Diageo plc Q4 FY2020 earnings call

• Fiscal '20 had two distinct halves: first half with broad-based organic growth and margin expansion, second half severely impacted by COVID-19. - Adapted quickly to protect people and business, reduced expenditure, conserved cash, and raised liquidity. - U.S. was most resilient with strong off-trade demand, while regions with higher on-trade exposure (Europe, Africa) were more severely affected. - Disciplined in working capital management. - Recommended a final dividend in line with fiscal '19, bringing full year dividend growth to 2%. - Refocused marketing investments to capture opportunities and strengthen brand equity.

The U.S. is Diageo's largest and most profitable market, with strong off-trade demand during lockdown, especially tequila and Canadian whiskey brands. Europe and Africa have higher on-trade exposure, leading to more severe impacts. For example, Europe has around 50% of sales in on-trade, and Africa is on-trade-oriented, making the beer business decline significant during COVID-19. Scotch category is disproportionately affected due to exposure to emerging markets and travel retail, which account for over 2/3 of scotch net sales prior to COVID-19.

• No specific revenue and profit guidance for fiscal '21 due to significant uncertainty around recovery pace. - Expect organic net revenue in the first half of fiscal '21 to be significantly impacted, but sequential improvement expected from Q4 fiscal '20 into fiscal '21 as on-trade reopens and consumer demand recovers.

• Impact of COVID-19 was severe on regions with high on-trade exposure (Europe, Africa) due to their large beer business and scotch category's exposure to emerging markets and travel retail. - Beer business in regions with high on-trade exposure saw significant decline during COVID-19. - Scotch category's greater exposure to emerging markets and travel retail led to disproportionately high impact from COVID-19.

Q: Regarding U.S. share performance in off-trade and emerging markets down-trading from spirits to other categories A: In U.S. off-trade, some brands are share-gaining (tequila, North American whiskey) while others are tougher (vodka, rum). Price/mix is higher than industry. In emerging markets, scotch imports face down-trading due to currency devaluations and economic slowdown, but spirits overall remain healthy Q: Outlook on margin development in first half of next year and stock levels A: Expect absolute margin in first half to be better than second half of fiscal '20. Stock levels are tracked closely, with global travel retail recovery uncertain. No big destocking expected in other emerging markets unless end consumer demand drops off Q: E-commerce in U.S. and group strength A: E-commerce sales in Q4 doubled from Q3, but still low single-digit. U.S. e-commerce runs 4x expected, with business from liquor stores delivering to homes. Group e-commerce has small percentage but accelerated growth in some markets Q: U.S. shipments vs depletions and India run rate performance A: Shipments are slightly behind depletions, but not a big deal. Focus on consumer offtake in second half. India saw sequential improvement from May to July post-lockdown Q: Capital return, innovation, and sustainability A: Leverage ratio increased to 3.3x, targeting 2.5-3x. Paused share repurchase, final dividend maintained. Innovation is being reassessed, focusing on big brands with innovation. Sustainability goals for 2030 are ambitious, including carbon, inclusion, and positive drinking Q: U.S. depletions ahead of shipments, demand from stimulus, and India long-term view A: Depletions ahead of shipments is on margin, not a big deal. Demand benefited from stimulus, but short-term down-trading possible. Long-term view on India remains positive with confidence in growth potential Q: China stock reduction, U.S. price/mix/share balance, and scotch market share in U.S.

A: China's Shui Jing Fang reduced stock and trade, ending with levels closer to 2018-2019. Focus on right balance of price, mix, and share in U.S. Scotch in U.S. has potential for share improvement with big plans for brands Q: U.S. market landscape, beer trends, and excise risks A: U.S. distributor and retailer stock levels normal. Beer business improving as on-trade opens, market-specific. Excise in India had some states reverse increases, generally no significant unfavorable developments Q: Expectations on recession, Q4 and Q1 growth, and consensus for FY '21 A: Expect modest recessionary environment with temporary down-trading, but on-trade recovery should overcome impacts. Sequential improvement in top line from Q4 fiscal '20 into first quarter of fiscal '21. No specific comment on consensus, but expect sequential improvement Q: U.S. hard seltzers and China growth potential A: Diageo participates in seltzers but not a big strategic priority. China is expected to become a bigger part of Diageo, with Baiju and scotch whiskey having growth potential Q: Initiatives on malts.com, bar.com, and Radar tool A: Diageo is experimenting with digital commerce platforms like malts.com and bar.com for learning and scaling. Radar tool uses external information to understand local economic situations for better marketing program decisions