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Original Source: FD (FAIR DISCLOSURE) WIRE
. Paul Walsh, Diageo plc, CEO . Nick Rose, Diageo plc, CFO . Andrew Morgan, Diageo Europe, President . John Pollaers, Diageo Asia Pacific, President . Ivan Menezes, Diageo North America, President . Stuart Fletcher, Diageo International, President . Trevor Stirling, Sanford Bernstein, Analyst . Ian Shackleton, Lehman Brothers, Analyst . Michael Bleakley, Credit Suisse, Analyst . Graeme Eadie, Deutsche Bank, Analyst . Ann Gurkin, Davenport & Company, Analyst . Bryan Spillane, BOA, Analyst . Antoine Belge, HSBC, Analyst
Co. reported that for 1H08, topline growth was 7% and EPS excluding exceptional items was 37.5p.
A. Key Data From Call 1. 1H08 topline growth = 7% 2. 1H08 EPS (excluding exceptional items) = 37.5p.
S1. Opening Remarks (P.W.) 1. Highlights: 1. Against same period last year, saw an acceleration in topline growth from 6% to 7%, driven by robust pricing strategies across many markets.
2. Growth in marketing spend was impacted by the reduction in
spend in Korea. 1. Outside of Korea, spend on non-ready to drink brands increased ahead of sales, up 8% in 1H08. 3. Operating margin increased this year, up 80 BP on an organic basis to 25%, despite increases in commodity costs. 4. Operating profit growth is in line with previous guidance. 1. Reiterated full-year guidance for 9% organic operating profit growth. 5. This time last year, reported investment in the future growth of scotch would impact free cash flow. 1. This, together with some factors, specific to the half means Co.'s free cash flow is lower than in prior period. 2. Given the overall strong cash flow characteristics of the business, returned over GBP1b to shareholders. 3. Increased dividend by a further 5%. 6. Investing behind brands and routes to market and delivering consistent growth.
S2. Financial Review (N.R.) 1. Net Sales: 1. Growth by Region:
1. North America and International made the biggest contribution to growth. 1. In North America, well-marketed, strong brands continued
to drive growth. 2. In International, consumer demand continued for scotch across the region and for Co.'s beer brands in Africa,
including local brands and iconic Guinness brand. 2. Changes Co. had to make to its route to market in Korea, this half, have constrained the growth rate of the Asia Pacific business. 2. Growth by Category: 1. Excluding RTD, spirits net sales grew 7% with growth across all the major spirits categories led by strong individual brand performances from Smirnoff, Crown Royal, Captain
Morgan and Bush mills. 2. Scotch is Co.'s biggest category. 1. Overall growth is being driven by emerging markets. 2. Saw strong performances across core brands, Johnnie Walker, JeB and Buchanan's.
3. In beer, net sales were up 8%. 4. Wine brands grew net sales by 11%. 3. Believes that Co.'s broad geographic and category reach, together with its focus on brands with price points above the value segment is key to consistent performance. 2. North America Performance: 1. Delivered good net sales growth. 2. Spirits, excluding RTD, up 8%. 3. Beer, up 6%. 4. Wine, up 12%. 5. Price increases and innovation were the main drivers.
6. Even in RTD where net sales were down 9%, saw mix improvement
from new Smirnoff Cocktails introduction. 7. US: 1. Performance in spirits industry continues to be polarized with weakness in the value segment, brands retailing below $10. 1. This segment is not a priority for Co. and it represents less than 10% of its US spirits business. 2. Lost share in this segment and in total, share of US spirits was down 10 BP in 1H08. 2. In contrast, priority spirits brands continue to grow with strong performances and share gains by Crown Royal, Smirnoff, Johnnie Walker and Captain Morgan Original Spiced Rum. 3. Dedicated focus within Reserve Brand Group is now driving stronger growth of super-premium brands such as Don Julio. 1. This out performance meant that Co.'s priority brands grew share by 40 BP. 8. Marketing increased 4%. 9. Spend on Parrot Bay RTD reduced following its launch last year.
1. Excluding this, marketing increased 6% with focus on proven
growth drivers. 10. Innovation drove about a third of net sales growth, primarily Crown Royal Cask No.16, Tanqueray Rangpur and addition of a new range of ready made cocktails, Smirnoff Grand Cosmopolitan and Smirnoff Mojito. 11. In wine, premium brands outpaced the market as Co. gained 70 BP a share, driven principally by the performance of Sterling and Chalone.
1. New releases, supported by sampling, gift packs and great coverage in wine magazines drove strong mix improvement. 3. Europe Performance:
1. Volume, up 3% continuing the growth trend of 2H07. 2. Saw further improvement in GB business with net sales up 4%. 3. Priority brands returned to growth following continued focus on marketing spend and simplified pricing strategy at Christmas. 4. Saw a recovery of Guinness in the period with net sales up 4%. 1. In GB, this success was attributable to a new advertising campaign and the benefit of the brand's association with international rugby during the world cup. 5. In a declining UK beer market, Guinness continued to gain on-trade share, up 50 BP, consolidating its position as Number 3 on-trade beer brand. 6. In Ireland, new advertising was key to the improved performance of Guinness and Co. gained 1.3 percentage points of share in the on-trade.
7. Strong growth of scotch business across Europe was driven by:
1. Johnnie Walker in Spain, Russia and Eastern Europe. 2. JeB in Spain, Eastern Europe and France. 3. Bell's in GB, following a good Christmas selling period. 8. Price increases across scotch brands and the growth of Johnnie Walker Black Label and Johnnie Walker super deluxe delivered overall mix improvement of 4 percentage points. 9. As in US, wine performed well with net sales up 11% vs. last year with strong growth in GB and Ireland.
10. Marketing spend increased 7% in total and 8% across the
priority brands, well ahead of net sales growth, with particular focus on Guinness, Smirnoff and Baileys. 1. Expects this trend to continue for the full year. 11. Increased marketing spend held back operating profit growth to 2%. 4. International Performance:
1. Growth was widely spread across a number of brands and in all
three hubs, which each delivered double digit net sales
growth. 2. Scotch: 1. In Latin America, premium scotch brands continued to deliver strong growth. 1. Price increases were put through on secondary scotch brands to support Co.'s focus on leading brands and this led to a decline in volume in the secondary segment and therefore total scotch volume was down 2%. 2. A combination of mix improvement and price increases drove net sales growth of 10%. 3. Buchanan's, up 15%. 4. Johnnie Walker, up 10%. 5. Old Parr, up 17%. 2. Africa delivered strong growth in scotch led by Bell's in South Africa and Johnnie Walker across the continent. 3. Global Travel and Middle East business delivered 14% net sales growth, with strong growth of Johnnie Walker Black and super deluxe and with price increases across Johnnie Walker range. 3. Beer: 1. In Africa, delivered strong growth with net sales up 19% due to price increases and 10% volume growth. 1. Increased marketing spend significantly with the launch of two campaigns, Guinness Greatness and sponsorship of the Africa Cup of Nations football tournament. 2. Guinness grew 13%. 3. Malta, Pilsner and Tusker performed well in 1H08 with
strong net sales growth driven by trade and consumer activity.
4. Smirnoff: 1. Principal drivers were Smirnoff Red and RTD in Brazil and Venezuela followed by RTD in Nigeria and Red in South
Africa. 2. In Brazil, Smirnoff Red, Caipiroska and Ice all delivered double-digit growth, even with significant price increase.
3. In South Africa, continued strong performance saw Smirnoff
core spirit gain 4.7 percentage points of share. 5. Asia Pacific Performance: 1. Continued to see strong performance by brands due to good consumer demand in these markets. 2. In India, volume increased 28% driven by Bottled-in-India brands as Co. achieved greater critical mass. 1. This was partially offset by disruption of the duty free channel caused by closure and delayed reopening of travel retail shops across the country. 2. This halved volume of Johnnie Walker sold in duty free, currently the main channel for scotch whisky in India. 3. In Korea, due to the loss of import license in July 2007, had to operate through a third-party distributor in 1H08. 1. In spite of this, Windsor remains the market leader in scotch. 2. Sales to the distributor were at a lower net sales value reducing total net sales growth of Asia Pacific by 5
percentage points. 4. In China, deluxe scotch brands, mainly Johnnie Walker, made further share gains in a growing scotch category. 1. Strength of renminbi has meant that Co.'s local price to wholesalers has been significantly higher than dollar-based
price of Johnnie Walker globally. 2. …