Good morning everyone. Welcome to our results webcast.

Transcription

1 Final version 29 July

2 Good morning everyone. Welcome to our results webcast. 2

3 As I said in the results release our F15 performance reflects the challenges we have seen this year to top line growth. However, Diageo continues to have an enviable position. We operate in an attractive, growing, high margin industry. We are a global leader by volume, value and profitability, with an outstanding portfolio of brands across both global and local categories and price points. With these assets we can capitalise on the long term demographic, economic and consumer trends which will drive future growth in both developed and emerging markets In the last 5 years we have transformed our geographic footprint. We now have a scale business in many of the fastest growing markets in the world. North America, Latin America, India and Africa. We are in an especially privileged position in Africa, where we are the only spirits company with an established business in all major countries. This scale enables us to build efficient disciplined operations across production, logistics, marketing and sales. We have strength in marketing and innovation and we are building world-class sales capabilities based on the sell out discipline we have now embedded. Diageo has the platform to create the best performing, most trusted and respected consumer products company in the world. 3

4 The long term fundamental growth drivers of this industry have not changed, but the last two years have been tough and more volatile. In the US the pace of consumer recovery has been slow. In Europe, the macroeconomic environment remains fragile. In the emerging markets GDP growth has slowed. In addition, currency weakness has made imported premium spirits relatively more expensive but has opened up the opportunity for Diageo s mainstream spirits. And the last two years have seen specific market challenges; the anti-extravagance campaign in China, which indirectly impacted our local baijiu business; currency in Venezuela; excise duty increases on Senator keg in Kenya; events in Ukraine which affected Russia and the challenging environment in Nigeria which we were slow to read. 4

5 In managing this macro environment we have applied a long term lens. We recognised we had to change the way we operate. Our sell out discipline has changed the way we engage with customers and consumers. It is giving us greater visibility of consumer trends and reduced top line volatility. Our route to consumer focus has increased our brand visibility. They are in the right outlets. Activated with flair. Ensuring we influence consumer choice at the point of purchase. We spend over 1.6 billion a year in marketing. It gives us scale and we spend it with skill and discipline. Consumers have a lot of choice. They see and hear a lot of messages. Our approach to marketing is about constant recruitment and re-recruitment. It is also about efficiency. Driving marketing productivity to invest back in increased marketing activity to drive growth. We have an efficient supply chain. We have expanded capacity in Africa and Scotland. We created a centre of brewing excellence in Ireland, and we rationalised our bottling and packaging facilities in both Scotland and North America. We drive sustained productivity improvements in all our activities. We now have a more proactive approach to our portfolio. Our focus is on our core assets and we have disposed of non core assets such as Gleneagles and USL s UB shareholding. These changes have strengthened our business. Making us more agile and better equipped to respond to a faster moving consumer environment. 5

6 The single biggest change in these two years has been the focus we now bring to sell out. This shift has strengthened the business. We had about a 2 percentage point difference between shipment and volume trends in F15 as we embedded this change. And the move to sell out and the destock in key channels has achieved 4 things: Sustainable growth with less volatility. A better relationship with customers and a closer understanding of consumer trends. Reduced working capital and higher free cash flow. And productivity in trade terms, marketing, and the supply chain. 6

7 In F15 we fully embedded these changes. Our move to a sell out discipline is now supported by monthly reporting which tracks shipments to depletions. Data which allows us to course correct more quickly when we see changing trends. Our route to consumer work has increased coverage by nearly 80,000 outlets. We are achieving our goal to innovate at scale. Orijin, for example, in both mainstream spirit and beer in Africa. Crown Royal Regal Apple recruited new consumers into the Crown Royal franchise, and Haig Club is bringing new consumers into whisky. We have launched powerful new campaigns. Ciroc s On Arrival campaign is a great example. We extended our leadership in luxury spirits. Our reserve brand portfolio gained 2 percentage points of share this year following share gains last year. We accelerated the delivery of the savings from our global efficiency programme and invested growth. The acquisition of Don Julio strengthened our portfolio, while USL has transformed our position in India. We have improved our cash conversion rates from below 90% to over 100%. 17 out of 21 markets delivered cash conversion above 100%. And we raised the bar on our 2020 environmental and sustainability targets. Now I will hand over to Deirdre to take you through the financials. 7

8 Good morning everyone. So starting from the top: Reported net sales were up 5% despite further currency weakness as we benefitted from the addition of USL. On an organic basis net sales were flat, as destock in South East Asia and West LAC, the tough comparison in the US in H1 and the move to a replenishment system for innovation in the US in the fourth quarter offset good performance in Africa and improving trends in emerging markets generally in the second half. This year our focus on cost has delivered savings from our global efficiency programme ahead of our original expectations. These savings along with marketing efficiencies have been reinvested back into the business through our route to consumer initiatives and our marketing programmes, with the balance driving margin improvement of 24bps. Cash was a clear priority for improvement this year. We changed our incentive programmes and set clear targets for each market, and free cash flow improved by 700m. The sale of Bushmills and Gleneagles generated an incremental 500 million of cash. The recommended final dividend increase is 9%, in line with the increase in the interim dividend. This rate of increase recognises that while EPS has declined, the decline was mainly driven by the impact of exchange in a year when free cash flow has improved strongly. 8

9 We have continued to strengthen our portfolio. Acquisitions, primarily USL, drove reported net sales growth. With the acquisition of the remaining 50% of Don Julio, we have full participation in an exciting and fast growing segment with a fantastic brand. Furthermore, regaining control of Smirnoff distribution in Mexico will allow us to accelerate growth of the brand in that market. Exchange movements as you saw from the release, had a significant impact on net sales. The US dollar appreciated and the euro was weaker, as were most other currencies against the pound. We have been conservative in the exchange rate we used to translate the results of our Venezuelan operations, adopting the SIMADI rate from April This reduced net sales by 57 million. Destock in West LAC and South East Asia and our recent changes to how we approach innovation launches in the US have impacted volume. These are the main drivers of volume being down 1%. Lower shipment volumes were however offset by positive price/mix. Mix was the main driver led by the growth of reserve brands and Crown Royal. The current consumer dynamic is putting standard price points under pressure in developed markets, and in emerging markets, we are investing to give the emerging middle class consumer brands at accessible prices. Price therefore contributed only 20 million to net sales growth, mainly price increases in Venezuela and Brazil. 9

10 Looking at net sales by market. US spirits net sales, which were flat in H1, were down 3% in the second half. As a result net sales were down 1.5% while depletions were up 4% for the full year. In F14 our shipments had been higher than depletions as we anticipated a recovery in the consumer environment in H1 which did not materialise. In addition, at the year-end we had tried to kick start demand with significantly increased summer programming, but the consumer response was muted. In F15 we have shipped broadly in line with depletions, which has resulted in shipments being down for the year. In addition we have made changes to the way we manage shipments of new innovations. As you know, innovation is now a significant part of the US spirits sector and we expect that to continue. Innovation requires pipeline fill before we move to consumer offtake. And this increases working capital for us and our distributors. So we are making process changes to reduce this impact and we expect these changes will allow us to reduce pipeline by up to one half. Therefore, in a period when we have seen strong innovation launches for Crown Royal Regal Apple and Ciroc Pineapple, shipment growth was held back against the very strong consumer demand we have seen for these innovations. In South East Asia and West LAC we planned for reduced inventory in specific wholesale channels and have held firm on this commitment despite further softness in consumer demand. In South East Asia, we destocked around 40 million of the 70 million we want to achieve. The remainder will be completed in fiscal 16. Events in Russia and Eastern Europe continued to disrupt demand. Net sales for Russia were down 14% reflecting destocking and down trading. And we have seen disruption in Indonesia, where recent legislation banning the sale of beer in mini marts and convenience stores led to volume decline of around 40% since the announcement of changes in January. In Africa, growth was led by the continued success of Orijin and double digit growth of spirits. In South Africa, Smirnoff 1818 grew almost 30% and broke the 2 million cases threshold and mainstream spirits drove over 20% spirits growth in East Africa. 10

11 Across other emerging markets we saw growth in many countries, for example double digit growth across Mexico, Colombia and Peru which are benefitting from implementation of our route to consumer programmes, and growth in China, led by improved performance of our baijiu business. Lower volume and positive price/mix for these markets largely reflects the impact of pricing in Venezuela and Brazil. Other developed markets contributed growth, with Western Europe gaining some share in spirits and finishing the year up 1%. North Asia, Canada and Australia net sales were all ahead of last year. 10

12 Looking at our net sales performance through a brand lens, blended scotch has been most impacted by market contraction and destock. For Captain Morgan, shipments were impacted by lapping the sell in of Captain Morgan White last year and by challenges to the rum category from craft beer and shot brands. Smirnoff flavours faced similar challenges in some variants, particularly in confections. In North American whiskey we have had strong growth this year with net sales up 12%. The success of Crown Royal Regal Apple and continued double digit growth of Bulleit are the key drivers. In North America, Bulleit is now an 800,000 case brand. Beer net sales grew 4% with the success of Orijin driving growth in Nigeria. Guinness performance improved this fiscal. It was flat overall and it was up 3% in developed markets following a number of successful innovations and brand communications focusing on the credentials of Guinness the brewer. Scotch malts grew double digit, led by Western Europe and The Singleton in Taiwan and China. Our innovation in single grain whisky, Haig Club, is off to a good start with sales ahead of expectations in year one. Our reserve brands in total grew 8%. While scotch and North American whiskey drove this growth we also saw good growth in tequila from Don Julio and DeLeon, from Ciroc and from Zacapa. The improved performance of baijiu in this fiscal added to reserve s performance. 11

13 Looking at marketing reinvestment levels over the last 3 years, we have held our marketing spend relatively stable, driving procurement savings to fund increased activity. In fiscal 15, through actions such as renegotiation of media contracts, savings on point of sale materials and rationalisation of the number of agencies that we use, we have generated procurement efficiencies of around 50 million. Most of this was reinvested, but the level of total spend was lower, generating margin improvement despite the increase in brand activities. Marketing spend was reduced in Asia Pacific, driven by a reduction in spend in China on Johnnie Walker and Shui Jing Fang, although reinvestment rates for China and for the broader region are still significantly ahead of the Diageo average. Marketing reinvestment was increased in Latin America as we continued to invest behind growth in domestic markets. From a brand perspective, we increased spend behind reserve, mainly scotch malts, tequila, and the launch of Haig Club. We saw the biggest reduction in spend coming from Johnnie Walker, particularly in China and South East Asia, and also in the US following a significant increase in spend behind the brand last year. Baileys spend was down double digit driven by Western Europe as they lap activities to support innovation last year, and China, as they review their marketing strategy for the brand. 12

14 The full consolidation of USL reduced margin by around 200bps while other acquisitions and disposals had a positive impact on margin, largely driven by the termination of the bottling contract with Cuervo. Organic operating margin was up 24bps as a result of significant cost savings. The global efficiency programme in 2014 identified 200 million of cost savings to be delivered by fiscal 17 across three main areas: organisational changes; IS and shared services; and logistics savings. We delivered 127 million this year against a plan of 110 million. Savings from delayering the organisation have mostly been delivered, with some savings delivered ahead of our expected timing. Through optimising our IS costs and leveraging regional shared service centres to provide additional support to the markets, we are driving world class levels of productivity and these savings are on track. With respect to logistics costs, we are driving savings and efficiencies in our warehousing and transport operations and around a third of the planned savings in this area have been delivered to date, slightly ahead of expectations. We have reinvested 30 million of the savings as planned, behind marketing investment, supply chain improvements and route to consumer initiatives. The procurement efficiencies I mentioned in marketing drove around half a percentage point of margin improvement. Aggregate savings from the efficiency programme and other cost initiatives broadly offset cost inflation and the impact of negative market mix on operating margin of about 60bps. 13

15 USL was fully consolidated in our results this fiscal and Ivan will talk more later about the opportunities we see with this iconic business. Before looking at the rest of the Diageo P&L, it is worth highlighting how this business has contributed to the year s results. USL brands have added over 90m cases to reported volume and represent almost 40% of Diageo s volume. The inclusion of USL has increased reported net sales by 921 million, representing 9% of Diageo s reported net sales. Once you adjust USL s results for differences between Indian GAAP and IFRS and following the necessary fair value adjustments, operating profit before exceptional items is 53 million. With relatively high net debt in USL and an interest rate of 12%, finance charges amounted to 60m. We are focused on reducing USL s net debt position and the sale of non core assets is one way in which we will do this. As part of this, earlier this month, USL announced the sale of its shares in United Breweries Limited for around 85 million. 14

16 Average net debt increased by 1.3 billion, largely driven by the acquisition of the controlling stake in USL in July 2014 and the consolidation of its debt. The increase in closing net debt is lower, at 677 million, taking into account the sale of Gleneagles and Bushmills in the second half. As a result of the increase in net debt, our closing net debt to EBITDA ratio increased from 2.5 to 2.7, still within our targeted range. Net interest charges increased by 12 million, as the increase in net debt was mostly offset by the reduction in our effective interest rate to 3.5%. Our strong balance sheet and cash delivery has continued to allow us to access commercial paper and source long term debt at very attractive rates, a combination of which was used to fund our acquisition of the 26% of USL in July. This, along with an increase in the proportion of floating rate debt through the use of fixed to floating interest rate swaps, was the main driver of the lower effective interest rate, despite the negative 40bps impact of consolidating USL s debt for the first time. The increase in other finance charges is largely driven by our projections for Zacapa that resulted in an increase in the estimate of dividends payable to ILG. I expect the effective interest rate to increase to around 3.6% next year assuming an increase in LIBOR rates during the course of F16. 15

17 Bringing this together, earnings per share was 88.8 pence per share, down 6.7 pence. Adverse exchange impacts and lower income from associates were the main drivers of this reduction. The tax charge for the year is lower as a result of lower profits, only partly offset by a slight increase in the effective tax rate. The external tax environment is changing, and as a result it would not be unreasonable to expect upward pressure on our tax rate over the next two to three years. We expect our effective tax rate to increase to 19% next year, reflecting the wider tax environment and higher profits from USL. In fiscal 14, non-controlling interests included a credit due to the loss made by Shuijingfang. We have recognised a profit for this business in fiscal 15, which is the main driver for the 29 million increase. EPS to dividend cover at 1.6 times is now outside our coverage ratio, and we will look to rebuild cover over time, maintaining dividend increases at a mid-single digit rate until we are back in range. 16

18 The driver of the improvement in free cash flow was working capital which has been the area of focus this year. Lower debtors was driven by phasing of sales and improvement in overdues. In total, days sales outstanding reduced by 6 days. Extended creditor payment terms also improved cash. Working capital ex maturing stock reduced by almost 360 million this year, having been up around 390 million in fiscal 14. We will look to reduce this again next year through driving efficiencies and improving processes, and expect it to come down a further 100 million year on year. Interest paid reduced in the year. This was driven by phasing of bond payments compared to the prior year and income generated from interest rate swaps as we rebalanced our fix to floating debt exposure. Tax payments were slightly higher than last year and I expect there will be a further slight increase next year. Net capital expenditure was 569 million, 586 million including USL. In fiscal 16, I expect capex to be broadly in line with this year. Contributions to pension plans were lower than the same period last year when we made a one off payment into the Irish pension scheme. This is the main driver of the improvement in other operating activities. Cash outflows in respect of exceptional items included a payment of 74 million in respect of the settlement with the Korean customs authorities and 117 million in respect of restructuring programmes. Next year this will be around 65 million. 17

19 Before I hand back over to Ivan, let me bring this together and touch on what we expect to see in the year ahead. In the past year the consumer goods sector has faced a volatile global economic environment which has weakened consumer demand in many markets. Despite this difficult environment, we continued the actions begun last year to strengthen this business for near and long term performance, and the results for the full year reflect the impact of these factors. Looking at the last quarter, we can see that the actions that we have taken are beginning to improve performance. In North America, US spirits depletions in recent months have improved and were up 5% in the second half. However, as I already described, we are moving to a replenishment focus and this change in how we manage innovation shipments will impact the first half next year and I expect net sales to decline around 2% for North America in H1. We may also have fewer innovation launches as we look to build successful F15 launches, such as Crown Royal Regal Apple, to scale. The second half for North America will be much stronger as we lap the impact of these changes made in the second half this year. So for the full year I expect shipment and depletion growth to be more in line. In Europe, we finished the year with a strong quarter, up 2%, largely driven by phasing of sales and innovation launches in Great Britain. We expect Western Europe to continue to improve in fiscal 16, although it is subject to Greece and the outcome there. In Turkey we expect growth to continue in line with this year, and while we remain cautious about performance in Russia, we do expect improvement against the 14% decline this year. Net sales in Asia Pacific were up 7% in the fourth quarter, although this did include a 3 percentage point benefit from the inclusion of a fifth quarter of Shuijingfang sales. While the destock in South East Asia and disruption in Indonesia will continue into fiscal 16, we expect Asia Pac to post growth in fiscal 16, especially as USL will contribute towards organic growth. In Latin America, as we anticipated, the fourth quarter benefitted from phasing versus the third quarter. Growth in fiscal 16 will be led by Mexico and Colombia, although the difficult market 18

20 conditions in Brazil will continue to impact performance. Africa s growth has been consistent in recent quarters and we expect this trend to continue. From a margin perspective, pricing will remain challenging but positive mix from growth of reserve will continue. We will deliver the balance of the global efficiency programme but organic margin expansion will be muted as we offset continued negative market mix. Cash will continue to be a focus and debt will further reduce in the year, improving net debt to EBITDA. In summary, we expect significant improvement in net sales performance in fiscal 16 driven by volume growth and mix. Given the current macro environment conditions, we anticipate continued weakness in the price environment in most markets. While margin will be muted, we still expect EBIT growth ahead of top line growth. Now let me hand back over to Ivan. 18

21 Thank you Deirdre. Deirdre has just talked to you about F16. I am going to talk about both F16 and the longer term future. We are focused on volume growth, mix and productivity gains to drive strong, sustained performance. First volume growth. 19

22 In F16 our marketing will accelerate volume growth. We are global leaders when it comes to building brands. Traditionally, our marketing was focused on strengthening loyalty amongst our existing consumer base. But consumer habits have changed and consumers have more choice. Now we use great marketing to constantly recruit and then re-recruit them again. We engage the consumer. We re-educate them about our brands and ensure our brand messages are seen by the widest possible group of consumers. We are more visible in all media channels, traditional and digital, all of the time, with less emphasis on a single annual big bang campaign. The content we create is relevant to people and the occasions where consumers view it. It is not about doing digital marketing, it is about marketing effectively in a digital world. 20

23 Nowhere is this change in our marketing approach more important and impactful than with our premium core brands. Over the last twelve months, we have launched powerful new campaigns with a clear objective of driving sales to improve performance. 21

24 Smirnoff s Exclusively for Everybody platform has turned around Smirnoff Red in the US and delivered depletion growth in the year. The new campaign delivers a clear, authentic message to consumers. We have built a deep association between Smirnoff and Electronic Dance Music, sponsoring a series of 26 festivals this year under the Smirnoff Sound Collective banner. Smirnoff is not just another big corporate sponsor. It is a valued and active member of the EDM community. Consumers have a strong sense of what s real and what isn t. Sometimes brands will share a lighthearted message and sometimes a more serious one. I m very proud of our active involvement in the Rainbow Laces campaign against homophobia. Great brand awareness helped increase the profile of the cause through the strength of the Smirnoff brand. The critical point is that there has to be authenticity in all communications if the brand is going to make the kind of impression that will turn into a sale. 22

25 The Tonight We Tanqueray campaign is in its third year running and focuses on encouraging consumers to make the first drink of the night a Tanqueray and Tonic. The message is very simple. In the last 12 months it again delivered great results, as we have supported the campaign with increased focus on visibility and distribution in the on-trade. As last year the brand was up 6% globally, with net sales in Western Europe again up over 20%. That is absolutely fantastic for a brand which is already so well established in the region. 23

26 On Guinness, we have adapted the Made of More global platform in Africa into the award winning Made of Black campaign. At a time of economic volatility, the pricing strategy we had pursued in Africa had left Guinness at too high a premium, particularly in Nigeria. But this is a great brand, which has incredible affinity with our consumers. Changing our pricing strategy and introducing a strong campaign, delivered great results. Net sales of Guinness in Africa, excluding Nigeria, were up 13%. And we are improving performance in Nigeria. This year we did not take price and we moved our marketing focus to a younger demographic. A vibrant Guinness for a new generation, and we have stabilised the share loss we experienced earlier this year. 24

27 Finally Johnnie Walker, where volume growth of our biggest brand is so important. The current campaign is iconic. But we are going to take it to a new stage. A new take on the brand s purpose to inspire personal progress. The global launch begins in September. It will redefine scotch marketing, ensuring Johnnie Walker is the leading brand for yet another generation of LPA consumers. 25

28 Having a world class marketing approach is Part One of how to grow volume. Brilliant activation of brands in outlet is Part Two. When we set up the route to consumer project, we chose 10 key markets to focus on. In each one we mapped the outlet universe and decided which outlets we wanted to actively cover, which ones we wanted to be present in, and which ones were not a priority for us. Then we laid out the sales resource we needed to achieve our target. In the last 12 months in those wave 1 markets, we have increased the number of sales people by 10% but increased the number of outlets we actively cover by nearly 30%. It means that we now cover nearly 80,000 more outlets. This additional outlet coverage has contributed roughly 90 million of net sales this year. Let s hear an example directly from our team in Kenya. 26

29 VIDEO 1 (EABL - Kenya) Alasdair Musselwhite, GROUP ROUTE TO CONSUMER DIRECTOR, EABL The East African Breweries Group stretches across five countries, Kenya, Uganda, Tanzania, Rwanda and Sudan. So we have a range of different beer markets largely on which spirits is being propelled. We have the biggest opportunity in that region across most of the markets is to extend our coverage and grow our distribution and availability of our brands. One example of us extending our coverage would be in Kenya where we have upwards of 90% distribution on some of our main brands. We delivered a project called Kaskazi which is the name of a wind. And we took that project into the urban slums and peri-urban dense populated areas of Kenya, first with a pilot with 13 motorbikes. We now have 130 of them, such was the success of it. And we identified an opportunity in a market where we had strong distribution to go into areas where our traditional beer trucks and route to market service couldn't access. We unlocked over 40% growth in spirits and late 20% growth in beer in a market where we have a strong market position. Where we have people who might have been delivering water or milk on a bicycle, who now are driving a motorbike with a petrol engine, making three times what they did and actually using that to help their community, or indeed educate their siblings and transform their lives. So I see our business model at the lowest granular level and our brands helping to transform people's lives and create businesses. That's wonderful to see and it's magical because it shows the scale of our business and how far it can reach. 27

30 The work the team did in Kenya was fantastic, and highlights just how big the opportunity really is for Diageo to grow the spirits market in Africa. Even in a country where we are the clear market leader, our team was able to expand distribution coverage in a matter of months. 28

31 Applying the same level of improvement to the rest of Diageo, our aim is to add a further 150,000 outlets where our brands are perfectly displayed and our campaigns are perfectly executed. And our route to consumer thinking can also be expanded to capture opportunities in new marketplaces. 18 months ago we looked at how we should tap into the e-commerce opportunity. This is a channel with high growth potential, as the spirits category is still relatively underpenetrated in online shopping, with 3% of spend versus 9% for all grocery shopping. We set up a test in Western Europe and analysed the opportunity and recruited a sales team with e-commerce experience. Our aim is now to create a 100 million business in Western Europe in 3 years. 29

32 We have always been at the leading edge of innovation in our industry, but we want to do even better. The biggest opportunity is to drive innovation at scale and with more speed. A scale launch is one that delivers over 5m in net sales in year 1. This year, scale launches represented 70% of our new launch net sales, up from just over 50% last year. But scale is not enough, we also need to be quick and agile. Hence our switch to a replenishment model for new launches in the US in Q4. We are now putting less volume into distributors at the outset and focusing instead on those innovations which are gaining traction. Crown Royal Regal Apple is a great example of this. When the brand really started to take off our supply chain acted to replenish stocks quickly. This replenishment approach will allow us to better direct marketing and sales activities at launch and reduce the volatility inherent in launching innovations. 30

33 Innovation opportunities go beyond products and we are exploring new technologies through our specialist futures team. We are looking at packaging ideas. For example, to improve visibility and availability in the trade, to drive volume. This can involve advanced labelling and closure technologies to prevent counterfeiting, or new pack formats to meet consumer needs. A great example is the use of Tetra-Paks in emerging markets. One of the synergies we have captured from United Spirits is that Tetra-Paks cut costs and reassure consumers that the product is safe as they are difficult to tamper with. We are exploring how we can use packaging innovations such as this more widely, to accelerate mainstream spirits growth in emerging markets. 31

34 Which brings me to the mainstream opportunity. We are already accessing it in beer and ready to drink with our success with Orijin in Nigeria and Smirnoff Double Black and Guarana in South Africa. We are now launching both brands in other African markets. While there is more we can do in these categories, the biggest opportunity is in mainstream spirits. Mainstream spirits in emerging markets, excluding USL for now, account for about 5% of our net sales and nearly 15% of our volume. Both up double digit this year. In Africa, sales are up 36%, outperforming other regions, and demonstrating how our beer assets accelerate performance in an area with strong growth potential. In emerging markets consumers are moving away from the illicit sector which can account for 50% of overall consumption, to safe, branded liquid at an accessible price. Local production and locally sourced product can capture this opportunity. We can get to scale quickly as we did this year with Orijin in Nigeria, with Jebel in Kenya and with Smirnoff 1818 in South Africa. These brands sell at attractive margins but it is a different business model to premium international brands; greater emphasis on volume and aggressive cost engineering. But there is a second consumer opportunity in this space at a slightly higher price point. We can access it through secondary scotch brands. We can offer an aspirational, imported product at an accessible price point when currency devaluation and inflation have made premium and standard imported brands expensive in local currency. We have a 37% of share in the scotch category, but only a 13% share of this value segment. Our scotch capacity expansion means we now have the young liquid we need to meet demand for more accessible price points. A great example of this is White Horse in Latin America, up 14% this year. As the economy has slowed down, we have activated White Horse at scale, with its own signature serve, giving consumers a high quality brand as they trade down. 32

35 But it s not only about emerging markets. In the last couple of years we defocused our value and standard brands in developed markets. Consequently in the US, the performance of brands such as Popov and other standard brands like Seagram s 7 Crown has driven most of our share loss, both volume and value. An astonishing result if you think that they account for 10 % of our net sales in the US. These brands require the right price point and this will be an area of focus for the US business going forward. 33

36 And finally nowhere is the mainstream spirits opportunity larger than in India. Our most transformational acquisition of recent years was the purchase of United Spirits in India. Although it has been mentioned many times, it is worth reiterating that the long term consumer opportunity for spirits in India is unprecedented. A huge and fast growing LPA+ population of 800 million people, increasing by 20 million per year. And many of these people have rising incomes and a cultural inclination towards drinking spirits. The recent Q1 results demonstrated this improving volume performance and I am looking forward to more good quarters to come. 34

37 Now let s look at mix, within which reserve is our most important driver. 35

38 Five years ago, we shifted our approach to luxury spirits and made reserve a strategic priority. We created a dedicated unit that builds brands in a different way. Our marketing and sales focus are those of a luxury company. The results have been spectacular. It shows what building capability and having focus can do. We have gone from 3 rd place in share of super premium spirits in 2011 to the clear market leader today. And we have continued to strengthen our exceptional portfolio through acquisition like Don Julio and innovations such as Orphan Barrel. We create stunning marketing and events. Leading the development of a fine drinking culture across the world. From David Beckham and Haig Club taking over Wellington Arch in London for a week for the most exclusive party in the world. To Johnnie Walker Blue Label and Jude Law partnering to produce The Wager, launched via the internet and viewed over 30 million times. Reserve operates a specialist sales force. Making fewer sales calls in a day, they educate customers about our brands and work with them to develop stunning new serves and recipes. For example, the Tanqueray TEN Langham Martini, at the Langham Hotel in London, or the Ketel One Copper Kettle serve. We deliver presentation in the off trade. Pop-up luxury brand embassies in high profile airports for Haig Club and Johnnie Walker to generate standout visibility. Reserve is pushing the boundaries of what great presentation looks like for a spirits brand. Reserve is now a large and highly profitable business. From 9% of net sales in F11 to 13% this year. And more importantly from 9% of CAAP in F11 to 15% this year. 36

39 We are also building a world class ability to incubate new brands. Not all innovations reach scale quickly and we need to nurture these brands to maturity. Haig Club was designed to bring new consumers into whisky, and giving them the space to reevaluate the category takes time. So we will build the brand steadily and sustainably. With our start-up spirits incubator programme, Distill Ventures, we are investing in a group of budding spirits entrepreneurs. This programme is a brilliant way for us to invest in small scale start-up brands. We know that if we bring very small brands into our portfolio prematurely they can struggle for attention and resources. So through Distill Ventures, we can invest in the early stages of growth at arms length and then scale them up when they are ready. 37

40 Finally, productivity. Cash is one way we measure productivity and Deirdre has described our stronger free cash flow. So I am going to move to operating productivity and how delivering on this will fund investment for growth and deliver margin improvement. F16 will continue to benefit from our global efficiency programme. It delivered material savings which were reinvested into a business which, following two years of change, is now leaner and more agile today than at any other time. Diageo is now better equipped to move at pace and invest cost savings effectively. 38

41 We have the disciplines in place to deliver sustained productivity gains. Every budget owner is focused on looking for ways of doing things better. For example, in all offices in LAC we have hot desking. It reduces office space by 25%. Reducing rent and overheads. In South Africa, we saved more than 200k by optimizing the way we fill pallets. Let s hear from the teams on how they are doing it. The first example is from the US on marketing spend efficiencies. The second is Nigeria talking about how they have reduced the cost of a bottle of Guinness there by 10% and used that saving to support our brands in a tough market where price is difficult to achieve. 39

42 VIDEO 1 (North America) Janelle Orozco (JO) - In F15 Procurement and Brand decided to partner, partially because there was a business imperative where we really needed to look at things differently. Susan Jones (SJ) - We realised we had to do something radical to change our business performance and as we adopted Next Generation marketing principles, it really spurred us on to save as much as we could from non-working costs and put it towards working costs. JO - There is a big need right now in North America, for us to re-look at how we are activating the on premise. The things that we have been doing previously, we know we want to change and focus more on millennials. So there is something called the Activation Army. So what we knew we needed to do was to free up about $50m worth of funds to be able to fund the activation army. SJ - We didn t want to just move money from everything else to on premise, we decided that we had to do on premise and everything else, which really necessitated us finding a lot of money. JO - So between the two of us and our teams, we really worked together to find the right places to take cost out so that we could invest. SJ - Procurement really brings that commercial knowledge and negotiation know how and the brand teams bring a knowledge of what it s going to take to deliver on their business and when those two things combine, that s when we saw real success. VIDEO 2 (Nigeria Beer) Julian Patton, Global Operational Excellence - Beer We have launched a number of initiatives such as our Perfect Plant Management system to drive the right behaviours but more importantly we have benchmarked against best in class. We ve set sighting targets and then collectively across source, plan, make, move, we seek to take out cost. We have been successful. We have taken out this year 43m of cost savings, and when you look at a specific example in Nigeria, we have reduced the cost to make a bottle of Guinness, by 10%, that is releasing money into the markets to develop our brands, train our sales force and grow the business. 40

43 In addition, we are releasing capacity to the markets because we are improving our OEEs. [Operation Equipment Efficiency] So we are on a journey, we have had great success but I think there is still a lot more to achieve. 40

44 The examples you have just heard demonstrate the disciplined productivity focus we now have in Diageo. We have delivered effective cost reduction programmes and implemented programmes which have removed nearly 600 million of cost in the last 5 years. F16 will see the culmination of the global efficiency programme. As that comes to an end, we have been working with external advisors to benchmark our activities, internally and externally, to identify productivity gains which will free up 500 million of cost per annum in 3 years to F19. It will drive improved top and bottom line growth. Delivering our must do - Drive out cost to invest in growth. 41

45 Our cost base is over 7 billion. We also have 3 billion of trade spend. I have appointed Brian Franz to become Diageo s first Chief Productivity Officer to lead the delivery of these productivity savings across cost and trade spend. We have established the areas where Brian and the markets will focus. Marketing effectiveness will be improved by more consistent and rigorous evaluation of spend to drive better returns. And opportunities exist to optimise our ways of working with vendors and rationalise the number we work with. Trade terms will be improved, reducing unconditional trade spend by adopting globally consistent trade terms across channels and customers. External and internal benchmarking across sales, finance, HR and general management, indicate there are significant savings opportunities. And there are efficiencies across indirect procurement, especially in tightening our T&E policy. We will improve the utilisation of our manufacturing capacity through volume growth which will improve the absorption of our fixed cost base. Better definition of standards for liquid quality, bottles, caps, closures and cartons for all mainstream products will also increase productivity. Continued productivity gains in shared services and better use of property and facilities complete the list of areas where we will be driving productivity. 42

46 The last two years have been a period of change for Diageo. And those changes have given us the platform to deliver stronger, sustained performance. We have great brands and the widest geographic reach. The addition of USL and Don Julio gives us more great brands and broadens our geographic reach. We have embedded a sell out culture which will reduce the volatility of our top line performance. We have improved cash conversion and enhanced our financial strength. We have expanded our outlet reach and the effectiveness of our activations in outlet. We have increased our focus on mainstream brands to provide affordable brands for consumers in emerging markets in volatile economies. We have continued to win in reserve. Extending our leadership and driving top line mix and operating margin. We have identified 500 million of productivity gains, which will provide the fuel to invest in growth and achieve our margin objectives. Deirdre has given you the outlook for F16. Increased volume growth. Continued price/mix at the same level as F15 and margin improvement, albeit muted as we absorb market mix. F16 will set us on an improving trajectory. From F17 we believe our trajectory becomes mid single digit top line growth. And with productivity gains of which we will invest two thirds in top line growth and one third in margin improvement, to support our objective of 100bps of operating margin improvement in 3 years. Strong and sustained performance. Thank you for your time. 43

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