Diageo PLC (DEO) 2023 Q2 法說會逐字稿

Good morning and welcome to Diageo's 2023 Interim 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) We're now ready to start the call.

Ivan, please go ahead.

Thank you. Hi, everyone, and thank you for joining our interim results call. I hope you've had a chance to read our press release and watch the presentation webcast on diageo.com.

I'm pleased with our results for the first half of fiscal '23. We delivered organic top line and operating profit growth above our medium-term guidance of -- net sales up 9%, with growth across all regions. Volume grew 2% even as we implemented strategic price increases. Operating profit, up 10%. Organic margin expanded 9 basis points. We generated GBP 800 million of free cash flow, fueling continued investment in long-term growth. We expect to deliver stronger free cash flow in the second half as we lap more normalized working capital movements.

We continued to gain or hold share in the majority of our markets, 75%. Our super premium-plus brands grew organic net sales by 12%. I am particularly pleased with the strong growth in scotch, up 19%; tequila, up 28%; and Guinness, up 17%. On a constant basis, Diageo is 36% bigger than before pre COVID and with a 4-year CAGR for organic net sales of 8%.

In North America, organic net sales grew 3%, lapping strong double-digit growth in the first half of fiscal '22. US Spirits net sales grew 2%, on top of strong double-digit growth for 4 consecutive halves, and we had depletions ahead of shipments. Our US Spirits business is 44% larger than fiscal '19, with net sales growing at a 4-year CAGR of 9.4%.

We took price and held share of TBA. As expected, growth in the U.S. spirits category is normalizing, trending towards a historical mid-single-digit range. Consumer demand remains resilient and the market continues to premiumize. 33% of American drinkers surveyed said they had spent $50 or more in a bottle of alcohol in 2022, and that was up from just 24% in 2021.

In Europe, organic net sales grew 10%. And we maintained volume despite the challenging economic environment. Asia Pac grew 17% despite Greater China which only grew 2%.

Latin America grew sales by 20% and delivered the highest margins across all our regions in the half. This business is 64% larger versus fiscal '19, with net sales growing at a 4-year CAGR of 15%. I'm very proud of our performance in Latin America. In Africa, net sales grew by 6%, with growth across all markets.

And we're delivering consistent returns for shareholders, increasing our interim dividend by 5%. And today, I'm pleased to announce an additional return of capital to shareholders up to GBP 500 million in fiscal '23.

As I look ahead to the second half of fiscal '23, I am pleased with our start in January and the resilience of our business. I am confident in our strategy and ability to deliver our medium-term guidance.

And with that, I'll turn it to the operator. Let's take our first questions.

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

Ivan and Lavanya, a couple from me, please. Firstly, could you just give us a sense of where you see US Spirits sell-out trends at the moment and how that contrasts with inventory levels and the numbers you've given us on the shipments and depletions so far in the first half? And secondly, would just love some early thoughts on how Chinese New Year has gone.

Sure. So the U.S. consumer is robust. If you look at the industry, we see it growing at about 4% or 5%. And I've said this for a long time, a couple of years or more, that post COVID, we expect the industry to come back to that mid-single-digit growth range. And what I'm really pleased about is the consumer, through the last 6 months, has come to that range, so we are feeling very good about it. Within that, premiumization remains strong. You see in our numbers our super premium plus business grew 10% in the U.S., so feeling really good about the health of the U.S. consumer. The spirits industry has 20 years of volume growth, taking share of TBA, outperforming beer and wine. Premiumization is strong. And I quoted those numbers of the robustness of above $50 a bottle, so overall strong, robust and pretty much where we expected it to be. If I turn to Chinese New Year, clearly the -- I mean there's 3 pieces to Chinese new year's, the sell-in before, what happens in a couple of weeks and what happens after. The sell-in before, we were cautious obviously with the lockdowns and the COVID conditions in China. Actual Chinese New Year itself is subdued in terms of socializing and consumption. And certainly the large events is more subdued, but we remain optimistic about China recovering fast, both for our scotch business and for baijiu. And as we go into Q3 and Q4, we're very much playing and -- into assuming a strong recovery. Obviously we have to watch it week by week, but I'm feeling positive about the China consumer environment going forward.

Got it. And just a quick follow-up there on the U.S. If you think the industry is growing 4% to 5% in sell-out terms, do you think Diageo is outperforming that? And just a quick word on where you think inventory levels are and how comfortable you are with that in the U.S.

Yes. I'll turn it to Lavanya.

Yes. So I'll address your question on inventory in a bit, but in terms of our performance in the U.S. itself, I mean, we are holding share of TBA in the U.S. And so that's we're feeling good about that, obviously not -- we were growing share and we plan to go back to that. And Ivan has a very strong point of view around that, I know, but coming back to inventory levels: Fiscal '22, we ended fiscal '22 with healthy inventory levels. We talked about this at -- in July when we announced our results. And inventory levels were close to -- back to close to where it was pre COVID, right, a little bit higher on imports just because the supply chain was longer but broadly back to pre-COVID levels on inventory levels. Where we ended the half, we ended with inventory levels that distributed slightly below where we ended last fiscal year, not because we wanted to destock or we needed to destock but just because December was a really good month. And so a lot of depletions happened towards the end of December especially, which just led to inventory levels being a little lower.

We feel good about where inventory levels are. And this -- we're lapping the replenishment of inventory last year, because if you go back to the start of fiscal '21, we were -- fiscal '22, sorry. We were coming off of a very, very, very high growth rate in fiscal '21. Fiscal '21, we grew 24% on U.S. spirits, so when we started fiscal '22, it was very low levels of inventory across the entire supply chain, which we replenished through the year. Some brands came in faster. Some brands came in a little later in terms of the -- when supply was available, and so that's what we are lapping here on shipped versus deplete.

I'd just add we've held TBA share. I think, if you look below that, what I'm really pleased with is we are gaining substantial share in the on-trade. So the on-trade in the U.S. -- and NABCA has the most reliable data here. So if you look at NABCA on-trade, it's about 20% bigger than pre COVID. And we've gained outsized share, so -- and to me that's a huge measure of the health of our brands and the portfolio. And even in the last 6 months, we gained over 100 basis points of on-trade share in NABCA.

Our next question comes from Olivier Nicolai.

Ivan, Lavanya, just a couple of questions, please. First, on the U.S., just following up there, as comps normalize, should we assume a stronger sales performance in H2 in North America in term of organic sales growth? And then if we think about the margins, obviously your margins was down in H1 in North America. Should we -- when could we expect a stabilization in margins in the U.S. or at least kind of gross margin inflection, to start with? And then just on FX, a quick question for you, Lavanya. You flagged that you're expecting GBP 300 million positive impact on FX for this year. How much transactional FX impact do you expect this year? And is it fair to assume further transactional FX impact in fiscal '24?

Yes. So maybe I'll take the first part, on U.S. top line, and Lavanya margins and FX. So yes, we do anticipate, as I talked about earlier, the U.S. industry should be in solid mid-single-digit growth in the second half. We expect to perform in-line, ideally better, but that's going in view. So focusing on the consumer, I think we feel positive about our ability of consumer offtake to be in the mid-single-digit range. Now we have an intense sell-out culture, right, so as we look at managing the depletions and shipments -- you will recall from last year's results, because we were in the restocking phase, we had shipments ahead of depletions 3 points when we closed out the year. So we will lap through all that stuff, but to me that's just supply chain. The main thing, most important thing, is ensuring we're well positioned to win with the consumer. And we've got phenomenal marketing plans, great innovation. We've got Super Bowl coming up, and Crown Royal is going to be on the Super Bowl for the first time. Really excited about that. So the team has significant ammunition behind our brands going into H2, so I'm feeling good about our ability to win with the consumer.

Now, Olivier, to your question on margins in North America. I mean look. I'll just start off by reminding us that North America has very, very strong margins, 41% operating margin. It was the highest-margin region for this business, just got toppled by Latin America who surpassed them by 30 basis points, but it is -- and one of our strategies has been to invest in North America for growth because every point of growth in North America comes with really, really strong margins. And so what you're seeing in the margin story is a bit of that. And we have invested in -- strongly in A&P, also in digital and capabilities to enable continued strong growth of the business in North America. The gross margins, some of it is inflation. And the impact of that is what we're seeing there, but again we have many levers to offset inflation. Premiumization, volume growth, pricing and the work that we do on revenue growth management, all of that helps us to offset inflation, so I'm not concerned about where the margins are in North America. I think it's a very healthy P&L and business in the U.S.

On FX. That was your second question, in terms of transactional FX impact. Not really expecting much in terms of transactional FX impact. Our major currency payers are hedged. And as you saw in the first half, we really did not have any impact from a transactional perspective on FX.

Our next question comes from Pinar Ergun of Morgan Stanley.

I have one on marketing. Diageo has invested very significantly into marketing in recent years, and you're indicating that the investment will rise faster than sales in H2. How do we reconcile that with your expectation of moderating sales growth across all regions? And specifically in the U.S., are your market shares evolving in line with your expectations given the investment that's gone into this region?

And then 2 quick clarifications, I guess. One is on free cash flow. Can you please take us through the different moving parts here? Why, how the creditor balances shifted so much and so on? And then on capital allocation, has your thinking evolved at all now that the cost of borrowing has gone up substantially? Does that change how you approach buybacks, M&A and so on?

Thanks, Pinar. I'll take the first 2, on marketing and share. So marketing, as you know, we built a lot of sophistication in the data and analytics and tools we now have to assess marketing effectiveness. And as we look to the second half, we see very good opportunities to step up the investment behind our brands. And that's why we indicated, in the second half, we intend to increase our reinvestment rate. This is built up by market, by brand, our -- and very much with a degree of confidence on returns. Now our marketing is not just to make the second half sales number. It is about the next 3 years, right, so everything in our business, upweights in marketing are not for short-term return alone. You do get some short-term impact, but the bulk of the impact really comes down the road and in line with our goal to be a very reliable top-tier compounder, this flywheel of Diageo of upweight investment, drive efficiency and get quality top line growth. So it's really in that context because we really want to ensure we are setting ourselves up well for the quality of growth through the medium term, but it's going against very specific brand opportunities where we have a high degree of confidence in the return that we will get for this investment. And I have to say the quality of our marketing continues to step up significantly and I feel really good about that.

On market share. I mean we are, firstly, at a global level, where 75% of the world is in green. That's a high benchmark and I'm pleased with that. In the U.S. context, we're holding share of TBA. We're coming off a period where we've grown significant share. And we've also taken price ahead of the industry, if you look at the last 3 years, and so flat share in the first half but fully expect and want to do better, as Lavanya alluded to earlier. So we want to get back into the share growth mode in the U.S.; and I expect, in the medium term, we will do that. And that's -- that also takes me to the point, when you look at our portfolio in the U.S., we've got a phenomenal tequila portfolio which has still a long way to run. We're the leader in whiskey, and whiskey is a hot category. Innovation, we've got a lot of exciting things in the pipeline that are going to be coming into second half and into F '24. And our execution and investment levels in the U.S., so I do feel good about the ability of our U.S. business to outperform the industry going forward.

Pinar, on your question on -- you had 2 other questions, 1 on free cash flow and capital allocation. I'll take the free cash flow question first. So what we are seeing on free cash flow is -- and working capital specifically is the lapping of what happened last year, so again I go back to reminding us of what happened in fiscal '22. We were coming off of very low inventory levels in the entire supply chain. We had a phenomenal growth year in fiscal '22. We grew 20%, with 10 points of that coming from volume. We were buying a lot of stuff, right, bottles, grains; marketing spend. I mean our total spend increased dramatically, and with that, our creditors increased tremendously in fiscal '22. Our creditors have increased in fiscal '23, in half 1, as well but just not to the same extent that it increased in fiscal '22, so what we are lapping is that huge increase in creditors that happened in fiscal '22. And that's about GBP 500 million of lower creditor increase this year than the increase of last year. In addition to that, we have invested more, a little bit more, on inventory, mainly to ensure our ability to support continued growth of the business across, as APAC has grown tremendously. Latin America has grown tremendously, so there has been about GBP 150 million of increase in inventory. And the third piece is investing in maturing stock, and this is something that I had spoken about as we announced results last year. It is a part of our capital allocation strategy, is to continue to invest in maturing stock to support the growth of our business. Almost -- around half of our business today is in aged inventories. I mean with the growth of tequila, et cetera. And the growth of scotch, the 19% growth of scotch that we've seen this half, is a good example of that; and so we are investing behind that. So that explains the 3 moving -- the 3 pieces to the moving parts of free cash flow.

As we've indicated in the press release, I do expect that working capital will increase in the second half simply because what we are comping in the second half of last year is a little easier. This business remains a very strong cash-generating machine, so no change to that. In terms of capital allocation and has our thinking evolved, the short answer is no. We have a very consistent and disciplined approach to capital allocation. And we will invest, first, in the business, lots of room to grow. We still have our ambition of going to -- from 4% market share to 6% market share. And so we will continue to invest in CapEx, maturing stock, A&P, as Ivan discussed. And then M&A, we will be looking for interesting bolt-on acquisitions, as we have done in the first half, where we just announced Don Papa. We're very excited about that and we will continue to look for opportunities there. We'll also be disciplined on the other side, from a divestiture portfolio, as we have been. Dividends, we will continue to be a progressive dividend payer. And we've announced a 5% dividend increase in this first half of this year. And then return of capital, we've announced an additional GBP 500 million of return of capital for this year. And we will come back at year-end results with a further update for next fiscal if the Board decides to do so.

Our next question comes from Nik Oliver of UBS.

Just one on the U.S. and just to make sure that I'm clear. When we think about U.S. underlying trends, we're thinking kind of 4% to 5% right now, with Diageo outperforming given the tequila portfolio. Is that the best way to think about growth for the U.S. market? And then I'll come back with other questions afterwards, if that makes sense.

The U.S. market at mid-single digits, yes. That's what we've always said the market will return to. And that's what we're seeing and that's what we feel confident about going forward. And it's driven very much by demographic, states preferences. It's a long-term secular trend which -- that is right, that level of growth for the industry.

Great. And then when we think about marketing investment in the U.S., I guess, because there's been unprecedented pricing levels coming through, is the best way to think about marketing investments still -- marketing as a percent of NSV? Or should we think about it more in absolute terms when we do our modeling? If there's -- any thoughts there will be helpful.

I mean, if you look at the last 3, 4 years, we've massively upweighted investment in the U.S. market. We don't target a percent of reinvestment. We actually build our plans bottom-up, right? So you take a brand like Crown Royal. I mean we put in place a very rigorous process of what is the right level of spend behind Crown Royal and what mix of activities we're putting behind. So we build our marketing budgets bottom-up, but what you see in the trend is our orientation is to lean in and spend more because we do believe there's plenty of attractive growth to be had. And we are very focused on the sustainability of the growth, as I talked about earlier. This is not just about delivering a return in the next 6 months. So that's the approach we take. And the U.S. market, I've always said it, if there's any opportunity to spend more, we will.

Okay. Final question: I think, back in -- back last August, you were talking about share gains for Diageo in the on premise were one of the reasons why obviously, maybe, there's a disparity between the Nielsen and NABCA data and what Diageo was reporting. Is that on-premise share gains still continuing?

Yes, very much so. I said we had over 100 basis points of share gains in the last 6 months, so we are feeling really good about our on-premise momentum. Claudia and the team made some really big changes in our approach to the on-premise about 3 years ago, and you just see the consistency of performance coming through now. And that's a phenomenal indicator of the health of the business, so I'm really happy to see the growth in the on-premise, the share growth in the on-premise.

Our next question comes from Simon Hales of Citi.

Ivan and Lavanya, I have 3, please. Firstly, sorry to labor the point, but can I just come back on the U.S. depletion trends, first, Ivan? Obviously you said that you held TBA share in the first half. Am I right to read that there's a share loss in spirits and a share gain in beer from a depletion standpoint? And if that's true, what's really been driving that relative depletion share loss in spirits in the first half? And what gives you the confidence that we will see the pickup so you will be growing spirits depletions at least in line with the wider market in the second half of the year? So that's the first one. And secondly, at the group level, I think price/mix was running in the sort of 7.5%, 7.6% in the first half. You indicated that pricing was up high single digits, so perhaps the implication of that is that mix overall was a bit negative globally. Is that correct? Is it geographic mix that's driven that, some channel shifts? Just some color there would be handy.

And then just finally and for Lavanya, with regards to the share buybacks outlook for the year. Obviously you said that, given the macro uncertainty, we might be at the lower end of the 2.5x to 3x leverage range sort of for now. How do we think about sort of how you will think about buybacks when we get to the full year and beyond? Does it make it more difficult in the current environment to perhaps commit to a multiyear share buyback program and perhaps therefore we should more think about rolling 6 months or 12 months forward commitment to capital return from here?

Okay, I'll deal with the share question and then turn it to Lavanya. So firstly, the share is consumer offtake, right? It's not depletion. So depletions is wholesaler/distributor sales to retailers, so when you look at us holding share of TBA, that comes in part from spirits doing better than beer and wine, right? So we are benefiting from the 20-year trend of spirits steadily gaining share of total TBA. And we've held share there. Now when you -- to your question on channels: We did gain share in the on-trade, as I talked about earlier. We are marginally down in spirits in the off trade, but you have to remember we are stronger in NABCA, which is a very stable channel to measure. Nielsen tends to be more promotional. And we've taken -- as I mentioned earlier, we've taken -- if you look at the last 3 years, we've taken more price. We've led the industry on price on spirits, so net-net-net, we're about flat. And our intention is -- as we go forward is very much to look at getting back to sustainable share growth. So that's how I would characterize the share performance. Lavanya?

Thanks, Ivan. So on price, Simon, what we said was that price contributed to high single-digit growth of NSV, right? So I think that's the clarification to your question on price. On share buybacks, I mean, look. It's, if I just point to the fact that prior to fiscal '19, Diageo did not have a multiyear share buyback program for well over a decade. But we have been very consistent in returning value to shareholders. And our TSR is on a 5-year and a 10-year basis is extremely strong. So we will come back at results with further guidance on share buybacks, but our approach to capital allocation continues to be very consistent.

Our next question comes from Celine Pannuti of JPMorgan.

Ivan and Lavanya, my first question is on your margin bridge. So we've seen gross margin under pressure in the first half. Can you help us how we should look at your cost setup in the second half? And maybe as well, in terms of the pricing cycle, are we expecting further price increases? And I was looking at that bridge. I think marketing, you said, will be up, so how should we think about the SG&A bucket in the second half? My second question is on trying to come back on Chinese growth. You said that you expect a very strong Q3, Q4. I think, compared to the growth rate of the market for international spirits, what do you think the growth rate could be in China? And what are you planning for not only for a fiscal year '23 H2 but as well for the fiscal year -- the first half of fiscal year '24?

And can I also ask on another number? It's you said normalization of growth in Europe in the second half. What is the normalization of the market growth you are looking for?

Okay. Celine, let me deal with China and Europe. And then Lavanya will cover margins. So on China, just to be clear: I'm not saying we're going to have a massive acceleration in Q3, Q4. I'm saying, I said earlier we are ready for the recovery of the Chinese consumer. I don't have a crystal ball on the pace at which that will happen. We are confident it's going to happen. Whether it takes 1 or 2 or 3 quarters, we'll need to see, so -- but we're certainly -- our approach to the marketplace in terms of marketing support and distribution is very much counting on a recovery of the Chinese consumer. And so the phasing of it, I think, we will obviously need to watch in the next few months. I think, longer term, we remain confident about double-digit growth in China for our business both in international spirits, which is primarily top-end scotch and in baijiu. And so we feel confident about China being an accretive growth engine for Diageo. And as you know, it's at very high margins. We have very good margins in China, so we are encouraged, with the reopening of China, that we shall see good momentum. And the phasing and timing of it, obviously we will watch very closely and stay very agile to respond to.

On Europe. I mean I'm delighted with our performance in Europe. I mean 10% growth in the first half, strong market share gains in spirits and phenomenal performance on Guinness. And I know it was in the presentation, but I have to say it again. Guinness is now the #1 beer in the British on-trade. I never believed I'd see this day. It's fantastic. The brand is really healthy. So we are gaining share. We're going to watch. The European consumer obviously is something that we put a lot of scrutiny behind, but we're confident we will continue to maintain the share momentum. What the external world does, we will deal with, but we've been pleased with the resilience of the sector as we've gone through the first half with all the negative news flow on consumers in Europe. Our category and our sector has held up very well, and we hope to see that continued resilience going into the second half.

Celine, your question on costs and the second half price increases and operating margin in general. On costs, look, we've seen higher inflation in the first half of this year than we did through last year. A lot of it was driven by energy costs, and -- but then on the other hand, we also have a lot going for us in terms of the levers that we have that helps us deal with inflation, volume growth. 2 percent points of our growth this half has come from volume. And that gives us operating leverage all the way through the P&L. Premiumization, revenue growth management. We have taken more pricing and smartly while holding market share at -- in 75% of our measured markets, holding or growing market share in 75% of our measured markets. Aged liquid is definitely a -- gives us some hedge as well in the sense that any inflation that is -- that happens on our aged liquid gets deferred to the P&L. Productivity, I do want to remind us that we've delivered GBP 220 million of productivity in this half. And that's a great way for us to offset inflation as well. Costs in terms of the what I see coming forward in the second half, I mean inflation it's persistent. It's not increasing, but it's not going away either. We are hedged from a commodity exposure perspective, so then the -- for the second half and beyond.

Price increases. We will -- we take price increases across markets at various points in time. And so especially when you think about the emerging markets, there are -- there will be pricing actions that will be -- that will continue to happen through the second half of the year. Overall, from an operating margin perspective, what I'd say is that, look, we have a medium-term guidance out there to consistently grow operating profit ahead of net sales. And that is what we're reaffirming our medium-term guidance.

Our next question comes from Edward Mundy of Jefferies.

2 questions from me. The first is just a really sort of big picture question. You set out a medium-term guidance range to grow sort of 5% to 7%. And I know that's a medium-term range, but you've clearly delivered growth in excess of that after a couple of really big years. You're talking about 8% since pre-pandemic levels. And how confident are you that you can grow off this higher base? Or do we need to go through a period of digestion given these significant gains and the very, very strong momentum after the last couple of years?

And then the second question is sort of what evidence are you seeing of weakening consumer spending power, so far. Is it in some of the volumes amongst certain consumers? Is it in certain countries? Are you seeing the downtrading? And how are you really adapting your business and getting ready for a potential weakening environment?

Sure. So I'd say, to the first part of your question, we are confident in the 5% to 7% top line growth. And I think the way to think about it, Ed, is TBA worldwide has very positive trends, right? You've got premiumization that's strong. You look at the emerging markets, and penetration is still low. You've got 600 million new consumers coming into the market. You take places like Latin America and India, Southeast Asia. In the developed world, we feel really good about the continued gains of spirits from TBA, outperforming beer and wine. So we pressure test this all the time, right? We are not just sitting here. So we do -- our strategy teams kind of run through a very rigorous kind of modeling of world economies, consumer behavior, sensitivities to shifts. And putting that all together, we do feel confident in the 5% to 7%.

On the big -- so we've got market dynamics. I mean we've got tough markets, right? Nigeria is a tough market. Africa, as you can see, is a bit slower in growth at 6%. We put the focus there on margin improvement and not chasing the lower end of the portfolio, so we've got different dynamics at different places, but by and large, the trend of premiumization is strong and intact. Our super premium plus business, I think it was in my presentation, every region grew double digits in the first half, so we are not seeing a weakening of the premiumization trend, I mean really anywhere, Latin America, Asia, India and certainly in the developed world, but we have the portfolio. I mean I think what you see in these numbers is Diageo's footprint is the real advantage, the brands, the categories, the price points and the geographies. And at any point in time when certain parts of the world are going through corrections or markets have slowed down, et cetera, we've got the ability to deliver this resilient performance and consistent performance. And that's very nice. So of course, we've got challenges in certain geographies, but we can offset it with outperformance in others. And that's where I believe the culture and our whole approach to this is being very agile operating as one Diageo. Debra and in her role overseeing the markets, the supply chain and marketing, we're making very quick decisions as we see shifts in end markets that enabled us to sustain this quality growth.

Our next question comes from Mitch Collett of Deutsche Bank.

Ivan and Lavanya, going back to the U.S. You said you're holding share of TBA in the U.S. and that spirits is gaining, which I guess implies that you're currently losing share of spirits despite the strength of tequila. And if I look at NABCA or Nielsen, the big difference appears to be prepared cocktails, which as a category is growing something like 50%. And I think your ready to drink in the U.S., which I appreciate may not be all prepared cocktails, is about plus 18%. Can you maybe comment on what you're doing to close that gap and whether that's going to be a strong driver of growth for you in the U.S. going forward? And then just to come back on margins for the group. You've obviously got marketing-to-sales being a drag in the second half, having been a tailwind in the first half. Lavanya, I think you said input cost pressures are likely to persist. Can you therefore comment on whether you think margins in the second half are likely to be up or down year-on-year?

Sure. So I'll take the first part of the question, Mitch. Firstly, you are right. The acceleration in RTD spirits has been the -- an important piece of the spirits market growth. Our strategy there is we're not chasing RTD growth. We want to be in the premium end of -- premium convenience is the way we look at the opportunity, so we are very focused on building a sustainable, quality premium business in this space. And there's a lot of growth right now happening in RTDs which is -- we're not interested in. The second thing I would say is actually, if you look at our share performance within bottled spirits, it is strong. We are gaining share, so -- and we absolutely believe having a healthy core spirits business is fundamental to our long-term health and outperformance in the U.S. So I'm really pleased with that. So that's to your question, and I'll turn it to Lavanya.

Yes. On -- so Mitch, on your question on margins in the second half. I mean we're not giving guidance here for the short term. And I'd reiterate that our medium-term guidance of growing operating profit ahead of net sales on a consistent basis. But as I said, I mean, like there's many levers that we have in the portfolio that helps us to grow margins. Yes, input cost inflation is -- we're not seeing it coming off, but as I also said, we are hedged; and that does protect us. And we have taken pricing in the first half. We will continue to do so in the second half. Some of the work that the teams have been doing on revenue growth management, which is really helping to move the mix to more premium end, I mean to Johnnie Walker Black Label and above, it's a strong driver of margin improvement for us. And we're seeing this happen across all regions. You see our scotch growth in -- even in Africa and Latin America and APAC. Scotch in total has grown 19% and contributed to 50% of the growth of Diageo. I mean scotch is a highly profitable category. So there are many levers to get to -- that we are working on all simultaneously, including productivity; and so I feel confident about our ability to deliver a consistent, healthy shape of the P&L.

Our next question comes from Laurence Whyatt of Barclays.

A couple from me, please. Firstly, on the U.S. business, you've -- your tequila performance continues to be very strong, but perhaps there was quite significant weakness across the Crown Royal, vodka and the scotch portfolio, with the expectation of getting back to that sort of mid-single-digit level. If tequila -- I think it's reasonable to assume that tequila performance still outperforms the wider spirits category, but that then assumes that you're comfortable with slightly lower growth, particularly in those 3 major categories for you. Is that the case? And is there anything you can do about those 3 categories in particular to accelerate the growth and get them back into positive territory?

And then secondly, on LAC. The Slide 15 shows your CAGRs over the past few years. And generally speaking, most geographies were around the sort of 7% to 8%, but LAC was the standout at around 15%. And you've highlighted the improved margin performance in that market as well. Over the past few years, that market has had a bit of benefit from government stimulus checks. And is there any other reason why you expect the LAC market to continue at these sort of levels? Is it reasonable to continue to see LAC drive double-digit growth on accelerated margins, or is that something that we should expect to slow down over the next few years?

Sure, so why don't I take the U.S. and Lavanya, you can cover LAC. The U.S., we are playing a total portfolio game, right? We are very happy with the quality of our portfolio, when you look at the disposals of the brands we made a few years ago and then obviously the additions of tequila and Aviation Gin and some of the smaller whiskeys we are adding now. So tequila still has a long runway, as we've talked many times before. Whiskey, we're very excited about. And Bulleit, in these numbers, you can see Bulleit has performed strongly, growing double digit. Crown Royal, our depletions growth is positive. What you're seeing in the sales numbers is what Lavanya talked about earlier, just the lapping effects and our sell-out orientation on keeping the shipment-to-depletion profile right, but we are growing share. Scotch, actually both Johnnie Walker and Buchanan's are growing share of the scotch category in consumer offtake terms. So whiskey, for us, remains very attractive. We're investing strongly behind it, Crown Royal, Bulleit, Johnnie Walker, Buchanan's. Malts, where if you remember we've always underperformed in malts, I'm really happy to see our malts performance now come through strongly. I think in the U.S. we were up 60% in our single malt business. So whiskey will be an engine.

On vodka. I think, if you -- there is one factor which is consumer led, where it's Cîroc has -- clearly has more pressure with the urban multicultural consumer, but Ketel One is solid. I mean, if you -- we were -- and Smirnoff is solid, so -- and Cîroc, I believe, will come back. So I'm -- we do see the Cîroc business stabilizing over time. And then we've got other brands like Baileys and Captain and our new additions to the portfolio, gins with Aviation, so when you plot the entire North American portfolio, we play a portfolio game to deliver the total outcome. It's not counting on tequila.

So Laurence, I'll take your question on Latin America, indeed a standout performance in Latin America, 3-year compounded annual average growth rate of 15%. And in fact, if you'll even go back before this, you look at fiscal '17, fiscal '18, fiscal '19, high single-digit growth in the Latin American business. And what we're seeing happen in Latin America is we've been growing the business the right way with strong A&P investment, driving -- taking price, driving premiumization. It's really the flywheel in action. I mean I think this is one of our -- it's a great example of where that -- how that flywheel works in pretty much every geography around the world. And if you -- our business in Latin America is predominantly scotch. We are growing the premium end of scotch in Latin America strongly. The work that the team has been doing in Latin America in terms of -- on digital, on consumer-centric advertising, bringing our brands to be front and center of a very dynamic, young consumer base who is really interested in brands that are part of culture has been really fantastic. And really the single biggest thing that I would say has driven this great performance, consistent great performance, over several years has been our approach to looking at the market from a lens of total beverage alcohol. And we are a very small player and last from a total beverage alcohol perspective, and what the team has been extremely successful in doing is recruiting out-of-premium beer into premium spirits. And that's what has driven the growth in margins, the growth in share and the consistent growth of our top line. And you mentioned stimulus checks, I mean, look, this is growth that the business has delivered over the last 3-plus years and 3-plus years before that, so it's anchored in fundamentally good business delivery versus any short-term tailwinds that may have existed.

Our final question of today comes from Andrea Pistacchi of Bank of America.

Two, please. Earlier you were talking about the good momentum that you're seeing across the business exiting the half year period and that trends in January were also looking encouraging. You referred to December having been good, I think, in the U.S. More broadly, in other regions, what sort of momentum are you seeing as you go into the second half? Everybody thinks about the inflection point, which doesn't seem to have happened yet in Europe, so in particular on Europe, where you had another strong half year, how do you see those markets like Ireland, Southern Europe which continue to be good but there's a -- you have a large on-trade exposure there?

And then if I may, my second question is just on Cîroc, which you mentioned earlier Cîroc was down or -- substantially in the half because, you said, distributors were destocking the brand. I think it knocked about 2 points off your total U.S. growth. Has this destock been completed? Should we see an improvement already in the second half?

Sure. I'll deal with the first one and ask Lavanya to comment on Cîroc. We have seen, as we said in my statement, I mean, January has started well pretty much around the world, including Europe, Andrea, so I'm really pleased to see the consistency of consumer momentum for our brands and our category continue in Europe. And obviously we track it very closely. One of the things we've learned through the COVID years is you've got to be extremely agile. And we have pulse on the consumers to really see. If any shifts happen, we will adjust. But what has been really encouraging, I would say, through the last 6 months of -- as I mentioned earlier, in Europe is we've seen the cocktail culture really thrive and premium brands within that do really well. And so we expect the momentum to that underlying consumer taste preferences as well as orientation to socialize and celebrate, coming out of COVID, is solid across Europe, so I'm feeling good about our ability to deliver a solid second half. Obviously there's uncertainty out there, but we focus on just making sure we emerge stronger and continue to keep share momentum there. And as I talked about earlier, Guinness is in really healthy shape, so feeling good about the Guinness business in Europe too.

Yes. And on Cîroc specifically, Andrea, yes, we have seen a slowdown in consumption on Cîroc. And shipments were lower than depletions on Cîroc, as the slowdown has resulted in distributors and us with our sell-out culture wanting to make sure that we have the right levels of inventory, healthy levels of inventory in trade. In terms of -- and if I kind of look back at the brand itself, I mean the brand has performed really well over the last 3 years. I mean what you're seeing over here is a bit of an impact on what's happening with the multicultural consumers in urban zip codes. But it's also the growth of tequila, the growth of U.S. whiskey. I mean these categories don't -- it's not like people are drinking so much more that you're getting that growth of tequila. It is the shift happening from one part of spirits to another. I mean that is a large part of what's contributing to that. And so Cîroc is impacted by that to a certain extent, but we -- our focus would be to be where the consumer is with the interest -- with whatever the consumer is most interested in. We have a very broad portfolio across price points and we move very quickly to win with the consumers.

Is that the last question?

Yes.

Okay, well, thank you, everyone. Really appreciate you taking the time and the questions. Lavanya and I will be out on the road show next week, so I look forward to meeting with many of you. Thanks very much for your interest in the company, and a belated but happy new year to all.

Ladies and gentlemen, this concludes today's call. Thank you for attending. You may now disconnect your lines.