Diageo plc

Good morning and welcome to Diageo's 2023 Interim Results Q&A call. Your call today will be hosted by Ivan, Diageo CEO, and Lavanya, Diageo CFO. This conference is being recorded. To ask a question today, please press star followed by one on your telephone keypads. We're now ready to start the call. Ivan, please go ahead.

Thank you. Hi, everyone, and thank you for joining our Interim Results call. I hope you've had a chance to read our press release and watch the presentation webcast I'm pleased with our results for the first half of fiscal 23. We delivered organic top line and operating profit growth above our medium-term guidance. Net sales up 9% with growth across all regions. Volume grew 2% even as we implemented strategic price increases. Operating profit up 10%. Organic margin expanded 9 basis points. We generated 800 million pounds of free cash flow, fueling continued investment in long-term growth. We expect to deliver stronger free cash flow in the second half as we lap more normalized working capital movements. We continue to gain or hold share in the majority of our markets, 75%. Our super premium plus brands grew organic net sales by 12%. I'm particularly pleased with the strong growth in scotch, up 19, tequila up 28%, and Guinness up 17%. On a constant basis, Diageo is 36% bigger than before pre-COVID, and with a four-year CAGR for organic net sales of 8%. In North America, organic net sales grew 3%, lapping strong double-digit growth in the first half of fiscal 22. U.S. spirits net sales grew 2% on top of strong double-digit growth for four consecutive halves, and we had depletions ahead of shipments. Our U.S. spirits business is 44% larger than fiscal 19, with net sales growing at a four-year CAGR of 9.4%. We took price and held share of TBA, As expected, growth in the U.S. spirits category is normalizing, trending towards the historical mid-single-digit range. Consumer demand remains resilient, and the market continues to premiumize. 33% of American drinkers surveyed said they had spent $50 or more on a bottle of alcohol in 2022. And that was up from just 24% in 2021. In Europe, organic net sales grew 10% and we maintained volume despite the challenging economic environment. Asia-Pac grew 17% despite greater China, which only grew two. Latin America grew sales by 20% and delivered the highest margin across all our regions in the half. This business is 64% larger versus fiscal 19, with net sales growing at a four-year CAGR of 15%. I'm very proud of our performance in Latin America. In Africa, net sales grew by 6%, with growth across all markets. And we're delivering consistent returns for shareholders, increasing our interim dividend by 5%. And today I'm pleased to announce an additional return of capital to shareholders up to 500 million pounds in fiscal 23. As I look ahead to the second half of fiscal 23, I am pleased with our start in January and the resilience of our business. I'm confident in our strategy and ability to deliver our medium-term guidance. And with that, I'll turn it to the operator. Let's take our first question.

Of course, if you'd like to ask a question via the telephone lines, you can do so by pressing star followed by one on your telephone keypad. If you choose to withdraw your question, please press star followed by two. And when preparing to ask your question, please ensure your phone is unmuted locally. As a reminder, that's star followed by one on your telephone keypad now. Our first question comes from Sanjit Orla of Credit Suisse. Sanjit, your line is open. Please go ahead.

Morning, Ivan and Lavanya. A couple from me, please. Firstly, could you just give us a sense of where you see U.S. spirit sellout trends at the moment and how that contrasts with inventory levels and the numbers you've given us on the shipments and depletion so far in the first half? And secondly, would just love some early thoughts on how Chinese New Year is going. Thanks.

Sure. Hi, Sanjit. So the U.S. consumer is robust. If you look at the industry, we see it growing at about 4%, 5%. And you know, I've said this for a long time, a couple of years or more, that post-COVID, we expect the industry to come back to that mid-single-digit growth range. And what I'm really pleased about is the consumer, through the last six months, has come to that range. So we're feeling very good about it. Within that range, premiumization remains strong. You see in our numbers, our super premium plus business grew 10% in the U.S. So feeling really good about the health of the U.S. consumer. You know, the spirits industry has 20 years of volume growth, taking share of TBA, outperforming beer and wine. Premiumization is strong. And I quoted those numbers of the robustness of above $50 a bottle. So overall, strong, robust, and pretty much where we expected it to be. If I turn to Chinese New Year, clearly, I mean, there's three pieces to Chinese New Year. It's the sell-in before, what happens in the couple of weeks, and what happens after. The sell-in before, we were cautious. obviously, with the lockdowns and the COVID conditions in China. Actual Chinese New Year itself is subdued in terms of socializing and consumption. And certainly the large events are more subdued. But we remain optimistic about China recovering fast, both for our Scotch business and for Baijiu. And as we go into Q3 and Q4, we're very much playing into assuming a strong recovery. Obviously, we have to watch it week by week. But I'm feeling positive about the China consumer environment going forward.

Got it. And just a quick follow-up there on the U.S. If you think the industry is growing 4 to 5 in sell-out terms, do you think Diageo is outperforming that? And just a quick word on where you think inventory levels are and how comfortable you are with that in the U.S.?

Yeah, I'll turn it to Lavanya.

So I'll address your question on inventory in a bit, but in terms of our performance in the U.S. itself, I mean, we're holding share of TBA in the U.S., and so we're feeling good about that. Obviously, we were growing share, and we'd like to go back to that. And Ivan has a very strong point of view on that, I know. But coming back to inventory levels, fiscal 22, we ended fiscal 22 with healthy inventory levels. We, you know, talked about this in July when we announced our results. And inventory levels were close to, back to close to where it was pre-COVID, right? A little bit higher on imports just because the supply chain was longer, but broadly back to pre-COVID levels on inventory levels. Where we ended the half, we ended with inventory levels at distributors slightly below where we ended last fiscal year. Not because we wanted to destock or we needed to destock, but just because December was a really good month. And so, you know, a lot of depletions happened towards the end of December, especially, which just led to inventory levels being a little lower. We feel good about where inventory levels are. And we're lapping the replenishment of inventory last year because if you go back to the start of fiscal 21, fiscal 22, sorry, we were coming off of a very, very, very high growth rate in fiscal 21. Fiscal 21, we grew 24% on U.S. spirits. So when we started fiscal 22, it was very low levels of inventory across the entire supply chain. which we replenished through the year. Some brands came in faster. Some brands came in a little later in terms of when supply was available. And so that's what we're lapping here on ships versus depletes.

I'll just add, we've held TBA share. I think if you look below that, what I'm really pleased with is we're gaining substantial share in the on-trade. So the on-trade in the U.S., and NAPCA has the most reliable data here, So if you look at NAPCA on trade, it's about 20% bigger than pre-COVID. And we've gained outsized share. And to me, that's a huge measure of the health of our brands and the portfolio. And even in these last six months, we gained over 100 basis points of on-trade share in NAPCA.

Great. Thank you, Ivan and Abhanyu.

Thank you. Our next question comes from Oliver Nicolai. Oliver, your line is open. Please go ahead.

Hi, good morning. Ivan Lavania. Just a couple of questions, please. First on the U.S., just following up there. As comps normalize, should we assume a stronger sales performance in H2 in North America in terms of organic sales growth? And then if we think about the margins, obviously margins was down in H1 in North America. When could we expect stabilization in margins in the U.S. or at least kind of gross margin inflection to start with? And then just on FX, a quick question for you, Lavania. You flagged that you were expecting 300 million positive impact on FX for this year. How much transactional FX impact do you expect this year? And is it fair to assume further transactional FX impact in fiscal 2024? Thank you very much.

Yeah, so maybe I'll take the first part on U.S. top line and Lavernier on margins and FX. So, yeah, we do anticipate, as I talked about earlier, the U.S. industry should be in solid mid-single-digit growth in the second half. We expect to perform in line, ideally better, but that's going in view. So focusing on the consumer, I think we feel positive about our ability of consumer offtake to be in the mid-single-digit range. Now, we have an intense sellout culture, right? So as we look at managing the depletions and shipments, you will recall from last year's results, because we were in the restocking phase, we had shipments ahead of depletions three points when we closed out the year. So we will lap through all that stuff. But to me, that's just supply chain. The main thing, most important thing is ensuring we're well positioned to win with the consumer and We've got phenomenal marketing plans, great innovation. We've got Super Bowl coming up and Crown Royal is going to be on the Super Bowl for the first time. Really excited about that. So the team has significant ammunition behind our brands going into H2. So I'm feeling good about our ability to win with the consumer.

Now, Olivia, to your question on margins in North America, I mean, I'll just start off by reminding us that North America has very, very strong margins, 41% operating margin. You know, it was the highest margin region for this business, just got toppled by Latin America, who surpassed them by 30 basis points. But it is, you know, one of our strategies has been to invest in North America for growth because every point of growth in North America comes with really, really strong margins. And so what you're seeing in the margin story is a bit of that. And we have invested in, you know, strongly in A&P, also in digital and capabilities to enable continued strong growth of the business in North America. You know, the gross margins, some of it is inflation and the impact of that is what we're seeing there. But again, we have many levers to offset inflation, you know, premiumization, volume growth, pricing, and the work that we do on revenue growth management. All of that helps us to offset inflation. So I'm not concerned about where the margins are in North America. I think It's a very healthy P&L and business in the U.S. On FX, that was your second question. In terms of transactional FX impact, not really expecting much in terms of transactional FX impact. Our major currency pairs are hedged. And as you saw in the first half, we really did not have any impact from a transactional perspective on FX.

Thank you very much, Lavanya and Sir Ivan.

Thank you.

Thank you. Our next question comes from Pinar Ergen of Morgan Stanley. Pinar, your line is open. Please proceed.

Good morning. Thanks for taking my questions. I have one on marketing. Diageo has invested very significantly into marketing in recent years, and you're indicating that the investment will rise faster than sales in H2. How do we reconcile that with your expectation of moderating sales growth across all regions? And specifically in the U.S., are your market shares evolving in line with your expectations given the investment that's gone into this region? And then two quick clarifications, I guess. One is on free cash flow. Can you please take us through the different moving parts here? Why have the creditor balances shifted so much and so on? And then on capital allocation, has your thinking evolved at all now that the cost of borrowing has gone up substantially? Does that change how you approach buybacks, M&A, and so on? Thank you so much.

Thanks, Pinar. I'll take the first two on marketing and share. So marketing, as you know, we built a lot of sophistication in the data and analytics and tools we now have to assess marketing effectiveness. And as we look to the second half, we see very good opportunities to step up the investment behind our brands, and that's why we indicated in the second half we intend to increase our reinvestment rate. This is built up by market, by brand, and very much with the degree of confidence on returns. Now, our marketing is not just to make the second half sales number. It is about the next three years, right? So everything in our business, upweights in marketing are not for short-term return alone. You do get some short-term impact, but the bulk of the impact really comes down the road. And in line with our goal to be a very reliable top-tier compounder, this flywheel of the audio of, you know, upweight investment, drive efficiency, and get quality top-line growth. So it's really in that context because we really want to ensure we're setting ourselves up well for the quality of growth through the medium term. But it's going against very specific brand opportunities where we have a high degree of confidence in the return that we will get for this investment And I have to say the quality of our marketing continues to step up significantly, and I feel really good about that. On market share, I mean, we are firstly at a global level where 75% of the world is in green. That's a high benchmark, and I'm pleased with that. In the U.S. context, we're holding share of TBA. We're coming off a period where we've grown significant share. And we've also taken price ahead of the industry, if you look at the last three years. And so flat share in the first half, but fully expect and want to do better, as Lavanya alluded to earlier. So we want to get back into the share growth mode in the U.S. And I expect in the medium term we will do that. And that also... takes me to the point when you look at our portfolio in the U.S., we've got a phenomenal tequila portfolio, which has still a long way to run, where the leader in whiskey, and whiskey is a hot category. Innovation, we've got a lot of exciting things in the pipeline that are going to be coming in to second half and into F24. And our execution and investment levels in the U.S., so I do feel good about our the ability of our U.S. business to outperform the industry going forward.

Pinar, on your question, you had two other questions, one on free cash flow and capital allocation. I'll take the free cash flow question first. So what you're seeing on free cash flow, working capital specifically, is the lapping of what happened last year. So again, I go back to reminding us of what happened in fiscal 22. We were coming off of very low inventory levels in the entire supply chain. We had a phenomenal growth year in fiscal 22. We grew 20% with 10 points of that coming from volume. We were buying a lot of stuff, right? Bottles, our grains, our marketing spend, our total spend increased dramatically. And with that, our creditors increased tremendously in fiscal 22. Our creditors have increased in fiscal 23 and half one as well, but just not to the same extent that it increased in fiscal 22. So what we're lapping is that huge increase in creditors that happened in fiscal 22. And that's about 500 million of creditors lower creditor increase this year than the increase of last year. In addition to that, we have invested more, a little bit more on inventories, mainly to ensure, you know, our ability to support continued growth of the business across, as you know, APAC has grown tremendously, Latin America has grown tremendously. So there's been about 150 million pounds of increase in inventory. And the third piece is investing in maturing stock. And this is something that I had spoken about as we announced results last year. It is a part of our capital allocation strategy is to continue to invest in maturing stock to support the growth of our business. Almost around half of our business today is in aged inventories. I mean, with the growth of tequila, etc., And the growth of scotch, the 19% growth of scotch that we've seen this half is a good example of that. And so we are investing behind that. So that explains the three pieces to the moving parts of free cash flow. As we've indicated in the press release, I do expect that working capital will increase in the second half. simply because what we are comping in the second half of last year is a little easier. This business remains a very strong cash-generating machine, so no change to that. In terms of capital allocation and has our thinking evolved, the short answer is no. We have a very consistent and disciplined approach to capital allocation, and we will invest first in the business, lots of room to grow, We still have our ambition of going to from 4% market share to 6% market share. And so we will continue to invest in CapEx, maturing stock in P, as Ivan discussed. And then M&A, you know, we will be looking for interesting bolt-on acquisitions, as we have done in the first half, you know, where we just announced Don Papa. We're very excited about that, and we will continue to look for opportunities there. We'll also be disciplined on the other side from a divestiture portfolio, as we have been. Dividend, we will continue to be a progressive dividend payer, and we've announced a 5% dividend increase in this first half of this year. And then return of capital, we've announced an additional $500 million of return of capital for this year, and we will come back at year-end results with a further update for next fiscal if the Board decides to do so.

Thank you very much.

Thank you. Our next question comes from Nick Oliver of UBS. Nick, your line is open. Please go ahead.

Good morning. Thank you so much for the questions. Just one on the U.S., and just to make sure that I'm clear, when we think about U.S. underlying trends, we're thinking kind of 4% to 5% right now, with EDGE outperforming, given the portfolio. Is that the best way to think about growth for the U.S. market? And then I'll come back with other questions afterwards, if that makes sense.

The U.S. market at mid-single digit, yeah, that's what we've... always said the market will return to, and that's what we're seeing, and that's what we feel confident about going forward. And it's driven very much by demographics, taste preferences. It's a long-term secular trend, which that is right, that level of growth for the industry.

Great, thank you. And then when we think about, you know, marketing investment in the U.S., I guess because there's been unprecedented pricing levels coming through, is the best way to think about marketing investment still, you know, marketing as a percent of NSV, or should we think about it more in absolute terms when we do our modeling? Any thoughts there would be helpful.

I mean, if you look at the last three, four years, we've massively upweighted investment in the U.S. market. We don't target a percent of reinvestment we actually build our plans bottom up, right? So you take a brand like Crown Royal. I mean, we put in place a very rigorous process of what is the right level of spend behind Crown Royal and what mix of activities we put in behind. And so we build our marketing budgets bottom up. But what you see in the trend is our orientation is to lean in and spend more because we do believe there's plenty of attractive growth to be had. And we're very focused on the sustainability of the growth. As I talked about earlier, this is not just about delivering a return in the next six months. So that's the approach we take. And the U.S. market, I've always said this, if there's any opportunity to spend more, we will spend

Thank you. Final question. I think back in, back last August, you were talking about, you know, share gains for Diageo in the on-premise were one of the reasons why, obviously, maybe there's a disparity between the Nielsen and NAVCA data and, you know, what Diageo was reporting. Is that on-premise share gains still continuing?

Yeah, very much so. I said we had over 100 basis points of share gains in the last six months. So we're feeling really good about our on-premise momentum. Claudia and the team made some really big changes in our approach to the on-premise about three years ago. And you just see the consistency of performance coming through now. And that's a phenomenal indicator of the health of the business. So I'm really happy to see the growth in the on-premise, the share growth in the on-premise.

Great. Thank you so much. That's really, really clear. Thank you.

Thank you. Our next question comes from Simon Hales of Citi. Simon, your line is open. Please go ahead.

Thank you. Morning, Ivan and Lavanya. I have three, please. Firstly, sorry to labour the point, but can I just come back on the US depletion trends first, Simon? Obviously, you said that you held TBA share in the first half. Am I right to read that as a share loss in spirits and a share gain in beer from a depletion standpoint? And if that's true, what's really been driving that relative depletion share loss in spirits in the first half? And what gives you the confidence that we'll see the pickup so you'll be growing spirit depletions at least in line with the wider market in the second half of the year? So that's the first one. Secondly, you know, at the group level, I think price mix was running 7.6% in the first half. You indicated that pricing was up a high single digit. So perhaps the implication of that is that mix overall was a bit negative globally. Is that correct? Is it geographic mix that's driven that? Some channel shifts, just some colour there would be handy. And then just finally, for Livania, with regards to the share buyback outlook from here obviously you said that given the you know the macro uncertainty we might be at the lower end of the two and a half to three times leverage range uh sort of for now um how do we think about sort of how you'll think about buybacks when we get to the full year and beyond does it make it more difficult in the current environment to perhaps commit to a multi-year share buyback program and perhaps therefore we should more think about uh rolling six months or 12 months forward commitments to capital return from here

Okay, I'll deal with the share question and then turn it to Lavanya. So firstly, the share is consumer offtake, right? It's not depletion. So depletion is wholesaler distributor sales to retailers. So when you look at us holding share of TBA, that comes in part from spirits doing better than beer and wine, right? So we are benefiting from the 20-year trend of spirits steadily gaining share of total TBA. And we've held share there. Now, to your question on channels, we did gain share in the on-trade, as I talked about earlier. We are marginally down in spirits in the off-trade. But you have to remember, we're stronger in NAPCA, which is a very stable channel to measure. Nielsen tends to be more promotional. And we've taken, as I mentioned earlier, we've taken, if you look at the last three years, we've taken more price. We've led the industry on price, on spirits. So net, net, net, we're about flat. And our intention is, as we go forward, is very much to look at getting back to sustainable share growth. So... That's how I would characterize the share performance. Lavanya?

Thanks, Ivan. So on price, Simon, what we said was that price contributed to high single-digit growth of NSV. So I think that's a clarification to your question on price. On share buybacks, I mean, look, if I just... point to the fact that prior to fiscal 19, Diageo did not have a multi-year share buyback program for well over a decade. But we have been very consistent in returning value to shareholders. And our TSR is on a five-year and a 10-year basis is extremely strong. So we will come back at results with with further guidance on share buybacks. But our approach to capital allocation continues to be very consistent.

Thank you. Our next question comes from Celine Panuti of JPMorgan. Celine, your line is open. Please proceed.

Good morning, Ivan, and good morning, Lavania. My first question is on your margin bridge. So we've seen gross margin under pressure in the first half. Can you help us how we should look at your cost set up in the second half? And maybe as well in terms of the pricing cycle, are we expecting further price increases? And I was looking at that bridge, you know, I think marketing, you said, will be up. So how should we think about the SG&A bucket in the second half? My second question is on trying to come back on Chinese growth. You said that you expect a very strong Q3, Q4. I think compared to the growth rate of the market for international spirits being low-teens, What do you think the growth rate could be in China? And what are you planning for, not only for fiscal year 23, H2, but as well for the fiscal year, the first half of fiscal year 24? And can I also ask on another number, you said normalization of growth in Europe in the second half. What is the normalization of the market growth you are looking for? Thank you.

Okay. Hi, Selina. Let me deal with China and Europe and then... labanil cover margins. So in China, just to be clear, I'm not saying we're going to have a massive acceleration in Q3, Q4. I'm saying, I said earlier, we are ready for the recovery of the Chinese consumer. I don't have a crystal ball on the pace at which that will happen. We're confident it's going to happen. Whether it takes one or two or three quarters, we'll need to see. So But we're certainly, our approach to the marketplace in terms of marketing support, distribution is very much counting on a recovery of the Chinese consumer. And so the phasing of it, I think we'll obviously need to watch in the next few months. I think longer term, we remain confident about double-digit growth in China for our business, both in international spirits, which is primarily top-end Scotch, and in Baiju. And so we feel confident about China being an accretive growth engine for the Ajo. And as you know, it's at very high margins. We have very good margins in China. So we're encouraged with the reopening of China that we shall see good momentum. And the phasing and timing of it, obviously, we will watch very closely and stay very agile to respond to. On Europe, I mean, I'm delighted with our performance in Europe. I mean, 10% growth in the first half, strong market share gains in spirits, and phenomenal performance on Guinness. And I know it was in the presentation, but I have to say it again. Guinness is now the number one beer in the British entree. I never believed I'd see this day. It's fantastic. The brand is really healthy. We're gaining share. We're going to watch. The European consumer obviously is something that we've put a lot of scrutiny behind. But we're confident we will continue to maintain the share momentum. What the external world does, we will deal with. But we've been pleased with the resilience of the sector as we've gone through the first half with all the negative news flow on consumers in Europe, our category and our sector has held up very well. And we hope to see that continued resilience going into the second half.

Salim, your question on cost in the second half, price increases, and operating margin in general. On cost, look, we've seen... higher inflation in the first half of this year than we did through last year. A lot of it was driven by energy costs. But then on the other hand, we also have a lot going for us in terms of the levers that we have that helps us deal with inflation. Volume growth, 2% points of our growth this half has come from volume, and that gives us operating leverage all the way through the P&L, premiumization, Revenue growth management, we have taken more pricing and smartly while holding market share in 75% of our measured markets, holding or growing market share in 75% of our measured markets. Aged liquid definitely gives us some hedge as well in the sense that any inflation that happens on our aged liquid gets deferred to the P&L market. Productivity, I do want to remind us, we've delivered 220 million pounds of productivity in this half, and that's a great way for us to offset inflation as well. In terms of what I see coming forward in the second half, I mean, inflation, it's persistent. It's not increasing, but it's not going away either. We are hedged from a commodity exposure perspective for the second half and beyond. Price increases, we take price increases across markets at various points in time. And so especially when you think about the emerging markets, there will be pricing action that will continue to happen through the second half of the year. Overall, from an operating margin perspective, what I'd look, we have a medium-term guidance out there to consistently grow operating profit ahead of net sales. And that is what, you know, we're reaffirming our medium-term guidance.

Thank you.

Thank you. Our next question comes from Edward Mundy of Jefferies. Edward, your line is open. Please go ahead.

Morning, Ivan. Morning, Lavanya. Two questions for me. The first is just a really sort of big picture question. You set out the medium-term guidance range to grow sort of 5% to 7%. And I know that's a medium-term range, but you've clearly delivered growth in excess of that after a couple of really big years. You're caggering about 8% since pre-pandemic levels. How confident are you that you can grow off this higher base? Or do we need to go through a period of digestion, given these significant gains and the very, very strong momentum? after the last couple of years. And then the second question is sort of what evidence are you seeing of weakening consumer spending power so far? Is it in some of the volumes amongst certain consumers? Is it in certain countries? Are you seeing the downtrading? And how are you really adapting your business and getting ready for a potential weakening environment?

Sure. So I'd say to the first part of your question, we are confident in the 5% to 7% upline growth. And I think the way to think about it, Ed, is TBA worldwide has very positive trends, right? You've got premiumization that's strong. You look at the emerging markets and penetration is still low. You've got 600 million new consumers coming into the market. You take places like Latin America and India, Southeast Asia. In the developed world, we feel really good about the continued gains of spirits from TBA outperforming beer and wine. So we pressure test this all the time, right? We're not just sitting here. So we do, our strategy teams kind of run through a very rigorous kind of modeling of world economies, consumer behavior, sensitivities to shifts, and putting that all together, we do feel confident in the five to seven. Oh, on the big, so we've got market dynamics. I mean, we've got tough markets, right? Nigeria is a tough market. Africa, as you can see, is a bit slower in growth at 6%. We put the focus there on margin improvement and not chasing the lower end of the portfolio. So we've got different dynamics at different places, but by and large, the trend of premiumization is strong and intact. Our super premium plus business, I think it was in my presentation, every region grew double digits in the first half. So we're not seeing a weakening of the premiumization trend. I mean, really anywhere, Latin America, Asia, India, and certainly in the developed world. But we have the portfolio. I mean, I think what you see in these numbers is the RGO's footprint is a real advantage. The brands, the categories, the price points, and the geographies. And at any point in time, when certain parts of the world are going through corrections or markets have slowed down, etc., we've got the ability to deliver this resilience performance and consistent performance. And that's very much. So, of course, we've got challenges in certain geographies, but we can offset it with outperformance in others. And that's where I believe the culture of our whole approach to this is being very agile, operating as one Diageo. Deborah and in her role overseeing the markets, the supply chain and marketing, we're making very quick decisions as we see shifts in end markets. that enable us to sustain this quality growth.

Great. Thank you. Our next question comes from Mitch Collett of Deutsche Bank. Mitch, your line is open. Please go ahead.

Thanks. Good morning, Ivan and Lavanya. Going back to the US, you said you're holding share of TBA in the US and that Spirits is gaining, which I guess implies that you're currently losing share of spirits despite the strength of tequila. And if I look at Nabca and Nielsen, the big difference appears to be prepared cocktails, which as a category is growing something like 50%. And I think you're ready to drink in the US, which I appreciate may not be all prepared cocktails is about plus 18. Can you maybe comment on what you're doing to close that gap and whether that's going to be a strong driver of growth for you? in the US going forward. And then just to come back on margins for the group, you obviously got marketing to sales being a drag in the second half, having been a tailwind in the first half. Lavanya, I think you said input cost pressures are likely to persist. Can you therefore comment on whether you think margins in the second half are likely to be up or down year on year?

Thank you. Sure. So I'll take the first part of the question, Mitch. Firstly, you are right. The acceleration in RTD spirits has been an important piece of the spirits market growth. Our strategy there is we're not chasing RTD growth. We want to be in the premium and of premium convenience is the way we look at the opportunity. So we're very focused on building a sustainable quality premium business. in this space. And there's a lot of growth right now happening in RTDs, which we're not interested in. The second thing I would say is, actually, if you look at our share performance within bottled spirits, it is strong. We're gaining share. And we absolutely believe having a healthy core spirits business is fundamental to our long-term health and outperformance in the U.S. So I'm really pleased with that. So that's to your question, and I'll turn it to Lavanya.

Yeah. So, Mitch, on your question on margins in the second half, I mean, we're not giving guidance here for the short term. I'd reiterate our medium-term guidance of growing operating profit ahead of net sales on a consistent basis. But as I said, I mean, like there's many levers that we have in the portfolio, you know, that helps us to grow margins. Yes, input cost inflation is, we're not seeing it coming off. But as I also said, we are hedged. And that does protect us. We have taken pricing in the first half, we will continue to do so in the second half. Some of the work that the teams have been doing on revenue growth management, which is really helping to move the mix to more premium end, you know, to Johnny Walker Black Label and above, is a strong driver of margin improvement for us. You know, and we're seeing this happen across all regions. You see our Scotch growth even in Africa and Latin America and APAC. Scotch in total has grown 19% and contributed to 50% of the growth of Diageo. Scotch is a highly profitable category. So there are many levers that we are working on all simultaneously, including productivity. And so I feel confident about our ability to deliver a consistent, healthy shape of the P&Ls.

Understood.

Thank you both. Your tequila performance continues to be very strong, but perhaps there was quite significant weakness across the Crown Royal vodka and the Scotch portfolio. With the expectation of getting back to that sort of mid-single-digit level, I think it's reasonable to assume that tequila performance still outperforms the wider spirits category, but that then assumes that you're comfortable with slightly lower growth, particularly in those three major categories overall. for you. Is that the case and is there anything you can do about those three categories in particular to accelerate the growth and get them back into positive territory? And then secondly, on LAC, the slide 15 shows your KGARs over the past few years. And generally speaking, most geographies were around the sort of 7% to 8%. But LAC was the standout at around 15%. And you've highlighted the improved margin performance in that market as well. Over the past few years, that market has had a bit of benefit from government stimulus checks and incentives. Is there any other reason why you expect the LAC market to continue at these sort of levels? Is it reasonable to continue to see LAC drive double-digit growth on accelerated margins, or is that something we should expect to slow down over the next few years? Thank you very much.

Sure. So why don't I take the U.S. and, Lavanya, you can cover LAC. The U.S., we're playing a total portfolio game, right? We are very happy With the quality of our portfolio, when you look at the disposals of the brands we made a few years ago, and then obviously the additions of tequila and aviation gin and some of the smaller whiskeys we're adding now. So tequila still has a long runway, as we've talked many times before. Whiskey, we're very excited about. And bullet in these numbers, you can see bullet has performed strongly. growing double digit. Crown Royal, our depletion's growth is positive. What you're seeing in the sales numbers is what Lavernier talked about earlier, just the lapping effects and our sellout orientation on keeping the shipment to depletion profile right. But we're growing share. Scotch, actually, both Johnny Walker and Buchanan's are a growing share of the Scotch category in consumer offtake terms. So whiskey for us, remains very attractive. We're investing strongly behind it. Crown Royal, Bullitt, Johnny Walker, Buchanan's, our malts, where if you remember, we've always underperformed in malts. I'm really happy to see our malts performance now come through strongly. I think in the US, we were up 60% in our single malt business. So whiskey will be an engine. On vodka, I think if you, there's one factor which is consumer-led, where Ciroc clearly has more pressure with the urban multicultural consumer. But Ketel One is solid. I mean, if you, we were, and Smirnoff is solid. So, and Ciroc, I believe, will come back. So, we do see the Ciroc business stabilizing over time. And then we've got other brands like Bailey's and Captain and our new additions to the portfolio, Gin's with Aviation. So when you plot the entire North American portfolio, we play a portfolio game to deliver the total outcome. It's not counting on tequila.

Lawrence, I'll take your question on Latin America. Indeed, a standout performance in Latin America, three-year compounded annual average growth rate of 15%. In fact, if you even go back before this, you look at fiscal 17, fiscal 18, fiscal 19, high single-digit growth in the Latin American business. What we're seeing happen in Latin America is we've been growing the business the right way with strong A&P investment, driving, taking price, driving premiumization. It's really the flywheel in action. I mean, I think this is one of our, it's a great example of how that flywheel works in pretty much every geography around the world. And our business in Latin America is predominantly Scotch. We are growing the premium end of Scotch in Latin America strongly. The work that the team has been doing in Latin America in terms of on digital, on consumer-centric advertising, bringing our brands to be front and center of a very dynamic young consumer base who is really interested in you know, brands that are part of culture has been really fantastic. And really the single biggest thing that I would say has driven this great performance, consistent great performance over several years has been our approach to looking at the market from a lens of total beverage alcohol. And, you know, we are a very small player in lack from a total beverage alcohol perspective. And what the team has been extremely successful in doing is recruiting out of premium beers into premium spirits. And that's what has driven the growth in margins, the growth in share, and the consistent growth of our top line. And, you know, you mentioned stimulus checks. I mean, look, this is growth that the business has delivered you know, over the last three-plus years and three-plus years before that. So it's anchored in fundamental good business delivery versus any short-term, you know, tailwinds that may have existed.

That's all super clear. Thank you so much.

Thank you. Our final question of today comes from Andrea Pistacci of Bank of America. Andrea, your line is open. Please go ahead.

Yes, thank you for taking the question. Two, please. Earlier you were talking about the good momentum that you're seeing across the business exiting the half-year period. and the trends in January were also looking encouraging. You referred to December having been good, I think, in the US. More broadly in other regions, what sort of momentum are you seeing as you go into the second half? Everybody thinks about the inflection point, which doesn't seem to have happened yet in Europe. So in particular on Europe, where you had another... strong half-year. How do you see those markets like Ireland, Southern Europe, which continue to be good, but you have a large on-trade exposure there? And then, if I may, my second question is just on Siroc, which you mentioned earlier. Ciroc was down substantially in the half because you said distributors were destocking the brand. I think it knocked about two points off your total U.S. growth. Has this destock been completed? Should we see an improvement already in the second half? Thank you.

Sure. I'll deal with the first one and ask Lavonier to comment on Ciroc. We have seen, as we said in my statement, I mean, January has started well pretty much around the world, including Europe, Andrea. So I'm really pleased to see the consistency of consumer momentum for our brands and our category continue in Europe. And we obviously, we track it very closely. One of the things we've learned today through the COVID years, you've got to be extremely agile. And we have a pulse on the consumer to really see if any shifts happen, we will adjust. But what has been really encouraging, I would say, through the last six months of, as I mentioned earlier, in Europe, is we've seen the cocktail culture really grow. thrive and premium brands within that do really well. And so we expect the momentum to that underlying consumer taste preferences as well as orientation to socialize and celebrate coming out of COVID is solid across Europe. So I'm feeling good about our ability to deliver a solid second half. Obviously, there's uncertainty out there, but We focus on just making sure we emerge stronger and continue to keep the share momentum there. And as I talked about earlier, Guinness is in really healthy shape. So feeling good about the Guinness business in Europe too.

On Ciroc specifically, Andrea, yes, we have seen a slowdown in consumption on Ciroc and shipments were, you know, lower than depletions on Ciroc as the slowdown has resulted in distributors and with our sellout culture wanting to make sure that we have the right levels of inventory, healthy levels of inventory in trade. In terms of, and if I kind of look back at the brand itself, I mean, you know, the brand has performed really well over the last three years. I mean, what you're seeing over here is a bit of an impact on what's happening with multicultural consumers in urban zip codes, but it's also the growth of tequila, the growth of U.S. whiskey. I mean, these categories don't it's not like people are drinking so much more that you're getting that growth of tequila. It's a shift happening from, you know, one part of spirits to another. I mean, it's a large part of what's contributing to that. And so Ciroc is impacted by that to a certain extent. But, you know, our focus would be to be where the consumer is with whatever the consumer is most interested in. We have a very broad portfolio across price points and we move very quickly to win with the consumer.

Very clear. Thank you.

Thank you. Is that the last question? Yeah. Okay. Well, thank you everyone. Really appreciate you taking the time and the questions. Lavani and I will be out on the roadshow next week, so I look forward to meeting with many of you. Thanks very much for your interest in the company and belated, but Happy New Year to all.

Ladies and gentlemen, this concludes today's call. Thank you for attending. You may now disconnect your lines.