch in North America as an example. And Johnny Walker in North America performed strong double-digit growth on the Scotch category. And so we are able to, through a combination of revenue growth management and pricing on the constrained areas, as well as demand shaping, you know, able to tackle these constrained situations.

Great. Thank you both for the call. Thank you.

Go ahead. We will now take our next question from Simon Hales from Citi. Please go ahead.

Thank you. Morning, Lavanya. Morning, Ivan. Three for me as well, please. Can I just follow up on those pricing comments? Are you seeing competitors really following or matching the price move that you've been making in the US and Europe? That's my first question. Secondly, and more specifically to your business, in the US, there were some mixed brand performances in the first half from a I suppose, a volume and a sales momentum point of view. Clearly, your premium brands have done very well. Tequila, Scotch, et cetera, showing strong growth. But some of the more mainstream ends of the portfolio, Smirnoff and Captain Morgan, look like they're struggling a little bit, while Bailey's and Bullitt, admittedly, you know, given some of the supply constraints on Bullitt, under a bit of pressure. Can you give us a little bit more colour of the drivers there, and perhaps more importantly, how we should think about how those trends will evolve in the second half? Yeah. And then just finally, a quick final one on CapEx. Clearly, you know, you're up weight in CapEx this year. I appreciate there's some catch-up, you know, in that sort of CapEx expectation. But how should we think about CapEx really beyond 2022?

Okay, so I can do the first two and then you'll cover CapEx. I'd say pricing, Simon, we... The revenue growth management capabilities we now have are really embedded. The analytics and data is very good. As I talked about earlier, we're investing behind the brands. Brand equity is going up. And we feel reasonably confident about our ability to take measured price increases and sustain the market share momentum we're looking at. You have different competitive dynamics in different parts of the world, but it's clear the inflationary pressures are high for everyone right now. And I'd say our customers are also understanding because everything they're buying right across the spectrum is facing more inflationary pressures. So I do believe we will be able to sustain kind of disciplined pricing as we go. And as I said, surgically applied, and we really want to keep the momentum of growth and make sure we're recruiting more consumers to our brands. And our investment levels in the brands and equity is very high. On the U.S. brands, I would just say, you know, as we've come through the bounce back of COVID and some of the supply chain issues, you're seeing some little differences in the portfolio. on shipments versus depletion. So I'll just answer your question directly on the three brands you mentioned. On Captain Morgan, actually, our depletion momentum is positive. So it's low single digits, but it's in growth. And if you look at market share momentum, where we've been losing share, as you look at 12 months, six months, three months, it's improving. So Captain should stabilize and be better. We've got a big program with the NFL, which we're excited about, and we're in season right now. So you should see some improvement there. Smirnoff Depletions is about flat. I'm talking the U.S. And again, we've got good marketing and innovation coming behind Smirnoff. So these two big brands will be below the North American growth rates, but we just need them to be stable to slight growth And we do see that happening. Bailey's actually is positive. And what you're just seeing there is the lapping effect of some of the shipments and coming off tariffs and all the things that happened on Bailey's. But we're very positive on Bailey's in the U.S. And again, it's in high single digit type depletion growth as we looked at the last six months.

Carmen, I'll take the second part of your question on the up weighting of CapEx in fiscal 22. We have guided to, we will, we expect to spend between 950 million and a billion pounds of CapEx in fiscal 22. This is higher than our previous guidance and really comes from the catch up for all projects that were paused or put on hold due to COVID not coming back online, and frankly, the need to continue to invest in the business. You know, from a capital allocation strategy perspective, our strategy remains unchanged. Our number one focus will be to continue to invest in the business, and this includes capital investment as well as A&P spend. From a CapEx perspective, you know, ensuring that we have sufficient capacity to meet the growth ambition of the business and the growth trajectory that we're seeing on the business today is critically important. We also continue to invest behind strong consumer experiences. This is a large part of how we support our brands. You know, we opened Johnny Walker Princess Street back in September, and that has been a real... um, uh, boost to, um, uh, you know, what consumers, when consumers visit that, visit, uh, Princess Street, they come away with a love for the brand that's, uh, remarkable and unmatchable. Um, and, uh, in terms of digital capabilities, that's, that's been a key focus area as well. We continue to invest behind digital capabilities to support, um, our commercial growth of our business, our marketing effectiveness, understanding as well as improving our marketing effectiveness, as well as in building capabilities even in terms of the supply chain. So that will remain our key focus area to continue to invest in our business.

Brilliant. That's very clear. Thank you.

We will now take our next question from Mitch Cliff from Deutsche Bank. Please go ahead.

Morning, Ivan. Morning, Lavania. I've got two questions. First, can you comment on inventory levels at the end of the half, ideally by region, particularly given the gap between depletions and shipments that you may have on a few brands that you've just mentioned? And then secondly, I think Colts per litre in the first half was up 1.6 year on year. I appreciate you saying in the statement that COGS have benefited from some of your productivity efforts, but can you perhaps comment on how you've kept COGS per litre at that level, given the premiumisation you're seeing, and then what you would expect is a reasonable level of COGS inflation for the second half?

Sure. I can take both of the questions, Mitch. So on stock and trade inventory levels, I assume you're talking about trade stock. Essentially what we've seen across the business at a group level and within North America, what we're seeing is our stock and trade is relatively flat year on year with shipments in line with depletion. There have been some differences across different parts of different brands within North America. And that comes from, you know, we had increased stock levels to support the opening up of the entree in certain brands. And in other places, because of just managing, you know, the timing by when product gets to the market due to, various supply chain issues. We've just seen some differences between shipment and depletion at a brand level, but at the total North America level as well as at the total group level, our shipments have been in line with depletion. On your second question on COGS and how are we able to manage COGS inflation and what do we see happening on inflation, You know, back at the end of our year end, last fiscal 21 year end results, I had shared with you that we are seeing a higher level of inflation. And we're seeing that come through in terms of both commodity costs as well as energy costs. We're also seeing the impact of higher logistics costs due to, you know, just shortages of drivers and containers, et cetera, that's impacting everybody, not just the Azure. Where we are seeing the leverage that we have to offset inflation, first of all, I'll remind you that because of the nature of our business and the percentage of our business that's an aged product, we have a natural buffer against inflation just because, you know, a large percentage of what we're selling today, we actually laid down the liquid several years ago, more than a decade ago in many cases. Other than that, we're seeing the benefits of volume growth. We grew volume 9% in the half, and that contributes significantly to margin benefits. Premiumization clearly contributes to our gross margin. From a COGS perspective, our productivity has been a big part of what has enabled us to keep COGS growing. growth, you know, muted despite inflation. And that's really embedded into every day. You know, and we're seeing cost productivity come through from a procurement perspective, from a manufacturing perspective, also from a logistics perspective. So we're seeing it really play out across the board. And then from a margin, going back to looking at margin, I mean, revenue growth management has enabled us to take smart pricing, manage trade spend, manage mix, skew mix in a way that allows us to grow our margins.

Thank you, Lavanya. That's very helpful.

We will now take our next question from Celine Panuti from J.P. Morgan. Please go ahead.

Yes. Good morning, everyone. Thank you. My two questions. Number one, I would like to understand what is your best guess of what the market growth is in the US? You said that 3% volume, it seems to be slightly ahead of the market. Could you say what the market growth rate overall is? And then my second question, I mean, you have made this point about the virtual circle of reinvestment and clearly 85% of your business gaining or holding share is very impressive. That said, I was looking at the US and how much your ANP has been increasing and I look at 3% volume which may be a bit ahead of market but it doesn't seem to be that much ahead. Is that an unfair observation, or should I look at it on a total basis, including the price-mix benefit, and it is the cost of moving consumer towards premium product? And, you know, what does that mean? Do you think that the support level maybe has been a bit oversized in the first half? Thank you.

Yeah, I can start, and then Lavinia will jump in. I'd say, now, when you look at market growth rates with all this... COVID kind of comps and what was happening last year and this year, you just have to be a bit careful. So what I would say in value terms in the past six months or the first half of this fiscal, we estimate the U.S. market in value terms growing at about 9%, 10%. But you have to remember, it's what it was lapping. The long-term growth on the U.S., let me just address that now. I mean, what we see is, I mean, pre-COVID, You have a US market industry growing at about 4% or 5%. We believe as things return to normal, it will grow at that or a little bit faster as the steady state return of the, because the US underlying demographic and taste trends are still very positive. The investment in marketing, is very targeted and we've got really good confidence on how we spend it by brand and get the returns. We, and you've seen us do this in the past few years, the U.S. is a top priority to invest behind because our goal here is to have a sustainable growth engine in North America and one that will grow share, outperform the TBA market And as you know, our margins are incredibly high. There is nothing structurally changing in the economics of our U.S. business, right? It's not like the cost to compete has gone up or our margins are under pressure. These are very deliberate choices we are making to sustain not just this quarter and this half's performance. It is really about the next few years. A lot of the A&P investments will pay back year two, year three, year four. We're building a number of smaller brands. that will get bigger five years from now. So that's how I would address your point on the marketing reinvestment going up in the U.S. We're very, what the capabilities the audio has built in the last few years now gives us a lot more confidence in really smartly investing and being very clear on the returns we want and the returns over time.

Yeah, I'll just build on that, Ivan. I mean, the way we look at marketing investment is really from a return on investment perspective. So it's not linked to volume growth alone, but really looking at it from a perspective of, you know, what is the overall financial return that we get on investment. And as Ivan said, you know, we've built over time, we've built several tools and a lot of capability in this area. In the past, we've talked about tools such as Catalyst, which allows us to forecast what a return on investment of individual marketing spend would look like, as well as then, on the back end of the program, measure and track whether we actually got the benefit that we were expecting The North American business is a high margin business. All of our investments that we are making in this market has allowed us to grow the business ahead of market, to grow share in a sustainable manner. And frankly, this growth is very accretive to the group P&L. And so it is, as Ivan said, it's a deliberate part of our strategy to build a sustainable growth engine for us within North America.

Thank you very much.

We will now take our next question from Olivier Nicolali from Goldman Sachs. Please go ahead.

Hi, good morning, Ivan. Good morning, Lavanya. Just two quick questions, actually, following up on the U.S. First of all, you mentioned in the press release that the price mix in the U.S. was plus 12%, and you obviously mentioned channel mix, premiumization, and pricing. Would you be able to quantify the pricing element, per se? And then if we look at this year, essentially 2022, can you give us an idea of the magnitude of the price increase you've been taking so far in your U.S. portfolio? Thank you very much.

Sure. Olivia, we don't break down the pricing that we have taken in our disclosures. But what I will say is that, you know, we look at pricing as a surgical part of a tool within our overall revenue growth management suite of tools that we have. We've taken pricing on tequila. In the first half of the year, we've taken about 4.5% pricing on tequila, and we've been able to execute it while continuing to grow the business strong, very strong double digits, 60% growth on that business and growing shares of spirits as well as growing our share of tequila. We've taken some pricing actions on Crown, where we have been, you know, liquid constrained, We've also taken some pricing action on Guinness. And so, you know, again, these decisions are made individual brand by brand based on the strength of the brand equity, based on the strength of the marketing program that we have. And as we take these pricing actions, we are doing so in a database manner and balancing our growth, top line growth, with margin growth. In terms of what we should expect to see as pricing in the second half of the year, I'm not going to give you a clean enough answer that you would expect on this, but I will say that we will continue to evaluate pricing opportunities on a case-by-case basis, both in the U.S. as well as in other parts of the world.

Thank you very much.

We're going to take our next question from Andrea Pistacci from Bank of America. Please go ahead.

Yes. Good morning, Ivan and Lasagna. Three, please, if that's possible. First, I just wanted to follow up again on pricing in the US. You said where you've taken pricing. And clearly the pricing environment seems more favorable than it has been in a long time. So the question really is, is it possible to start thinking or are we far away from the point where you can really take pricing on some of the brands where there hasn't been pricing in years, like the vodka portfolio or brands like Captain Morgan? A second question, please, on emerging markets where you've got very strong momentum. How do you feel about this momentum continuing as you'll be up against tougher comps and with inflationary pressures building on the consumer? And do you expect much divergence in performance among EM regions in the next six, 12 months? And then, please, the last one on SG&A. It seems to me, given the organic basis points impact from SG&A, it would suggest, I think, that SG&A organically was up quite strongly, probably low double-digit. So I was wondering whether you could give a bit more color on that, what drove this significant increase in SG&A. Thank you.

Okay, Andrea, why don't I take the first two and Lavania the third. On pricing in the U.S., again, I'm not going to get into specifics of pricing by brand. What I would say is... We are and do intend to be able to take more pricing than historically. The brands have been well invested in, and the capabilities we have on revenue growth management are really embedded and delivering. So you should see better price realization coming through on our U.S. business. And we manage the portfolio well. And so, as Lavania talked about, I mean, yeah, tequila and Crown and a few places, we've taken more significant price increases. Over time, we will look at it across the whole portfolio and ensure we can deliver the right balance of volume, price, and mix going forward. On emerging markets, I would say I would just guide you to medium-term guidance for Diageo that we laid out a few weeks ago. In the total growth for the RGO of 5% to 7%, we expect emerging markets to grow a bit faster than that. All the fundamentals, actually, are intact. The demographics, the penetration of spirits being low and increasing. The risk scotch is very vibrant. You see it in our Johnny Walker report. and scotch numbers came through really, really strongly, and I'm really pleased about that. Most of the growth in scotch, the growth rates in the emerging markets were much faster. There is some bounce-back effect, but what happened through COVID is we did see in-home penetration increase for deluxe scotch, and we see the recovery as the on-trade opens also strong. So we're feeling positive about the emerging market momentum. I mean, you see the very strong momentum in Latin America. Africa has come back nicely. Guinness and beer is doing really well. Our beer business in – our Guinness business is up 19% in Africa, but Johnny Walker is up 19%. Smirnoff is up 15%. And then in Asia, India had a very solid – performance, including Scotch, which did really well. So we do see good – now, emerging markets always have a level of volatility, but the long-term prospects, we feel very good about this being an accretive growth business for Diageo in the years ahead.

Yeah, I'll take the question, Andrea, on overhead, on SDNA. Yes, on a dollar basis, our SDNA has increased, although it has increased far slower than our overall growth rate. You know, our overhead, we're seeing significant operating leverage come through driven by the growth of the business. And really the reason behind it is just that we're laughing a period where we had pulled back on discretionary spend in a significant way at the start of COVID, which had continued through to the first half of fiscal 21. And as things have started to revert back to normal, I mean, we are back in the office, as Ivan said, You know, the investor relations team, Ivan, myself, we're all back in the office again. We have had some modest recovery of travel, thank God. And so, you know, it's just a reversal. We're just trying to think about getting back closer to normal.

Okay, thanks very much.

We will now take our next question from Edward Mundy from Jefferies. Please go ahead.

Morning, Ivan. Morning, Lavanya. Three questions from me, please. There was a comment, I think, in your pre-release presentation around gaining share of TBA in the on-trade. Presumably, this is partly a de-agile comment given the health of your brands and strong execution, but is there any early evidence that consumers are drinking more spirits and cocktails in the on-trade as the recovery comes through? The second question is really around tequila that continues to be a good part of your growth engine. We're about five years into the cycle. What gives you confidence there's still plenty of runway left for the category? And how do you think about the risk of new entrants, some of these other celebrity-endorsed brands? How do you ensure that your brands stay relevant and don't lose their momentum? And then the third question, on the buyback, could you just run through the reasons for the acceleration and bringing it forward by year?

Hi, Eddie. I'll take the first two. We are seeing... spirits momentum in the on-trade a little stronger. I'll take the UK as an example. So the recovery across spirits, beer, wine, cider has been strongest in spirits and premium spirits. And in other parts of the world, we see the on-trade coming back. There was a concern as to whether people down-trade when they go back to the on-trade. And that hasn't happened. So we see continued. So as a broad statement, I'd say in most markets, we are seeing positive trends for spirits in the on trade as it reopens. The tequila growth, I'd say when you cut the consumer understanding on tequila, and I'll focus on the US before the rest of the world, we still see a lot of runway. The categories appeal. across demographics is significant. It is crossed over. The multicultural growth is very strong. It cuts across age segments. It cuts across gender. It cuts across day parts, the occasions, and the nature of drinks. It's not just shots and margaritas as it used to be many years ago. So we see tequila growing faster than the spirits industry. It's obviously not going to grow at the kinds of rates we're seeing right now forever. But we do see it for the next five to 10 years growing faster than the spirits industry. So taking a bigger share of total spirits. The international growth in tequila is just starting. It's very small. But we do see at the high-end bars around the world, I mean, the mixology community is very connected, and tequila is making its way onto drinks and cocktail menus, and bartenders are excited about it. I expect that to be a slow build. It's not going to explode. So in total, we do feel positive about the long-term growth trends for tequila, and that in part is also guiding the investments we're making in Mexico as around agave and distilling capacity.

And I take your question on the acceleration of the buybacks. But maybe I'll just remind us that, you know, when we announced the share buyback program back in July 2019, we announced a $4.5 billion program to be completed in three years. And, you know, we bought the program, we completed 1.25 billion by January 2020, but then we bought the program in April. due to COVID and restarted it in May 2021. We have announced that we plan to complete a billion pounds of buyback by March of this year. The reason for accelerating the program, the completion of the program to fiscal 23 is simply because our leverage ratio is back to the bottom end of our target leverage ratio range. We target a range of 2.5 times to 3 times net debt to EBITDA. We ended the half at 2.5 times. And, you know, in line with our capital allocation strategy, where possible, we return money to shareholders in the best method possible. And so we had, when we restarted the program in May 2021, We had extended the completion date from what was originally end of 22 to end of 24. Given that we are back at within our range on leverage, we pulled it forward to fiscal 23.

Very clear. Thank you. And Ivan, just coming back to tequila, clearly some of the other celebrity-endorsed brands are getting traction. The Rock's tequila is now at 600,000 cases. I mean, how do you ensure that both Casamigos and Don Julio stay relevant and don't lose momentum?

Yeah, I'm sorry, I didn't address that. I mean, the key is keeping these two brands incredibly vibrant, aspirational, recruiting. I mean, we've gained outsized share in tequila with Don Julio and Casamigos, right? And so that shared momentum within the category, we've got to keep doing. I would say we feel good. These brands are incredibly healthy. They're on trend. We have... premiumization within Don Julio happening at a terrific pace. And as we may have mentioned before, we were constrained on liquids on 1942 and Ultima, some of the higher price points. So I would say keeping these brands really healthy, it is a brand's business, a premium brand's business. So it's not like the wine business. You absolutely have the power of the brand playing a very important role in this category. And this is what Viaggio needs to keep doing, is ensuring we're at the top of our game on keeping these two brands and their market share momentum within tequila. And I feel good about the ability of the team to keep doing that. And we start from a very strong base of brand equity momentum. Thank you.

We will now take our next question from Trevor Stirling from Bernstein. Please go ahead.

Good morning, Elabanya and Ivan. Three questions from my side, as ever. First one, Ivan, looking at the 8% CAGR over the last three years, which is an incredibly impressive performance, but then looking at a regional level, I would say probably the one region probably underperforms compared to potential is Asia-Pacific. I wonder if you could talk a little bit about that, about the reasons behind that. But Latin America, incredibly strong performance. And that seems to be pretty broad based, but primarily Scotch. Is that fair? So maybe a little bit of color in those two regions. And then finally, I noticed that you're investing as well behind Diageo, one B2B platform. Is that something that's oriented more towards distributors or where you have direct retail relationships or a bit of both?

Yeah, so I'll take the first two and Lavanya can cover the B2B platform. The 8% growth, as you say, is over three years now. This business has gone through the COVID disruption and we're at that level. The Asia-Pacific numbers, there's a few things going on. You've had tougher, less of a bounce back in growth Yet, I mean, we still, even through this half, there are parts of Asia that have been more challenged. So you see in this half, Asia back only grew 13%, whereas Latin America grew really strongly at 45%, and Africa grew at 23%. Within Asia Pacific, China we feel really good about, and it will come back. I mean, Australia has been a bit tough, parts of Southeast Asia, So I think that impacts the CAGR. But I remain very positive about looking forward that India and China should be very accretive growth engines for the RGO, growing faster than our average. And Southeast Asia, Scotch is coming back nicely, will be positive. And then we have some drags. I mean, Australia will be low growth. Korea is low growth. Japan is lower growth. So you've got developed Asia will be lower growth Your second question on Latin America, the momentum is in the Scotch recovery. And we're feeling, I mean, I think our Scotch volumes were up 20 plus percent in the half. Deluxe Scotch, Johnny Walker was up 40 plus percent in volumes. And what was interesting to see is the at-home consumption through COVID is the penetration of high-priced whiskey increased at a faster rate. And as conditions have improved and the entrees come back, we're seeing really strong growth. And we're gaining market share right across, other than Mexico, where we're slightly behind. Everywhere else, we're gaining very strong market share in Latin America. And I'm very positive about the outlook for what we can do with, we brought this lens of TBA share. And that's driving us over the last couple of years. I mean, the way we activate the occasions we're going after, looking at the bigger pool has just opened up more opportunity. And it's not just scotch. I mean, Tanqueray is doing really well. Our gym business is also performing nicely. Bailey's is good. Smirnoff is coming through as well. So feeling good about Latin America.

Sure. Trevor, I can take your question on the Azure One. It is a B2B platform, and it's basically a single point. It allows us a single point of engagement with our customers. They're able to access their account. They're able to access any other D'Azure content, and they're able to do so from any device anywhere online. at any point in time. It's something that we have in place now in six markets, and it enables us to be able to provide better customer service to our customers, more digitally enabled service to our customers.

Super. Thank you very much, Lavanya and Nazan.

We will now take our next We will now take our next question from Nick Oliver from UBS. Please go ahead.

Hey, good morning. Thank you for the question. Two from my side, please. First one on the emerging markets, but this time on the margins. I mean, I guess operational leverage, particularly in Africa and LATAM, has surprised to the upside in the good years like now and the downside in the past. Is there anything you can share with us in terms of cost structure, you know, fixed versus variable or anything else to maybe help us model these better going forward? And then the second one, and back to the US, you called out very good growth in the spirits RTDs. Where's that sourcing from? I mean, I guess some of it is cannibalizing spirits, but is a bigger part, you know, coming from an outsider spirits market, you know, beer, etc.? ? Thank you very much.

Yeah, why don't I get started on the margins on Africa and lag. So in Africa, when we went through the lockdown, I mean, the beer business is a fixed cost business, right? So you take a big hit on the downside as volumes drop. But they recover really fast as the volumes come back. So while we were going through that correction, I mean, I wasn't particularly worried. We knew we would get the economics back on the business. And you take a market like Nigeria, we've had significant margin expansion come through as our businesses come back. And so what you look at going forward to your question is, I mean, if you've got big volatility, hopefully we won't have the swing of the COVID-type volatilities that But when you have volatility in volume due to external factors, it does impact your margins. And what we've stayed true to is kind of staying invested and not kind of trying to manage the business for short-term margin when we went through those cycles. On Latin America, as the deluxe, similar kind of dynamic, it's more the mix. When we were at the height of COVID, the Hot whiskey business, deluxe volumes dropped. That had a very high margin businesses. And now they're coming back very strongly. So you take the long view on both Africa and Latin America, and we do see margin expansion in both markets, driven by volume growth, premiumization, pricing, and productivity. And so we would expect steady margin expansion going forward. But as we know, it's never a straight line. And I think what you see in Diageo's approach is we are steering the company through volatility in a way where we're really focused on getting quality, sustainable growth and the economics to the right place and not having knee-jerk reactions to short-term disruptions in the external environment.

I'll take your question, Nick, on U.S. spirits ready to drink. First of all, I'd say that it's a very small percentage of the business right now, and so 50% growth on a small number while really good is a small number. But the second thing that I'd say is one of the dynamics that we're seeing playing out in the U.S. on ready to drink, which really caters to a convenient benefit for consumers. It's the same thing that we're seeing in the rest of the U.S. market, where consumers are choosing to drink better. They're looking for more flavorful liquids and, frankly, more premium offerings. And so one of the dynamics we're seeing play out in the U.S. category is that consumers are willing to pay a significant premium to have a fantastic product such as Clown Royal cocktails in a can. And so that's one of the drivers that we're seeing to the growth of our RTP business is coming from people who may have been drinking other products in a can now moving up to really a much better experience, frankly. with Crown Royal in a can or Tanqueray Soda or Tanqueray Conic in a can or Kettle Botanical Spritz in a can.

Great. Thank you very much. That was really clear.

We will now take our last question from Jeff Stint from XNBB Parva. Please go ahead.

Good morning. Two questions, if I may. The first one just on India. Historically, Ivan, I think you said it could be a big gananda in the trade discussions. What's your current view?

We're having a hard time hearing you.

There's a bit of background noise. Hang on. Can you hear me better now?

Yeah, yeah.

Hello, can you hear me? Sorry, we can't hear you.

It appears the caller may have stepped away. We will now take our last question from Chris Pitcher from Redburn. Please go ahead.

Thanks very much. I hope you can hear me. A couple of questions for me in terms of the recovery in Guinness and travel retail. It was striking that the travel retail LATAM is back to pre-COVID levels, obviously mindful of travel restrictions. But do you expect, when do you expect actually the other markets to get back to pre-COVID levels? Or do you think reduced business travel might make those structurally lower? And then could you give us a sense of how many of the Guinness outlets in Europe and Africa that you were trading with pre-COVID are back trading to give an idea of the reduction there? And then lastly, on capex you mentioned uh raising capex but in terms of maturing inventories and those stepped up in the first half could you be on track for for five billion this year can you give a sense of how much you're investing behind the strong recovery in scotch particularly in obviously latin america thanks okay i'll take travel retail and uh guinness recovery uh travel retail i mean we're nowhere back uh the the there's a long way ahead to recover to pre-covid levels on travel retail

I would say we remain confident about the channel, that it will recover. You've got to remember a lot of our growth is consumer traveling, the personal traveler. So we're not relying on business travel as much to drive the recovery. And if you look at what the aerospace industry, the airlines all predict, It's a little hard to call, but we do expect there to be a significant interest in consumer travel returning. And we are seeing, I mean, we've had fast growth in the recovery as you see travel pick up. So I would say to get back to where we were, it's probably another two years, maybe a bit longer, but we will just focus on gaining market share through that recovery. because it's very much going to depend on passenger numbers. The Guinness, I don't... Was there a question how many on-trade outlets have closed?

In terms of the addressable market, as the market recovers in terms of the number of outlets you were trading with, has there been a structural reduction in the number of accounts you've got?

Yeah, there is a level of shakeout, which there's been historically as well. As you know, the on-trade business has a degree of churn, the weaker outlets do drop out and then you have new entry coming in. I'd say the consumer dollars, though we feel good, will come back, even though the fleet of outlet composition will change a bit, particularly for the weaker, unfortunately for the weaker, financially weaker outlets that just haven't been able to make it through. I mean, generally, and this is more a global number, we expect 10%, 15% of outlets that will be unable to recover through the shock of what COVID has represented to them. But then you're also seeing new capital come back into the sector to expand and create new outlets or invest behind the existing fleet. Overall, I mean, Guinness recovery is happening fast as conditions improve. And the brand is in healthy shape in Europe. And we are seeing very good momentum, actually, not just in the on-trade, but also in the off-trade. And some of the innovation and brand building is now kicking in. And I'm very positive on the future for Guinness in Europe. And it was really strong in Africa, and it's strong internationally. growing in the U.S. So the brand is in very good shape.

I'll take the second part of your question on maturing stock. And I think that you were referring to the fact that our maturing stock inventory has increased at the end of fiscal, at the end of the half of fiscal 21, now close to, I think, $4.8 billion. Look, we look at our investment in maturing stock as really an investment in the future sustainable growth of Diageo. And, you know, we continuously evaluate what level of liquid to be laying down across the portfolio on Scotch, on Canadian whiskey, on American whiskey, and now on the aged variants on tequila as an example. on an ongoing basis. And the way we look at, you know, this is critically important for us to be investing in the future growth potential for the Azure.

Thank you. Just one quick follow-up. On Guinness Zero-Zero, in terms of the draft launch in the UK, is that pulling ahead? I know there's only a short bit of dry January left, but how's that launch going?

I mean, we've got production constraints, the demand is way beyond what we expected on given zero zero. So over the course of the next year, we hope to get back into a position of supply. So that's what we're dealing with right now. The demand is far, far outstripping supply. Thank you. Okay, well. We draw to a close. Thanks, everyone, for joining the call. Appreciate your interest and support for the company and look forward to catching up with many of you. Lavanya and I will be doing the roadshow virtually and look forward to catching up with many of you in the next few days.

This concludes today's call. Thank you for your participation. You may now disconnect.