Diageo plc Q2 FY2022 earnings call

• Organic net sales growth of 20% with all regions seeing double-digit growth and exceeding pre-COVID net sales levels.
• Operating margin improved by 131 basis points despite higher cost inflation and supply chain constraints.
• Investing in long-term growth including production capacity, digital capabilities, and Society 2030 goals.
• Increased interim dividend by 5% and accelerated return of capital program to 2023.
• Advantage portfolio, effective marketing, excellent commercial execution, and successful innovation helped gain or hold off-trade share and gain on-trade share as it recovered.
• Positive outlook on industry growth, premiumization trends, and resilience in off-trade with further recovery in on-trade.

Organic net sales were up 20%. All five regions delivered double-digit growth and exceeded net sales in the first half of fiscal '19. Growth was broad-based across categories: scotch up 27%, tequila up 56%, and beer up 22%. Operating margin improved by 131 basis points while increasing marketing spend ahead of net sales growth. Revenue contribution percentages aren't explicitly stated for each segment, but key categories like scotch, tequila, and beer showed significant growth.

• Expect continued volatility in the near term but optimistic about industry and Diageo's growth prospects.
• Anticipate benefiting from premiumization of spirits category and share gains within total beverage alcohol.
• Return of capital program accelerated to be completed by 2023.
• Confident in strategy and ability to execute strongly through the remainder of fiscal '22 and beyond.

• Supply chain constraints impacting volumes in certain regions and products (e.g., aged liquid constraints on Crown Royal and tequila, glass issues on Bulleit).
• Cost inflation affecting operations.
• Potential impact of consumer spending on premium spirits due to cost of living concerns.
• Volatility in the near term affecting business performance.

Q: To what extent have supply constraints impacted volumes, especially in North America? And do you see any signs of improvement in the supply chain situation?

A: Lavanya mentioned North America volume growth was 3% in H1, with spotty supply constraints in aged liquid (Crown Royal, tequila) and glass issues on Bulleit; the organization is navigating these and working to resolve them.

Q: Do you see any possibility that consumers might spend less on premium spirits as the cost of living goes up? And can Diageo continue to raise prices with a limited impact on volumes?

A: Ivan stated premiumization trends are long-dated and steady, demographics (young adults, multicultural) support premium spirits, and within shifts, higher price brands grow faster.

Q: Can you give us a bit of a timeframe as to when you expect supply chain constraints in North America to be resolved?

A: Lavanya said constraints like aged liquid and glass issues are being worked on, with Bulleit glass issues expected to be resolved in months, and other constraints managed through demand shipping and revenue growth management.

Q: As you think about the pricing outlook, particularly in Europe, can you give us a sense of what sort of magnitude of pricing you feel you're in a position to take in the region?

A: Ivan said they've been investing behind brands in Europe, gaining market share, and will take some price increases due to inflationary pressures, applied surgically.

Q: Any color on current sellout trends through Chinese New Year or into Chinese New Year against heightened lockdowns in recent weeks?

A: Ivan said China environment is solid, Baidu and Scotch whisky have good momentum, but COVID lockdowns impact business, with Chinese New Year being solid but not exuberant.

Q: Are you seeing competitors really following or matching the price move that you've been making in the U.S. and Europe?

A: Ivan said they have good revenue growth management capabilities, feel confident in taking measured price increases as customers understand inflationary pressures.

Q: Can you give more color on drivers of mixed brand performances in the U.S. and how trends will evolve in the second half?

A: Ivan said Captain Morgan depletion momentum is positive, Smirnoff depletion is flat with marketing and innovation, Baileys is positive with lapping effects resolved.

Q: Comment on inventory levels at the end of the half, ideally by region, and COGS per liter?

A: Lavanya said stock in-trade is relatively flat at group and North America levels, COGS managed through volume growth, premiumization, productivity, and revenue growth management.

Q: What is your best guess of what the market growth is in the U.S.? And comment on marketing investment in the U.S.?

A: Ivan estimated U.S. market value growth at 9-10% in H1, long-term growth expected at 4-5%, marketing investment is targeted with good returns, and U.S. is a top priority for sustainable growth.

Q: What is the magnitude of price increase you've been taking so far in your U.S. portfolio?

A: Lavanya said they've taken pricing on tequila (4.5%), Crown, and Guinness, evaluating pricing opportunities case-by-case.

Q: Is it possible to start thinking about taking pricing on some of the brands where there hasn't been pricing in years like the vodka portfolio or brands like Captain Morgan? And about emerging markets and SG&A?

A: Ivan said they intend to take more pricing, emerging markets have strong momentum with good fundamentals, and SG&A increase due to reverting to normal after COVID-related pullback.

Q: Any early evidence that consumers are drinking more spirits and cocktails than in the on-trade as the recovery comes through? And confidence in tequila growth runway and keeping brands relevant?

A: Ivan said spirits momentum in on-trade is stronger, tequila has runway due to broad appeal across demographics and international growth, and brands like Don Julio and Casamigos are kept relevant through brand equity and momentum.

Q: Reasons for accelerating the share buyback program and bringing it forward by year?

A: Lavanya said leverage ratio is back to target range, so they accelerated the program to fiscal '23 to return money to shareholders.

Q: On Travel Retail recovery and Guinness outlets, and CapEx?

A: Ivan said Travel Retail has a long way to recover, Guinness has some outlet shakeout but expects consumer dollars to return, and CapEx guided between GBP 950 million and GBP 1 billion in fiscal '22 for catch-up and growth investment.