Diageo Plc · LSE:DGE
Diageo — H1 F18 Earnings Presentation
54 slides from Diageo's earnings presentation, January 2018
Slide 1: Diageo Interim Results, Six Months Ended 31 December 2017
DIAGEO INTERIM RESULTS SIX MONTHS ENDED 31 DECEMBER 2017 1
Slide 2: Consistent Delivery of Strong Results
CONSISTENT DELIVERY OF STRONG RESULTS Reflecting our ambition to be one of the best performing, most trusted and respected consumer products companies in the world Delivering through our six priorities with clear goals defined by our performance ambition Four measures of our progress • efficient gro
Slide 3: Consistent Delivery of Strong Results
CONSISTENT DELIVERY OF STRONG RESULTS Organic volume 1.8%. Organic net sales 4.2% Organic operating margin expansion 81bps Consistent strong cash delivery: Free cash flow £1bn Eps pre-exceptionals up 9.4% Returned £0.8bn to shareholders through share buy-back Interim dividend up 5% 3
Slide 4: Continuing Our Performance Momentum
CONTINUING OUR PERFORMANCE MOMENTUM Organic operating margin Free cash flow (£ million) Organic net sales growth improvement (bps) 4.3% 4.2% 77 81 2.8% 1,084 1,029 839 37 699 24 326 19 0.4% 0.0% F14 F15 F16 F17 F18 H1 F14 F15 F16 F17 F18 H1 F14 H1 F15 H1 F16 H1 F17 H1 F18 H1 4
Slide 5: Continued Solid Growth in the Three Focus Areas
CONTINUED SOLID GROWTH IN THE THREE FOCUS AREAS: ORGANIC NET SALES GROWTH Scotch 2.8% US Spirits 2.9% India 2.3% 5
Slide 6: Continued Momentum Which Reflects
CONTINUED MOMENTUM WHICH REFLECTS: Delivering our strategy through our six execution priorities Consistent broad based growth across the business and the three focus areas Continued margin expansion enabled by productivity programme and strong cash flow Confidence in delivering our medium te
Slide 7: A Set of Results That Demonstrate Continued Performance Momentum
A SET OF RESULTS THAT DEMONSTRATE CONTINUED PERFORMANCE MOMENTUM Efficient growth: F18 H1 Organic net sales growth 4.2% Organic operating margin improvement +81bps Free cash flow £1.0bn Pre-exceptional eps up 9.4% to 67.8p Value creation: ROIC up 77 bps to 16.5% Total Shareholder Return up 22% 7
Slide 8: Reported Net Sales Up 1.7%, 4.2% Organic Growth
REPORTED NET SALES UP 1.7% 4.2% ORGANIC GROWTH Organic growth 149 6,530 6,421 111 (134) (17) F17 H1 Exchange Acquisitions Volume Price/mix F18 H1 and disposals 8
Slide 9: 4.2% Organic Net Sales Growth
4.2% ORGANIC NET SALES GROWTH Organic volume growth Price/Mix Organic net sales growth 4.3% 4.2% 3.2% 2.8% 2.4% 1.8% 1.3% 1.5% 1.1% F16 F17 F18 H1 9
Slide 10: All Regions Delivered Top Line Growth
ALL REGIONS DELIVERED TOP LINE GROWTH Organic net sales growth 6.9% 6.8% price/mix volume 4.4% 4.2% 1.7% 8.7% 8.3% 2.5% 2.4% 4.6% 1.7% 3.6% 1.8% 0.8% (0.2)% (1.9)% (1.8)% (1.5)% NAM EUROPE AFRICA LAC APAC DIAGEO & TURKEY 10
Slide 11: Broad Based Organic Growth Across Our Categories
BROAD BASED ORGANIC GROWTH ACROSS OUR CATEGORIES Organic net sales growth 43% 16% 5% 5% 4% 4% 3% 1% (3)% Scotch Vodka NAM Rum Liqueurs IMFL Gin Tequila Beer Whiskey Whisky Category as a % of net sales 27% 11% 9% 7% 6% 5% 4% 3% 15% 11
Slide 12: Strong Performance Across Our Portfolio
STRONG PERFORMANCE ACROSS OUR PORTFOLIO Organic net sales growth 11% Global giants Johnnie Walker 7% Smirnoff (1)% Captain Morgan 6% 5% 5% Baileys 6% Tanqueray 16% Guinness 4% Global Local Reserve giants stars 12
Slide 13: Reported Operating Profit Before Exceptional Items Up 6.1%
REPORTED OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS UP 6.1% ORGANIC OPERATING PROFIT UP 6.7% £m F18 H1 F17 H1 PRIOR PERIOD OPERATING PROFIT * 2,065 1,717 Exchange (15) 303 Acquisitions & Disposals 2 (42) Organic growth 138 87 CURRENT PERIOD OPERATING PROFIT * 2,190 2,065 *Reported operating profit be
Slide 14: Reported Operating Margin Up 138 bps, Organic Margin Grew 81 bps
REPORTED OPERATING MARGIN EXCLUDING EXCEPTIONAL ITEMS UP 138 BPS ORGANIC OPERATING MARGIN GREW 81 BPS 81bps 33.5% 12bps 45bps 32.2% F17 H1 Exchange Acquisitions Organic F18 H1 and disposals operating margin 14
Slide 15: Organic Operating Margin Up 81 bps
ORGANIC OPERATING MARGIN UP 81 BPS Movement in organic operating margin 122bps 33.6% 32.8% 3bps (44)bps F17 H1 Gross margin Marketing Other F18 H1 operating items 15
Slide 16: Productivity Efficiency Funded Significant Increase in Marketing Activity
PRODUCTIVITY EFFICIENCY FUNDED A SIGNIFICANT INCREASE IN MARKETING ACTIVITY £m F18 H1 Prior period marketing 908 Exchange (8) Acquisitions 2 Marketing efficiencies (69) Underlying increase 15% 135 Current period marketing 968 16
Slide 17: Organic Operating Margin Up 81 bps
ORGANIC OPERATING MARGIN UP 81 BPS Movement in organic operating margin 122bps 33.6% 32.8% 3bps (44)bps F17 H1 Gross margin Marketing Other F18 H1 operating items 17
Slide 18: Productivity Programme on Track to Deliver Increased Guidance
PRODUCTIVITY PROGRAMME ON TRACK TO DELIVER INCREASED GUIDANCE F17-F19 Guidance Productivity target £700m 2/3 reinvested Margin improvement of 175bps NET REVENUE GLOBAL ORGANISATION MARKETING INDIRECTS MANAGEMENT SUPPLY EFFECTIVENESS 18
Slide 19: Strong Free Cash Flow Delivery
STRONG FREE CASH FLOW DELIVERY 86 1,084 (37) (17) (15) 21 8 1,029 (101) F17 Exchange (i) Operating Working Capex Tax Interest Other (iii) F18 profit (ii) capital (i) Exchange on operating profit before exceptional items (ii) Operating profit excluding exchange, depreciation and amortisation, post em
Slide 20: Improved Cost of Debt Supported by Favourable Refinancing
IMPROVED COST OF DEBT SUPPORTED BY FAVOURABLE REFINANCING F18 H1 F17 H1 Movement Closing net debt* £m (9,198) (8,936) (262) Average net debt* £m (8,819) (9,066) 247 Net interest charge £m (130) (153) 23 Net other finance charges £m (24) (29) 5 Net finance charges £m (154) (182) 28 Effective interest
Slide 21: Disciplined Approach to Capital Structure, Share Buy Back on Track
DISCIPLINED APPROACH TO CAPITAL STRUCTURE, SHARE BUY BACK IS ON TRACK Leverage policy Adjusted Net Debt* to EBITDA: 2.5x – 3.0x Organic growth Dividends – 1.8x to M&A and portfolio 2.2x dividend cover management * Net debt is equivalent to net borrowings. Adjusted net debt includes net debt and post
Slide 22: F18 Exchange Impact Now Forecast to Be Negative
F18 EXCHANGE IMPACT NOW FORECAST TO BE NEGATIVE FOR BOTH OPERATING PROFIT AND NET SALES Exchange rates Total Exchange Impact Translation rate F18 F17* F18 H1** F18 forecast *** £m F17 F18 H1 forecast $/£ 1.27 1.32 1.36 Net Sales 1,359 (134) (460) €/£ 1.16 1.12 1.13 Operating * Average rate **Average
Slide 23: Basic EPS Increased 36%, EPS Before Exceptional Items Up 9.4%
BASIC EPS INCREASED 36% EPS BEFORE EXCEPTIONAL ITEMS UP 9.4% Pence per share F17 H1 eps before exceptional items 62.0 Exchange (0.6) Organic operating profit growth 5.5 Associates and joint ventures (0.1) Tax (0.3) Finance charges 1.1 Other 0.2 F18 H1 eps before exceptional items 67.8 23
Slide 24: A Strong Set of Results Delivering Efficient Growth and Value Creation
A STRONG SET OF RESULTS DELIVERING EFFICIENT GROWTH AND VALUE CREATION Efficient growth: F18 H1 Organic net sales growth 4.2% Organic operating margin improvement 81bps Free cash flow £1.0bn Pre-exceptional eps up 9.4% to 67.8p Value creation: ROIC up 77 bps to 16.5% Total Shareholder Return up 22%
Slide 25: Consistent Delivery of Strong Results
CONSISTENT DELIVERY OF STRONG RESULTS Reflecting our ambition to be one of the best performing, most trusted and respected consumer products companies in the world Delivering through our six priorities with clear goals defined by our performance ambition Four measures of our progress • efficient gro
Slide 26: Alcohol in Society: Diageo's Ambitious New Targets
ALCOHOL IN SOCIETY: DIAGEO’S AMBITIOUS NEW TARGETS The outcome we seek through our Alcohol in Society work: Our consumers drink better, not more We contribute to the World Health Organization goal of 10% reduction in harmful drinking by 2025 By 2025, we will: Educate 5 million young people, parents
Slide 27: A Clear Strategy Delivered Through Our Six Priorities
A CLEAR STRATEGY DELIVERED THROUGH OUR SIX PRIORITIES 1 Keep premium core vibrant 2 Increase participation in mainstream spirits 3 Continue to win in reserve 4 Drive innovation at scale 5 Build advantaged routes to consumer 6 Embed productivity in our culture to drive out costs to invest in growth 2
Slide 28: Execution of the Six Priorities in Mexico
EXECUTION OF THE SIX PRIORITIES IN MEXICO: DELIVERING CONSISTENT STRONG GROWTH AND SHARE GAINS Organic net sales growth Rolling 12 month spirits industry value share* 29.1 28.6 27.5 19.9% 25.6 25.2 12.7% 11.9% 10.2% F14 F15 F16 F17 November F18 (4.3)% F14 F15 F16 F17 F18 H1 *Source: NISCAM spirits i
Slide 29: Keeping Premium Core Vibrant with Purpose Driven Marketing in Mexico
KEEPING PREMIUM CORE VIBRANT WITH PURPOSE DRIVEN MARKETING IN MEXICO F15-F17 organic net sales CAGR 14% 29
Slide 30: Increasing Participation in Mainstream Spirits: Black & White in Mexico
INCREASING PARTICIPATION IN MAINSTREAM SPIRITS: BLACK & WHITE LEADING PRIMARY SCOTCH GROWTH IN MEXICO REGIONAL + NATIONAL + REGIONAL + NATIONAL ACCELERATE DISTRIBUTION DISTRIBUTION COMMUNICATIONS COMMUNICATIONS 550K cases 391K cases 231K cases 128K cases 65K cases Value F13 F14 F15 F16 F17 Share* 5.
Slide 31: Continue to Win in Reserve in Mexico
CONTINUE TO WIN IN RESERVE WITH THE LEADING LUXURY DRINKS PORTFOLIO IN MEXICO Rolling 12 month value share of reserve category* 49.4 46.8 47.0 47.9 45.2 F14 F15 F16 F17 November F18 31 *Source: NISCAM spirits industry reporting
Slide 32: Driving Innovation at Scale in Mexico
DRIVING INNOVATION AT SCALE IN MEXICO 32
Slide 33: Build Advantaged Routes to Consumer: Expanding Footprint in Mexico
BUILD ADVANTAGED ROUTES TO CONSUMER: EXPANDING OUR FOOTPRINT IN MEXICO On Trade Expanded distribution from 50 to 75 cities More than doubled called on outlets while increasing sales force effectiveness Off Trade Created a team 100% focused on execution Increased distribution by 25% Almost
Slide 34: Embedding Productivity to Drive Out Costs to Invest in Growth
EMBEDDING PRODUCTIVITY TO DRIVE OUT COSTS TO INVEST IN GROWTH Net revenue management enabling top line growth Delivered supply savings through footprint optimisation, operational excellence and procurement savings Marketing efficiencies delivered through rationalising media agencies, reducing cost o
Slide 35: Guinness Is Vibrant and Growing
GUINNESS IS VIBRANT AND GROWING Organic net sales growth 5.6% 3.7% 3.9% 3.6% 2.1% 0.4% 0.0% (1.6)%* Total Beer Total Guinness *Excluding Orijin F15 F16 F17 F18 H1 35
Slide 36: Guinness Is Vibrant and Growing
GUINNESS IS VIBRANT AND GROWING Nigeria/Kenya GB US Ethiopia 36
Slide 37: Continued Solid Growth in the Three Focus Areas
CONTINUED SOLID GROWTH IN THE THREE FOCUS AREAS: ORGANIC NET SALES GROWTH Scotch 2.8% US Spirits 2.9% India 2.3% 37
Slide 38: F18 Focus Areas: Scotch Solid First Half Performance
F18 FOCUS AREAS: SCOTCH SOLID FIRST HALF PERFORMANCE Organic net sales growth 16.2% 9.6% 8.8% 7.5% 6.0% 6.7% 6.5% 4.7% 4.8% 2.5% 2.8% 2.5% 0.4% 0.7% 0.9% (4.5)% (13.5)% (14.0)% F16 F17 F18 H1 Total Scotch Johnnie Walker Buchanan's Scotch Malts Primary Scotch Other % of Scotch 57% 9% 12% 11% 11% net
Slide 39: Scotch: Recruiting with Johnnie Walker
F18 FOCUS AREAS: SCOTCH RECRUITING WITH JOHNNIE WALKER INSPIRING STORIES COMPELLING DRINKS STRATEGY GIFTING BLUE LABEL 39
Slide 40: The Year We Paint the World Johnnie Walker Black
THE YEAR WE PAINT THE WORLD JOHNNIE WALKER BLACK 40
Slide 41: Accelerating the Future of Scotch in China
F18 FOCUS AREAS: SCOTCH ACCELERATING THE FUTURE OF SCOTCH IN CHINA Liquid on Lips- Whisky Academy Love Whisky Prestige Scotch Social Media Platform for Whisky Enthusiasts Whisky Boutiques Johnnie Walker Blue Label and The Singleton 41
Slide 42: F18 Focus Areas: US Spirits Robust First Half Performance
F18 FOCUS AREAS: US SPIRITS ROBUST FIRST HALF PERFORMANCE Organic volume and net sales growth Volume Net sales Netsales Net sales excluding excluding Cîroc Ciroc andand Ketel Ketel One One vodka vodka 6.1% 5.5% 4.2% 3.1% 3.4% 2.9% 1.2% 1.5% 0.9% (1.5)% (2.1)% (3.5)% F15* F16 F17 F18 H1 * Excluding W
Slide 43: US Spirits Category Share Gains Continued for All Key Brands Except Vodka
F18 FOCUS AREAS: US SPIRITS CATEGORY SHARE GAINS CONTINUED FOR ALL KEY BRANDS EXCEPT VODKA Nielsen and NABCA combined value growth 34.2% 27.8% 15.0% 10.6% 11.9% 11.6% 7.3% 5.9% 5.3% 5.7% 4.7% 4.4% 1.5% 1.8% v (1.6)%(2.4)% (2.4)% (8.1)% (3.9)% Core brands (14.4)% Crown Royal Johnnie Captain Baileys S
Slide 44: US Spirits: Strong Plans in the Second Half
US SPIRITS: STRONG PLANS IN THE SECOND HALF Execute proven plans for our brands in the second half supported by marketing up-weight Improve super premium vodka Continue double digit growth on reserve* Robust innovation pipeline for the second half * Excluding super premium vodka 44
Slide 45: India Improved Performance as Top Line Headwinds Subside
F18 FOCUS AREAS: INDIA IMPROVED PERFORMANCE AS TOP LINE HEADWINDS SUBSIDE Prestige and above brands organic net India organic net sales growth sales growth 5.3% 4.0% 11.3% 9.5% 2.3% 5.7% 2.8% 0.5% 45
Slide 46: India: Prestige and Above Plans Are Working
F18 FOCUS AREAS: INDIA PRESTIGE AND ABOVE PLANS ARE WORKING Continuing renovation of Prestige and PAINTING INDIA JOHNNIE WALKER BLACK Above brands Innovation Primary scotch - Black Dog Black & White Captain Morgan Royal Challenge 12 year old Original Rum Xtra Bold 46
Slide 47: India Mitigated GST Impact with Accelerated Productivity
F18 FOCUS AREAS: INDIA MITIGATED GST IMPACT WITH ACCELERATED PRODUCTIVITY AND ADDITIONAL MITIGATION STEPS • Price increases implemented across 13 states Net Revenue • Efficiency in trade spend Management • Positive mix from prestige and above brands growth Gross margin improvement c. 200bps • Inputs
Slide 48: Effective Execution of Our Strategy, Consistent Delivery of Strong Results
EFFECTIVE EXECUTION OF OUR STRATEGY CONSISTENT DELIVERY OF STRONG RESULTS: Delivering our strategy through our six execution priorities Creating a more agile, disciplined and high performing organisation Consistent top line growth and margin expansion enabled by productivity programme and strong cas
Slide 49: Appendix 1: Forward Looking Statements 1/2
APPENDIX 1: 1/2 FORWARD LOOKING STATEMENTS Exchange rate outlook Using exchange rates £1 = $1.39; £1 = €1.13, the exchange rate movement for the year ending 30 June 2018 is estimated to adversely impact net sales by approximately £460 million and operating profit by approximately £60 million. Net sa
Slide 50: Appendix 1: Forward Looking Statements 2/2
APPENDIX 1: 2/2 FORWARD LOOKING STATEMENTS Taxation Our current expectation is that the tax rate before exceptional items for the year ending 30 June 2018 will be approximately 20%, a 1ppt improvement versus our prior guidance. The decrease between our prior expectation and the estimated tax rate fo
Slide 51: Appendix 2: Reconciliation of Cash Flow Statement
APPENDIX 2: RECONCILIATION OF CASH FLOW STATEMENT Reconciliation of free cash flow waterfall on slide 19 Movement on operating profit as shown on Cash slide YoY Statement of cash flows (£m) F17 H1 F18 H1 Movement waterfall (£m) Operating profit after exceptional items 2,065 2,190 125 Operating profi
Slide 52: Cautionary Statement Concerning Forward-Looking Statements
Cautionary statement concerning forward-looking statements This document contains ‘forward-looking’ statements. These statements can be identified by the fact that they do not relate only to historical or current facts. In particular, forward-looking statements include all statements that express fo
Slide 53: Cautionary Statement (continued)
• (continued from previous page) • changes in the cost of production, including as a result of increases in the cost of commodities, labour and/or energy or as a result of inflation; • legal and regulatory developments, including changes in regulations relating to production, distribution, importati
Slide 54: Celebrating Life, Every Day, Everywhere
CELEBRATING LIFE, EVERY DAY, EVERYWHERE 54