Diageo PLC (DEO) 2014 Q4 法說會逐字稿

Good morning, good afternoon and good evening, everyone. Thank you for joining the call. I'm in London with Deirdre. Hopefully, by now you've had a chance to watch our webcast and read the press release, so I think it'll be best if we go straight to questions.

(Operator Instructions). Olivier Nicolai, Morgan Stanley.

I just got two questions. First of all, USL is obviously fully consolidated, but it was a small drag on your cash flow in 2015. Now, could we expect a positive contribution on cash from USL in full-year 2016?

And just going back to your very strong cash conversion ratio in 2015, how confident are you that this ratio could exceed 80% again in 2016?

Yes, thanks, Olivier. Maybe I'll just talk a bit on the broader context on both USL and cash conversion. And then I'll ask Deirdre to comment more specifically.

USL, as you know, our business is performing well. The first-quarter results that were announced by USL were good-quality results in terms of top-line growth and the prestige plus end of the portfolio growing strongly. So our strategy there is working well.

We do have an intent focus on margin improvement, and on cash conversion and cash delivery. As you know, the Company is still heavily levered. And I'll ask Deirdre to comment more on that.

On our overall cash conversion, I'm very pleased with what you've seen in the results in FY15. That's coming through real operating discipline in how we're managing the entire working capital chain.

We are embedding disciplines across the business, S&OP, management of inventory, forecasting accuracy is getting better. Our route to consumer initiatives is driving less volatility in the management of the demand signal. All of that, I think, is sustainable improvement for the cash conversion.

Clearly, we've had an extraordinary year this year in terms of cash conversion; and I expect us to continue to have good, steady cash conversion improvement, in line with the best benchmarks in the CPG world.

I'll ask Deirdre to comment more specifically on both.

Hi, Olivier. On India, I would say India's no different than the rest of our businesses, in that we expect them to have improving metrics with respect to cash on an ongoing basis.

India is relatively new to our processes, and so I think we'll need to continue to work with them to optimize what their underlying working capital usage is. And as you know, there are some complexities in India with respect to state movements that we're still working to optimize.

The short answer is I think our intent would be to continue to improve it. I couldn't give you any specific guidance on what that might be in FY16, other than to say our expectation is we will look to optimize.

It's not just for the efficiency, but also to get down their debt level. As USL did at the start of this fiscal year, when they sold the UB shares, that is consistent with our trying to drive cash to take down the debt.

I think with respect to the overall business, Ivan has said clearly what we've stated. The only thing that I would add to that is CapEx, which we've said in the presentation that we expect to be at about the same level in absolute spend on a growing net sales number. So that would also give us greater efficiency in terms of our cash.

Thank you. And just a quick follow-up on the US. Do you expect to grow in line with the market in 2016? And just looking at your margin there, the margin was down 47 bps in full-year 2015. If we were to assume that you were to grow in line with the market, could we assume some margin recovery in full-year 2016, from the stronger top line, and potentially some positive transactional effects as well?

On the top line, Olivier, I would say for the full year, we do expect to grow in line with the industry. As you will have seen in our presentation, the H1/H2 cycle is different. We've changed our innovation replenishment model. We've been in the process of doing that for several quarters, and that'll continue into the first half.

Underlying depletions, as you know, we ended the year strong; the second half was stronger than the first half. I expect that momentum to continue into FY16, so underlying depletions will be steady and strong H1 and H2. Reported shipments in NSV, H1 will be weaker, and then it will bounce back in H2.

On the margin front, we're going to manage it carefully. You know the margins are high in the US, and this is one of our most profitable businesses. We will be looking at, and we alluded to this, also driving volume performance in the US.

A lot of our share erosion historically has been at the low end of the portfolio and we intend to get more competitive there, so that we get volume momentum back in the business.

But on an ongoing basis, steady state, we do see the US, even from its high base, it's got all the characteristics of -- to drive margin expansion, modest, on an ongoing basis, but I want to retain the flexibility to invest behind the US, to really shore up the top-line momentum in a sustainable basis.

Thank you very much.

Ian Shackleton, Nomura.

Three points of just clarification on some of the guidance you've given us for the new year and starting first with North America. When you say shipments and depletions growth to more in line for the full year, does that mean we should be thinking about the same sort of figure? Or is it just a comment that there'll be much smaller gap for full year than in H1?

Secondly, on Latin America. You've talked about some of the markets, but not given us an overall conclusion. Should we expect LatAm to be up or flat in the year?

And the third question, back on free cash flow. You still had about GBP200 million outflow from investment in maturing stocks in FY15. With the slowdown in Scotch whisky production, should we expect that number to fall quite a bit in FY16?

Hi, Ian. Let me take the first two questions; then I'll ask Deirdre to address the Scotch stocks question.

On North America, for the full year, we've said that we expect shipments and depletions to be in line. So that is our expectation for the full year.

On Latin America, if you look at our numbers, you can see improving momentum in Latin America as we went into Q4, growing roughly -- our Q4 grew about 6%, 7%. There were some phasing issues that helped that, but I would expect Latin America to be in positive growth next year.

Brazil is tough and I'm not expecting much to happen in Brazil. But we're seeing good momentum in Mexico, in Peru, in Colombia, I mean these markets are all up double digits.

As you know, our West LAC business, we have been through in the export channels a destocking phase, so I'm confident our business is in good shape in Latin America; we will grow share.

And some of those economies, as you know, are still -- growth has been subdued and we won't be immune from that, but I fully expect us to do better and to have decent growth in LAC going into FY16.

Good morning, Ian. With respect to the maturing stocks, as you know, we've been on an expansion plan in our distilleries and that coincided, to a large degree, with a bit of a slowdown, largely driven by the emerging markets, so we have had more maturing stock.

That is a very positive thing. As you know and you will have seen from the presentation, we have the intent to grow volumes, both in standard, secondary and premium Scotch, and this gives us a fantastic opportunity to focus on volume growth. So we do expect our Scotch business to return to volume growth in the year and therefore, on a net-net basis, there will probably still likely be a reduction.

So just to be clear, we should still expect a continuing reinvestment in maturing stocks broadly in line with FY15?

In terms of the amount of Scotch that is being put away, yes. But in terms of the net effect, I expect there to be a bigger off-take. So we're not expecting a significant move.

We do, of course, as you know, adjust our maturing stock production, basically to manage to a long-term growth rate. So I'm not going to say it would be precisely the same because we'll be managing that as the year goes through, but I'm not expecting any significant shift with respect to our Scotch production.

Very good, thank you.

Simon Hales, Barclays.

Three questions, if I can. I wonder if I could just start asking a little bit about FX. Clearly, there's a lot of volatility at the moment and I'm sure you've seen the impact of that as you've been preparing your outlook statement in recent weeks in relation to FX.

Is there any way you can help in trying to think about how transactional FX may move as we think about how the dollar may move over the next six months, or the ruble?

I'm just trying to get to some sort of rough working rule of thumb as to how we might think about further downside or upside in terms of your FX guidance given the volatility there.

I mean briefly, secondly just going back to USL, clearly loss making overall in the year. How should we think about the development of the business from a net profit standpoint as we go into 2016?

Should we be expecting this business to move into profit? I hear what you said, Deirdre, in terms of trying to reduce the interest cost burden through non-core disposals, but any help you can give us in terms of the shape of the P&L?

And when you talk about potential further non-core disposals, what are you thinking of there? What is non-core still within USL?

And then I did have a final third one, sorry to hog it, but just on Crown Royal. Can you talk a little bit about where you're sourcing the consumers from with Crown Royal Regal Apple and perhaps also just comment on the underlying performance of the actual Crown Royal mother brand as well in the year?

Sure, why don't I start with Crown Royal, and I'll turn to Deirdre on FX and the USL margin question.

Crown Royal Regal Apple, as you know, well we've shipped over 1 million cases. The depletions have been nearly 900,000 cases. It's been an extraordinary year 1, way exceeding our expectations.

The consumer data actually is very encouraging because the consumption is cutting across gender, age and ethnicity and geography. So it's very broad-based, and it's clearly drawing new consumers into the Crown Royal franchise.

What it's done on base Crown Royal is it's stabilized it. So actually, our relative trend on base Crown Royal has improved and so we see this as being helpful to the overall trademark and clearly, it's something we're analyzing and watching and supporting very closely. Our intention very much is to see the momentum continue to build as we go into FY16.

The consumption occasions are also quite varied. It's consumed in shots, it's consumed in cocktails, it's consumed long with mixers and so it's fundamentally bringing new consumers into the Crown Royal and into whisky, and we have hit a sweet spot here that has really broadened the franchise for the brand.

I'll address the questions on FX and the USL profitability. First, on foreign exchange, with respect to the GBP100 million guidance that we gave; that's about one-third transaction and two-thirds translation.

And it is being -- if you look at the US dollar, the US dollar is positive, but less positive than it was the last time we gave the guidance. This is based on current spot rates and the spot rates have deteriorated slightly.

In terms of the euro and our other emerging market currencies, they continue to be negative and the current spot rates actually have deteriorated further, and that's what's driving it. But transaction, of course, as you know, we would have some of that hedged, and so that's a smaller piece because as that phases in, we're having a smaller effect on it.

On USL, you will have seen in the presentation that USL does deliver an operating profit. And as we have said, we expect that business to continue to work to improve its profitability as it strengthens its business and invests in the business.

It does have -- where the net loss comes in is largely due to the interest charge. That will come down, certainly, as a result of the assets sold at the start of this year.

The remaining non-core assets are largely around properties that USL holds, that they don't require. And so agents have been engaged and that will just take its natural course.

We're certainly also working with them, as best we can, to help get the best possible rates for their debt and the best programming for their debt. So we'll certainly be working to get that back to a profitable position as soon as we can.

Perfect. Thank you ever so much.

Trevor Stirling, Bernstein.

Three questions from my side please. Ivan, if I look at net sales in FY15, reported net sales were flat but you highlighted the difference between depletions and shipments, which probably means underlying net sales running around 2% there.

Second question. You're forecasting/expecting a GBP500 million of savings, which would translate into 100 basis points of margin expansion, which implies about GBP400 million of reinvestment.

Is that mainly going to be in A&P or to offset country mix? A little bit more color on where that GBP400 million is going would be very helpful.

And the third question probably for Deirdre. On tax, Deirdre, you've guided to a 1% increase in FY16 in tax rate, but also said that pressure's likely to be upwards on that.

Should we be thinking in terms of another percentage point per annum for 2017 and 2018 or is the pressure less than that?

Hi, Trevor. Thanks. Let me take the first two questions. On the NSV guidance of mid-single digits, the way we see the world is getting the US back to, let's say, mid-single digits, 4, 5, 6, and we see by FY17 very much all the fundamentals that we're putting in place and the changes we're making in the US with things like the Activation Army and our incubation of brands. And we'll talk more about this at the investor conference in November, so that's leg number one.

Leg number two is Europe's steady. Europe has come back to growth this year, Western Europe, that's one; holding that above there.

And then the third, the emerging markets, which, to an extent, are clearly influenced by the GDP development there, but you can see the consistency coming through in Africa now, we were plus 6%.

Latin America, I talked about, I feel better about. USL will be a clear contributor as we look at getting to about 10% growth and perhaps stronger if the economy continues to improve. And the rest of Asia, we see more stability. China is back into growth with the Baijiu business. So that's on the geographic front.

On the category front, beer is coming back, so our beer business performed and we grew 4% and I would see that continuing. Reserve, as you know, we had very good momentum.

And the premium core brand, in particular I'll point to Smirnoff, Guinness, Johnnie Walker and Captain Morgan, I would say our marketing has shifted quite significantly this year, and as we go into next year, which gives me more confidence on these brands.

On your second question of the GBP500 million productivity savings, two things I would point to. One is you will -- and the 100 basis points, the margin improvement. Our intention is to invest two-thirds of the productivity savings back into the business.

You will notice this time we're not announcing a new restructuring program with the one-time charge. We are going to fund the changes ourselves and we will be really looking at investing behind marketing, innovation and capacity to ensure we secure the mid-single digit top-line growth. So the two really go hand in hand and we said that two-thirds of it will be invested back in the business.

You don't want to answer the tax question (laughter)?

I'm looking at Deirdre here.

Deirdre, you get the boring one (laughter).

With respect to the tax rate, as you know, because this is quite topical at the moment globally, there has been upward pressure on the tax rate for us, that had two legs.

One is the mix of the markets where our growth is coming from, that had some effect; but the other thing is some of the changes that are happening, even in the developed markets and particularly around the OECD and the base erosion profit-shifting changes.

So, this year, we can see, based upon what we know on legislative changes and what's happening in terms of our own mix of profits, that we expect our tax rate to be 19%.

I hesitate to predict what will happen beyond that because the reason why we say there's upward pressure, if you listen to what's happening in the regulatory environment and with the treasuries around tax, it's only going in one direction.

Some of the proposals that are being put forward with respect to the deductibility of interest, for example, put forward by the OECD would have a material impact on the rate for us and a number of our other UK plcs.

So we're -- right now, I'll say there's upward pressure. As soon as there is some kind of change in legislation that would give us more clarity on that, we will absolutely let you know. But right now, I wouldn't predict more other than to say it's not a favorable tax environment with respect to corporate rates.

Thanks very much Deirdre.

Andrew Stott, BoA Merrill Lynch.

Two questions. I just wondered if you had any thoughts on gross margin for this year ex-FX, just any pointers or moving parts there?

Second one was receivables. Receivables ratio is a big part of that cash release. I just wonder if you think for this year there's further scope for improvement there. Thanks.

On receivables specifically, or on working capital are you talking about?

On receivables specifically.

Yes, I think on receivables specifically, many of the things that we're doing and actually have been referred to in terms of the productivity plan, and as you would know, some of the longer-term affects that have to do with trade terms and how we actually manage our commercial terms, are longer term in coming to be able to drive down DSOs.

What we've been focused on this year, if you come back to last year, we actually had a significant use of cash on receivables, it was I think because we weren't as efficient as we could be in working with our customers on how the business is managed and also on overdues -- overdue debt.

And so while I think we can get some improvements next year, I think the material improvement was likely in terms of DSO and therefore receivables would likely come over time as we move to get more effective trade terms and shorten the value chain, which -- if we can shorten the value chain then, of course, our customers are more prepared to have a shorter payment period.

So I think the receivables piece, there will be some movement but not anything of the size that you've seen, but we'll be working to keep that moving in a positive direction.

I think going forward in FY16, I'd be looking to get benefits in inventories. The work that we've been doing on S&OP planning and again, on driving efficiencies straight through logistics and supply chain, should continue to drive -- which should begin to drive some savings and efficiencies in the amount of inventory that we're holding. So I don't think you should expect as big an impact from receivables next year.

Your gross margin question. The gross margin excludes FX. And I think the way to think about it is, as you know, our products and country mix was a drag this year with Southeast Asia, West LAC, the scotch destocking that had taken place. That was about 60 bps of negative drag, which we overcame by the cost savings and productivity savings to net out to the 24 bps of operating margin expansion.

But there was negative impact because of the deliberate decisions we took on the categories, Scotch in particular, and country mix this year.

Okay, so do you think that can actually level out this year, when you talk about that country mix, as you see this year?

Yes, broadly I would say it should be -- some of the hits we took this year, we will not take the same degree of hits next year. I expect Scotch whisky to grow in FY16 and as you know, that's very accretive for us.

It'd certain be less, but, of course, the overall impact on organic, because of USL, that will have a negative mix effect because of the overall margins there. But the drag that we've been getting from what's been happening in Southeast Asia and Latin America, of course, that won't repeat and that will be helpful in the overall mix.

Okay, very clear. Thank you very much.

Andrea Pistacchi, Citi.

I have a couple of questions on the US please. First, if you expect to sustain the 4% depletion growth that you achieved in FY15, if you can sustain it in FY16?

And because most of the growth this year has come from Regal Apple, once you've lapped that launch, what do you think will replace Regal Apple's contribution to sustain that level of depletion?

And finally, if you could talk about Captain Morgan a bit. The brand was down sharply in the US, particularly in 2H. So what's the plan to stabilize it and where are you in the process of reducing its price premium versus competition?

Sure. Hi, Andrea. On the depletions going forward, if you look at the US portfolio in total, clearly, Regal Apple had a very strong influence on the FY15 performance. But we've got more momentum in the portfolio. So if you look at brands like Bulleit, our tequila portfolio, Buchanan's, etc., they're strong.

But the key difference makers in terms of FY16 will be to get relatively better performance from Smirnoff than we had in FY15. And a big one is Captain Morgan, which is your second question, which I can talk to.

On Captain Morgan, firstly outside the US, Captain Morgan is very strong and doing very well. In the US, the rum category is tough and Captain, in the most recent periods, is holding share. So we've stabilized it.

But as we go into FY16, we have a new campaign in place, which we're very excited about. It's called GO FULL CAPTAIN and it basically says in this age where 21 to 24 years olds have a lot of anxiety and social media and digital and staying up with everyone, we're going to put the fun back into their lives with the Captain.

A lot of on-premise activation, we are scaling up our Activation Army in the United States, 250 people across 40 cities. That's going to be a big focus. So Captain will have -- I'm confident we'll have better performance on Captain Morgan in FY16 than in FY15.

We also have a very exciting innovation that's going to market in a few weeks. It's called CANNONBLAST and I think it's quite disruptive. But that will be incremental because we really need to get base Captain Morgan OSR into better shape.

And that will be part of shoring up, to your first question. We're not relying on another Crown Royal Regal Apple-type innovation to get us there. It is getting more sustained performance across the portfolio that will get us to the depletion goals we had for North America in FY16.

Thanks. And if I may just have a very quick follow-up. Emerging markets in FY15 in aggregate, do you have a number for how much they grew in aggregate and how much growth would have been underlying ex the destocking issues?

The total was essentially flat or was it -- I'm just looking. Minus -- just about 1% in NSV terms for total emerging markets.

Minus, sorry, 1% --

No, no.

Or plus 1%?

Plus 0.8% in total emerging markets. And within that, you've got the destocking effects of Latin America and Southeast Asia, which are GBP80 million to GBP100 million.

Thanks.

[James Edwardes Jones.]

Two questions quickly if I may. Going back to Andrew's question, I just want to understand with your guidance for margin growth and cost savings from 2017 for the next three years, have you got anything built into your assumptions in terms of country mix or category mix, either positive or negative in terms of margins there?

And secondly, Ivan, in terms of the changes to marketing that you were talking about in your big brands. I'm not asking for any trade secrets, but philosophically, what are you doing? Is there some kind of overarching plan that you have to revive those big brands?

Sure. Let me take the second one first and I'll ask Deirdre to talk about the margin mix. Fundamentally, the big shift in our marketing approach, what we call our next-generation marketing, is all about in this world when you look at consumer behavior, you look at the millennials, you look at the dynamics in our category, it's all about recruitment and re-recruitment.

And so we are moving away from what I would call marketing that's been focused historically on growing loyalty with existing consumers, to marketing that's always on, marketing in a digital world, where today, we have 25% to 30% of our spend in digital. In the US it's 40%. That's going to keep going up.

And the way we build our platforms and our engagement has evolved quite substantially, but at its core, the key to it is this continuous focus on recruitment and re-recruitment. And we're putting a lot more into the experiential. I talked about the US Activation Army. We've got 110 brand ambassadors around the world building up, so those are the shifts that I see.

And each brand, if you look at the brand plans and we'll give you a flavor of the new campaign on Johnnie Walker in September, as to where we're taking that brand next, but it really looks quite different from the way we would do our brand marketing, say, five years ago.

And this is where I think Diageo is. We are at the cutting edge in terms of thinking about how to engage and build brands in the environment in which we compete right now.

With respect to the GBP500 million in productivity, that GBP500 million in productivity, we're confident that we can deliver that by looking at external benchmarks against very specific elements of our commercial practices and policies and across our supply chain and our overhead base, with respect to where we can really drive efficiencies to the program; in many ways, not different than what we have been delivering in the program over the last few years.

This is a commitment really to driving future and further productivity so that we are improving our cost base and our commercial practices, up to best-in-class practices.

So, in that regard, while I can look at commercial terms or I can look at specific trade terms that give me confidence and I can believe it, I have not, at this point, allocated that down to categories or brands.

I think you can expect, in the coming months, as we get into the specifics by market on where the biggest opportunities are, you'll hear more about that and we'll bring you specific examples.

I guess, Deirdre, what I'm after is to try and get an understanding of you've got a roughly 350 basis point difference, as Trevor was saying, between the cost savings you promised and the margin growth that you're pointing at.

In a simplistic world, should we expect to see all that go into marketing or is some of it going to be absorbed by things like differential inflation, category mix, country mix and so on?

Okay. Maybe I didn't understand your question first then. It is not going to be absorbed by inflation. That number is net of inflation. So we expect to deliver GBP5 million in productivity.

That means you take your cost [base], you add inflation, then after that inflation, we expect to absorb the inflation and deliver GBP500 million. So that's real productivity gains as opposed to an inflation element.

The second piece about where it's going to be reinvested, Ivan pointed out, we're not taking a restructuring charge. Some of this will be investment in the underlying activities that are required to drive these improvements. Some of it will be brand investments. Some of it, like on our route-to-consumer program, might be around continuing to add people. So what we're going to do is invest where we see the biggest opportunities to drive growth.

Our expectation going in, as Ivan said, is that we will reinvest two-thirds, and that is against our commitment to drive long-term growth in the business.

And so, the exact -- again, how much that is -- like this year, where we've talked about our reinvestment of the GBP30 million against our savings program that's in place this year, and we talked about what we've invested that in, we will, of course, be transparent about what we reinvest it in.

But today, I would expect it to be yes, against the best-returning brand activities and yes, against elements where we need to actually invest in infrastructure or people on the ground that will drive growth into the future. But our expectation is to drive growth, we'll invest and that we'll drop the remaining to the P&L.

Of course, as you would also expect, if we think that we don't need all of that in order to drive the growth we need, then there could potentially be more. But right now, we see it as driving 100 basis points over three years out of that one-third that's remaining.

Brilliant. Thank you.

So, I guess, again, one other clarification if it excludes mix, etc. Well, I'm talking -- the best way -- we can't predict that mix going forward, but what we can do is know we can save gross. How much money we're going to save, real cash, and then how much we'll reinvest.

And of course, we'll look at optimize the mix going forward, but that would be overlaid on top of the GBP500 million. So if it's a negative mix, the net margin effect would be slightly less.

Understood, that's very clear. Thanks, Deirdre.

[Javier Gonzalez.]

A quick question on cash flow. You've mentioned that CapEx will remain flat year on year in FY16, and as a consequence, with net sales growing, the percentage of sales will be coming down.

I just wonder whether you could, first of all, give us a little bit of flavor/color in terms of what are the investments you're looking to make in FY16.

More specifically I wanted to ask what is the normalized level of CapEx for Diageo when measured in percentage terms to sales?

Also, just going back to receivables and things that you can do to reduce those receivable days further, can I ask also directly is there a target level of receivable days that you think Diageo should be on?

Okay, let me start with CapEx. Yes, you're right that we would expect it to come down. We used to operate, before we were entering into emerging markets, at a CapEx rate around that 4.5%-ish. I now expect it to normalize at around 5%.

Part of that is to do with some policy changes where crates and bottles in emerging markets are now as CapEx. They used to be in inventory, now they are part of the underlying CapEx.

So as our beer business in Africa grows, it does require more CapEx in order to be able to maintain the bottles and crates associated with the returnables business.

The other elements of CapEx that I would point to are we do have continuing completing certain investments around expansion in a few of our markets with respect to mainstream spirits, which we see as an opportunity for growth going forward. And there is then the normal maintenance in our underlying manufacturing footprint.

There's a bit of, also, some CapEx in the US relating to our driving productivity through that footprint into next year.

Regarding receivables, the DSO number, we have DSO targets and look at what the right efficiency is on a market-by-market basis. I think it's less useful to look at it on a Group basis, so I don't look at it that way. I understand why you might. But it depends on the length of the value chain.

So in some markets where the customer, their value chain is long in order to basically make it reasonable to manage their working capital. Our DSO is to be a bit longer; in places like the US, it's shorter. So I think it depends on the maturity of the value chain in total. So I guess the short answer is I don't have a specific target on a Group basis.

Right. And very last quick question on the US. I just wonder whether you could share with us how big is the American whiskey category within your North American business? And when you blend together Bulleit and Crown Royal now, what is the growth rate that that category overall is growing at?

Well, our North American whiskey is growing at 12%. I'm just adding up the numbers; it will be $700 million, $800 million.

Okay.

Well there's more. You could have had Seagram's 7 Crown. We'll get the precise number to you because we've got more brands like VO and Seagram's 7, etc.

Okay, great. Thank you.

Martin Deboo, Jefferies.

Just one question around the North American H1/H2 guidance. I understand the shape of the guidance, but I'm not sure, Ivan, that I've understood this issue of innovation replenishment.

Can you just give me a bit more color on why we're going to have the negative H1/positive H2? I just want to make sure I've understood this.

It's Deirdre, I'll answer the question. I think what we found is -- and it might be a little bit longer, but I'll give you some context just so that you can understand what's happening.

What we found is over the last two or three years, as our innovation business and impact in the US and actually globally has gotten bigger, which is a fantastic thing I think for the sector, is that managing the volatility of innovation can be quite challenging.

We've been working over a period of time to see how we can reduce the impact of that volatility and specifically how to reduce the working capital requirements, whether that be on input or whether it be on shipments and cases for ourselves and actually through the value chain.

So, for example, a couple of years ago in Ciroc , when we launched Ciroc Orange, we had difficulty staying in stock with that product and then we basically forward-shipped -- well, produced significant amounts of product and then shipped that out and then in fact found that the demand signals started to fall off and so first you have too little stock and then you have too much stock.

That has created a number of difficulties. It also happened to us in our frozen pouch business where we thought that the long-term sustainability of the business was stronger than it was and put debt on it early and fast and then had the opposite effect of having to have write-offs.

So what we've been doing over time is to look to move to what we refer to as a replenishment model, which is that basically the actual launch to a precision stock to actually fill the pipeline through the value chain. But rather than anticipate a growing demand signal and continue to ship in more product, we're going to be looking to replace that on a replenishment basis.

So we will only ship more based upon what the distributors deplete rather than anticipating growth. And if we see that we're running short of stock, we'd frankly rather incur some expedite costs than to tie up all that working capital.

And so what's going to happen is -- in fact, there was some effect of that in the fourth quarter as we started to adjust that, and in the first half, you'll see the effect, because the first half of last year where we had significant shipments of Ciroc Pineapple and Crown Royal Regal Apple, that was again effectively on a demand four-step basis as opposed to a replenishment basis.

We won't be repeating that. And you just end up with a comp effect in the first half and we expect that to normalize as we move through the year.

Deirdre, that's very clear. That implies you've got launches in H1 then, because the comp effect is on the launches not on the underlying business. Am I understanding it correctly?

That is right. And Ivan referred to CANNONBLAST, for example. There would be other launches that we would have. So look, the really positive thing for us is we have an ongoing good pipeline of innovation in the US and we expect it to continue to be a growth opportunity for the entire sector and we expect to participate in that.

So yes, there will be other launches, but I expect the year-on-year effect both in terms of likely -- although it's hard to know on innovation, likely on the size of the launch and also the amount of pipeline that we're going to sustain will be smaller in the first half of FY16.

Okay, that's very helpful. Thank you.

Andrew Holland, Soc Gen.

Yes, just two questions. Firstly, just looking at the category trends in the US, which I think we're all familiar with; vodka perhaps losing out to North American whiskey. Do you see any reason why those trends should change over the next year?

One of your competitors, one of your peers is describing this as a generational shift away from white spirits, particularly vodka, towards North American whiskey. Do you see it that way?

Second question is just another sort of little elephant in the room, the SEC enquiry. It strikes me that trade loading has been a feature of the industry for a very long time and it's not just Diageo that does it.

What makes the SEC interested now and why are they talking to you and not your peers, or are they in fact talking to your peers?

Andrew, on the SEC, there's an information request in from them and we are complying and providing them information on US distribution.

It wouldn't be appropriate for me to comment any more. There are no allegations. What I will say is in terms of how we operate our business and our Company is that we operate to the highest standards of reporting, controls, transparency and we take those obligations very seriously.

On category trends, let's not forget vodka is still growing and the vodka category is still big in the US and it is still in growth. Flavors are clearly going to shake out and there's more pressure on flavors.

My view on this is when you look at category trends over decades, they do shift and I think companies that are successful are going to stay -- anticipate those strengths and stay ahead of them.

And one of the strengths of our portfolio in the US is that we've got very good brand category and price-point representation and a very good innovation capability. And we will add what I think is a world-class incubation capability which will enable us to build smaller and new brands as well.

So I don't know where you were going with that question, but I am very confident about our ability to drive a sustained performance in the US and it does take more agility, it does take being ahead of understanding the consumer trends and that's really the direction in which we are shaping our US business as we go forward.

I'll just come back to Javier's question earlier. North American whiskey, just confirm the number; it is GBP800 million growing at 12%.

Okay, thank you.

Mitch Collett, Goldman Sachs.

Firstly, I wanted to clarify what you mean by margin progression being muted this year. Presumably, to some extent, that's because you're having to spend to fund the cost-saving program and as you said, that doesn't go through exceptional. Should we assume muted means less than the margin progression in FY15?

Secondly, you say that your dividend coverage has fallen outside of your targeted range, which I think is 1.8% to 2%. Given the muted margin progression, potential for top-line growth, I guess, could be slightly better than this year; higher tax and negative FX impact.

Could you maybe just give a bit of context on what it would take to stop growing the dividend? You said that you expect it to grow mid-single digit, so restoring cover would imply that EPS would grow more than mid-single digit.

And then one very small point; I think it says that Shui Jing Fang had an additional quarter within this year. Can you maybe give a bit of context around why that was? I presume there's another quarter of costs as well as another quarter of sales. Thanks.

Okay, let me talk about the margin. The margin this year, if you want to call it muted, at the 24 basis points of margin is because we delivered the cost-savings program that we've been moving forward on driving inefficiencies, but we had 60 basis points of negative market mix.

And that is because effectively our higher-margin markets were either growing slower and in some cases declining and so that ends up with the mix effect. So we were still driving efficiencies and, in fact, a number of our markets continued to grow margins during the period.

So that's what it is. Next year, we expect, as we mentioned earlier, that that impact of that negative mix will be less, although with USL coming in, there will be some negative effect. And so that's what we meant to say there.

Sorry, I wasn't suggesting this year was muted, but I thought you said on slide 18 that from a margin perspective, there's a few bits before that about pricing, margin expansion will be muted as we offset continued negative mark-to-market mix.

Okay, sorry, so yes, next year we expect there to be a relatively weak pricing environment. So we had said that while we'll get some brand mix effect benefit on our growth of our reserve brands, we're not expecting a strong pricing environment. In fact, in most parts of the world right now, it is not a strong pricing environment. So you won't see a lot of price coming through and then we'll have lower savings from our efficiency programs next year because we've delivered GBP127 million this year.

There's some next year and there's a little bit of that GBP200 million in FY17 and so while we're beginning the work on driving the next level of productivity in the business, we don't think the effect of that next year will be big. That combined with USL coming in and the fact that we're not going to have a strong pricing environment, we're not expecting significant margin expansion next year.

So does that mean more muted than this year? I guess, walking through those points, I guess it does.

Yes, we expect it to be positive but a bit more muted than this year, yes.

Okay. And then on the dividend side, given --

Oh, sorry, on dividends, I lost track. I got distracted by the last one. Now, the dividend, we have a strong cash flow, we have a progressive dividend policy. We've kept our dividend at 9% this year.

We are now operating outside of our dividend cover policy, which is typically -- which is at 1.8x to 2.2x cover. And so we will bring our dividend growth rate to mid-single digit until that gets back in line. We've done that in the past as well in similar kinds of circumstances.

And so I think you mentioned something about reducing the dividend. There certainly is no intention to reduce the dividend. We would expect to keep it at a mid-single digit growth rate until we see it come back within the cover and then we'll consider raising it again.

I guess, given that EPS and I appreciate FX has been against you, EPS hasn't grown since 2013, does that imply that you would happily see the dividend cover continue to reduce rather than stop growing it? That would be the thing you would choose to flex, if you --?

I don't expect there to be a protracted period of EPS decline, as you mentioned which are really being driven by FX. And every year, as you continue to have a weak FX the next year, as we've seen already, even with a difficult FX environment again in FY16, the impacts were a bit less than they were in FY15. And so I'm certain -- we're certainly not anticipating that.

If it got to a period where we had 10 years of negative FX, we'd have bigger issues. But I don't and certainly it would then signal a change in the dividend. We don't see that.

We think this is quite manageable up in mid-single digit range and, in fact, expect over time us to get recovery to the point that we would be able to increase it as we did kind of in the early -- as we did three or four years ago when we started increasing the dividends systemically.

And then finally, Shui Jing Fang, I think there was a quarter --

Yes, Shui Jing Fang, we're just adding. It's a catch-up. We were reporting that there's a quarter lag. We now have the reporting systems and the alignment with Chinese security and stock exchange requirements where we can report them together.

And after 7 points of Q4 Asia-Pac revenue growth, 3 points was that. But the business overall is performing well on Shui Jing Fang. And we've got good momentum there. And I am pleased with how our Baijiu business is bouncing back.

And just to be clear, so that's about 30 basis point of benefit at the Group level. Does that go into organic or is that scope?

It is in organic.

It's in organic, okay. Thank you.

It is in organic. Yes, yes. I'm just checking that, yes, it is.

Okay, very clear. Thanks.

Chris Pitcher, Redburn.

A couple of questions to finish up, firstly, on remuneration. From your perspective, for the exec, was FY15 a better year than FY14? You set some pretty aggressive cash flow targets last -- some aggressive targets last year on cash flow that weren't met. Was GBP2 billion ahead of your own target?

And then on the share awards, you've been reducing the range for the share awards. Your guidance would imply 4% to 6%. My concern is that the lower end to the FY15 award gets reduced to 3%. Can you -- I know it's only 1 percentage point, but can you reassure me that 3% growth is not now perceived as good enough at Diageo?

And then the final question on India. You're talking positively about the outlook for India, but your main competitor is talking more cautiously because of regulatory changes. Can you give us a feel for what your expectations on India are in that context? Thanks.

Chris, I knew you were going to ask about the RemCo. Well, the Remuneration Committee met yesterday. And you can be rest assured that they've -- we haven't yet, obviously, published our remuneration for the year, but you've seen where our goals and targets are set. And appropriate oversight and discipline will be applied to the awards for FY15.

On the target and range setting, I think you've seen where we let out our outlook for the medium term in what we expressed today. So RemCo is going to be very much aligned with ensuring management has appropriately stretching targets.

India has -- sorry, go ahead.

Yes, it was just the bridge of FY16 to FY17 because obviously, you're saying you're expecting a lower growth year in FY16. Would RemCo expect you as an executive to almost suffer that and still stick with a target of 4% to 6%? Or is there a risk at the FY15 level that the low end gets reduced to 3%, which is a realistic outcome for FY16 growth? That's what I'm angling at.

No, no. The RemCo's going to stick to the targets they've laid out for us.

Okay. It was just that bridge between 2016 and 2017.

Yes, yes. Yes, yes, yes. On India, it is the pricing environment and the cost and the taxation environment is challenging. So one of the things about the nature of the Indian business is we've got state controls in many states, which limit your pricing ability.

That is a challenge that USL faces and it is part of what I think will put pressure on the margin front, but, clearly, we're looking at costs, productivity, supply chain effectiveness, etc. and other areas to offset it.

Our outlook for USL India, if you just look at the quarter, at the amounts, they grew 12% in terms of top line and they had a bit of EBITDA expansion and we will keep that focus going.

But you don't control everything in India. And a lot of it does hinge on the ability to get price increases through in many of the states. And that's an ongoing challenge that we will work through, but, in the meantime, we're looking for strong productivity in how we manage the business, the supply chain, and we're looking at every aspect of the business to help shore up margin improvement.

Clearly, the other factor we have helping us is we will be driving premiumization of that portfolio. So even in the results announced, the prestige and above categories at USL grew 17% and, as you know, we have catch-up to do there because the last five, seven years, USL didn't perform very well in that space, as one of our competitors did.

And so we fully -- our strategy is very much to rebuilding our position in prestige and above and I'm encouraged by the momentum there. And that's margin accretive.

Great. Thank you very much.

Thank you. Okay. Well, thanks, everyone. I think we're done with the questions. Appreciate everyone calling in and look forward to seeing many of you over the next few days and next week. Thank you very much.