Diageo plc

Good morning and welcome to Diageo's 2022 Preliminary Results Q&A call. Your call today will be hosted by Ivan, Diageo's CEO, and Levania, Diageo's 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 thanks for joining our Preliminary Results call for fiscal 2022. Hope you've had a chance to read the press release and watch our presentation webcast on diagio.com. I'm very pleased with the quality of our excellent results for fiscal 22. Our teams have executed with tremendous agility and resourcefulness, despite stronger headwinds from supply chain disruptions and geopolitical events in the second half. Sales were up 21%, with double-digit growth across all regions, Growth was balanced with volume up 10% and price mix growth was 11 points, with price contributing mid-single-digit growth. Diageo's three-year compound annual growth rate for organic net sales was 9%. North America's three-year CAGR was 12%, and for Europe it was 6%. On a constant basis, Diageo is 28% bigger than it was pre-COVID in fiscal 19. Our share momentum continues. We gained or held off trade share in the majority of our markets. We have an advantage portfolio, which we continue to actively shape towards fast-growing categories, and our super premium plus brands grew 31%. We continue to invest. A&P grew 25%, and we had a record year on CapEx, spending over a billion pounds on capacity, sustainability, and setting the business up right for future growth. Strategic pricing action across all regions and our supply productivity savings more than offset the absolute impact of cost inflation. We have strong gross margin expansion and leverage of operating costs drove further significant improvements in operating margins, while increasing our marketing spend ahead of net sales. Our strong cash generation enables us to keep investing for the long term, including, as I talked about, production capacity, supply chain agility, digital capabilities, and our society's 2030 goals. Now, while we expect the operating environment to be challenging in the near term with several headwinds, including ongoing volatility related to COVID-19 and a potential weakening of consumer spending power, I'm confident in our ability to navigate that. We're staying very close to our consumers, leveraging our digital tools and data capabilities to quickly spot trends and respond with speed. I'm also confident in the resilience of our business With our advantage portfolio, effective marketing, strong commercial execution, and successful innovation, we're well positioned for the continued premiumization of the spirits category and its share gains within total beverage alcohol. And our iconic global brand Guinness is beautifully positioned for growth trends within the category of the premium year. So with that, Lavanya and I are here in Soho, in our London headquarters, and I'll open up the line for questions.

Thank you, Ivan. As a reminder, to ask a question, please signal by pressing star 1. Our first question comes from Sanjit Auzla from Credit Suite. Please go ahead.

Ivan Labania. Three questions from me, please. Firstly, you called out headline pricing of mid-single-digit in fiscal 22. Given the heightened cost headwinds the industry is seeing, is it reasonable to assume you would require more pricing in fiscal 23 to navigate those headwinds? Secondly, you called out in your prepared remarks U.S. tequila household penetration running at 15%, half the levels of whiskey Do you think in the fullness of time, whisky is a relevant benchmark for tequila household penetration? And thirdly, just on capital allocation, with the remaining one billion or so of the buyback, it feels like your net day EBITDA will end up being below your targeted two and a half to three times range in fiscal 23. Can you just give us a sense of how you think about capital allocation and to what extent you will relever to get into that range? Thanks.

Thanks, Sanjit. I'll handle your second one on tequila and ask Lavanya to handle your first on pricing and inflation and capital. I'll give her one on allocation. So on tequila, I'd say what we're seeing in terms of the underlying dynamics in the category is very positive. The category has very broad momentum across demographics, across multicultural America, across age groups, the versatility in drinks. And we're seeing really good momentum. Agave has very positive associations. And as you know, we've got two of the hottest brands with Casamigos and Don Julio. Regarding will tequila hit the whiskey penetration level, I mean, we don't know. We can't project for sure. What we can see is the runway. a fast growth ahead of the U.S. spirits industry for many, many years still. And again, if you look at it regionally, so the most developed states are places like California and Texas and Arizona, where the scent of spirits volume in those states, tequila represents about 20% of the volume, and the value will be higher. If you look at the rest of America, states like New York, Florida, New Jersey. There's a lot of America where the share of tequila is still top 10 of the total market. And the consumer traction we're seeing everywhere. So I do think what we're planning on is attractive growth ahead of the spirits industry for the next five to 10 years in the US. And then we also see attractive growth developed globally. That will build slower, but there's a lot of tequila interest that we, you know, we track a huge number of mixologists and bartenders on the Bar Academy and through our relationships. And tequila is hot everywhere. It's showing up in the top bars in cities right across the world. So we expect momentum to also build over time, and that will be slower at the top end of the market globally as well.

Yes, Sanjeev, I'll take the first and third part of your question. The first one was on pricing. We've taken the single-digit price. Your question was, are we planning on taking more in 2023? But before I get to price, maybe just one point. I mean, we drew volumes. 10 percentage points this year. We grew price mix by 11 percentage points. And within that, price was about mid-single digit. And so what we've been able to deliver this year, as we did in the prior year as well, is really a very balanced growth algorithm. And we've done this by investing in the business. We increased our investment in the business by 25%. The combination of the pricing that we took and the productivity that we generate through our everyday efficiency program more than offset the absolute inflation that we had this year. Now, in terms of what do we see going forward, I think what we see going forward is the same. I think we will continue to use our entire suite of revenue growth management, and price will be a level within that. And we will continue to invest in the business. We will continue to drive productivity. And I think that is what gives us the confidence that, you know, this flywheel that's really working for us is what gives us the confidence that we will continue to grow this business in a sustainable and consistent manner. The third question was around finance and capital allocation. You know, our capital allocation strategy remains unchanged. It's very, very clear. We start with investing in the business. As you've seen this year, we have increased our investment in the business, both our marketing spend as well as capital spend. We invested 1.1 billion pounds of capital this year into expanding production, into our consumer experience centers, into our digital and analytical tools, and into our sustainability agenda. So that will continue to be our number one priority area. And for fiscal 23, we have guided to between 1 and 1.2 billion pounds of capital. Our second priority is M&A. And we've been very active this year on M&A and in terms of bolt-on acquisitions. We acquired 21 seats of flavored tequila and union mezcal. this year, we've also, you know, divested and pruned parts of our portfolio. So that continues to be our second focus area from a capital allocation perspective. Third, we're a progressive dividend payer. We've announced a 5% increase to dividends this year. And we intend to continue to be a progressive dividend payer. And last, we do return excess cash to shareholders. The board's takes a very rigorous approach to this. We will complete our 4.5 billion pound return of capital program in fiscal 23. And, you know, if it's warranted and if the board believes it's appropriate after we have invested in the business, after we have done the M&A that's available to us, and after paying dividends, we would consider for the return of cash.

Thank you very much. Colleen Panotti, JP Morgan, please go ahead.

Yes, thank you so much. Good morning, everyone. So two questions for me. My first question is even in the outlook, you talk about the volatility of COVID, but as well the potential weakening of consumer spending power. So what I would like to know is what is your expectation on how demand may shift in this regard, regarding the volume, but as well the premiumization, which has been quite strong, as you alluded in your prepared remark. And what actions could you take in that environment, be it to protect top line, but as well bottom line? And my second question, maybe it's somehow related, but we've seen that you continue to invest a lot in the business with A&P up strongly in North America. What kind of flexibility do you have for this spending? If we look into 2023, if the environment becomes more challenging, Or are you able to give us a guide on how you think ANP will evolve for 23 for the group? Thank you.

Hi, Celine. Yeah, I'll take the first and ask Lavamir to handle the second. So the first thing I would say is we do not have and nor do we pretend to have a crystal ball on how consumers are going to behave in the next 6, 12, 18, 24 months. I mean, clearly the economic pressures are real. the spending power pressures are going to hit and get worse for a few quarters. What I would say is we're staying extremely close real time to understanding shifts that are happening in occasions, in motivations, in the brands and price points that people are buying. One of the imperatives in the company, you know, we've built incredible agility and restlessness in our culture. And we said we're going to double down on that as we go into next year and beyond. And we've just had our leadership group together, the top 100, and we just talked about how we're going to do that. You know, we've got incredible data and analytics and the ability to track. So I just wanted to start with that. Now, if you step back and zoom out and look at the category, This category does have very good resilience, if you look at it over decades. And certainly through the financial crisis, we saw volume growth continue in the international sphere. And we saw a few quarters of a bit of downtrading, and then premiumization came right back. Now, our approach is to, we have an advantage portfolio. When you look at our categories, price points, and the geographic footprints, We have resilience built into the diversity of our portfolio, and we have agility to switch and move quickly. So let me give you examples. If we see downtrading accelerate, we have the ability in the United States to pivot our execution and support to brands like Smirnoff and Captain Morgan very strongly. If we see back sizes change, and we're tracking all of this, you know, the 175 going up or the small sizes on premium brands increasing, we have the agility in our supply chain to move very quickly and in our marketing dollars to ensure we're tracking these shifts in consumer behavior. So I feel, I mean, this is why we reiterate our medium-term guidance. We believe The audio has the strength and the consumer connection to be able to navigate through these volatile times. And again, I've said this before, we should not forget our category is an affordable category. The tourist household, typical U.S. household spends a dollar a day on our tourist category. It's an infrequent purchase. And that also brings a lot of resilience, right? You only buy a few bottles of Kettle One vodka a year. So the combination of all that, we tend to skew to a higher income consumer, say in the United States, where nearly 60% of our business comes from households that make $80,000 or more. It's a higher skew than, say, the beer business, et cetera. And the final point I'd make is the affordability of spirits. And a Don Julio on the rocks in terms of equivalent serves, a Don Julio Blanco on the rocks is the same cost to the consumer as a $10 bottle of wine. Where's the comparison? Or indeed Crown Royal. serving of Crown Royals is the same as Seltzer, White Salt. So spirits has tremendous value and huge desirability and aspiration. And the underlying trends of younger consumers moving towards spirits continue. So you put that picture all together and we're not taking anything for granted and we're being hyper-connected and restless and tracking shifts But we feel confident that we're going to stay invested, right? We're not retreating. We're going to invest smartly to ensure we come out of this stronger, much as we did through the last two, three years of the COVID volatility. You can see where the company is today relative to where we were in fiscal 19. And we intend to do the same again.

Yeah, Celine, I'll take the second part of your question. As Ivan said, I mean, our orientation is to invest in the business. As I said before to Sanjeev, I mean, this flywheel of growth for us is really working. As we invest in the business, we strengthen our brand equity and we're able to drive more price, drive more productivity, drive more premiumization, drive volume growth, very importantly, drive market share growth. And that allows us to continue to invest in the business. But we do so in a very disciplined manner. We do not have a target return on investment rate, a reinvestment rate. We do not have a target reinvestment rate for our marketing spend. But we do have a lot of discipline in making sure that we get a good return on investment for all of our marketing dollars. So our brand team put together the plan. It's a combination of brand creativity, as well as using our tools and data to ensure that we're able to drive the best effectiveness. And so we will make the decision market by market, brand by brand as we go into the year. We'll do it based on where we see the consumer and where we will get the most effectiveness and efficiency of spend. And this is what we've done over the last, you know, two plus years, and it's working. We're growing shares, growing our holding share in 85% of our off-trade in measured markets. And we'll continue to follow the same flywheel.

Thank you.

Thank you. Simon Hales of Citi, please go ahead.

Thank you. Morning, Ivan. Morning, Nathaniel. Two or three for me, please, if I can. Firstly, Ivan, I wonder if you could just talk a little bit more about any changes in consumer behaviour that perhaps you are starting to see in the US. I mean, clearly, we've heard from some of the US retailers this week, like Walmart, flagging that they have seen some changing spending patterns amongst their customer base. I appreciate that's not a like-for-like customer base necessarily with yours. But What does the real-time data that you referenced that you get in your business, what's that really showing now in terms of occasion shifts onto off-trade moves that we're perhaps starting to see, any down trading at all, or even just pauses in the trade-up momentum in some of the spirits categories in the US? Or is that data just showing no change at all right now? So quite a long-winded first question. And then secondly, obviously a number of your competitors have talked about supply chain constraints. sort of impacting their businesses late. You've clearly had issues for a while around things like Crown Royal. Are there any other particular sort of issues you'd call out that I think we should be worried about, particularly with regards to glass supply when it comes to fiscal 23?

Sure, I'll take the first one. Hi, and lovely to talk about supply chain. So our consumer behavior so far, and I qualify it by so far because we read this day by day, week by week, to your point on the US, we are not seeing either slowdown or downtrading trends, just broadly. I mean, obviously, we analyze these excruciating details. But at the headline level, we're not seeing it, which doesn't say it won't come. And we are staying very alert to it. And I mean, the channel product category mix, I mean, the untrade is strong and continues to be strong as we gone into July, and so we're feeling good about the on-trade momentum. And that's a big piece, actually, of our momentum, because we're gaining share in the on-trade in the U.S. I think 83 basis points in the NAFTA data, which tracks on-trade. And we're really well positioned for that recovery. When we cut price tiers and look at all the analysis as to has there been any shift in trends, I'd say not yet, but it's too early to call. I think we'll obviously watch it. And as I said in my earlier remarks, we're ready to move very fast to ensure that we can sustain our outperformance in the U.S. market. But the core fundamentals of spirits momentum, people drinking better, continues. And the demographic shifts and taste shifts in America are very positive for our category. Younger Americans are drinking more spirits than beer and wine. And you can see that come through as the co-ops come through the demographics. Multicultural America is very good for our category. And our brands are very healthy and well-invested. And we only have 7% of the PBA dollars in America. So there's a lot... of opportunity, even in a slowdown, for us to gain from other weaker parts of the PBA market. So you put that all together, and now we're clearly not going to see the torrid rates of growth that we've had. And even in these numbers, right, North America growing at 14%, as we said in our F23 outlook, we expect those growths to slow down. But they are still very attractive, and it's So that's how we're looking at the current dynamics. No real shift, but tracking it very closely.

Simon, on your second question on supply chain, I'll begin with reminding us again that we have grown volume 10 percentage points this year. And that comes on the back of growing volume 11 percentage points last year. And so our supply organization have done a fantastic job of being able to ensure that there is sufficient availability of our products to consumers all over the world at the right time and at the right place. We did have some constraints on aged liquids on crown oil, mainly because demand has outstripped, you know, all expectations by such a large extent. Also, some of our aged variants of tequila, like 1942 comes continues to be, you know, rather elusive to find. But in the first half of the year, we did have some issues with Bullet. That was very specific to bottles, to the particular shape of that bottle and the design of the bottle. We had some issues with procuring enough of it at the right time. That has been solved. Bullet is back on shelves for consumers to enjoy. If I step back and think more broadly to your question on bottles, there's two things that I think really distinguishes the Azure. One is we have a global reach, and we're able to leverage our global reach to ensure that we are able to meet demand. Then the second one is the strategic relationship that we have built with our suppliers. This is true for our bottle suppliers, but more broadly as well. And this is what has enabled us to navigate what has been a very difficult supply environment, you know, as well as we have done.

Got it. And can I just sort of come back and just clarify, Ivan, in terms of your remarks as regards to what you're saying in terms of consumer behavior trends, you've clearly seen no down trading as things stand. Does that also mean you've seen no change in the rate of up-trading as we've moved through the back end of fiscal 2022 and perhaps into July. And overall, based on what you're seeing at the moment and your confidence in the agility of your business, are you confident you can deliver organic EBIT growth in 2023 within your mid-term guidance range?

Yeah, I mean, we've reiterated our mid-term guidance range, right, so on that in terms So we fully intend to do that. There's not been a dramatic and a significant shift yet. And also, it's too early to fall. There is strong consumer exuberance this summer in America. The Jersey Shore is coming. By the way, this is what I spend all my time on. I talk to customers. I look at all the data. I talk to distributors. To me, this is the critical different factor for the audience is really understanding the consumer and the ship and being able to see them fast and execute against them faster than anyone else with flair and impact and investment. So, I mean, I'm consumed with it because I love it. I mean, this is what I really follow very closely. And I'll say there's nothing I see right now, to your point, that sees the the shifts in the price tier category dynamic. But four weeks also doesn't make a trend. So you have to really look at this and understand it. And when I was in the US last time, I visited a lot of retailers. And you've got pockets. I mean, the multicultural urban America, you can see the pressure on categories like Cognac and even our Syrah brand and certain VMAs in America. We see that coming through. But broadly, at the same time, you've got very strong momentum on high-end tequila continuing in many parts of America. So we're all over it. And as of now, and I certainly don't see, I mean, you only have to go back to the financial crisis. I mean, you potentially could see a bit of down trading for a few quarters, or the higher price tiers growing a little slower. But I mean, that doesn't give us concern. And it's not going to cause us to change strategy. We're going to be, we feel really confident about our ability to steer through this effectively.

Brilliant. Very helpful. Thank you.

Thank you. Olivier, Nikolai, Goldman Sachs, please go ahead.

Hi, good morning. Ivan Lavania. Just three questions, please. Firstly, you've done some disposals in beer in Africa recently, first in Ethiopia and more recently in Cameroon. Is there any change of strategy in Africa and potentially more beer disposals to come as your spirit sales are becoming bigger? Secondly, on the U.S., a very impressive growth overall. I've noticed the spirits related to drinks also grew by 18%. It's about 4% of your North America sales. Can you give us an idea of how big this category could become and how much distribution gain there is still to come in the U.S.? And lastly, I mean, you partly answered that question before, but Ivan, you were obviously running North America back in 2008, 2009 during the last recession. If the U.S. does enter into a recession this year or next year, Can you tell us how Diageo today is different from 12 years ago, and the lessons you've learned from that last recession where you were running North America, and where do you see the risk for your business now, if any? Thank you very much.

Thank you, Olivier. Let me take the first and the third, and I'll allow you to talk about what you need. Our beer strategy is, as you know, we operate an asset-light model in beer with the Guinness brand. And by the way, I could not be happier with the health of the Guinness brand. It's the strongest I've seen in my 25 years at the argument, right across Europe, US, and Africa. The actions you see at stake, Ethiopia and Cameroon, is part of really getting an effective asset-like model and route to market around the world on how we build our business. And that is a smart decision in terms of ensuring we still see good growth for Guinness in West Africa. But we're going to do it through more capital, less capital intensive model. So no real change in our strategy. We're delighted with the performance of Guinness. As you may have seen, we're We've announced a 200-million-euro investment in Ireland to open a carbon-neutral brewery. We need one more. We're out of capacity in Dublin. So remain positive about it. On your US recession point, yes, I remember very clearly. I was there. It was a financial crisis. The main point is PRG is so different today than when we were then. Our portfolio is different. Our health of our brands is different. The data and analytics at hand are different. The whole commercial execution, the innovation and marketing machine, and our talent is different. So I feel the company is in a much stronger place. I mean, we have an intense sellout culture, right? We know exactly what's happening every day. We didn't have that in those days. And so what I said earlier, I think the company is much fitter, much more agile, and our portfolio is much healthier, right? I mean, we've got momentum in tequila, in whiskey, in our reserve brand. And it's not just tequila that's driving our growth, right? We've got super growth happening on Johnny Walker and Bullitt and Conroy and Gettleman. And so I do feel... We're in a much healthier place. Having said that, we're not taking it for granted. We're paranoid about it, as we talked about earlier. And we're tracking it very closely. But we've got the ability to capture where the consumer needs to be. And let's not forget spirits is very good value relative to beer and wine. in the dynamic of a more stretched consumer. That's why we feel there's resilience here for this first category.

Sorry, I think your second question on RTD. I mean, if you just step back and think about it, I mean, where RTD plays in the consumer benefit area of convenience and beer, F&B, so the flavored malted beverages and seltzer, all of these also play in that same area of convenience. What we're seeing happen here in this segment, in the convenience area, is consumers are premiumizing. It's exactly the same trend that we're seeing in the rest of the spirit category. Consumers are willing to pay an extra amount to be able to get that beautiful, ready-to-drink, spirit cocktails made with real spirit. So if you kind of think about our Crown Royal ready to drink, it's made with real Crown Royal. It's not a mortade, something that gives you a funny aftertaste. It's absolutely delicious. It looks stunning. And it is significantly more premium, but that is what the consumer is gravitating towards. We see the same on Thai Korean soda in the U.S. or the bullet Manhattan or the bullet old-fashioned that we have in the U.S. I mean, they're absolutely brilliant liquids. How big will it get? I'm not sure, but what we are definitely seeing is that consumers are willing to pay that extra premium to get the great taste of silk with the convenience attached to it. But on the other hand, what I'd also say is that the spirits category continues to be very special. I mean, the art and the craft of being able to make a cocktail at home is something that consumers, you know, really took to during COVID, and that is very much alive and growing. So that's what allows consumers to be able to be creative, make something authentic or that matches their meals. And so that magic is by no means going away.

Thank you very much.

Thank you. Lawrence Wyatt from Barclays.

Please go ahead. Morning, Ivan and Lavanya. Thanks very much for the questions. Three from me, if that's okay. Firstly, on the tequila category, if we look at Casamigos, it grew 125% last year and then another 88% this year. These are some extraordinary growth numbers. And just your views on how long this sort of extremely high double-digit, triple-digit growth can continue. And on a similar point... What are your levels of agave supply? Do you have agave contracts that are able to deal with this sort of level of demand? And if you have a view on where the agave price may go to, there's certainly been some expectations that agave prices might start to fall. But it doesn't sound like we've seen any of that yet. I wonder if you have a view on the agave price as well. Secondly, on the AMP spend, just following on from an earlier question, I wonder if, Lavanya, you could give us a bit more detail on the returns you're getting on your AMP, or certainly whether it's continuing to increase. And if so, could we expect the AMP as a percent of sales to actually continue to increase from here if you're getting better returns from it to potentially drive faster top-line growth? And then finally, we have...

Laurence, we lost you. Could you please unmute your line? It appears that Laurence has difficulties with his line. Shall we move to the next question? Pinar Ergun from Morgan Stanley. Please go ahead.

Hi. Thanks for taking my questions. Two for me. A follow-up on the U.S. Could you please help us reconcile the very strong growth you've reported in the U.S. with the softer trends we're seeing in the Nielsen NAPCA data in recent months? And comment if you're happy with the level of the wholesaler inventories in the channel now following the restock. And then the second one is, can you please talk a little bit more about the new supply chain agility program? Is this aimed at replacing aging operations or building new ones? And are you able to give us a steer on the magnitude of the related savings you're expecting? Thank you.

Thanks, Benara. I'll take the U.S. and Lavanya on supply agility. So, as you can tell from our release, I mean, our U.S. first depletion grew at about 14%, right? Really strong growth. And what you're seeing, to your point, we should never forget, I mean, Nielsen is a tiny piece of the market, right? In value terms, I think it's under 20%, 16%, 17%. NAFTA is another piece. But then you have the on-premise. And I talked about our momentum in the on-premise is really strong right across the country. And we have the independent and franchise states and independent retailers of spirits. And you've got e-commerce platforms, et cetera, which typically are served by independent retailers. We're doing very well in these other channels. And I mean, our estimates in last fiscal year, the U.S. industry, spirits industry, grew about 6% to 7%. And we're clearly outperforming it. So our growth is broad-based, multi-channel, I just wouldn't over-read what's happening in Nielsen. And Nielsen tends to be a very promotional channel. We don't like fighting a lot in promotional channels because we've got plenty of higher quality business we can build. The stock levels in distributors, I mean, they're perfectly satisfied. There were two dynamics at work. One was, you know, With the impacts of COVID, we immediately took our stock levels down as we couldn't forecast future demand when we were in the teeth of the COVID storm. So you're seeing a restocking coming from there. And then the second thing is our imported products. Shipping Johnny Walker from Scotland to the U.S. now takes two weeks longer. It's sitting on the water. And so our distributors want to make sure that they're covered. So we have daily visibilities. on depletions and stock levels and a huge sellout culture. I'm very comfortable with where we are. And back to your first point, really comfortable about the broad outperformance in share growth that's coming through in the U.S. And for many years, we didn't perform that well in the on-premise. And what Claudia and the team have done, I've put a machine in place. where we're really executing superbly in the on-premise. And I went to see it firsthand a few weeks ago in the U.S. and where our whole capability and execution of winning in the on-premises has improved significantly in the last couple of years.

Tina, thank you for your second question on the supply agility program. I'll start off by saying that supply is a core capability and a strength for Diageo. This is what has enabled us to be able to grow volume, 10 percentage points in this fiscal on top of 11 percentage points in fiscal 21. I feel like I said that before today. But it is absolutely essential for us to ensure that we keep this capability at a cutting edge. And we have an ambitious growth agenda. in terms of increasing our market share from 4% of total beverage alcohol to 6%. And supply has to be a competitive advantage for us to be able to achieve that ambition. Our business has changed quite a bit over the last years. We've grown volume. We have reoriented our portfolio. We've seen shifts in category and product mix and market mix. And so we have initiated the supply chain agility program that spans five years, starting this fiscal in 23. The objective really is to strengthen our supply chain, to improve its resilience, to improve its agility, to be able to deliver further productivity savings, and to make our supply operations more sustainable. And it's really all around being able to fulfill our shared growth ambition by creating a supply chain, by continuing to enhance our supply chain to be fit for the future. So we do think it will create significant long-term value. It's not one project. It will be a series of projects. At the right time, you know, of course, after communicating it internally to our employees, we will communicate it externally as well with more detail. The savings will be incremental to our ongoing everyday efficiency program of 1.2 billion pounds that we laid out. So this will be incremental to that. It does not replace or overlap our everyday efficiency program in any way at all. And we do believe that we expect that this program will have a payback period of five years.

Great. Thanks. Is Lawrence back?

No, sir. We'll now move to our next question from Edward Mundy from Jefferies. Please go ahead.

Morning, Ivan. Morning, Lavania. Three from me, please. Apologies if you've sort of partly answered this question, but you've come through fiscal 22 with great momentum and you're flagging some normalization rate of growth. I appreciate there's a lot of known unknowns, but Is there anything you're seeing at the moment in either customer or consumer behavior that would indicate you'd deliver below 5% to 7% organic sales for fiscal 23? The second question is around the inventory picture. I appreciate it sounds like it's quite normalized, and you've obviously moved from a sell-in to a sell-out culture, but can you talk about the health of inventories globally? Are there any areas where you're holding back inventory at this stage? And the third question is around the U.S., I missed your answer around what you think the industry is growing at at the moment. Could you just confirm what that was? And if you look back to 2008, 2009, a number of suppliers took pricing down to match where the consumer was heading. In this inflation environment, does it make it harder for the industry to use price as a lever to take value out of the U.S. spirits industry?

And your last question was about industry growth.

Yeah. What do you think? Why do you think the industry is growing? And relative to last time, 2008-2009, when people cut prices, given we've got an inflation environment, does it make it harder for suppliers to cut prices and therefore help to protect industry growth?

Yeah, so I'd say, I mean, I mentioned in the fiscal year I finished, I estimated the U.S. industry is about 6-7% growth in fiscal 2022 in value terms. We do, if you go back to the financial crisis, I mean, you had the industry groove through it and you had three, four quarters of slight down trading, which then reversed. I would say the industry is in a much healthier place. Let me talk about the industry. Our brands and our connection to consumers, the effectiveness of our marketing and the scale of our marketing dollars And we've also got a much better portfolio. But don't forget, we've sold a bunch of low-performing brands. We've added this incredible tequila position to our business. Whiskey is hot, and those trends will continue. So it's a very different picture from last time around. And if you get trade down, let's say the premium sector, where if you look at the price segmentation, The price points around Smirnoff and Captain Morgan pick up and the black label or the Don Julio slows down. We've got depth and breadth in this portfolio to be able to respond to it. And I see nothing that suggests spirits share gains of PBA will slow down. In fact, to the contrary, to my earlier comments about value, spirits offer tremendous value. And so you put that all together and we could have a few quarters of down trading, but we'll work our way through it. And your first question on the, or your second question, inventory levels globally, we're very happy. I mean, we moved through COVID. I mean, we took dramatic action, bringing the trees down and we are at very appropriate levels of the sellout cultures, highly embedded, and we track and measure this in every market in the world. Lavani and I review it in detail as every heart. So I'm very comfortable with where we are, very healthy levels of inventory and receivables, very, very healthy levels. And the audio is in really fit shape to respond to shifts because we don't have, and markets around the world are tracking that very closely.

I can take your first question. I mean, what I'll do is I'll actually answer it in a slightly different way, which is I'll tell you why we are confident in our medium-term guidance. You know, and kind of going back a little bit to pre-COVID, you know, our guidance was to grow between 4% and 6%. And at Capital Markets Day, we issued guidance which was one point faster. And this was really driven by the fact that we now have a much more advantage portfolio in terms of markets and categories. The spirits category is growing faster, taking share from wine and beer, as Ivan just mentioned. Premiumization has accelerated and it's really driven by consumers choosing to drink better. And we are performing better. I mean, we're growing share more consistently. We're executing much better. We have... you know, a tremendous suite of tools and people capability and energy. And so that's what led us to have the confidence that we will be able to deliver on a medium-term guidance of top line growth of between 5% and 7%. Now, having said that, I will say that, you know, that's still, you know, quite different than where we have delivered as a three-year taker of 9%. But we do recognize that market conditions are changing. We expect category growth in markets such as North America to revert to pre-pandemic levels. And we do see the potential impact of the inflationary impact on consumers. But again, put it all together, we do have strong confidence in our ability to consistently deliver on our top line growth of 5% to 7%.

Great. Thank you. And we have back Lawrence Wyatt from Barclays. Please go ahead, Lawrence, with your questions.

Lawrence, we got your questions. Tequila and A&P, so I'll do tequila. Carson Eagles, I mean, obviously. These kinds of growth rates are not going to sustain in such a big business. However, the brand is incredibly hot. Brand equity and consumer traction, penetration, recruitment continues to be very strong. We see a good runway of continued exciting growth. We are both of Casamigos and Don Julio. And by the way, we've just taken global leadership in in value, both in the U.S. and globally with these two brands. You see the investments we're making in Mexico. So we are counting on continued growth, but the growth rates were clearly slowed down. Agave prices, again, in part because demand has been so strong for the category, you haven't seen the softening yet that was predicted three years ago. I mean, our advantage is we've got scale and we're playing at the top end of the market. So we do expect agave pricing to come down over time, but we don't have a, it's a demand supply dynamic. And right now we're really struggling to fulfill demand, which has continued at the But certainly, in a few years, I would expect the agave prices to come down.

Yeah. I'll answer your question on A&P and whether we're seeing improving returns on investment on our A&P dollars. And the answer is yes. And it is because we continue to build and improve our capabilities in this area. So you've heard us talk about tools such as Catalyst, which we've had for several years now. At Capital Markets Day, we talked about a tool called Sensor, which is a proprietary tool that helps us measure the relative effectiveness of our media spend across digital platforms. So within digital, we can understand the effectiveness of our spend between platforms A versus B versus C. And it has enabled us to improve our return on investment on our digital spend in the U.S. by about 30%. So, you know, as we continue to build more capabilities, we are able to, you know, get better effectiveness of our A&P spend and the better return on investments. I'll give you another example of Crown Royal in the US. Again, and this was with the NFN. We were able to create multiple versions of the Crown Royal video. And by using our data analytics, we were able to deploy the right video content to the right consumer location and by geolocation. So it could be personalized to target consumers in specific cities where we have individual NFL team sponsorships and with the right messaging. And, you know, work like this has contributed to like a 17% improvement in our ROI on Crown Royal Digital Media, which is a large part of our spend in the U.S. And so, yes, we do continue to see improvement in our A&P effectiveness. And, you know, we measure it on an everyday basis and we will continue to you know, invest behind our brands as long as we see these returns playing through.

That's great. Thank you very much. I think before I got cut off, I was hoping to ask a final question about the potential situation in India. There's certainly been a lot more discussion around a potential UK-India trade deal that sort of heated up over the summer. Obviously, the UK government has changed somewhat in the interim, but I was wondering if you'd got any views on what may or may not happen in India and how you might respond to any changes that could take place in that market.

Yeah, I'll take that. I mean, the discussions between the teams continue. And clearly, we need a prime minister on the UK side before Diwali, I hope, which is what Boris Johnson and the Indian prime minister had hoped for a deal to get to. You know, free trade agreements, till they're done, we don't count on them. The conditions are more encouraging. That's on the table. However, there's a lot of give and take on both sides. The trade teams on both sides are working very hard. So it hasn't stalled. And the urgency that both prime ministers have put on it is working through the system. I would not give you the odds on what's likely to happen. We're just tracking it, supporting it. And clearly, it will be another nice boost to the growth of the category in India. Though I would point out, even without the even with these high tariffs. You know, our scotch whiskey business in India was up 62%. Johnny Walker up 66%. We're seeing real momentum on the high end of the Indian business, even with the high tariffs. And so that would clearly add an additional benefit and accelerate business. the growth of premiumization within whiskey. And whiskey, as you know, India is the largest market for whiskey in the world. So we'll wait and see, and we'll work very closely with both sides to see if we can get a Scotch whiskey addressed in some form. It won't be an overnight change to zero. There'll be a staggered change, but every step will be helpful.

Super. Thank you very much.

Andrea Pistacchi, Bank of America.

Yes, good morning. Thank you. I have two questions, please. The first one on the US. Now, it's of course hard to say how the consumer slowdown might play out on the industry, but in the event of, let's say, mild recession for a few quarters, do you think some categories may be more impacted than others? I think you highlighted cognac. Do you see categories that could potentially be beneficiaries of a of a weaker environment. For example, I'm wondering whether prepared cocktails, given the sort of affordable proposition of buying a cocktail in a can just for a few dollars, whether this could, if anything, whether a difficult environment could be a further boost to the growth of the category. And the second question is actually about emerging markets. You've talked about, well, you sound reasonably confident about the resilience of the industry and your business, of course, in developed markets. How do you feel about Emerging markets over the next six to 18 months where consumer demand tends to be usually more correlated to disposable income. Are there any sort of hotspots in emerging markets or any areas that you're monitoring quite more closely? And if you could highlight the main differences in your business and portfolio in emerging markets, generally speaking, compared to 2013-14, which is when we saw the last slowdown there.

Yeah, I can take those. I'd say on the first one, the recession impact on big shifts in consumer preferences across categories and formats, it's not that big. And in part because it comes back to what consumers are spending on the spirits category is for households that buy spirits, about $300 a year. So it doesn't, this is an occasional purchase. You're buying it five, six, seven times a year. It doesn't cause a shock to kind of downgrade from a premium detergent to a private label detergent. And when we tracked it also through the financial crisis, there weren't big dramatic shifts. Now, we'll have to watch it. I'm not saying there won't be. and they'll be at the margin, and we need to be quick. So pack sizes is a very important factor, which Claudia and the team are tracking daily, kind of how is the pack mix changing, because you tend to see a little bit of the 175s pick up as value is more, and people shop at clubs and warehouses as opposed to going to the little liquor stores. So those kinds of trends we've tracked. On the emerging markets, I mean, we have a lot of experience of working through cycles in the emerging markets. I think what's different this time around is our portfolio and brands are in healthy shape. I mean, Scotch whisky clearly is a big play across Latin America and Asia. And in Africa, our beer business and Guinness is in very healthy shape. when you get down cycles and big devaluations, I mean, it does have an impact. There's more volatility in emerging markets. But again, we're in a healthier position. Our stock levels, as I talked about earlier, are very healthy. We're reading the shifts earlier. And you look at the numbers in Latin America through, let's say, what was not a great economic period this last year. And we've really come through very strongly in Latin America. And it's mostly deluxe cut. And that's because marketing, activation, commercial execution, pricing actions, I mean, all of that is really working at a far superior level than five or ten years ago in Latin America. So there will be more volatility in emerging markets, but again, our focus is just ensure we come out ahead, grow market share, and do it in a quality, sustained way.

Thank you. Trevor Sterling for Bernstein. Please go ahead.

Hello, Ivan and Lavanya. Two from my side, please. First one, probably for you, Ivan, concerning Scotch. I mean, definitely Diageo Scotch seems to have got its mojo back in great numbers in the fiscal. But also the blends tended to do much better with Johnny Walker at 35%, old par up 59%, and malts just lagging a little bit at 17%. I guess part of that may be a comp effect, Maybe you talk a little bit about your malt strategy. I know you're putting a lot of money into the visitor centers in Scotland. That would be really helpful. And the second one, I think I haven't the first time had a chance to chat since the appointment of Deborah as CEO, or rather the announcement about Deborah's appointment. And I wonder if you could give us a little bit of color about that decision.

Sure. So on scotch, as you know, historically, Trevor, we've always underperformed in more market share. And it has always been my biggest frustration for a company that owns these 28, soon to be 30, beautiful distilleries all around Scotland. And we were spoilt for choice, and we've been feeling what's changed in the last three years. We now have a very focused long-term strategy on more. So Singleton is a major play for us, going at, let's say, the more mainstream malls. We're very clear on Talisker and where we want to build it. Moor Clark has a high end. I mean, Moor Clark is our jewel. And it's going to be a long play. It's going to be 10 years. But I'm really encouraged with what we've seen there. And then every market, depending on the world, has specific malls that they're driving. So what's changed? Yeah, 17% growth is not good enough. We should be doing better. And I hope to see our malt momentum improve year after year. The strategy is clear. The investment behind it is now clear. And those are things we didn't have before that clearly laid out. And Deborah, delighted to have a move into the COO role October 1. The main focus, and it's actually dealing with a lot of the questions we've had on this call, She will be connecting the market, supply, and the brand, and really bringing everything we talked about here, steering the company through the volatility and navigating and delivering the art performance you've seen us do in the last few years. But I would say, I mean, I'm really delighted about the exec team and the top 100 leaders in the RGO. And so Deborah will move into that role. The challenges and opportunities are clear, as we've talked on this call, and really looking forward to it. She's done a terrific job in North America and with our supply team and works very well across the executive committee. So looking forward to that next step.

Thank you very much, Ivan.

And we have time for one last question today from Chris Pitcher from Redburn. Please go ahead.

Good morning. Thank you, Ivan. A couple of questions I'll keep them short. Following on from Trevor's point around blends, obviously you've seen very strong price mix for Johnny Walker in the U.S. You gave the global growth rates for red, black, and blue, but could you share these for the U.S. as well? You mentioned double digit for black and blue, but how much did blue grow ahead of black? Did red grow ahead? And can you give the mix of the Johnny Walker portfolio today in the US? And then very short final question, 7% capex to sales is a level we've never seen before. How many years before that sort of steps back down again to the four to five, or will it stay high during the whole supply chain investment? Thanks.

Chris, I don't have at hand the mix of red, black, blue in the US first. But what I would say is black and blue are, I mean, that's our focus. to build Black and Blue. Both are doing really well and growing fast. Red benefits from the Johnny Walker halo, but it is not... I mean, if you step back, our total Scotch whisky business, 70% of it now, globally, is at Black Label and above in terms of value. This is a very premium business. And we've shifted it over the last few years. So... The focus areas will continue to be to build black and above. And blue label has super momentum. I mean, you've seen the global numbers, right? Roughly speaking, red label grew 20%. Black label grew 40%. Blue label grew 60%. That's the trade-off within the Johnny Walker trademark that we're seeing. And the US trends are similar.

And what the second question was?

It was around the CapEx, the 7% of sales. I mean, even when you were building RTD capacity in the early 2000s, it was never that high. I mean, how long is it going to be at this level, do you think?

Yeah, no, I'll take that question. On CapEx, you know, in fiscal 22, CapEx was 1.1 billion pounds, and that was really coming off the back of... several projects slowing down through COVID and the need to support the growth of the business and our sustainability agenda. We've guided to between 1 and 1.2 billion pounds here for the medium term. And it's really to continue to support the growth of the business. I mean, you've seen the fabulous volume growth that we have on the business. We have an ambitious growth agenda. This will also be required for us to be able to meet our sustainability goals, and it is also going to be a portion of it is also going towards our supply agility program. So we do expect a slightly higher level of CAPEX as we execute this program, and I do expect our CAPEX levels to go back to more normal as this program completes.

Great. I'm going to close it here. Thank you, everyone. Appreciate your interest in VRGO and for following and tracking and investing it up. I wish all of you a great summer. Lavanya and I look forward to meeting several of you over the next week or 10 days as we get around. So thanks again. Appreciate it. And goodbye.

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