Diageo PLC (DEO) 2005 Q2 法說會逐字稿

Good morning, good afternoon, everyone, and welcome to the Diageo Conference call. I will now hand you over to Mr. Paul Walsh and Mr. Nick Rose. Please go ahead, sir. I’ll be standing by.

Hello, everyone. This is Paul here. Thank you for joining us today. As usual, before we move to questions, I’d like to give you a brief overview of the half-year results that we’ve announced today.

In the six months to December, we have once again delivered a strong performance across all our measures. We have delivered organic net sales growth of 5% and organic operating profit growth of 7%. We’ve continued to improve our organic operating margin up a further 20 basis points in the period.

Free cash flow at ?651 million has again demonstrated the ability of our business to generate significant cash, enabling us to return over ?1 billion to shareholders in the first six months through the interim dividend and the doubling of our share buyback to ?700 million. Our underlying earnings per share are up 11%, reflecting our operating performance improvement and the share buyback.

Let me summarize the highlights in each of our regions. In North America, we have delivered strong top-line growth driven by focus on our premium brands, and a superior route to market for spirits in the US. We continue to outperform this growing market, registering volume share gains of 40 basis points across our spirits portfolio, with our premium brands drawing volume share by 1.2 percentage points. Great brands and great marketing are driving strong growth for our beer brands, whilst in wine we now have a significant and growing presence in the profitable premium wine segment.

In Europe, where the market dynamics are tough, we have created a more cost-efficient organization, and we’ve made choices as to where we invest to generate growth in spirits and wine. Our organization here has been designed to enable us to utilize our scale on a Pan-European basis.

In International, our strategy to invest behind our brands and organization has led to strong top and bottom-line growth that you saw today. Performances of Johnny Walker and Smirnoff, where we have upweighted our marketing investment, have played a major part in delivering this growth. In International, we have also demonstrated how we use innovation to broaden our category reach, contributing to top-line growth.

Our performance in the growing North American market, we focused investment on cost savings, driving operating profit growth in Europe and very attractive top and bottom-line growth in International. Together, these demonstrate that our focused premium drinks strategy is delivering.

I will now open it up to your questions.

Thank you. [OPERATOR INSTRUCTIONS.]

Todd Duvick from Banc of America.

Yes, good morning. I’ve got a question for you from the fixed income side. You’ve got a pretty sizable cash balance of north of ?1 billion, it looks like, and you also have some debt maturities coming due the second half of 2006. I’m wanting to know if -- what your plans are for the cash, and if you plan to refinance the debt maturities.

I’ll ask Nick to take that question.

Thank you for the question. I think in simple terms, there are probably two parts to the answer. One is you will always see a certain level of cash balance at Diageo, and that will sort of go up and down from time to time, but there will be some level of cash balance. You will see, though, that our maturity profile is now sort of stretched out for quite a number of years, and has now reasonably even maturities in any one given year as we go forward in time. And therefore, I think it’s fair to assume that Diageo will be a pretty regular borrower in the market each year. We try to arrange our debt maturity so that we don’t get a big spike in any one given year and, therefore, you’ll see us as a regular issuer in the market. I frankly hope not always in the US debt market but, given the liquidity in pricing there, I think that’s always going to be the majority of our funding. But, I think you can expect to see Diageo in the market at least a couple of times a year refinancing those debt maturities, and we will always have a certain amount of cash on the balance sheet just to make sure that we can match up the timing, et cetera.

OK, and thank you. And then, with respect to the wine business, Foster’s was out with their results just earlier this week, and they mentioned, among other things, that it looks like the grape crop in California is up significantly higher than it had been expected. And I’m wanting to know if you expect that to pressure your wine margins in your US business, or how you see that.

This is Paul here. First of all, bear in mind, wine is 3% of our business. We have been very keen to focus it at the premium end of the price points. I would agree that the crush in California is abundant and, also, you have a lot of vine coming up on-stream in Australia. We do not believe that will have a material impact on our wine offerings, and bear in mind, for our lower price point around such as Blossom Hill, we actually source that juice in the open market, anyway. So, we have some insulation in that regard.

But, in many ways, this is why we have some hesitation with Montana because, whilst we like the Montana brand, that brought with it 75% of the asset was dedicated to lower price point offerings, which were -- is a place we don’t want to play. So, understand the dynamic, do not believe it has a material impact on us and, in any event, wine is only 3% of our total business.

And then I guess just a follow-up with respect to that, in terms of acquisitions, there are probably some categories that it would be very difficult for you to get larger, but wine would be one of them. just to kind of refresh my memory, is this a category that you would be interested in acquisitions, especially on the premium side?

Wine we would be interested if we can make the economics work. We are very disciplined, from a financial point of view. We continue to look for opportunities. We were able to make the stars align with [Shalom] and, therefore, we moved forward on that. Equally, you saw, in the case of Montana, when we could not make the numbers work that we elected to pass. And we will continue to adhere to that discipline.

OK, thank you very much.

Brian Spillane.

Hey, good morning, Paul, Nick. A couple of questions. The first one on, Nick, just a modeling question. The restatement in the first half of -- one half ’05 for IAS21, what kind of adjustment should we make for the full year to our ’05 numbers?

The short answer is we won’t know for sure until we see, ultimately, how exchange rates pan out because, as you know, IAS21 is really [arranged], how things like inter-company funding work and whether you are classifying that, or can classify it, as long-term funding and whether it gets hedge treatment, et cetera. So, the short answer, Brian, I’m afraid is we will not know for sure until we get to the end of the year. However, I think as a modeling assumption, the same kind of magnitude of change is probably what I would put in for the sort of full year EPS restatement, as well.

OK. Oh, so you use the first half run rate as a range for the full year?

Yes, that’s what I do.

OK, OK. And then, more broadly, I guess on International, and you got good delivery of sales and profit growth here, and I guess one of the things that struck me is now you’re being able to see traction from new products. And Paul, I’m kind of curious. You’ve got a more developed footprint in a lot of these markets now, and do you have more confidence in your ability to start flowing additional new products in a lot of these markets, and more interested in expanding just beyond whiskey, potentially?

We do. We do have more confidence. We believe we’ve developed the infrastructure. That said, we still believe there is huge potential for the offerings that we’ve already put into those marketplaces. So, I think it is the best of both worlds.

And with the new products that you’ve introduced so far this year, it looks like it’s more mid-priced product. And is that a potential in some other markets, I guess thinking about places like China and Russia? Is there a potential to introduce more mid-priced offerings in some of those markets?

I think you have to look at it market by market, and you also have to look at the competitive dynamic. If we see a situation of folding whereby lower price point offerings are being used to fund development of higher priced offerings that compete directly with our portfolio, then we will move in to counter that particular market development. If we see opportunity that makes economic sense, then we will obviously pursue that. But, you shouldn’t view this as a broad-based strategy to bring those type of offerings into every market. We’ll look at it based on a consumer and competitive perspective.

And then, for products like [Benmoor] and Golden Knight, are the margins on those products similar to -- how do they rank, I guess relative to the more premium?

They are lower. They are lower margin products, which is why, Brian, I made the point I just made.

OK. and then lastly, just in Europe, I guess it -- beginning to hear at least that there is some slight improvement, more broadly I guess, with the consumer. And we know that the regulatory environment’s been difficult, and the retail environment’s been difficult, and there’s a drag from ready-to-drinks. But, if you get an uptick in -- first of all, are you seeing any improvement in the consumer? And if you do, is there a potential to see some acceleration in volume, or potentially mix, as the economy improves?

I think there are some signs, but I think it’s very early days. Having said that, I’m encouraged by the volume growth that we saw on our core spirits offerings. That said, we have to recognize that one-third of our business in Europe is in ready-to-drink and beer, and we anticipate that remaining quite a tough market to operate in. So, I am encouraged on spirits. It’s early days but, yes, let’s hope that we continue to see the spirits market develop.

OK, great. Thank you, guys.

[Mark Schwartzberg.]

Thanks, and good afternoon, guys. Question on North America and your selling organization. You’ve talked a fair bit in the recent past, Paul, about becoming more of a selling organization, and I think we’re seeing evidence of that in the performance we saw in the latest results here. But, could you give us a little more detail, in your opinion, of what some of the accomplishments you’ve achieved in the latest six months in North America as far as selling are? And what, in your opinion, are some important signposts we should be looking for over the next year or so?

I think, for me, the things that have really come through in the last six months is, one, we have continued to advance our market share. And then, if you look at the market share development, it’s coming from the right brands. Market share in the global priority grounds is stronger, as it should be. I think our ability to execute our price increases was very strong. And thirdly, our ability to bring new products to market faster is also very good. So, those will be three areas that I think we are seeing our sales organization really step up their performance in, and that, of course, was the goal. As I’ve said also, this is a journey. We will continue to get better at that. So, I’m encouraged by our share. I’m encouraged by our pricing execution, and that will continue.

And what is your thinking about price increases going forward in North America?

Well, bear in mind we always put these in in October. I would not anticipate going with another major increase probably in the current fiscal year. But certainly, if input costs continue to move as we are seeing them move, I think that will create the right environment for our brands to take further price increases, maybe as we did in October last year, in October this year.

OK. And if you look at your portfolio of brands here in North America, there’s obviously a handful that are particularly important. If I ask you, Smirnoff, Crown Royal, Tanqueray, Captain Morgan, is there a brand you think is particularly poised for an acceleration -- it’s notable how Tanqueray picked up here -- and I mean sustained acceleration? And on the flip side, [inaudible] about in terms of those key brands that are doing well that might slow down?

Our goal is to continue to see the momentum sustained behind Smirnoff and Captain Morgan. We’re seeing very, very good momentum behind those brands. Certainly, I would like to see some reversal of fortunate in the US on Johnny Walker Red. We are seeing good performance on Black and above, and we have to maintain the improvement we’ve seen in Tanqueray. Whilst I am pleased with the performance in the first half, it is a first half, and we have to see that continue to come through. I think the brand that I want to see pick up more than any is Bailey’s, and we’ve got a lot of thinking and work being done behind that. I am very pleased with how our beer business is performing, and I am hopeful that some innovation around ready-to-drink in the US can inject some more vibrancy to that category.

Great. Thanks, Paul.

[OPERATOR INSTRUCTIONS.]

[Richard Shipley.]

Yes, hi, Paul, a couple of questions. Firstly, in the US, can you just comment on whether you’re seeing greater pricing discipline in the market in the New Year? I guess there were some comments the end of last year on some discounting on the Allied brands. Then secondly, in Europe, taking on board the greater efficiency on marketing spend, what confidence can you give us that the higher prices and the lower marketing spend won’t lead to an acceleration in the volume declines going forward? Then, I’ve just got a last question on international, whether you could just talk to how you’re focusing the increased marketing and setting resources, and which countries are getting a disproportionate amount of those resources. Thanks.

OK. First of all, Europe marketing. The only thing we can point to is growth in spirits. We don’t think it is wise to continue to invest in marketing funds behind categories like RTD when we are seeing the level of declines that we’re seeing. And this is a situation that we will ourselves have to monitor very carefully, let alone you watching it for us. So, if we believe that we are pulling that throttle back too sharply, we will correct the situation. But, the evidence to date is that that is not the case. And as I said several times today, I’m encouraged by the fact that the core spirits have grown by 2%.

Going to your US question, it was clear that the Allied organization remained in place until the end of December, and we had not seen any material price moves from them during that period. That isn’t surprising because our intelligence suggested they were heavily incentivized on volume. In the New Year, we have not seen any material changes, but we’ll continue to monitor the situation.

And your third question I forgot.

International.

In International, I mean, a lot of it has gone behind Latin America and also in China, where we have doubled our spend, and also in some of the other Asian countries. But, that, as you saw today, seems to be paying off nicely.

[OPERATOR INSTRUCTIONS.]

Todd Duvick.

Thank you. Just a follow-up question, and I had to hop off for a minute. I’m not sure if this type of question was asked. But, in terms of your overall portfolio, certainly some of the pieces are performing very well, and others a little more challenging. Would it be unreasonable to expect some potential divestitures throughout the next year, or are you pretty well set with the portfolio that you have, and just primarily looking to add to it?

I would not anticipate divestitures, and we’ll continue to be alert for acquisition opportunities. That said, we don’t feel compelled to pursue acquisition opportunities for the sake of it, as I mentioned earlier, as they pertain to wine. We will continue to be disciplined. But, what I would also say is that, as we look at acquisition opportunities, there is not one that we have missed that we wanted because of what some people view as a very high hurdle rate that we apply. I would have no compunction in coming back and explaining why we felt this particular acquisition made sense. So, we are disciplined. We will remain very financial disciplined, but equally, if we see strategic opportunity, we will seize it.

OK, thank you.

[Flement Richardson.]

Good afternoon, gentlemen. I come from Wisconsin, where I was brought up. I now have a business in New Hampshire, USA. Could you comment on bourbon? And is it your financial discipline that prevents you from getting big into bourbon?

Well, we do have certain offerings in bourbon, and there are a couple of brands out there that, if they became available, we would quite like. I don’t think the issue is one of financial discipline. I think it’s a matter that those brands are simply not available. If ever they were to become available, we would look at them with great interest, but that does not mean that we would forego our financial disciplines.

Thank you.

As there are no more questions, I will pass you back to Mr. Paul Walsh, who will conclude the conference. Please go ahead, sir.

Well, again, thank you for joining us today. I’d just like to say a few things before we close the session. We’ve stated previously our intention to be recognized as a company which delivers consistent top and bottom-line growth, and our results today represent the 13th consecutive reporting period that we have delivered improvements across all key measures. We’ve also demonstrated today how the strategies that we put in place in each of our regions are delivering improved returns. These strong first half results underpin our confidence in reiterating our overall guidance of 7% organic operating profit growth in the full year.

Thank you for your interest in Diageo.