Diageo PLC (DEO) 2009 Q2 法說會逐字稿

Good day and welcome to the US analysts and investors conference call for Diageo. This conference is being recorded.

At this time, I would like to turn the conference over to today's host, Mr. Paul Walsh. Please go ahead.

Well, good afternoon, good morning, everyone, and thanks for joining us. What I'd like to do is give a very brief overview of our results, as many of you will have participated in the webcast this morning, and then Nick and I will take your questions.

It has been a challenging six months with economic trends little improved over the second half of fiscal '09. And, as we've communicated before, we did have a tough comparable topline growth in Q1 last year of 6%. We finished the half slightly stronger than anticipated with organic net sales up 2% in quarter two, despite being down 6% in Q1. Therefore, organic net sales were down 2% in the half and organic operating profit was down 3% in the half. However, EPS pre-exceptionals was up 5% due to favorable currency movements.

We're particularly pleased with the free cash flow performance. This has been strong, driven by a number of changes to our working capital management, and we generated an increase of GBP517 million to almost GBP1 billion pre-restructuring charges. We have confidence in the business and we are, again, increasing the interim dividend by 5%.

I will stop there and open it up for questions.

(Operator Instructions). John McMillin, Lord Abbett.

Paul, there's a lot of skepticism in terms of you doing your full-year numbers. I just saw you on TV, and certainly, they were skeptical; the market seemed skeptical. Can you just kind of go into what type of topline trend you need to achieve this improved second half EBIT?

Sure. I think (multiple speakers) -- go ahead.

And also some -- what -- when you say one-offs last year, what specifically are you relating to?

Well, let me ask Nick to cover the one-off costs. But basically, we are seeking a continuation of the topline trend we saw in the first quarter. That trend line, coupled with the fact that we will not have the same level of one-off costs in the second half, will allow us to deliver on the guidance that we've offered. It's really as straightforward as that.

So it's basically (multiple speakers) the organic sales?

Sorry -- (multiple speakers) In the second quarter we were up 2%. That is the trend line we are expecting in Q3 and Q4.

Okay.

Yes, let me answer that. A couple of things -- that is the fundamental piece of this. We will need some topline growth, as Paul has described. We will also, and we believe we can achieve, some modest expansion of our gross margin from where we are.

Our gross margin in the first half, as you'll have seen from the release, did actually deteriorate. A number of factors in that, including some market mix as well as some down-trading within the business. And we are believing and seeing that we will get some of that gross margin back -- maybe not all of it, but we will get some of that back.

And of course, any movement in gross margin is very powerful as it drops down through the P&L to the bottom line. And then on top of that, as Paul has said, there are some what we've called nonrecurring costs in the first half that we will not be facing in the second half.

So, for instance, you know, because we've disclosed it, I think, that we have a number of investigations going on right now in places like Korea, and the sheer amount of effort required to delve into those and to answer some questions that the SEC is asking of us right now, is actually adding cost in terms of accounting and legal fees in our first half. They will not appear as incremental costs, if you like, in our second half.

And then the -- I think the third factor that should give you some comfort is, if you think about what we have to achieve in the second half compared to the second half of last year, the bulk of our cost savings, which Paul talked about this morning, which will be about GBP120 million by the time we get to the end of this fiscal year, didn't stop until this year. So, comparing second half of last year, we weren't really getting much in terms of overhead savings. And by the end of this year, we'll be getting the full GBP120 million.

So the second half performance is going to look very strong profit-wise, partly because of what we are lapping in the previous year. So it's a combination of the topline growth Paul talked about; the fact that some of these nonrecurring one-off costs that we saw in the first half aren't going to appear; and thirdly, what we're lapping from the prior year in many ways is just a lot easier, not least of all the GBP120 million of cost savings that we're going to be getting running rate by the end of this year.

Thank you.

Thomas Russo, Gardner, Russo & Co.

A couple of quick questions. The first on the working capital relief. To what extent do you find that the trade still needs to have vendor financing as they continue to suffer with their own credit lines? Are you too tight on the trade with your working capital demand?

First of all, we have not offered any vendor financing. In fact, if you look at the cash flow both last year and this year, our receivables showed a marked improvement. And we think it is just judicious to operate on very keen terms. We haven't tightened our terms, but we are certainly driving our customers to pay on terms.

So I'm feeling very good that we have managed our cash in this manner. We have not extended our receivables. And in the face of some companies going into some bankruptcies or whatever, we've managed our way through it pretty well. I intend that that will remain the case.

Thank you. Anecdotes from either the India or Chinese market, if you could, strength of your brand and anything in particular with your local relationships in each markets that we should note?

Well, let me talk about Asia generally. Asia, sort of the brakes went on there pretty fast but equally with the fiscal stimulus package going in, particularly in China, the brakes have come off and we are definitely seeing growth in that market.

India, we did have some overshipments in the first half of the previous fiscal year. We're lapping those in these numbers. They were unwound in the second half of last fiscal year, so to the earlier question and Nick's point, it means in India, we are lapping a lot easier numbers in the next six months.

That aside, highlights for me is the general economic improvement in Asia; the fact that in Indonesia and Malaysia, we've seen 21% growth on the Guinness brand -- stunning performance. In fact, our beer performance overall is up 5%, which I think stacks up pretty well; in fact, very well on a global basis.

We've seen a return to growth in Australia and we now have our own operations on the ground in Vietnam. So, I'm encouraged by our performance in Asia. As I said, we did have some issues where we overstocked in the first half of the previous fiscal. We've now got beyond those numbers for the second half.

Thank you. Then lastly, the strength that you've got in your position in sub-Saharan Africa is remarkable. I'm wondering what kind of weight you're putting into that market, either through investment and distribution, marketing or manufacturing -- your plan broadly across Africa.

I'm down in South Africa in a couple of weeks opening a new brewery in Johannesburg. We've already signed an agreement to move into Angola. We have upweighted our spend selectively in certain African markets. We are very committed to that country. We see very good returns going forward and we have very, very strong marketing positions. And by the very nature, the M&A opportunities in that region will be limited, but you should expect us to move with prudence but with alacrity, when we see such opportunities.

Thank you.

(Operator Instructions). We will now take a follow-up question from Thomas Russo of Gardner, Russo & Gardner.

I am sorry, Paul, but if no one else is going to ask, I've got your time. Thank you. Paul, talk a brief moment about Black Label and the announced launch of an extra distilled or special distilled Black Label. I'm just curious what you think about the health of the brand and how expandable the Black Label is, up and down need-states versus using other Johnny Walker Brands to meet those need-states. It seems like Black Label may be expanding into territories once owned by other Johnny Walker colors.

The Double Black is --

That's it.

-- (multiple speakers) bottle. It is unaged. It is priced at a premium. It is a very special blend and we think it will have a role. But we reckon it will be quite small versus the parent, which is Johnny Walker Black Label.

The other variant that has been introduced in Asia, particularly in global travel, is the John Walker, which is a blend of very rare whiskeys. This sells at $3,000 a bottle. And I heard the other day that we've had to start air freighting some more product into that market, because it's already sold through -- which just shows that for these markets, we're seeing confidence return. There is still a very strong role for ultra-premium products.

Thank you.

Jonathan White, Evergreen.

I just have a question about price mix. I noticed this first half -- and I apologize, I haven't fully gone through the transcript from the earlier call from the UK -- but there wasn't any price mix on an organic basis this half. And I was just wondering if you could talk about what the drivers were there? And then over the long-term, how do you see that moving forward?

Yes, there are two dynamics at play. The first dynamic, particularly in developed markets, is a shift from the on-premise to the off-premise. When people don't have the -- even if they have the money in their pocket, if they don't have the confidence, they tend to conserve that money and stay in. That means we lose out on the opportunity to up-trade consumers in the on-premise occasion.

It's hard to replace that consumption occasion through the off-trade channel. Mainly, because if you go out in London and you want a Johnny Walker Blue Label, it's, say, GBP15. If you want to enjoy that in your home, even if you buy a half-bottle, it's probably GBP80. So there's a sticker shock element there.

That means that our Ultra Premium and Super Premium brands have performed less well. The brands that have performed very well are our Premium Spirits brands that are in the sweet spot -- brands like Smirnoff, Captain Morgan, and so on. But because we've lost that top spin, that is why you are not seeing the mix improvement coming through as you have seen in the past.

Also, you've had a situation whereby, as I said earlier, our beer business has done very, very well. And clearly, there is some mix dilution as a consequence of overperformance from beer.

That's very helpful. And just also, just longer-term, I don't know in your own model how you see mix as well as price having an impact on the top line, but that would be helpful as well.

It's particularly interesting in the US market. When we were faced with some of these economic conditions, many people said that beer would win out over spirits. What's very interesting and very encouraging is that spirits are now getting taken into the home occasion more, and in fact, spirits performance through the up-trade channel is actually outperforming beer.

We are very gratified by that. And it shows you that we have actually earned these consumers' respect and they stay with the brand. Maybe they don't purchase the higher-end mark; maybe they don't purchase with the same frequency; but they remain very loyal to these brands. Therefore, our expectation is that when you get consumer confidence back, you will see more buoyancy in the higher-end offerings.

Now we've started to see some improvement in GDP numbers but understandably, there is a lag between GDP growth and raw consumer confidence. We've yet to see real improvement on the confidence [stakes]. Until we see that, I don't think we will get a kind of return to the previous trends that we enjoyed.

And did you guys -- just lastly, did you guys take any pricing across the portfolio in the first half?

No -- minimal. In certain markets that were either high inflation or where we saw devaluation, we would have done; but other than that, no, and I don't anticipate any kind of raw pricing in the balance of this fiscal year.

Great. Thanks very much, guys.

(Operator Instructions). We will now take a follow-up question from Thomas Russo of Gardner, Russo & Gardner.

Yes, hi, Paul. Any particularly troubling spots in terms of excise tax developments for spirits or beer?

Actually, there are some encouraging news. If you look in the US, we did not get a federal excise tax as part of the recent budget. In Ireland, you have seen a 20% reduction in excise taxes. Unfortunately, in the UK, they have come out and said that they will increase excise tax by RPI plus 2%, which given RPI is pretty low, basically means by 2% -- not ideal, but very manageable.

So I'm not seeing any huge threats. And I think the reason for this is that, one, it's very unpopular at a time when politicians need some popularity; secondly, I think there's concern that it may not yield the revenue generation that they would like; and thirdly, if it had negative consequences on the whole hospitality industry, those are low-value jobs, but they would do nothing for the unemployment statistics.

So I'm not taking anything for granted. We've got to be on our game in this area. But I'm not seeing a huge threat in this regard.

Thank you.

Kevin Dreyer, Gabelli & Company.

I just had two questions. First, in the US, could you talk a little bit about the competitive environment? How promotional your competitors are being versus how you're being?

And also, if you could talk a little bit about potential acquisitions? Obviously, Moet Hennessy is one that's bandied about a bit. Maybe you could relay your current thoughts on that.

Okay. In the US, there is no question that the level of competitive intensity has stepped up. But as best we can determine, it's probably notched up around the promotional spend level by between 1 and 2 points of sale -- 1% to 2%. And we actually believe that we're probably at the bottom of that cycle.

We have leading brands, and therefore, you have customers, liquor store owners whatever; it's usually the leading brands they want to promote. And our view is that we want to continue to convey excitement around such brands. And therefore, the promotional intensity has increased.

I think it's very manageable. Our philosophy is that we want to maintain kind of bottle sale momentum. We need to remain vibrant with our consumers and our customers. And, as I said earlier, when confidence starts to return, we will go back to the trading-up activities that you saw in the -- in previous periods. So, I think we've demonstrated great agility and I would do it all over again. It's the function of the environment that we're in.

Regarding M&A activity, we have said that if ever the 66% of Moet Hennessy is available, we would be interested. It would have to be at the right price. And really, the ball is in the court of LVMH, if they ever wish to sell. I suspect that that is not the case.

We have announced recently a modest transaction in Africa to an earlier point -- where we see opportunity for inorganic expansion in the developing markets, we will take that opportunity. It's relatively modest in the overall context of our cash flow, but I think those are probably the sort of transactions that you would -- should expect to see more of, rather than any mega-plays at this stage.

Great. Thank you.

As we have no further questions at this time, I would like to turn the call back over to Mr. Paul Walsh. Please go ahead.

Well, first of all, thanks for joining us. I believe that in the face of the economic situation that we have seen, these are a very resilient set of numbers. It was a tale of two quarters -- 6% down in the first quarter but 2% up in sales terms, in the second quarter.

It's also a tale of kind of a polarized world. We are seeing very good growth momentum in Asia, Latin America and Africa. We expect that to continue. However, in Europe and the US, it's pretty flat, and we do not expect that to change in the short-term and our guidance does not rely on it changing.

I am very pleased with the way the organization has responded to our call for cash management. This is an outstanding performance on cash. Not all of it can be repeated. But I believe in the current environment, cash is always important; but it's particularly important in the current set of circumstances.

And therefore, as I said, I think this is a resilient set of numbers. All the consumer testing that we have done; our equities are strong; and I remain confident that when we see returning consumer confidence, we will see a return to premiumization as well.

Thanks for your support and I'll be seeing some of you over the next couple of weeks. Thank you.

Thank you, ladies and gentlemen. That concludes today's conference call. You may now disconnect your lines.