Half Year 2021 Diageo PLC Earnings Call - Q&A Session

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Good morning, and welcome to the interim results in today's conference is being recorded your call today will be hosted by Ivan menezes month and CFO Kathy Michaels to ask a question today, please press star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment again, that's star one to ask a question. We are now ready to start the call. Mr. Menezes, please go ahead. Hello. I'm Cathy and I welcome you to our interim results call. I hope you and families are staying well during this time, and please turn encouraged by our financial results for the first task 521. We delivered a strong performance in a challenging operating environment. We return to Top Line organic sales Road in the heart driven by strong sequential Improvement. Yep.

Regions compared to the second half of the school twenty. This was ahead of our expectations at the start of the fiscal year in particular. We delivered strong Road the North America off just most profitable Market consumer demand in North America has been extremely resilient and Spirits continues to take share from beer and wine. We also benefited from the replenishment of stock level Distributors and retailers across regions. We have rapidly responded to increase demand of the upgrade Channel delivering broad-based category growth and market share games on strategic actions in recent years have created an agile business with a strong position in fast-growing markets such as the US and China and in high-growth categories, including a whiskey Canadian whiskey tequila and gin

A deep understanding of consumer Behavior using proprietary tools and data meant we were able to Pivot quickly to add home occasions and convenience and invest effectively in marketing and Innovation. We are strengthening brand Equity premium, izing our portfolio and expanding our digital capabilities including in e-commerce home business continues to be impacted by the on trade Channel restrictions and the reduction in Global Travel this impacts our beer and Scotch performance in particular due to the ongoing volatility. We're not providing specific items for the second half of fiscal 21. However, we will be lapping the second half of fiscal twenty which will significantly impacted by the office set-up COVID-19.

so we expect to see Improvement across all

This is this week comparator. We also expect continued momentum in North America augmented by laughing inventory reductions by distributors.

The pace of recovery. In other regions will be more closely aligned with the gradual reopening of the on trade and the degree to which restrictions continue to be in place. We expect travel-retail need to continue to be heavily impacted by the reduction in international travel despite the challenges created by COVID-19. I am cautiously optimistic about the outlook for our business office today. We announced a 2% increase in our interim dividend this reflects our confidence that the argel will continue to navigate strongly in this environment and that the fundamental growth drivers home or business remained intact. I'm confident in our people our strategy the resilience of our business and our ability to deliver long-term shareholder value.

And with that I'll open the line for questions for Kathy and myself.

Thank you will not take our first question comes from Simon Hayes of City, please go ahead.

Thank you for calling Ivan Lori got the morning everyone. That's a couple of questions, please obviously mr. Ivan. You can still turn the presentation about the strong day. So now go to your place and radar coming on freedom and the benefits they've had a few limited and they can focus on those for off-premise occasion. I think have you talked to AJ station about the further reinvestment in Cycles in North America. I wonder if you could just sort of focus sort of rain the levels of investment that we've had sneaked in DC indeed sold over the next sort of few years. Also more. Generally. You know how widespread now is the rollout of of these inside stores across the organization how widely are they being used? Lots of black North America a lot but more General than we've been stuck in the only put yourself to a little bit about the Commerce. I think I have a new so just see completely Gathering momentum experienced having historically being low versus their best friends be to God.

About the essential medium-term implications of growth in that trade channel from a value in a margin standpoint from it's a brief level and I appreciate it very very much my market depending on the bank talk with you, Channel, but I think if you look at something like Grizzly, I think it said in the u.s. You tend to feel more premium Brands through the twisty platform, but it does that come as an accretive. Margin all you have to pay more away to those third-party sites to get your brand in the right place.

Okay, so I can thanks Kathy you take I'll take the second. Thanks so much. I even so look if we think about our our reinvestment rate I'd say we have always felt good about the ongoing building capabilities that we've continued to invest in to just ensure that the choices were making are really going to drive good returns from that investment that we're making and you would have faith in the first half, you know, overall. Our reinvestment rate was pretty similar to what we would have seen and the prior. And we've clearly booked to significantly up wait or investment relative to what you would have seen and the second half of fiscal twenty and specifically the fourth quarter of fiscal twenty where we really made the decision that certain investments in A&P were just not going to earn a return and we therefore decreased rnp spending in the fourth quarter pretty significantly as I look at that continued investment in tools, you know clearly North America wage.

Is always the first Market if not one.

At the First Market we're looking to invest in just because it's our it's our largest market and it tends to be the market that has the richest data set but radar as an example, which Ivan would have talked about a little busy when we announced preliminaries at the end of fiscal twenty. That's something that we expand it very quickly and just over kind of a bit over a two-month period over the summer and it's covering about 80% of the company's A&P. So, you know clearly we look to expand these tools and deploy them in our biggest markets with pace and I think you'll see that based on that number as I look forward to what we've done in this first half in our expectations for the second half. I'm expecting to see our reinvestment rate in the second half a relative to a pre covered. As we've gained more confidence in the programs that were investing behind and I think you really see that in terms of the off-trade share gains that we've had wage.

Especially in the market, you know where we have the largest off trade businesses, you know, the US GB of France Australia from Germany would be another one. We've seen really good games behind our investments and so as we look to the second half, I would tell you we're going to continue to put more money behind the programs that are working that tends to be over indexing into category and brand within markets that already have momentum. And obviously we're seeing that come through our results in this first half. And so we're going to continue to invest really smart way in the second half looking to gain that quality market share.

On e-commerce, I'd say preco bent the sector. I mean was roughly about 2% of the business was Annie, It's clearly accelerated. And in fact, it's still small, but it's growing very fast. So it's under 5% but growing rapidly and what we're seeing is so just to give you an example of the speed down in GB in the UK. It took ten years to step up Five Points of alcohol penetration in e-commerce. And with Corbett, we eight points got added in full month of penetration. So significant increase our businesses, we pivoted very quickly and moved teams and dollars into e-commerce right around the world wage Columbia to Uganda. It's not just Germany China us UK and we are seeing acceleration. I mean significant growth in this channel as you'd expect of a small dog.

But really accelerating what I'm pleased about is we're gaining market share and typically market share on e-commerce platforms tends to be higher than our market share and Rick and five point one point to to your question. We actually sell a more premium mix in e-commerce than we do in uh-uh in brick-and-mortar as well now suck. This is deliberate. So for example, we've done a lot on Whiskey and premium whiskey and gifting and Indulgence are to Consumer motivations that have really gone up through Chrome and so on margins to Ostrom I anticipate e-commerce continuing to grow very nicely. We certainly want to lead in this Channel and Thursday. As I said, we we are putting the investment behind it strongly on platforms like grizzly in the US we're doing very well Our Brands perform, uh strongly in that channel and Spirits does ma'am.

Equally well on a platform like Grizzly, but also in the United States, uh within state.

Because retailers who's e-commerce platforms have actually significantly picked up through through Corbett's so uh, we're working closely with our Distributors and retailers to make sure we can kind of support them effectively in that group. So I remain confident that this is a long-term sustained Trend in some markets. We broke new ground for example home delivery in some states and India which didn't exist before and our teams in the industry are hoping to retain that round going off or take home cocktails in New York from the on trade. So to me, there's this is going to be a an attractive segment and we are very focused on keeping it to premium and profitable one. Perfect. Thank you so much.

Our next question comes from Sanji table of credits with please. Go ahead.

Morning, Ivan and Kathy a couple of questions, please on the on the I was hoping you might be able to to break down that that 15% growth in u.s. Birds a bit further down about three points of distributor restocking what sort of benefit did you get in with retailer restocking. I'm really trying to think about your underlying sell out Trends their relative to the market and the post office. Um, that's the first question. Uh, and then just on the outlook for the market, you know, we saw a bit of a Slowdown I think in some of the scanner - 2 through November and December, how are you feeling about the category as we we go into the first available of 2021?

So I'm happy to take that if you look at our us business, I mean, we had underlined depletion growth in double-digit. And as we indicated u s. About three points distributor restocking impact in that 15% growth consumer asked if you take Nielsen napta combat, I mean we're growing in the mid team our market share performance in Newton and after channels sequentially improved so are the Improvement in the office has steadily got better as we went through the half and I would say in the first three weeks of January in Milton. We've had share gains. We measured this every week off so consumed optic is strong and has continued Thanksgiving was a little weaker Christmas and New Year came in dead.

Stronger clearly in the second half we are lapping, uh a much weaker. Uh with the uncertain recorded last year, but I would just point to the lounge the US and say that eight Spirits penetration through Kobe has increased the penetration of spirits has gone up three times that have beer and wage. The increase in penetration has been three times greater. So I do expect those habits to stick and you do see the long-term trends of both premiumisation Thursday. It's going ahead of beer and wine and continuing now clearly. I mean these will you will have a reversion to long as we come through the spirit but the fundamental of sustained Quality Group and continued premiumisation. We feel very confident about

Got it. Thanks, sir.

Question, I'm sorry on retailer on retail inventories. I think once you got to remember is when we were in June there was a huge degree of anxiety on what the world was going to look like wage. What forward demand was and it looked like for retailers or Distributors for us. And so everyone was tight and working capital and we certainly right across the world were very focused on ensuring we ended up with very healthy levels of inventory, assuming a cautious Outlook and forward demand and very healthy levels that receivable right through the business everywhere clearly the growth accelerated ugh retailers started accelerating there by so there is some impact there, but it's it's pure I'm not responding to the end consumer demand and the refilling of the pipeline has demand came and stronger than retailers expected at the end of June.

Got it. Thank you.

Our next question comes from Mitch Call of Duty Bank, please go ahead.

Morning to questions if that's okay and just to come back to stock levels. And can you just confirm you think stock levels are at the end of the first half off our region will just highlight any areas where you think it might be different where it should be appreciate that's difficult because of understanding demand at the same time. And then secondly, I I appreciate it very difficult to give guidance for this year. But if we think longer-term and the next shift towards premium that you've highlighted in the slides combined with the strong growth in the US and the productivity savings that I hope is still applicable. Is there any reason why you can't get back to the previous peak in terms of profitability, which I think was off 30% ebitda line in fs19 or even perhaps Beyond it given all those positive drivers.

So I'm I'm happy to take that question. What if we think about stock levels I'd say we felt incredibly good about where we end it to school twenty. I think the the shift toward a sell-out culture, you know, when Ivan first stepped in as CEO and then just the ongoing focus on being consumer-centric and really focusing on consumer Trends consumer off-take has enabled us to you know, adjust our stock level across the globe very quickly, you know, the the company acts in a much faster sharper manner, so I felt very good about where we ended to school twenty and I'd say as We've Ended this half, you know, again, we feel pretty good about overall stock levels in terms of stock and trade off the Global Travel duty-free business, you know, I'd say that has experienced, you know, a more dramatic shift in demand as international travel, you know has has just declined so

Significantly and so it has taken longer.

I'd say it again stock level, you know in that particular part of the business down to where we want it, you know, if we looked at that impact at a total Diageo level the impact of needing to start to recede stock levels after the end of fiscal item mentioned that was worth three points in our Spirits business, you know that refilling of stock in trade worth about 1 and 1/2 points that our total Diageo level if we think about margins and the margin evolution of your business, which is the second half of your question, I'd say as we look out to the second half. We will continue to update our A&P investment. We would expect that our reinvestment rate. So A&P is a percent of Ennis e is going to be above what a pretty co-ed level would be and we're going to continue to have the impact of both the duty-free Global Travel Channel being greatly reduced as well as dead.

You know the on trade Channel not yet being back to you know, I'll call it a pre-owned level and and just continued level of uncertainty in terms of on-trade closure off restriction. So certainly that's going to continue to put a certain level of pressure on our margins and we're seasonally, you know, we always see our margins in the second half, you know declined relative to the first half because we see a seasonal peak in the first half as we think longer-term about the structure of the business. I would say we feel very good that the fundamentals of the business postcode the you know should revert to something similar to what we've seen in the past just in terms of growth being fueled by premiumisation Emerging Markets by you know growth in um, legal drinking age consumers as well as growth and per capita income and then as I've been mentioned earlier, you know, just birth

Gaining kind of tradition relative to beer and wine. I mean if you looked at the 2014 to 2019. Spirits gained five percentage points of Cherbourg the total out of industry and clearly that's especially accentuated in the US which is our largest business. So I would say long-term we feel very good about the Industry Recovery and we feel very good about our ability to manage the uncertainty that we have and to continue to drive productivity to bring us bottom-line results. You saw that coming through our margins, you know, even in this half if I look at our overhead line, you know, our overheads contributed about 70 basis points, the gross margin positively wage that was partially offset by some one-offs running through other expenses, but overall, I tell you productivity continues to be alive and well at Diageo embedded in our DNA.

And so we would expect that to continue to be.

Part of how will get margin leverage over the long term.

the next question

our next question comes from Lawrence wire of Barclays, please go ahead.

Hi, good morning. I think Kathy three for me if that's okay. That's that's one just building on Saint Jude's question around the us. Obviously, we've seen quite significant changes in consumer behavior during the pandemic with a significant shift to the off-trade as we emerged from the pandemic and the on-trade start to reopen do you believe that the underlying Market wage underlying Spirits Market has reached a new base and therefore we can grow from the levels that we saw during calendar 2020. What do you think as people return to the on trade and return home? I place the work and the like and they will be able Hap's a a set of difficult comps there will be facing during the twenty Twenty-One Year. My second question is on South India. Obviously. We saw a lot of changes in regulation and in particular tax increases. What do you think will be the impact of those tax increases on the prices in India and there?

For what? We see some price volume at asset elasticity following those price increases and do you think any of that or would be able to be offset by the changes in econ us that you outlined and then finally you've made some Acquisitions in the Gin Market obviously Jean has been anticipated as a category for growth in the month. We haven't seen so much evidence of that over the past few years. Is there anything in particular that has made you think that Jen is a much more attractive category in recent months wage than it has been over the past few years. Thank you very much.

Should I go first copy? That sounds awful to your point long as you get the recovery of the on trade and as people socialize outside the home more you will see that mixture of so, I don't expect the growth rate racing in the upgrade sustaining. I mean those will come down the appoint. Will there be a correction and adjustment? I mean, we've worked with different scenarios. The thing I'd point to is the module we we will work through that but the key thing we're focused on is improving the momentum and quality of our business where only 6% VA is most America, so that's plenty of opportunity to go after but there will be some some ships that do happen as uh people spend less time.

I told him and get back to.

Work and to socializing outside the home and there will be some lapping issues, but I'm not concerned about that. I mean we're focused on really sustained quality growth out of North America off and continued premiumisation coming through so your point is valid. Yes, there will be some impacts. It's little hard to predict because so much of it is based on the wage progression of the evening of the pandemic and how household Behavior changes in home, but without important but the fundamental attractiveness of wage penetration growing on T be a premium version continuing we feel very good about on India. Yes, the taxes had uh had an impact on pricing. I'm not that concerned about it. I'd say the biggest thing on India is just getting the recovery of the economy and consumer spending and I would expect our business to come back.

Back in business was better than we expected it grew one 1% and interestingly within our portfolio actually are cut off friends like Johnny Walker which you know as hi Beauty and high-priced actually did uh did the best we had strong performance in in Grant like Johnny Walker and Thursday through the last six months. So the premium ization Trend in India is strong and uh, the the tax pricing environment. I wouldn't say the dramatic change we will work through it and log into your point on e-commerce and at home delivery. We're working hard with governments and state governments to try and keep some of the games we've had on things like home delivery package because as you know in there has such a tiny universe of outlets for alcohol and off-premise Outlets, uh, seventy eighty thousand, which is nothing we would 3 time.

Number in Spain tiny Spain. So getting more access on e-commerce or through home delivery is is a real positive, but we are working as an industry with uh with state governments to try and keep some of those games or indeed take them even further to make gain access easier for for consumers.

And then I'm happy to pick up the question about gin and then specifically in the US. I mean, we feel good about our overall results engine and half, you know, the the category for June was up 6% tangueray was up cordons was up and the gym momentum, you know, I haven't talked about before, you know, it started six or seven years ago in southern Europe it expanded. It's a phenomena in many different countries, you know than just Europe, right? So when we look behind our numbers for the past, I mean strong gin growth in Australia and South Africa and Brazil, you know, it's still a small category in in many other countries, but when we do our analysis we would say, you know, Jin is a category, you know, globally that we actually think has momentum because in many different countries off of a small base, it's growing strongly in the US we've always talked about the fact that Juniper is quite polarizing in the US so

You know when you think of more?

Traditional London dry gin like Tanqueray, you know Juniper is a flavor can be a polarizing that said, you know tangueray was actually up in the half in North America. Now importantly when you kind of pick apart to Jen category what you see in the US is that it's the super Premium Plus price points within the category that are actually growing more strong. And so when you think about the aviation gin acquisition that we did earlier in the half, it was both targeted to that strong premiumisation phenomena. We're starting to see engine and importantly also offer it to just being um, you know a liquid that isn't so Juniper Centric and so it's a much more versatile liquid and therefore used in many different types of cocktails and and I'd say more appealing to more us consumers. So, you know, we feel good that uh at higher price points. Jen is really starting to pick up some momentum in the US wage.

We're obviously investing behind that organically and inorganically.

That's already. Thank you very much.

Our next question comes from Olivia in life from Goldman Sachs, please. Go ahead.

Hi, good morning Island Cafe. This regards. Just three questions on my side and one on China. If we start on the US she work at billing issue phone number of here. Do you think the brands now are Which floor and he's going to return to growth going going forward? What will be the driver behind the the growth we've seen in the image one month then second question again on the more generally when you look at your business, do you think the government supports you can similar to other an important impact on the on the demand? I'm seeing on the on going through additional or you think it's quite quite marginal and then just lastly on the on China quite amazing growth of 15% in each one driven by by by 2, and then also scratch off but stay strong, but what it's negatively affected by the Chinese in your timing and and should we expect you know, a stronger each to in China and birth.

You think or you teams on on the ground? I thinking about Chinese near here. Thank you.

Okay, I'll take the first got to take the second on the US and then I'll come back to China. So once the rock yeah, this was strong growth in the hospital. I think we were up 17% of the US and part of what's happened on the Rockets as you know, we've been working at the table for 4 p.m. For many years to get stability in the health of the brand back and in better shape and you're seeing some of those actions on uh, the brand coming through to the marketing very strongly. We've eased out some of the volatility and flavors. We've had some good Innovation that's helped. I don't expect it to continue a double-digit growth. I mean to me the key on the Rock would be to get it into steady growth on an ongoing basis and I wouldn't declared Victory yet, but we're certainly encouraged by dead.

the performance we've seen here, I mean

Callback to the US was up 6% Uh-huh. And so that's clearly also benefited by the atom consumption surges that we took in the bombed Iraq is definitely the standout performer within our vodka portfolio went and pleased that the brand has been healthier shake and and should have a better trajectory the declines we've seen in the prior Year's and I'll take the second question, you know, just in terms of how we think about the fact the fact that there's been a fair amount of fiscal stimulus that certainly has has supported the consumer. I think the other thing going on there Olivia is that consumer habits just in terms of what they're able to spend on have to really shift it. Right? So people are not travelling as much right. They're they're not able to go out to concerts and sports events and those time

The things and so, you know, they're spending more money on food and beverage they're interested in treating themselves. You know, if you look at our Bailey's results and the half they were in the in North America off of 12% you know, and they've been leaning more into big trusted Brands, you know, and that clearly has been something that we've also been putting money behind and and you've seen that come through in our Innovations in the you know, apple pie for Bailey's Captain Morgan spiced apple as an example. They've also really been looking for convenience. So, you know, I would just mention launching, you know, tangueray can't cocktails similar doing the same thing in terms of looking at Crown Royal. So I you know, the consumers behavior has shifted as a result in part of certain things that are unable to do or not do to the same degree and certainly the fiscal stimulus has helped birth.

So that consumer pocketbooks, you know haven't been squeezed to the same degree. But you know, the fact that people want to treat themselves is also part of what even further accelerated than ization Trends which are already, you know, incredibly strong pre-coated would have actually accelerated a bit, you know through covet and clearly, you know, these consumer shifts have been going on for you know, not quite a year now. So if we try and think forward, you know, we will see some reversion, you know of some of these shifts but they're not going to come immediately. So we certainly think some of these habits, you know are likely going to stick for a while.

And on China Olivia as you say greater China, we were up 15% by June. 18 18 20% International spirits of May 10th. We're feeling very good about China you will have seen in my presentation. I mean a few years ago five years ago China was 2% of the address business. It's now 5 and it's going to get bigger and certainly as we look at current trading I'd say the the way feeling good about the sentiment into Chinese New Year. Now, I will point out. I mean we should not uh assumed that they won't be disruptions. I mean as we know Kobe does pop up here and there and the and the government takes them off action right away to lock down. So, uh, that is something we clearly need to watch but our Focus both on and on the international Spirit wage.

Actually, hi.

Install the brands are healthy. The momentum is strong we're gaining in performance in e-commerce is really strong. So I I do expect continued. Good morning in China simply for the next several years and it is one of the big growth opportunities for the company and I'd say our platform today is never been healthier both of them by Drew international service.

Thank you very much.

Our next question comes from Edward Monday of Jeffries, please. Go ahead.

Morning. Good morning. Kathy. I'm three for me. The first is on low and no alcohol. We've seen it quite a good step up Innovation the last couple of years the Catalan Botanicals Gordon zero. Can you talk about the opportunity here and abroad can you really go with both the offering and also across different categories? The second question is I'm coming back to your slide 6 which shows the the strange shifting off trade market share momentum in a 70% you're of off trade. You're you're you're holding or gaining share. Can you talk about some of the key drivers here, you know across for instance the portfolio took a great people folio as well as execution. And then the third question is is really as the on trade comes back to you think you can hold and gain share in the on trade in a similar way. I keep telling me off trade.

Sure, I'm having would take the first one. Yeah, so as we as we look at the low and no job opportunity I'd say, you know, we know people continue to to drink better not more and the low and no opportunity really plays into that long-term shift, you know what she'll good about the innovations that we've continued to roll out and obviously seedlip was really the first large I'd say non-alcoholic Spirit type drink off and we continue to feel great about that brand that came out of the DV portfolio. If you look at just some of the things we've done in the half, you know, we launched Gordon 0.0% right off and that just is a complimentary product to a previously having a gorgeous, you know, uh, ultra-low and Cocktails out in the marketplace as well.

Seattle also launching and cocktail. So that's another Innovation that we're behind and we don't talk about a lot of the Investments that we do and distill Ventures. But I'd say your question in terms of can a cut across different categories. We certainly think that's a future opportunity and we've made a number of incremental Investments through distill, you know, looking to rebuild brands in that area. So we do think this is a really positive long-term Trend and another area that you know, it's still a nascent part of the business today, but one that should provide us with very good growth over the long term.

On your other to add on the off-trade. We we have a commercial and sales capability and what we do with our to like Edge and data may have been building over the last few years. I'd say a rail differentiated strength in our commercial capability to serve the Accord trade and as the Panthers it we pivoted first to the consumer in really ensuring our marketing and Innovation and at home engagement and the occasions we went after we we shifted clearly significantly and quickly our our marketing investment against the actual location. And that's where you see kind of very strong growth on Brands like Bailey's a month. Will it right across our portfolio Crown Royal cetera?

The second thing I would say is the customer relationships and what we have done in terms of serving and working with our Retail Partners in the in the off-trade off again, we've been the team's have again moved very rapidly in the early days of the pandemic. I mean Supply was the big issue and so really ensuring our supply chain called 12:00 and we were able to get product in time. We worked very closely with our Retail Partners on kind of getting the right level of programming and support we pivoted to eCommerce as I talked about earlier in a big way and that has been a big source of growth. So I'm really pleased with the market share performance in in the off-trade that's happening right around the world and we put a huge focus on all our markets around the world that we can't control the external environment. There's still a lot of volatility there. What is the now control is winning and wage?

The upgrade was uh, a key focus on the on trade of we did very close to our trade customers, uh, you know, we've made significant investments in supporting the on-trade through this very tough. Uh our focus and our objective is as the end on trade recovers. We absolutely want to be growing share their thoughts and we do think with our portfolio and the brands and even the brand like Guinness when when things opened up over the summer in Europe. We saw market share again for as long as the consumer started coming back to the pub. So uh, uh, uh, we are certainly not pivoting our business just to win in the off-trade. We absolutely won't be ready to win in the arm trade when it comes back and we do believe it will come back because the consumer orientation to wanting to socialize out of the home is very strong.

All right. Thank you.

Our next question comes from Pinner Aragon of Morgan Stanley, please go ahead. Hi, good morning. Thank you for taking my questions. You've talked about strong premiumisation wage across your markets. Are you seeing down trading anywhere and two quick follow-ups on my side as well. We've seen a nice acceleration in some of your Brand's this half year, but Crown appears to have slowed. Can you help us bridge the gap between slower reported figures who still very strong sell out Trends employed by the scanner data, and finally, I know you've commented on this before, but I've been getting questions from investors lately. What are your latest thoughts on the potential impact of brexit on your business. Thank you.

Sure, I'll I'm happy to take those premium is the dollar trading we are in emerging markets and you see it in Latin America as the economic crunch hit you all seeing the growth of primary Scotch whisky the black and white and white horse is going as accelerated rate much and you're seeing a downgrading from the lodge know we very deliberately five years ago built a strategy of creating that flow with primary Scotch whiskey and I'm really glad we have it because we've got the very fast growth on those rebounds. So we do see pockets of downgrading but I'd say we remain confident that has condition stabilized and economic growth return that the wage trading up will happen again. I mean we've seen this in Latin America all the all the many cycles but most parts of the world that premiumisation current as is really strong through this.

On Crown Royal the the demand is high and we're struggling to keep up with it. So that's part of what do you think that the the commercial vendors really healthy to uh, and uh, we've just had a hard time keeping up and creating big purple mountains and Texas over the holidays. I think some of these options with smaller Hills because we had to allocate our product a little more carefully. So that's that's a bit behind that and brexit as we've always said we take brexit in our strategic the operations for January. We've been able to handle very effectively the the long-term price really is the UK Leti to pursue an independent trade policy. And uh,

If we can get breakthroughs that say like with the market like India where the UK and he didn't government are talking about trade Arrangements going forward. I mean that would probably be a big fan on but if if the customs duty came down on stops table, so so brexit does not have Major Impact doesn't have an impact and all the other countries where we benefited from t u f t a for Scotch whisky UK government has done a very good job of being able to retain those same with countries. So we are not disadvantaged in any significant market for us.

Thank you.

Our next question comes from Nick Oliver of UBS, please go ahead.

Hello, and thank you for the questions apologies bendy's will ask for form my line broke a couple of times but one on North America is looking at the RTD performance in a very strong again. And I think you know even in the past you were maybe a little bit skeptical on the life cycle of things like selters, but just is there any change in thought going forward? Just thought I guess that category appears to be sourcing more from beer than spirits and then the second one is on Europe margins, I guess, you know a lot of uncertainty about what is the any help you can give us in terms of the kind of operational deal average. I guess we should think about for Europe given obviously things like, you know Guinness keg are very high. Margin Europe how we feel about that piece and going into the the junior end. Thank you.

Okay, I'll take the first copy you take the second. So the way we think about the consumer.

Opportunity is around convenient single-serve convenience, which by the way has accelerated through the last year off and products that are perceived to be better for you and good for you. And that's been a big factor that's been behind sulfur we fully found two possible participate in a broad way across the convenience opportunity in the United States, and we've uh, I think Kathy referred to it, for example, we've launched off the Capital One spritzes in single-serve cans. We've gone into Texas and Louisiana with Crown Royal single-serve products, which have it's just a few weeks. I've had terrific success in the early days. So Deborah and the team in North America have a have a strong focus on building uh off.

An attractive, uh, significant convenient single-serve business, we do think there's an opportunity for trade up from mold paste into Spirits basic jobs. And that's part of what's driving a uh Innovation agenda on on Spirit based single serbs, but we're closed on the participate as well in the mall paste friend. And I we do see this trend that segment continuing to grow ahead of the market and will participate in in a bigger way in the next. Yes.

And then overall Nick I'll start at a higher level and then I'll talk specifically about Europe which was your your question, you know is we look at margins from a total competition level and we think about the second half, you know, we're clearly going to continue to be impacted by the Global Travel duty-free business continuing to be down year-over-year, you know who travel will have start international travel will have started to have fallen off more significantly come like in mid-march, you know in the prior-year compare, but we're going to continue to see over here declines there and then obviously we're going to be dependent on the on trade reopening to to see margins come back, you know compared to a level that that we've seen previously in the business Europe is hit particularly hard by both of these things, you know, so Europe has a relatively large Global Travel duty-free part of the business.

And obviously it is beer, you know is very big in Europe and Guinness is literally our largest brand in Europe and the fact that you know, strategic business, you know are big Brands like Guinness the that keg business declining, you know has really pressured the margins in Europe and while at a toll the actual level, you know, our volumes recovered in the half, you can see our volumes were only down 0.2% in the beer business and specifically the beer business in Europe volumes are obviously down significantly and so we get that negative pressure just in terms of the fixed cost based in Europe that sits in the beer business and seeing those big declines. So, you know overall I expect to see, you know, margin seasonally soften and the second half relative to the first half as they always do and relative to a pre COVID-19 spec to c r a m p in, Georgia.

Current rate go up. Um, so those things will impact margins, you know in the second half as you think about our recovery, but Europe is going to depend a lot.

On just what we see in terms of the opening of the on trade and you know, we're obviously starting from a tough place. If you just look at, you know, the UK and and GB and the situation exists today.

Great. Well, thank you Kathy. That's really clear. Thanks a lot.

Will now take our next question, please. May we ask you to limit two questions going forward our next question comes from far away from home ahead.

Hi, most of my questions have been answered. So I have just one. Actually I wanted to know a little bit more of from you. How you seem or how would you characterize the health of the value chain that you operate in, you know, so upstream and downstream with regards to your suppliers and your your entree and off-trade customers obviously different Trends there but just overall looking at your value chain how how healthy is it off? And if you could discuss any ongoing cash-flow implications from from your assessment of of that situation

Thank you. So I'm happy to take either maybe that's the first part of that question on suppliers as we look Upstream on suppliers. I would say we feel very good, you know Jack about the the resiliency of supply for Diageo and and certainly one of the things that we did during this period where there's been more volatility and you can see this in us and Thursday. So is we have been willing to sit on a bit more inventory ourselves just to ensure that we don't have any Supply disruptions. But as we think about the supply base, you know, it's life feeds into our value chain. I would say we feel very good about that. Um, you know overall coming off of a relatively low base at the end of the at the end of the 4th quarter of fiscal twenty, you know, our our production and business has recovered strongly, which also helps to support that supplier base, but we've done a lot of work to just wage

Sure that we have the resiliency and Supply that we need and we use this disruption in order to reduce. The number of skus we have and take certain actions to just walk in sure that in our biggest most important Brands and scuse we have an adequate Supply, you know to be able to serve the market and then maybe I'll give it to you. I tend to just talk about how long you think about that on trade and and off-trade customers. So on the customer front, well clearly are operate customer base is healthy and doing well, uh and uh walk around the world wherever they're open. The on trade is clearly taken a significant hit and we are working firstly if I go one step earlier are Distributors around the Edge by large very well-capitalized businesses. And and so the health of our distributor network, not just the United States but everywhere else.

Is strong so uh the resilient and and and well Gabba.

Plus, I think the biggest challenge would be on trade is there is going to be a level of shake out and you are going to see uh Outlets that will not be able to survive off the small businesses that will not be able to provide. We are working very I mean, I just going to say what we've done on Guinness. I mean we moved very quickly to support the armed Revolt in the first when the pandemic hit we took back Guinness ahead of any other competitor. So we we've gone into this with a new we want to be very supportive to the object of the difficult. You know, we announced a hundred million dollar fund which is supported at uh-uh. The recovery of the on trade that money doesn't go to promote Branch it is to help create covet safe environments in the on trade and we we we are rolling that out across multiple countries in the world.

So I mean our goal is to be really the best Partners to be on trade through this difficult time and and we are we're training them. Although hundred fifty thousand bartenders around the world remotely Our Brands are giving back in the US. For example, bulletin Crown Royal's Guinness in Ireland had very specific program to support the on trade. So we are certainly as far as our business is concerned. He talked about we've taken significant here to be on a wait but but we remain confident about the recovery of the consumer demand of the on-trade coming back and we're supporting our partners through this difficult. Uh to ensure that way they can come back in in a healthy shape as well.

Thank you. I'll pass it along to the next question.

Our next question comes from Chris picture of Red Burn, please go ahead.

Good morning, or evening Cafe two questions for me. Plz firstly on the sort of structural changes you'll seeing in route to Market you've talked about the Investments you've made in e-commerce and direct-to-consumer, but could you change how you see the the Global Travel retail Channel having changed specifically, are you rebalancing your exposure to where you see the recovery coming such as more domestic and international travel to give us a sense for how much you're investing in Hainan in China. And then secondly, it's very rarely get the chance to talk about Cricket on a result school so I couldn't resist the question. But if I look at the the IPL to be about two to three percent to the sales revenue, so if that shifted from H22 your page 121 that seems to account for the whole difference between growth and your reported India growth. I wanted to check that and then secondly on that how contingent on successes that have Royal Challengers make it to the final next year. Should we expect a double bounce in the half?

Okay.

I can I can cover I'll give you the last answer quickly. I mean the the Royal Challengers franchise is an extraordinary franchise and it's got uh a great consumer engagement across India. Of course, we'd love to win but even when we don't win we do we do pretty well both with the media rights and the and the extraordinary levels of consumer engagement bath franchise has on route to Market Global Travel as we pointed out is is very challenged. So the recovery is very slow. We could do see it being taking several years to get back to 2019 levels. It's clearly dependent on passenger traffic in demand. So now's assessment is based on what the Airlines and the Aerospace company how they look at the at the airline recovery. We we are pivoting to pick up domestic consumption.

That would normally have gone through Global Travel. So for example in India, one of the reasons Johnnie Walker is good success is the team in India pivoted very quickly with programs to to to pick up the whiskey that indeed would buy as they travel the world and and that in part has helped a scotch whiskey business in India, and we see China actually tilting to TJ Klee to driving more domestic consumption and taking those dollars that went overseas more at home where relatively small in Highland, but we do see domestic travel and and and duty-free Zone like in Highland shopping retail environment building. And so that is going to be a big area of focus for us. It's what is very sick today. But as I look at the next five years, it should be an an attractive channel for group.

India sure, so I would say yes, you're correct that when we look at how results are are reported. The IPL is one of the differences between usl's results and what we report at the local level.

Thank you. I just don't know how easy is it to build presents in Hainan as an International Supply just to give us a sense to you small through deliberate decision or is it just taking longer?

No, it's we've traditionally the sector's been small. So but it will build so it's not a false whiskey in particular Spirits has been International spell a relatively small but we do see it as an opportunity. So uh where we see good growth there and in those types of uh home travel-retail zones like a created in in China.

like you

and Spirits only got included I think in the middle of the theater, so it wasn't included in Highland earlier. It's just opened up this words.

Okay. I think we're out of time. I just want to say thank you to all of you for your interest in the company and joining us on the call and Kathy and I look forward to meeting many of you took over the next few days. Thank you and stay safe, and I hope to see many of you or talk to you again soon, bye-bye.

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

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