Interim 2012/2013 Diageo PLC Earnings Conference Call (Second - Q&A) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Simon Hales - Barclays Capital - Analyst : Just a couple of quick questions if I can, Paul. Firstly, just on Europe, I think back at the Europe dinner you hosted back in October, I think at that stage Andrew was indicating, or hoping, that for the full-year 2013, that you'd be able to deliver probably flat sales and profit in Europe. I just wondered where your thinking is against that now, given it probably was a slightly tougher Q2 performance in Southern Europe for you. And then, just related to that, in terms of the destocking we saw in Spain towards the end of the first half, was that all completed in the first half? Or is that going to be an ongoing drag into H2? And then, just secondly, around Deirdre's comments on the pension, the GBP400 million pension contribution, I wonder if you could just talk in a little bit more detail about the impact that will have. You indicated that will be slightly positive for earnings and I'm just trying to reconcile that in my mind. And, related to that, just remind us how you're planning to account for the IAS 19 pension changes and how and when they're going to come in and hit your numbers. Thank you.

Question: Simon Hales - Barclays Capital - Analyst : Yes, that does it. Thank you.

Question: Ian Shackleton - Nomura - Analyst : A few questions just round the US. You've always had a very good performance, but there have been a few comments from some of your competitors about some weakening over the holiday season. I'd love to have your view on that. Secondly, the 2% to 3% of pricing that you talked about, is that the sort of level of pricing you're aspiring to do every year from here on? And the third question, obviously beer and ready to drink was a drag factor in H1. Do you see that becoming less of a drag as we go into H2 and fiscal 2014?

Question: Trevor Stirling - Sanford - Analyst : Two questions from my side. The first one may be for Deidre. I notice that you took a GBP40 million exception on restructuring the global supply chain. Could you just give us a little bit of color of what the initiatives are that lie behind that restructuring? And the second thing, maybe you'd give us a slight update on USL. And we note that you're in discussions with the Indian regulator. Is there anything there that could slow down, or put at risk, your ability to consolidate USL, fully consolidate it, into your accounts?

Question: Trevor Stirling - Sanford - Analyst : Thank you very much, Deidre.

Question: Philip Morrisey - Berenberg - Analyst : You've highlighted this morning positive operating leverage to overheads, most notably in emerging markets. And I wondered if this is something that we should expect to be sustained going forward, and even after the United Spirits deal starts contributing to the organic growth numbers. And then secondly, in the Unites States obviously you've highlighted the 2% to 3% price increases on strategic brands. And I wondered if competitors were generally following those increases, and whether there was any risk as we go forward of their being pulled back. Thanks very much.

Question: Melissa Earlam - UBS - Analyst : A couple of questions, please. In your prepared presentation you commented that you were looking to address tequila in the US organically. Is that going to be a sizeable launch that could impact marketing spend over the next 12 months? Or is that going to be absorbed in your overall guidance of flat A&P to sales in North America that you've indicated previously? And then secondly you've increased your dividend growth guidance to 9% for the interim dividend. How should we be thinking about use of balance sheet going forward, obviously since the Cuervo discussions have ended? Are you looking to modestly increase your rate of dividend growth going forward, and you would consider a share buyback even resuming? Or are you looking to be on a continued basis opportunistic and, therefore, keeping balance sheet powder dry, so to speak? Thanks.

Question: Melissa Earlam - UBS - Analyst : Great. Thank you very much.

Question: Ann Gurkin - Davenport - Analyst : Two questions, if I might. One is the industry has talked a lot about building out capacity, and if I could just get an update on how you think demand is tracking versus that projected capacity growth. Any changes in expectations there. And then second on Russia, Russia being one of your growth markets -- faster growing markets. If Russia decides to enact a smoking ban in many public places, how do you envision that impacting consumption? And right now what are you incorporating for growth in Russia in the second half of calendar '13?

Question: Ann Gurkin - Davenport - Analyst : Correct.

Question: Ann Gurkin - Davenport - Analyst : That sounds great. Thank you so much.

Question: Andrea Pistacchi - Citigroup - Analyst : I have a couple of questions, please. One is on your cost savings. In this period you delivered benefits from procurement, production efficiencies and overhead savings, and you're flagging that, going forward, the incremental overheads savings, there will be less of that. So I was wondering, the other two drivers of the cost savings, how should we think of the incremental benefits going forward, please? The second question is on Ciroc. We saw a bit of a slowdown in this half period, I think -- in the US; I think 14% sales growth. Is this a reflection of anniversary -- just anniversarying the Peach selling? Or are there any other factors, maybe one-off shipment issues, here? And is this the sort of growth rate we should expect going forward for the brand, given its much larger base now in the US?

Question: Andrea Pistacchi - Citigroup - Analyst : Thanks.

Question: Eddy Hargreaves - Canaccord Genuity - Analyst : Just coming back to the beer performance, I take on board, Paul, your comments about Nigeria probably improving in H2, but looking at the

Question: Eddy Hargreaves - Canaccord Genuity - Analyst : Okay. Thank you. companies.

Question: Chris Wickham - Oriel Securities - Analyst : Just a couple of things. I was wondering perhaps if you could talk a bit more about just the working capital increase and what working capital pressures you come under as you shift the balance of your business more in towards those high-growth markets and whether they're just much more working capital heavy. And then the second one, I was wondering if you could talk a bit more, similar to the Ciroc question, about Captain Morgan. Obviously there are a number of markets, we've just seen Captain Morgan putting in some very good numbers; clearly there's some white space there. But I was wondering perhaps if you could talk a bit more about the sustainability of the growth in Captain Morgan.

Question: Chris Wickham - Oriel Securities - Analyst : Thank you very much. companies.

Question: Chris Pitcher - Redburn Partners - Analyst : Paul, you've referenced Nigeria picking up again, or improving in the second half for beer. Could you give us a bit more clarity on what gives you that confidence? Is it capacity coming on stream? Is it the new management team in place? And on Korea, Deirdre this morning made the comment that you expect some improvement because competitors have taken up price. Is that an improvement in your market share because the Scotch market does seem to have deteriorated into the end of the year? I wonder if you can give us a feel for where you see Scotch declines currently in that market. And then finally, I may have missed it but have you given us a figure for actual Spanish net sales declines? And, if possible, could you just aggregate what was the stocking impact? Thanks.

Question: Chris Pitcher - Redburn Partners - Analyst : If I could just interject there. You've mentioned it's doing well on the sales side, but the world's biggest Scotch market France, I know it's relatively small for you, but is that still holding up despite everything you were saying in the (inaudible) commentary?

Question: Chris Pitcher - Redburn Partners - Analyst : Thanks, very clear.

Question: James Edwardes Jones - RBC Capital Markets - Analyst : A couple of questions, please. Can you explain why your overheads in Western Europe didn't decline, given the cost focus in that market? And secondly, in your free cash flow guidance for a GBP400 million reduction in free cash flow this year over last, does that include the additional pension contribution of GBP400 million? So, in other words, would it be flat if it wasn't for that?

Question: James Edwardes Jones - RBC Capital Markets - Analyst : Flat in absolute terms, rather than percentage terms?

Question: James Edwardes Jones - RBC Capital Markets - Analyst : Thank you very much.

Question: Mitch Collett - Goldman Sachs - Analyst : Just returning to the US, if I can. To some extent this might be caused by the rounding, but looking at the Q1 and Q2 performance it does look like a bit of a slowdown, which, given some of your comments, maybe isn't surprising. But I notice that the spirits performance has remained relatively strong in the half, and is consistent with the performance in F '12. Perhaps if you could give some context as to how spirits performed between the two quarters. I know you said in the statement that the (inaudible) was a bit weak. Have you got some weakness in pre-mixed cocktails and RTDs as well? And then secondly on Korea, perhaps if you could quantify how much of the 19% decline was market, and how much was market share? And, finally, on Spain. You've said there'll probably be a bit less destocking in the second half. Could you maybe quantify how much more destocking there is to do in total? Will the second half be the last time we should expect destocking to affect the performance of that business? Thanks.

Question: Mitch Collett - Goldman Sachs - Analyst : Just to come back to US, I accept the difference in performance is relatively small. And is that -- is the difference more marked in certain (inaudible)? Is it perhaps -- is there more of a change in performance in the on-trade versus the off, or is it pretty much the same for both? companies.

Question: Mitch Collett - Goldman Sachs - Analyst : Yes. I understand. Okay, thank you very much.

Question: Dirk Van Vlaanderen - Jefferies - Analyst : Just some questions on Asia. Firstly, Australia seemed to be quite a good result in the half. I was wondering what your outlook was there? Should we expect similar level of growth in the second half in Australia? And then secondly, just coming back to China, the 16% growth there. I was wondering if you talk maybe about the phasing of that growth. Was that fairly evenly spread through the half? And then also maybe your thoughts on your market share positions within Scotch in China over the half. Thanks.

Question: Dirk Van Vlaanderen - Jefferies - Analyst : Thank you.

Question: Luke Cummings - Campton Capital Management - Analyst : Regarding your growth strategy, is it more focused on geographic expansion or improving your brand/product mix? And what's your strategy regarding your routes to market in new markets?

Question: Luke Cummings - Campton Capital Management - Analyst : Okay, thank you.

Question: Nicolas Ceron - Societe Generale - Analyst : I have two questions. First one, could you confirm that your M&A policy will still be focused on emerging markets going forward? And, secondly, on North America, you seem very confident about the organic growth for H2. Do you think you can achieve the same growth rate in H2 versus H1, despite a much tougher comp? And if yes, why? Thank you.

Question: Nicolas Ceron - Societe Generale - Analyst : Okay, thanks. companies.

Question: Jamie Isenwater - Deutsche Bank Research - Analyst : A couple of questions for Deirdre, actually. I think, Deirdre, you mentioned zero-based budgeting. You didn't use those words exactly, but I wondered if you could talk a little bit about how long that's been in place, what sort of progress you're making on that side of things in terms of costs? And I also think I'm right in saying that the results have been announced about a week earlier than they were last year. So I was just wondering whether there have been any systems changes or whether actually you just accelerated the whole process? Thanks.

Question: Jamie Isenwater - Deutsche Bank Research - Analyst : Great. Thank you very much.