Diageo PLC (DEO) 2022 Q4 法說會逐字稿

Good morning, and welcome to Diageo's 2022 Preliminary Results Q&A call. Your call today will be hosted by Ivan, Diageo's CEO; and Lavanya, Diageo's CFO. This conference is being recorded. (Operator Instructions)

Ivan, please go ahead.

Hello, everyone, and thanks for joining our preliminary results call for fiscal '22. Hope you've had a chance to read the press release and watch our presentation webcast on diageo.com. I'm very pleased with the quality of our excellent results for fiscal '22. Our teams have executed with tremendous agility and resourcefulness despite stronger headwinds, some supply chain disruptions and geopolitical events in the second half.

Sales were up 21%, with double-digit growth across all regions. Growth was balanced with volume up 10% and price/mix growth was 11 points with price contributing mid-single-digit growth. Diageo's 3-year compound annual growth rate or organic net sales was 9%. North America 3-year CAGR was 12%. And for Europe, it was 6%.

On a constant basis, Diageo is 28% bigger than it was pre COVID in fiscal '19. Our share momentum continues. We gained our held off-trade share in the majority of our markets. We have an advantaged portfolio, which we continue to actively shape towards fast-growing categories and our Super Premium Plus brands grew 31%. We continue to invest A&P grew 25%, and we had a record year on CapEx spending over GBP 1 billion on capacity, sustainability and setting the business upright for future growth.

Our strategic pricing actions across all regions and our supply productivity savings more than offset the absolute impact of cost inflation. We had strong gross margin expansion and leverage of operating cost growth, further significant improvements in operating margin while increasing our marketing spend ahead of net sales. Our strong cash generation enables us to keep investing for the long term, including, as I talked about, production any supply chain agility, digital capability and our Society 2030 growth.

Now while we expect the operating environment to be challenging in the near term, with several headwinds, including ongoing volatility related to COVID-19 and a potential weakening of consumer spending costs, I am confident in our ability to navigate them. We are staying very close to our consumers, leveraging our digital tools and data capability to quickly spot trends and respond with speed.

I'm also confident in the resilience of our business with our advantaged portfolio, effective marketing, strong commercial execution and set of innovation. We're well positioned for the continued premiumization of the spirits category and its share gains within total beverage alcohol. And our iconic global brands give us beautifully positioned of growth trends within the category of the previous year.

So with that, Lavanya and I are here in Soho in our London headquarters, and I'll open up the line for questions.

(Operator Instructions) Our first question comes from Sanjeet Aujla from Credit Suisse.

Ivan, Lavanya, three questions from me, please. Firstly, you called out headline pricing of mid-single digit in fiscal '22. Given the heightened cost headwinds the industry is seeing, is it reasonable to assume you would require more pricing in fiscal '23 to navigate the headwinds?

Secondly, you called out in your prepared remarks, U.S. tequila household penetration running at 15%, half the levels of whiskey. Do you think in the fullness of time, whiskey is a relevant benchmark, for tequila household penetration?

And thirdly, just on capital allocation, with the remaining GBP 1 billion or so of the buyback, it feels like your net debt EBITDA will end up being below your targeted 2.5x to 3x range in fiscal '23. Can you just give us a sense of how you think about capital allocation? And to what extent you will re-lever to get into that range?

Thanks, Sanjeet. I will handle your second one on tequila and ask Lavanya to handle your first on pricing and inflation and capital allocation (inaudible). So on tequila, I'd say what we're seeing in terms of the underlying dynamics in the category is very positive. The category has very broad momentum across demographics, across multicultural America, across age groups, the versatility in drinks, and we're seeing really good momentum. Agave has very positive associations. And as you know, we've got 2 of the harvest brands with Casamigos and Don Julio.

Regarding, will tequila hit the whiskey penetration level, I mean, we don't know. We can't project for sure. What we can see is the runway or fast growth ahead of the U.S. tourism industry for many, many years, still. And again, if you look at it regionally, so the most developed states are places like California and Texas and Arizona, where the spent on spirits volume in those states, Tequila represents about 20% of the volume. The value will be higher. If you look at the rest of America, states like New York, Florida, New Jersey, there's a lot of America where the share of tequila is still sub 10% of the total market. And the consumer traction we're seeing everywhere.

So I do think what we're planning on is attractive growth ahead of the spirits industry for the next 5 to 10 years in the U.S. And then we also see attractive growth developed globally. That will build slower, but there's a lot of tequila interest that we track a huge number of mixologists and bartenders on our Diageo brand Bar Academy and through our relationships. And tequila is hot everywhere. It's showing up in the top bars in cities right across the world. So we expect momentum to also build over time, and that will be slower. The top end of the market globally as well.

Yes, Sanjeet, I'll take the first and third part of your question. The first one was on pricing. We've taken mid-single-digit side, your question was I mean, planning on taking more in fiscal '23. But before I get to price, maybe 1 point to me we grew volume, 10 percentage points this year. We drew price/mix by 11 percentage points. And within that price was about mid-single digits. And so what we've been able to deliver this year, as we did in the prior year as well, it's really a very balanced growth algorithm. And we've done this by investing in the business. We increased our investment in the business by 25%.

The combination of the pricing that we took and the productivity that we generate through our everyday efficiency program more than offset the absolute inflation that we had this year.

Now in terms of what do we see going forward, I think what we see going forward is the same. I think we will continue to execute our entire suite of revenue growth management and price will be a level within that, and we will continue to invest in the business. We will continue to drive productivity, and I think that is what gives us the confidence that this side that's really working for us is what gives us the confidence that we will continue to grow this business in a sustainable and consistent manner.

The third question was around buybacks and capital allocation. Our capital allocation strategy remains unchanged. It's very, very clear. We start with investing in the business. As you've seen this year, we have increased our investment in business, both our marketing spend as well as capital spend. We invested GBP 1.1 billion of capital this year into expanding production into our consumer experience centers, enjoy digital and admin tools and into our sustainability agenda. So that has continued to be our #1 priority area. And for fiscal '23, we have guided to between GBP 1 billion and GBP 1.2 billion of CapEx.

Our second priority is M&A, and we've been very active this year on M&A, and we end in terms of bolt-on acquisitions. We acquired 21 deals of flavored tequila and (inaudible) this year. We've also divested and grown parts of our portfolio. So that continues to be our second focus area from a capital allocation perspective.

Third, we have a progressive dividend payer. We have announced a 5% increase to dividends this year, and we intend to continue to be a progressive dividend payer.

And last, we do return excess cash to shareholders. The Board takes a very rigorous approach to this. We will complete our GBP 4.5 billion return of capital program in fiscal '23. And it's warranted and if the Board believes that's appropriate after we have invested in the business, after we have done the M&A that's available to us and after paying dividend, we would consider a further return of cash.

Celine Pannuti, JPMorgan.

Yes, so two questions for me. My first question is, Lavanya is on outlook. You talked about the volatility of COVID but as well the potential weakening of consumer spending power. So what I would like to know is what is your expectation and how demand may shift in this regard regarding the volume, but as well the premiumization, which has been quite strong, as you alluded in your prepared remarks. And what actions could you take in that environment, be it to protect top line but as well bottom line?

And my second question, maybe it's somehow related, but we've seen that you continue to invest a lot in the business with A&P up strongly in North America. I mean, what kind of flexibility do you have for this spending? As we look into 2023, if the environment becomes more challenging, or are you able to give us a guide on how you think A&P will evolve for '23 for the group?

Celine, I'll take the first and ask Lavanya to handle the second. So the first thing I would say is we do not have and nor do we pretend to have a crystal ball on how consumers are going to behave in the next 6, 12, 18, 24 months. I mean clearly, the economic pressures are real. The spending power pressures are going to hit and get worse for a few quarters. What I would say is we're seeing extremely close real time to understanding shifts that are happening in occasions, in motivations, in the brands and price points that people are buying.

So one of the imperatives in the company, we've built incredible agility and restlessness in our culture. And we said we're going to double down on that as we go into next year and beyond. And we've just had our leadership group together, the top 100, and we just talked about how we're going to do that. We've got incredible data and analytics and the ability to track it. So I just wanted to start with that.

Now if you step back and zoom out and look at the category, this category does have very good resilience if you look at it over a decade. And certainly, through the financial crisis, we saw volume growth continued in the international spirits. And we saw a few quarters of a bit of down trading, and then premiumization came right back.

Now our approach is to -- we have an advantaged portfolio -- when you look at our categories, price points and the geographic footprint, we have resilience built into the diversity of our portfolio, and we have agility to switch and move quickly.

So let me give you an example. If we see down-trading accelerate. We have the ability in the United States to pivot our execution and support to brands like Smirnoff and Captain Morgan very strongly. If we see pack size of change, and we're tracking all of this, the 175 is going up for the small sizes on premium brands increasing, we have the agility in our supply chain to move very quickly and in our marketing dollars to ensure we're tracking these shifts in consumer behavior.

So I feel that -- I mean, this is why we reiterate our medium-term guide. We believe Diageo has the strength and the consumer connection to be able to navigate through these volatile times. And again, I've said this before. We should not forget our category is an affordable guidance. The serious household, typical U.S. households spend a dollar a day on our spirits category. It's an infrequent purchase. And that also brings a lot of resilience, right? You're only buying a few bottles of Ketel One vodka a year.

The combination of all that, we tend to skew to a higher-income consumer in the United States, where nearly 60% of our business comes from households that make 80,000 or more. It's a higher SKU than the beer business, et cetera. And the matter point I'd make is the affordability of spirits. And Don Julio on the rocks in terms of equipment service, Don Julio on the rocks is the same cost to the consumer as a $10 bottle of wine, which was the comparison all in these Crown Royal. A serving a Crown Royal is the same as a seltzer (inaudible).

So spirits has tremendous value and huge desirability and aspirations and the underlying trends of younger consumers moving towards spirits continue. So you put that picture together, and we're not taking anything for granted and we have been hyper connected and restless and tracking shifts.

But we feel confident that we're going to stay in best we're not retreating. We're going to invest smartly to ensure we come out of this stronger much as we did through the last 2, 3 years, the corporate volatility. You can see where the company is today relative to where we were in fiscal '19, and we intend to do the same again.

Yes, Celine, I'll take the second part of your question. As Ian said, I mean, our orientation is to invest in the business. as I said before to Sanjeet, I mean the flywheel of growth is really working. As we invest in the business, we strengthened our brand equity and we're able to drive more price, drive more productivity, and drive more premiumization, drive volume growth, very importantly drive market share growth, and that allows us to continue to invest in the business.

But we do so in a very disciplined balance. We do not have a target return on investment -- reinvestment rate, sorry. We do not have a target reinvestment rate for our marketing spend. But we do have a lot of discipline in making sure that we get a good return on investment for all of our marketing dollars. So our brand team put together the plan. It's a combination of brand creativity as well as using our tools and they're there to ensure that we're able to drive the best effectiveness.

And so we will make the decision market by market, brand by brand as we go into the year. We'll do it based on where we see the consumer and where we will get the most effectiveness and efficiency of spend. And this is what we've done over the last 2-plus years, and it's working. We are growing share, growing a holding share and 85% of our cost rate in measured markets. And we'll continue to follow the same flywheel.

Simon Hales of Citi.

Two or three for me, please, if I can. Firstly, Ivan, wondering if you could just talk a little bit more about any change in consumer behavior that perhaps you are starting to see in the U.S. I mean clearly, we've heard from some of the U.S. retailers this week like Walmart plugging, but they have seen some changing spending patterns amongst their customer base. So I appreciate -- that's not a like-for-like customer base necessarily with yours. But what does the real-time data that you referenced that you get in your business? What's that really showing now in terms of occasion shifts on to off-trade moves that we're perhaps starting to see any down trading at all or even just pauses in the trade up momentum in some of the spirits categories in the U.S.? Or is that data just showing no change at all right now. So quite a long-winded first question.

And then secondly, obviously, a number of your competitors have talked about supply chain constraints sort of impacting their businesses late. You've clearly had issues for a while around things like Crown Royal. Are there any other particular sort of issues you'd call out? Anything we should be worried about, particularly with regards to glass supply when it comes to fiscal '23?

I'll take the first and Lavanya can talk about supply chain. So our consumer behavior so far, and I qualify it like so far because we read this day by day, week by week. To your point on the U.S., we are not seeing either slowdown or down-trading trends. Just broadly. I mean, obviously, we analyze excruciating detail. But at the headline level, we are not seeing it which doesn't say won't come. And we are staying very alert to it. And I mean, the channel product category mix, I mean the on-trade is strong. And continues to be strong as we've gone into July. And so we're feeling good about the on-trade momentum.

And that's a big piece actually of our momentum because we're gaining share in the on-trade in the U.S., I think a 3 basis points in the NABCA data, which tracks on trade. And we're really well positioned for that recovery. When we cut price tiers and look at all the analysis as to -- has there been any shift in trends. I'd say not yet, but it's too early to call. I think we'll obviously watch it. And as I said in my earlier remarks that we were ready to move very fast to ensure that we can sustain our outperformance in the U.S. market.

But the core fundamentals of spirits momentum, people drinking better, continue. And the demographic shift (inaudible) in America very positive for our category. Organic younger Americans are drinking more spirits than beer in environment. And you can see that come through in the -- as the goal come through the demographics.

Multicultural America is very good for our category. And our brands are very healthy and well invested. And we only have 7% of the TBA dollars in America. So there's a lot of opportunity even in a slowdown for us to gain from other weaker parts of the TBA market. So you put that all together and we -- we're clearly not going to see the torrent rates of growth that we've had. And even in these numbers, right, North America growing at 14%. As we said in our F '23 outlook, we expect this growth to slow down. But they are still very attractive and it remains -- so that's how we're looking at the current dynamics, no real shift, but tracking it very closely.

Simon, on your second question on Slide 2. I begin with reminding us again that we have grown volume 10 percentage points this fiscal year. And that comes on the back of growing volumes 11 percentage points last fiscal year. And so our supply organization have done a fantastic job of being able to ensure that there is sufficient availability of our products to consumers all over the world at the right time and at the right place.

We did have some constraints on each liquids on (inaudible), mainly because demand has outstripped all expectations by such large percent. Also on some of our aged variance of tequila 1942 continues to be at a use of DuPont. But in the first half of the year, we did have some issues with this. That was very specific to on bottles to the particular shape of that bottle and the design of the bottle, we had some issues with procuring enough footprint at the right time. That has been solved, so it is back on shelf for consumers to enjoy.

If I step back and think more broadly to your question on bottles, I mean the 2 things that I think really distinguishes Diageo, one is we have a global reach and believe to leverage our global reach to ensure that we are able to meet demand. And then the second one is the strategic relationship that we have built with our suppliers. This is true for our bottle suppliers, but more broadly as well. And this is what has enabled us to navigate what has been a very difficult supply environment as well as we have done.

Can I sort of come back and just clarify, Ivan, in terms of your remarks with regards to what you're seeing in terms of consumer behavior trends? You're clearly seeing no down-trading as things stand. Does that also mean you've seen no change in the rate of up-trading as we've moved through the back end of fiscal 2022 and perhaps into July? And overall, based on what you're seeing at the moment, and your confidence in the ability of your business, are you confident you can deliver organic EBIT growth in 2023 within your midterm guidance range?

Yes. I mean we've reiterated our midterm guidance range, right? So on that in terms of growing profits slightly ahead of sales, yes, we have seen us do that even through the tough period of high inflation -- so we fully intend to do that. The -- there's not been a dramatic -- a significant shift yet. And I also say it's too early to call. There is strong consumer exuberance this summer in Americas. The (inaudible) show is coming. By the way, this is what I spent all my time on. I talk to customers, I look at all the data, I talk to distributors, to be the critical different factor for Diageo is really understanding the consumer shifts and being able to season fast and execute against them faster than anyone else with flavor and impact and investments. So I mean, I'm consumed with it because I'm not it. I mean this is what I really followed very closely. And I'd say there's nothing I see right now. To your point, that the shifts in the price tier category dynamics.

But 4 weeks also doesn't make a trend. So you have to really look at this and understand it. And when I was in the U.S. last time, this is a lot of retailers. And you've got pockets. I mean the multicultural it urban America, you can see the pressure on categories like cognac and even our CIROC brands in certain [DMAs] in America. You see that coming through. But broadly, at the same time, we've got very strong momentum on high-end tequila continuing in many parts of America. So we're all over it. And as of now -- and I certainly don't see I mean you will only have to go back to the financial crisis. I mean you potentially could see a bit of down trading for a few quarters. All the higher priced is growing a little slower, but I think that doesn't give us concern. And it's not going to cause us to change strategy -- we're going to be, we feel really confident about our ability to steer through this effectively.

Olivier Nicolai, Goldman Sachs.

Just three questions, please. Firstly, done some disposals in beer in Africa recently, first in Ethiopia and more recently in Cameroon. Is there any change of strategy in Africa and potentially more beer disposals to come as your spirits sales are becoming bigger?

Secondly, on the U.S., a very impressive growth overall. I've noticed spirits ready to drinks also grew by 18%. And it's about 4% of your North America sales. Can you give us an idea of how big this category could become? And how much distribution gain still to come in the U.S.?

And lastly, I mean you partly answered that question before, but Ivan, you were obviously running North America back in 2008, 2009 during the last recession. If the U.S. does enter into a recession this year or next year, can you tell us how Diageo today is different from 12 years ago. And the lessons you've learned from the last recession where you were running North America? And where do you see the risk for your business now, if any?

Let me take the first of the third and Lavanya will talk about (inaudible) Our beer strategy is, as you know, we operate an asset-light model with beer with the Guinness brand. And by the way, I could not be happier with the help of the Guinness brand. It's the strongest as seen in my 25 years that we have right across Europe, U.S. and Africa.

The actions you see a stake, Ethiopia and Cameroon is part of really getting an effective asset-light model and route to market around the world on how we build our business -- and we -- that is a smart decision in terms of ensuring we still see good growth for Guinness in West Africa. But we're going to do it through more capital -- less capital intensive model. So no real change in our strategy.

We're delighted with the performance of Guinness. As you may have seen where we've announced a GBP 200 million investment in Ireland to open a carbon neutral brewery. We need 1 more, we're overcapacity in Dublin. So remain positive about it.

On your U.S. recession point, yes, I remember very clearly, I won't say the financial crisis. The main point is Diageo is so different today than where we were then. Our portfolio is different. Health of our brands is different -- the data and analytics have had are different, the whole commercial execution, the innovation and marketing machine and our talent is different.

So I feel the company is in a much stronger place. I mean, we have an intense sellout culture, right? We know exactly what's happening every day. We didn't have that in those days.

And so what I said earlier, I think the company is much more agile. And our portfolio is much healthier right. I mean we've got momentum in tequila, in whiskey, in our reserve brands. And it's not just tequila that's driving our growth, right? We've got super growth happening on Johnnie Walker and Buleit and Crown Royal and Ketel One So I do feel we're in a much healthier place.

Having said that, we're not taking it for granted. We're paranoid about it. And as we talked about earlier. And we're tracking it very closely. But we've got the ability to capture where the consumer moves. And let's not forget spirits, there is a very good balance relative to beer and wine. And in the dynamic of a more stretched consumer, that's why we feel there's resilience here for the spirits category.

Olivier, I'll take your second question on RTD. I mean, if you just step back and think about it, I mean, where RTD plays in the consumer benefit area of convenience and beer, SMBs, so the favorite malt beverages and seltzers. All of these also play in that same area of convenience.

What we've seen happen here in this segment in the convenience areas, Consumers are premiumized exactly the same trend that we're seeing in the rest of the spirits category. Consumers are willing to pay an extra amount to be able to get that beautiful ready to drink spirit cocktails made with real spirit. So if you try to think about our Crown Royal ready to drink, it's made with real -- Crown Royal is not a more something that gives you a funny after taste. It's absolutely delicious with (inaudible). And it is significantly more premium, but that is what the consumer is gravitating towards. We see the same on Tanqueray soda in the U.S., on the Buleit, Manhattan has been at the Buleit old fashion that we have in the U.S. I mean it actually is really liquid -- how big will it get mature. But what we are definitely seeing is that consumers are willing to pay that extra premium to get the great taste of (inaudible) with the convenience attached to it.

But on the other hand, what I'd also say is that the spirits category continues to be very special. I mean, the art and the craft of being able to make a cocktail at home is something that consumers really took to during COVID, and that is very much alive and growing. So -- and that's what allows dealers to be able to be creative, make something authentic or that matches their meals. And so that margin is by no means going away.

Laurence Whyatt from Barclays.

Three from me, if that's okay. Firstly, on the tequila category. If we look at Casamigos, it grew 125% last year and another 88% this year. Some extraordinary growth numbers. And just your views on how long this sort of extremely high double-digit, triple-digit growth can continue.

And on a similar point, do you -- what are your levels of agave supply? Do you have agave contracts that are able to deal with this sort of level of demand? And if you have a view on where the agave price may go to -- there's certainly been some expectations that agave prices might start to fall, but it doesn't sound like we've seen any of that yet. So I wonder if you have you on the agave price as well.

Secondly, on the A&P spend, just following on from an earlier question, I wonder if Lavanya, could give us some -- a bit more detail on the returns you're getting on your A&P more certainly, whether it's continuing to increase. And if so, could we expect the A&P as a percent of sales to actually continue to increase from here if you're getting better returns from it to potentially drive faster top line growth. And then finally, we have...

(technical difficulty)

Should we move to the next and then the next question?

Pinar Ergun from Morgan Stanley.

Two for me. a follow up on the U.S. Could you please help us reconcile the very strong growth you've reported in the U.S. softer trends we're seeing in the Nielsen/NABCA data in recent months and comment if you're happy with the level of the wholesaler inventories in the channel now following the restock.

And then the second one is, can you please talk a little bit more about the new supply chain agility program? Is this aimed at replacing aging operations or building new ones? And are you able to give us a steer on the magnitude of the related savings you're expecting?

Thanks, I'll take the U.S. and Lavanya will take supply agility. So as you can tell from our release, I mean, our U.S. based depletions grew at about 14%, really strong growth. And what you're seeing, to your point, we should never forget, I mean, Nielsen is a tiny piece of the market, right?

In value terms, I think it's some 20%, 16%, 17%. NABCA is another piece, but then you have the on-premise. And I talked about our momentum in the on-premise is really strong right across the country. And we have the independent and franchise states and independent retailers of spirits. And you've got e-commerce platforms, et cetera, which typically are served by independent retailers.

We're doing very well in these other channels. And I mean, our estimates in last fiscal year, the U.S. industry spirits industry grew about 6% to 7%, and we're clearly outperforming. So our growth is broad-based on multichannel. And I just wouldn't overread what's happening in Nielsen, and Nielsen tends to be a very promotional channel. We don't like citing a lot in promotional channels because we've got plenty of higher-quality business we can build.

The staff levels in distributors, I mean, they're perfectly satisfied. There were 2 dynamics at work. One was with the impact of COVID, we immediately took our stock levels down. As we couldn't forecast future demand when we were the seats of the COVID storm. So you're seeing a restocking coming from there.

And then the second thing is our imported products. Shipping Johnnie Walker from Scotland to the U.S. takes 2 weeks longer sitting on the water. And so our distributors want to make sure that they're coming. So this is -- we have very visibility on depletions and stock levels and huge and our culture. I'm very comfortable with where we are. And back to your first point really comfortable about the broad outperformance in share growth that's coming through in the U.S.

And for many years, we didn't performed that well in the on-prem. And what Claudia and the team have done to put a machine in place where we're really executing superbly in the on-premise. And I went to see it first in a few weeks ago in the U.S. and where our whole capability and execution of winning in the on-premise has improved significantly in the last couple of years.

Thank you for your second question, the supply agility program. I'll start off by saying that supply is a poor capability and a strength for Diageo. This is what has enabled us to be able to grow volume, 10 percentage points in this fiscal on top of 11 percentage points in fiscal '21. I feel like I said that before today. But and it is absolutely essential for us to ensure that we keep this capability at cutting edge. And we have an ambitious growth agenda in terms of increasing our market share from 4% of total beverage [alcohol] to 6% and supply is going to be -- has to be a competitive advantage for us to be able to achieve that ambition.

Our business has changed quite a bit over the last years. We have grown volume. We have reoriented our portfolio. We've seen shifts in category and product mix and market mix. And so we have initiated the supply chain agility program that spans 5 years starting this fiscal '22. The objectively is to strengthen our supply team to improve its resilience, to improve its agility, to be able to deliver further productive savings and to make our supply operations more sustainable.

And it's really all about being able to fulfill our share growth ambition by creating a supply chain but continue to enhance our supply chain to be fit for the future. So we do think it will create significant long-term value, it's not 1 project. It will be a series of projects. At the longtime, of course, after communicating with our employees. We will communicate it externally as well with more details.

The savings will be incremental to our ongoing everyday efficiency program of GBP 1.2 billion that we laid out. So this will be incremental to that. It does not replace or overlap our everyday efficiency program in any way at all. And we do believe that we expect that this program will have a feedback period of 5 years.

We'll now go to our next question from Edward Mundy from Jefferies.

Apologies if you've sort of partly answered this question, but you've come through fiscal '22 with great momentum and you're flagging some normalization rate of growth. I appreciate there's a lot of known, unknowns, but is there anything you're seeing at the moment in either customer or consumer behavior that would indicate you deliver below 5% to 7% organic sales for fiscal '23.

The second question is around the inventory picture. I appreciate it sounds like it's quite normalized and you've obviously moved from a sell-in to a setup culture, but can you talk about the (inaudible) inventories globally. Are there any areas where you're holding back inventory at this stage.

And the third question is around the U.S. I missed your answer around what you think the industry is growing at, at the moment. Could you just confirm what that was? And if you look back to 2008, 2009, a number of suppliers took pricing down. I'm not sure where the consumer is heading. In this inflation environment, does it make it harder for the industry to use price as a lever to take value out of the U.S. spirits industry?

Your last question was about the industry growth and...

Yes, where do you think industry is growing? And relative to last time 2008, 2009 when people cut prices, given we've got an inflation environment, does it make it harder for suppliers to cut prices and therefore, help to protect industry growth?

Yes. So I'd say -- I mean, I mentioned we in the fiscal year, I finished our estimate that the U.S. industry is about 6% to 7% growth in fiscal '22 in value terms. We do -- if you go back to the financial crisis, I mean, you had. The industry grew through it, and you had 3, 4 quarters of slight down trading, which then reverses I would say the industry is in a much healthier pace.

Let me talk about the art of the industry, is our brand and our connection to consumers, the effectiveness of our marketing and the scale of our marketing dollars. And so -- and we've also got a much better portfolio. But don't forget, we've sold a bunch of low-performing brand. We've added this incredible tequila position to our business. Whiskey is hot and those trends will continue. So it's a very different picture from last time around.

And I do think we -- and if you get trade down, let's say, the premium sector where if you look at the price segmentation, the price points around Smirnoff and Captain Morgan pick up and the Black Label or the Don Julio are down, we've got depth and breadth in this portfolio to be able to respond to it.

And I see nothing that suggests spirits share gains of [PPA] will slow down effect to the contrary to my earlier comments about value. Spirits offer tremendous value. And so you put that all together and we could have a few quarters of down trading, but we'll work our way through it.

On your first question on the -- your second question, the inventory levels globally, we're very happy. I mean we moved through COVID. I mean we took dramatic action to bring inventories down and we are at very appropriate levels. The sell-out culture is highly embedded, and we track and measure this in every market in the world.

Lavanya and I review it in detail as every half. So I'm very comfortable with where we are, very healthy levels of inventory and receivables, very, very healthy number. And Diageo's in really fit shape to respond to shifts because we don't -- have and markets around the world are tracking that for us.

I can take your first question. I mean, what has to do is I'll actually answer it in a slightly different way, which is I'll tell you why we are confident in our medium-term guidance? And kind of going back a little bit to pre COVID, our guidance was to grow between 4% and 6%; And at Capital Markets Day, we issued guidance, which was one point positive. And this was really driven by the fact that we now have a much more average portfolio in terms of markets and categories.

The spirits category is growing faster, taking share from wine and beer as Ivan just mentioned. Premiumization has accelerated, and it's really driven by consumers 2 things to drink pattern. And we are performing better -- I mean, we're growing share more consistently. We're executing much better. We have a tremendous suite of tools and people capability and energy. And so that's what led us to have the confidence that we will be able to deliver on our medium-term guidance of top line growth of between 5% and 7%.

Now having said that, I will say that, that still quite different than where we have delivered at a 3-year CAGR of 9%. But we do recognize that market conditions are changing. We expect category growth in markets such as North America to reverts to pre pandemic levels. And we do see the potential impact of the inflationary impact on consumers. But again, put it all together, we do have strong confidence in our ability to deliver on consistently deliver on our top line growth of 5% to 7%.

And we have back Laurence Whyatt from Barclays.

We got your question. So that's tequila in Casamigos, I mean, obviously, these kinds of growth rates are not to sustain and such a big business now. However, the brand is incredibly hot. Brand equity and consumer traction penetration, recruitment continues to be very strong. We see a good runway of continued exciting growth. We are both for customers and done. And by the way, we just taken global leadership in tequila in value, both in the U.S. and globally with these 2 brands.

You've seen the investments we're making in Mexico. So we are counting on continued growth, but the growth rates will clearly slow down. Agave prices, again, in part because demand has been so strong for the category, you haven't seen the softening yet that was predicted 3 years ago. I mean our advantage is we got scale and we're playing at the top end of the market.

So we do expect agave pricing to come down over time, but we don't have a -- it's a demand/supply dynamic. And right now, we're really struggling to fulfill demand which has continued at this accelerated rate. But certainly, in a few years, we would expect the agave prices to come down.

I'll answer your question on A&P, whether we're seeing improving return on investment on A&P dollars. And the answer is yes, and it is because we continue to build and improve our capabilities in this area.

So you heard us talk about to (inaudible) such as catalysts, which we have had for several years now at Capital Markets Day. We talked about a tool called Sensor, which is a proprietary tool that helps us measure the relative effectiveness of our media spend across digital platforms. So within digital, we can understand our effectiveness of our spend between platforms A versus B versus C. And it has enabled us to improve our return on investment on our digital spend in the U.S. by about 30%.

So as we continue to build more capabilities, we are able to get better effectiveness of our A&P spend and the better return on investment. I'll give you another example of Crown Royal in the U.S., again, and this was with the NFL. We were able to create multiple versions of the Crown Royal video. And by using our data and analytics, we were able to deploy the right video content to the right consumer locations, like geolocation. That could be personalized to target consumers in specific cities where they have individual NFL team sponsorships and with the right messaging.

And work like this has contributed to like a 17% improvement on our ROI on Crown Royal Digital Media, which is a large part of our spend in the U.S. And so yes, we do continue to see improvement in our A&P effectiveness. And we measure it on an everyday basis, and we will continue to invest behind our brands as long as we see the returns playing through.

That's great. I think before I got cut off, I was hoping to ask a final question about the potential situation in India. There's certainly been a lot more discussion around a potential U.K. India trade deal that sort of heated up over the summer. Obviously, the U.K. government has changed somewhat in the interim, but I was wondering if you'd got any views on what may or may not happen in India and how you might respond to any changes that could take place in that market.

Yes, I'll take that. I mean, the discussions between the team continue. And clearly, we need a prime minister on the U.K. side before Diwali, I hope, which is what -- which is what Boris Johnson and the Indian Prime Minister hoped for a deal to get to.

Free trade agreements until they're done, I don't -- we count of them. But conditions are more encouraging. The scotch whiskey is on the table. However, there's a lot of give and take on both sides. The trade teams on both sides are working very hard. So it doesn't stall and the urgency that both prime ministers have put on it is working through the system.

I would not give you the odds on what's likely to happen. We're just tracking it, supporting it. And clearly, it will be another nice boost to the growth of the category in India. Though I would point out, even without even with these high tariffs, our scotch, whiskey business in India was up 62%, Johnnie Walker, up 66%. We're seeing real momentum on the high end of the business even with the high tariffs. And so that will clearly add an additional benefit and accelerate the growth of premiumization within whiskey. And whiskey, as you know, India is the largest market for whiskey in the world.

So we'll wait and see, and we'll work very closely to -- with both sites to see if we can get Scotch whiskey addressed in some form. It won't be an overnight change to 0. There will be a staggered change, but every step would be helpful.

Andrea Pistacchi, Bank of America.

I have two questions, please. The first one on the U.S. Now it's, of course, hard to say how the consumer slowdown might play out in the industry. But in the event of, let's say, mild recession for a few quarters, do you think some categories may be more impacted than others? I think you highlighted cognac. Do you see categories that could potentially be beneficiaries of a weaker environment? For example, I'm wondering whether prepared cocktails, given the sort of affordable proposition of buying a cocktail and account just for a few dollars, whether this could if anything, whether a difficult environment could be a further boost to the growth of the category.

And the second question is actually about emerging markets. You've talked about while you sound reasonably confident about the resilience of the industry and your business, of course, in developed markets, how do you feel about emerging markets over the next 6 to 18 months where consumer demand tends to be usually more correlated to disposable income? Are there any sort of hotspots in emerging markets or any areas that you're monitoring quite more closely?

And if you could highlight the main differences in your business and portfolio in emerging markets, generally speaking, compared to 2013, '14, which is when we saw the last slowdown there.

Yes, I can take those. I'll say on the first one, the recession impact on big shifts in consumer preferences across categories and formats, it's not that big. And in part, because it comes back to what consumers are spending on the spirits category is for households that buy per it's about $300 a year. right?

So it doesn't use an occasional purchase. You're buying it 5, 6, 7 times a year. It doesn't cause a shock to kind of downgrade from premium detergent to a private label detergent, right? And so and when we track it also to the financial crisis, and there were big dramatic shifts. So we'll have to watch it. I'm not saying they won't be. And they'll be at the margin, and we need to be quick.

So back sizes is a very important factor, which Claudia and the team are tracking daily and how the pack mix changing because you tend to see a little bit of the 175 pickup as value is more and people shop at clubs and warehouses as opposed to going to the (inaudible) store. So those kinds of trends we've track.

On the emerging markets, I mean, we have a lot of experience of working through cycles in the emerging markets. I think what's different this time around is our portfolio and brands are in healthy shape. Scotch, whiskey is clearly a big player across Latin America and Asia. And in Africa, our beer business and Guinness is in a very healthy shape.

So when you get down cycles and big devaluations, I mean, it does have an impact. There's more volatility in emerging markets. But again, we're in a healthier position, our stock levels, as I talked about earlier, are very healthy. We're reading the shift earlier. And if you look at the numbers in Latin America through, let's say, what was not a great economic period.

This last year, we've really come through very strongly in Latin America, and it's mostly deluxe scotch. And that's because our marketing activation, commercial execution, pricing actions, I mean all of that is really working at a far superior level than 5 or 10 years ago in Latin America.

So there will be more volatility in emerging markets. But again, our focus to just ensure we come out ahead, grow market share and do it in a quality sustained way.

Trevor Stirling from Bernstein.

Ivan and Lavanya, two from my side, please. First one, probably for you, Ivan, concerning Scotch definitely, Diageo Scotch has seems to have got its mojo back in great numbers in the fiscal. But also look at the blends tend to do much better with Johnnie Walker, 35%, Old Parr up 59%. And malts just lagging a little bit at 17%, I guess part of that may be a comp effect. But maybe you can talk a little bit about your malt strategy? I know you're putting a lot of money into the visitor centers in Scotland. That will be really helpful.

And the second one, I think I is the first time had a chance to chat since the appointment of Debra as COO or rather an announcement about Debra's appointment, I wonder if you could give us a little bit of color about that decision.

Sure. So on Scotch, as you know, historically, Trevor, we've always underperformed more in market share. And which has always been my biggest frustration for a company that owns the 28 soon to be 30 beautiful distilleries over on Scotland. And we were spoiled for choice, and we've been seeing what's changed in the last 3 years. We now have a very focused long-term strategy on malts.

So Singleton is a major play for us going at, let's say, the more mainstream malts. We're very clear on (inaudible) where we want to build it. Mortlach at the high end. I mean Mortlach is our due, and it's going to be a long play. It's going to be 10 years, but I'm really encouraged with what we'll see there.

And then every market depending on the world as specific malls that they're driving. So what's changed? Yes, 17% growth is not good enough. We should be doing better. And I hope to see our malt momentum improve year after year. The strategy is clear. The investment behind it is not clear. And those are things we didn't have before that clearly laid out.

On Debra, I'm delighted to have a move into the COO role, October 1. The main focus, and it's actually dealing with a lot of the questions we've had on this call, she will be connecting the market, supply and the brand, and really bringing everything we talked about here, steering the company through the volatility and navigating and delivering the outperformance you've seen us do in the last few years.

But I would say, I mean, I'm really delighted about the exec team and the top 100 leaders in Diageo. And Debra will move into that role. The challenges and opportunities are clear, as we talked on the call and really looking forward to it. She's done a terrific job in North America and with our supply even and works very well across the executive committee. So looking forward to that next step.

And we have time for one last question today from Chris Pitcher from Redburn.

A couple of questions, I'll keep it short. Following on from Trevor's point around blends, obviously, you've seen very strong price mix for Johnnie Walker in the U.S. You gave the global growth rates for Red, Black and Blue, but could you share these for the U.S. as well? You mentioned double-digit for Black and Blue, but how much did Blue grow ahead of Black? Did Red grow? And can you give the mix of the Johnnie Walker portfolio today in the U.S.?

And then a very short final question, 7% CapEx to sales is a level we've never seen before. How many years before that sort of steps back down again to the 4% to 5%? Or will it stay high during the whole supply chain investment?

Chris, I don't have at hand the mix of Red, Black and Blue in the U.S. (inaudible) but what I would say is Black and Blue -- I mean, that's our focus, to build Black and Blue. Both are doing really well and really fast. Red benefits from the Johnnie Walker yellow, but it is not -- I mean if you step back, our total Scotch whiskey business, now globally is at Black Label and above in terms of value. This is a very premium business, and we've shifted it over the last few years.

So -- the focus areas will continue to be to build Black and above. And Blue has super momentum. I mean you've seen the global numbers, right? Roughly speaking, Red Label grew 20%, Black Label grew 40%, Blue Label grew 60%. That's the trade up within the Johnnie Walker trademark business. And the U.S. trends are similar. Second question was?

It's around the CapEx, the 7% of sales. I mean even when you were building RTD capacity in the early 2000s, it was never that high. I mean, how long is it going to be at this level, do you think?

I'll take that question. On CapEx, this in fiscal '22, our CapEx was GBP 1.1 billion that was really coming off the back of several projects going down to [support] and the need to support the growth of the business and our sustainability agenda. We've guided to between GBP 1 billion and GBP 1.2 billion here for the medium term. And it's really to continue to support the growth of the business. I mean, you've seen the fabulous volume growth that we have on the business.

We have an ambitious growth agenda. And this will also be required for us to be able to meet us in the (inaudible). And it is also going to be a portion of it is also going towards supply agility program. So we do expect a slightly higher level of CapEx as we execute this program, and I do expect our CapEx levels to go back to more normal levels as this program completes.

I'm going to close it here. Thank you, everyone. Appreciate your interest in Diageo and for following and tracking and investing enough. I wish all of you a great summer. Lavanya and I look forward to meeting several of you over the next week or 10 days as we get around. So thanks again. Appreciate it, and goodbye.

This concludes today's conference call. Thank you for your participation. You may now disconnect.